The author shows how the successive incidence of these properties in observed corporate accountability reports can be used to determine whether and how those reports create or destroy value for shareholders and other constituencies. He shows how the hypotheses developed in the skeptical appraisal of corporate accountability reporting section can be used to distinguish across these explanations in observed corporate accountability reports.
Ramanna, K. 2013. A Framework for Research on Corporate Accountability Reporting. Accounting Horizons 27 (2): 409-432.
This paper provides new evidence on the fee-quality relationship using the propensity to use income-increasing discretionary accruals to meet or beat analysts' forecasts. The evidence in this paper suggests that abnormal audit fees are positively related to audit quality. This result is consistent with concerns raised by regulators that lower audit fees could reflect a lower level of effort provided by the auditor. This is important, given the trend of declining audit fees in recent years. By finding different results using a more focused sample of firms with the incentive and ability to manage earnings, this study highlights the importance of considering the context when performing tests of earnings management. This information is of interest to regulators, such as the SEC.
Eshleman, J. D., & P. Guo. 2014. Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management. Auditing: A Journal of Practice & Theory 33 (1): 117-138.
This study provides evidence that whistleblowers take report recipient individual differences (i.e., managerial likeability) into account when making reporting decisions. In addition, this is despite that fact that, eventually, the investigation and resolution will involve multiple organizational members. Further, the results highlight the benefits of managerial likeability: employees have higher reporting intentions when faced with a likeable manager than one who is unlikeable.
Secondly, this study finds that employees have higher reporting intentions when the fraud involves misappropriation of assets as opposed to fraudulent financial reporting, possibly because employees see fraudulent financial reporting as benefiting the organization as a whole, while misappropriation of assets benefits a single employee to the detriment of the organization.
Finally, the authors suggest that findings indicating that the strength of managerial procedural safeguards to not influence reporting intent could be a result of poor manipulations and need to be further investigated.
Kaplan, S. E., K. R. Pope, and J. A. Samuels. 2015. An Examination of the Effects of Managerial Procedural Safeguards, Managerial Likeability, and Type of Fraudulent Act on Intentions to Report Fraud to a Manager. Behavioral Research in Accounting 27 (2): 77-94.
The finding that investors distinguish the plausibility among seemingly self-serving attributions based on concurrent industry performance and earnings commonality suggests that investors are somewhat sophisticated when interpreting these narrative disclosures. This study should be of interest to policymakers who advocate the importance of narrative disclosures. A potential concern that policymakers face is that managers can use unregulated narrative disclosures to manipulate investor perceptions, particularly if investors accept managers’ self-serving pronouncements uncritically. These findings mitigate this concern because investors appear to be sophisticated enough to use relevant information to distinguish the plausibility of seemingly self-serving attributions. Apparently, providing self-serving attributions purely to mislead investors may not be an effective strategy.
Kimbrough, M. D., & Wang, I. Y. 2014. Are Seemingly Self-Serving Attributions in Earnings Press Releases Plausible? Empirical Evidence. Accounting Review 89 (2): 635-667.
This study is important to provide an insight into the personal relationships and familiarity between audit committee directors and external auditors in terms of auditor independence. Furthermore, our examination of AC director-auditor interlocking provides a more complete basis for understanding the effectiveness of corporate governance in guarding earnings quality. The results not only support the view that AC director-auditor interlocking positively affects investors’ perception of earnings quality, but also support the regulatory requirement that audit committees include at least one financial expert.
For more information on this study, please contact Jeng-Fang Chen.
Chen, J.-F., Y.-Y. Chou, R.-R. Duh, and Y.-C. Lin. 2014. Audit committee director-auditor interlocking and perceptions of earnings quality. Auditing: A Journal of Practice and Theory 33 (4): 41-70
This paper contributes to research examining the determinants and impacts of audit quality by identifying the limitations of aspects of metrics employed in recent research that could have been utilized by practitioners and suggesting useful alternate metrics for investigating the impact of audit quality on the properties of analysts’ forecasts, including the usefulness of audited financial information and the prediction of future performance.
Wu, Y. and Wilson, M. 2016. Audit Quality and Analyst Forecast Accuracy: The Impact of Forecast Horizon and Other Modeling Choices. Auditing: A Journal of Practice and Theory 35 (2): 167-185.
This study provides evidence that is important to corporate governance decisions. The results suggest that hiring a high quality auditor to constrain accruals earnings management may result in management’s use of real earnings management as a substitute. Real earnings management involves potentially costly deviations from “business as usual.” Consequently, it may be important to consider other corporate governance measures aimed at constraining real earnings management concurrently with the decision to hire a high quality auditor.
Burnett, B., B. Cripe, G. Martin, and B. McAllister. 2012. Audit Quality and the Trade-Off between Accretive Stock Repurchases and Accrual-Based Earnings Management. The Accounting Review 87 (6): 1861-1884.
This paper contains important applications for borrowing firms wanting to have more favorable loan contract terms. By hiring a high-quality auditor this decreases risks for the creditors and therefore oftentimes reduces the stringency of debt covenants. Subsequently, the borrowing firm will violate the debt covenants less.
Robin, Ashok, Q. Wu, and H. Zhang. 2017. “Auditor Quality and Debt Covenants”. Contemporary Accounting Research 34.1 (2017): 154.
http://commons.aaahq.org/groups/e5075f0eec/summary
The audit profession operates in a highly legal environment, and because of this, audit firms must find ways to manage their risk exposure. One way to reduce the risk of litigation against the firm is to manage the client portfolio and resigning from high risk clients. According to the study, family owned firms are less of a litigation risk to the auditor than non-family owned firms, especially when the CEO of the family-owned firm is not a family member. However, if an auditor does resign from auditing a family-owned firm managed by a non-family CEO, the investing public reacts less negatively to this than if the firm were not family owned.
For more information on this study, please contact Samer K. Khalil.
Khalil, S., J. Cohen, and G. Trompeter. Auditor resignation and firm ownership structure. Accounting Horizons 24 (4): 703-727.
The author claims that motivating the CEO to reveal information may or may not be beneficial. The disconnection between compensation and outcomes results from active monitoring. Compensation contracts rely on board evaluation, not on the final outcomes, to provide incentives. The proactive board activity can result in poor firm performance. This proactive activity requires extra care to reign in an expert: the CEO.
Tian, J. J. 2014. Board Monitoring and Endogenous Information Asymmetry. Contemporary Accounting Research 31 (1): 136-151.