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  • Jennifer M Mueller-Phillips
    Factors Influencing Recruitment of Non-Accounting Business...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 13.0 Governance 
    Title:
    Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing
    Practical Implications:

    Internal audit plays a critical role in maintaining corporate governance. This study examines factors that lead into non-accounting business professionals’ willingness to work in the internal audit function. This is an effort to provide guidance to the internal audit profession on how to better recruit students and non-accounting business professionals into internal audit roles. 

    Citation:

    Bartlett, Geoffrey D., J. Kremin, K. K. Saunders, D. A. Wood.2017. “Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing”. Behavioral Research in Accounting 29.1 (2017): 119.

     

    Keywords:
    internal audit; hiring decisions; business professionals; outsourcing; management training ground.
    Purpose of the Study:

    An effective component of corporate governance for many entities is a strong internal audit function. According to recent studies stakeholders are generally dissatisfied with their current internal audit division. Additionally, prior research also indicates that companies face difficulties in recruiting for internal audit roles. This study examines the perception of the profession and factors affecting non-accounting business professionals’ willingness to work within internal audit.

    Design/Method/ Approach:

    The research project contains two different studies. The first study had a final sample size of 502 and the participants were undergraduate and graduate non-accounting business students from four different universities. The participants were read job descriptions and their responses were used as data. The second test included 46 students from across the country. They were provided a survey and asked what would make a career in internal audit more appealing to them.

    Findings:

    The authors find the following from the first study:

    • Business professionals have positive perceptions of internal auditing. These perceptions include internal auditors being respected and highly compensated, while performing meaningful work and having abundant career opportunities.
    •  Business professionals believe other business professionals hold negative stereotypes of internal auditing.
    • Business professionals are less willing to apply for positions in internal auditing than similar positions outside of internal audit.
    • Business professionals are not more inclined to work in internal audit even if the structure of their job is varied.

    The authors find the following from the second study:

    • Students with lower academic performance would be more interested in internal auditing if they were paid more.
    • Students with higher academic performance would be more interested in internal auditing if they performed less boring/tedious work, worked in a preferred company, and if they had a better understanding of the profession.
    Category:
    Corporate Matters, Governance
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    The Interplay of Management Incentives and Audit Committee...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    The Interplay of Management Incentives and Audit Committee Communication on Auditor Judgment
    Practical Implications:

    This study indicates that increasing the frequency of informal communication between the audit committee and the audit team can positively impact reporting quality, but auditors need to be sensitized to how management may exhibit undue influence and its potential to undermine audit committee effectiveness. From a practical standpoint, this study indicates that failing to consider specific expectations communicated by the audit committee can have severe consequences.

    Citation:

    Brown, J. O. and V. K. Popova. 2016. The Interplay of Management Incentives and Audit Committee Communication on Auditor Judgment.  Behavioral Research in Accounting 28 (1): 27-40.

    Keywords:
    audit committee communication, management incentives, competing preferences, source credibility and auditor judgment
    Purpose of the Study:

    Over the past two decades, the audit committee has evolved from a passive observer to a critical player in ensuring quality financial reporting. Just recently, the PCAOB approved Auditing Standard No. 16 to enhance communication between the external auditor and the audit committee in order to better facilitate the audit committee’s oversight role and improve financial reporting quality. However, despite this reform, auditors continue to harp on the importance of management’s role in corporate governance and its ability to exhibit significant influence during the audit. Consequently, the purpose of this study is to examine the interplay of management and the audit committee on auditor judgment, and whether auditor’s sensitivity to a characteristic of management, its incentive to influence the auditor, moderates the effectiveness of additional oversight by the audit committee. It is also important to examine whether auditors are effectively integrating expressed expectations voiced by the audit committee, in light of the recent passage of AS No. 16.

    Design/Method/ Approach:

    The authors administered a 2 x 2 between-subjects experiment that required audit seniors to evaluate management’s estimate for obsolete inventory. The auditors either were or were not given additional communication from the audit committee of its expectations. Management’s incentives to influence the auditor were also manipulated by varying the perceived propensity to manage earnings.  

    Findings:
    • The authors find that management’s incentives to influence the auditor not only affect the persuasiveness of management-provided information but also spill over to impact the potential benefit of additional audit committee communication on auditor judgments.
    • The authors find that when management’s incentives were lower, additional audit committee communication had no effect on auditor judgments, and auditors documented more items consistent with management’s aggressive reporting preference.
    • The authors find that when management’s incentives were higher, the additional communication of the audit committee had a significant and positive impact on auditors’ evidence evaluation and judgments, as auditors were less supportive of management’s aggressive estimate and also documented a greater proportion of evidence items consistent with the audit committee’s expressed expectations. 
    Category:
    Corporate Matters, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight
  • Jennifer M Mueller-Phillips
    The Effects of Prior Manager-Auditor Affiliation and PCAOB...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.06 Board/Audit Committee Processes 
    Title:
    The Effects of Prior Manager-Auditor Affiliation and PCAOB Inspection Reports on Audit Committee Members’ Auditor Recommendations
    Practical Implications:

    This paper provides evidence indicating that audit committee members recognize the potentially harmful effects of a manager-auditor relationship on auditor independence. It also supplies insight into the audit committee’s auditor selection and audit quality assessment process. 

    Citation:

    Abbott, L. J. V. L. Brown and J. L. Higgs. 2016. The Effects of Prior Manager-Auditor Affiliation and PCAOB Inspection Reports on Audit Committee Members’ Auditor Recommendations.  Behavioral Research in Accounting 28 (1): 1-14. 

    Keywords:
    audit committees, auditor selection, PCAOB auditor inspections, audit affiliation and audit quality.
    Purpose of the Study:

    The authors of this paper investigated the extent to which audit committee members utilize Public Company Accounting Oversight Board (PCAOB) inspection reports and consider a prior manager-auditor affiliation in their auditor selection decisions when management has recommended an auditor. The audit committee is directly responsible for the appointment, compensation, an oversight of the external auditor. When performing this duty, audit committees are to annually assess the auditor’s qualifications, independence, and performance and to avail themselves of any information sources necessary to make that assessment. It is likely that audit committees utilize PCAOB inspection reports to assess auditor performance. Prior archival research has only examined the use of PCAOB reports indirectly, and the results were hampered by the confounding effects of auditor brand name, auditor switching costs, and attempts by the auditor to de-emphasize the PCAOB’s report findings. This behavioral setting has a unique benefit by eliminating these confounding effects, providing direct evidence about whether audit committee members find PCAOB inspection reports useful in the context of the auditor selection decision. 

    Design/Method/ Approach:

    The authors conducted an experiment with 118 financially literate participants, acting as surrogates for audit committee members. The study also utilizes a 2 x 2 research design with manipulated auditor competence and independence constructs. 

    Findings:
    • The authors find that auditors with unfavorable inspection reports receive less favorable hiring recommendations, and auditors with management affiliations also receive less favorable hiring recommendations.
    • The authors find that the impact of auditor affiliation on participants’ judgments is context specific: it manifests itself only when the auditor is deemed to be competent via a favorable inspection report.
    • The authors find that there does not appear to be an auditor affiliation effect in the presence of an incompetent auditor with an unfavorable inspection report. 
    Category:
    Governance
    Sub-category:
    Board/Audit Committee Processes
  • Jennifer M Mueller-Phillips
    Internal Audit Quality and Financial Reporting Quality: The...
    research summary posted October 12, 2016 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting 
    Title:
    Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence
    Practical Implications:

     This study is the first to establish IAF characteristics as separate, distinct constructs that act jointly in creating IAF quality; therefore, it contributes to the overall understanding of IAF quality and the determinants of the IAF as an effective internally based financial reporting monitor.

    Citation:

     Abbott, L. J., B. Daugherty, S. Parker and G. F. Peters. 2016. Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence. Journal of Accounting Research 54 (1): 3-40.

    Purpose of the Study:

     In 2013, the NASDAQ Stock Market LLC (NASDAQ) proposed a rule change that would require all NASDAQ registrants to maintain an internal audit function (IAF). The New York Stock Exchange (NYSE) has required all registrants to maintain an IAF since 2006. The thinking behind these requirements is that an effective IAF provides the audit committee and other financial reporting stakeholders with critical information pertaining to a company’s risks and internal controls. Corporate governance proponents also emphasize the IAF’s role in enhancing financial reporting quality; however, despite having many proponents the IAF’s role in the financial reporting process is not yet fully understood and empirical evidence concerning the impact of IAF quality is minimal. As a result of this lack of evidence, the authors investigate the potential impact of IAF quality as a joint function of the IAF’s competence and independence. They base this view upon theoretical work stating that external audit quality is a function of the external auditor’s ability (competence) to detect accounting misstatements and willingness (independence) to oblige proper accounting treatments.

    Design/Method/ Approach:

    In this paper, the authors develop and test a two-factor model of IAF quality as a function of the IAF’s ability to prevent/detect financial misstatements (competence) and its inclination to report the misstatements to the audit committee and/or external auditor (independence). The study uses survey evidence from 189 Chief Internal Auditors from Fortune 1000 companies during fiscal 2009.

    Findings:
    • The authors’ overall results provide evidence consistent with the hypothesis that the combined presence of both competence and independence is a necessary antecedent to effective IAF financial reporting.
    • The authors find results consistent with independence being enhanced by relatively greater degrees of audit committee oversight of the IAF, as opposed to management oversight.
    • The authors find that enhanced independence interacts with IAF competence as a means of curtailing financial reporting discretion in both income-increasing and income-decreasing environments. A similar set of relationships were documented when the authors interact IAF competence and the relative lack of IAF outsourcing.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    CEO Power, Internal Control Quality, and Audit Committee...
    research summary posted October 12, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.02 Board/Financial Experts, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    CEO Power, Internal Control Quality, and Audit Committee Effectiveness in Substance versus in Form
    Practical Implications:

     The findings of this paper have significant policy implications and are important to shareholders. While regulators have set rules to improve audit committee effectiveness, the reforms may not change the substantive effectiveness in certain cases, one case being that the CEO has too much power. The authors provide empirical evidence showing that the negative association between audit committee financial expertise and internal control weaknesses becomes weak when the CEO is powerful. The result implies requiring audit committee to possess certain characteristics, such as financial expertise and fully independence, may not be sufficient to strengthen the underlying substance of monitoring effectiveness. The findings are consistent with evidences from survey and interview studies that argue top management ultimately determine the effectiveness of audit committee. The authors also show a powerful CEO can affect the substantive effectiveness even though he/she is prohibited from selecting audit committee members under the SOX Act. Finally, the findings raise concerns over the common practice of CEO duality in the U.S. A CEO, being the chairman of the board at the same time, can adversely affect audit committee effectiveness.

    Citation:

    Lisic, L. L., T. L. Neal, I. X. Zhang, and Y. Zhang. 2016. CEO Power, Internal Control Quality, and Audit Committee Effectiveness in Substance versus in Form. Contemporary Accounting Research 33 (3): 1199–1237.

    Keywords:
    CEO power, audit committee, financial expertise, internal control
    Purpose of the Study:

     Since the passage of SOX Act of 2002, regulators have implemented several changes to strengthen audit committees’ oversight of public companies’ financial reporting, such as requiring a completely independent audit committee and a disclosure on whether the firm has at least one financial expert on the committee. A stream of academic research shows that financial expertise improves audit committee effectiveness. However, there is an ongoing debate on whether these requirements can truly enhance audit committee’s monitoring effectiveness. Some argue the reforms merely represent a change in form rather than substance. To add additional insights to the debate, the authors examine whether top management can exert detrimental influence on audit committee effectiveness. Specifically, the authors investigate the effect of CEO power on the substantive effectiveness of audit committee, as measured by the firm’s internal control quality. The authors expect a powerful CEO reduces the positive effect of financial expertise on audit committee effectiveness. They also expect this moderating effect of CEO power is stronger when the CEO behaves in a way to benefit him/herself at the expense of the shareholders (i.e., extract rents from the firm).

    Design/Method/ Approach:

    The initial sample comes from public companies’ firm-years without CEO changes between 2004 and 2010. The final sample consists of 7,217 firm-years at the intersection of three databases: COMPUSTAT for financial information and ExecuComp and Corporate Library Directors Databases for information on CEOs and directors. Most CEO characteristics and audit committee financial expertise data are hand-collected by the authors from proxy statements. Audit opinions on internal control effectiveness are obtained from Audit Analytics.

    Findings:
    • The authors find CEO power has a moderating effect on audit committee effectiveness. When CEO power is low, audit committee financial expertise, a measure of audit committee effectiveness, is negatively related to the incidence of internal control weaknesses. However, this relationship is monotonically weakened by increasing CEO power. When CEO power reaches to a high state, audit committee financial expertise is no longer negatively associated with the incidence of internal control weaknesses. This result is not driven by potential indirect involvement by CEO in selecting audit committee members.
    • Consistent with the authors’ expectation, the moderating effect of CEO power is stronger when the CEO extracts more rents from the firm through profitable insider trading.
    • Supporting the main findings, the results also show when CEO power is high, audit committee hold fewer meetings and financial misstatements are more frequent. Both relationships are stronger when internal controls are weaker.
    • The authors also demonstrate the structure and expert dimensions of CEO power are most closely associated with the moderating effect. Specifically, the sources of power of a powerful CEO come from being the chairman of the board at the same time, receiving compensation much higher than other executives, and taking more management positions in the firm before becoming the CEO. 
    Category:
    Corporate Matters, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Financial Experts
  • Jennifer M Mueller-Phillips
    Managers’ Strategic Reporting Judgments in Audit N...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    Managers’ Strategic Reporting Judgments in Audit Negotiations
    Practical Implications:

     The results of this study are important to consider when examining the effects of the audit committee on managers’ judgments. This study identifies the changes to the reporting environment stemming from the implementation of SOX, particularly with respect to communications between auditors and the audit committee and the authority and responsibility of the audit committee. This study adds insight to prior archival research that suggests that audit committees considered to be effective are associated with greater financial reporting quality. Further, these findings suggest that managers act as if auditors and audit committees that jointly resist management pressures to engage in aggressive reporting play important roles in ensuring high financial reporting quality.

    Citation:

     Brown-Liburd, H., A. Wright and V. Zamora. 2016. Managers’ Strategic Reporting Judgments in Audit Negotiations. Auditing, A Journal of Practice and Theory 35 (2): 47-64.

    Keywords:
    Audit negotiation, past counterpart relationship, audit committee oversight
    Purpose of the Study:

     Prior research has largely characterized audit issue negotiations as a dyadic relationship between auditors and managers. However, the Sarbanes Oxley Act (SOX) substantially enhanced the audit committee’s oversight responsibilities for the financial reporting and auditing process. Thus, negotiations post-SOX may be viewed as a triadic relationship involving managers, auditors, and the audit committee. Differing judgments between auditors during negotiations and managers during financial reporting exist because they have different perspectives and incentives. Whereas managers’ incentives relate to maximizing financial reporting outcomes while maintaining the firm’s reporting reputation, auditors’ incentives relate to fostering a functioning working relationship with the client while appropriately attesting to the financial statements. These differences in perspectives and incentives yield contrasting expectations of negotiation judgments for auditors and managers. This study seeks to examine the joint effects of past auditor-client negotiations and audit committee strength on management’s strategic reporting judgments.

    Design/Method/ Approach:

     The authors recruited participants from an executive training session attended by CFOs/controllers and held at a large public university in the southeastern U.S. During a controlled experiment, participants completed the hard copy experimental case. Participants engaged in planning for an upcoming audit negotiation involving a subjective estimate for an inventory write down due to obsolescence. The authors asked participants to identify their initial offer and their perception of the negotiated ultimate final outcome. Audit committee strength was manipulated as either weak or strong. The nature of past auditor-client negotiations over “grey” misstatements was manipulated as either contentious or cooperative.

    Findings:

    The results are consistent with a strong combined effect of the roles of both the auditor and the audit committee in managers’ pre-negotiation judgments.

    • The presence of both strong audit committee oversight and an auditor that has been contentious in past negotiations together significantly constrain managers’ aggressive reporting.
    • The presence of weak audit committee oversight and an auditor that has been cooperative in past negotiations jointly provide the opportunity for managers to engage in more aggressive reporting.
    • Managers report less aggressively in the presence of a contentious auditor and strong oversight by the audit committee to ensure timely resolution and protect the firm’s financial reporting reputation, and to minimize the risk that the audit committee will intervene against the managers’ favor.
    • Managers report more aggressively in consideration of his/her relative bargaining power against a cooperative auditor who appears to have high relationship concerns, along with weak oversight by the audit committee that is passive/persuadable. 
    Category:
    Corporate Matters, Engagement Management, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight, Interactions with Client Management
  • Jennifer M Mueller-Phillips
    Assuring a New Market: The Interplay between Country-Level...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance 
    Title:
    Assuring a New Market: The Interplay between Country-Level and Company-Level Factors on the Demand for Greenhouse Gas (GHG) Information Assurance and the Choice of Assurance Provider
    Practical Implications:

     The results from this study highlight the complexity of assurance-related decisions and the interplay between macro-level and micro-level institutional factors. The results also reveal the diversified nature of this particular emerging assurance market, which should prove to be a rich source of future research.

    Citation:

     Zhou, S., R. Simnett, and W. J. Green. 2016. Assuring a New Market: the Interplay between Country-Level and Company-Level Factors on the Demand for Greenhouse Gas (GHG) Information Assurance and the Choice of Assurance Provider. Auditing: A Journal of Practice and Theory. 35 (3): 141-168.

    Keywords:
    greenhouse gas assurance, stakeholder theory, legal environment, corporate governance.
    Purpose of the Study:

    Recently there has been a dramatic increase in the public reporting and assurance of broad ranging sustainability information covering multiple nonfinancial elements. In addition to this, there has been greater public reporting of organizations’ single element greenhouse gas (GHG) emissions. The growth of GHG reporting ultimately resulted from the heightened awareness of global warming among investors, stakeholders, and regulators, as well as the growing number of countries mandating the reporting of GHG emissions. As more and more companies publish this information, it follows that there is a growing reliance on independent assurance of these nonfinancial reports; consequently, two major types of publicly available assurance engagements have evolved: assurance on the broad-ranging subject matter of sustainability reporting and assurance of an organization’s report of their GHG emissions. Many studies have examined the assurance of the broader sustainability subject matter; however, there is limited research examining the more defined and specific GHG emissions assurance engagements, as this paper does.

    Design/Method/ Approach:

    The authors analyzed information about GHG emissions assurance from a sample of 32 countries that comprise corporate responses to the Carbon Disclosure Project’s annual questionnaires. These data were gathered within the period of 2008-2011

    Findings:
    • The authors find that just over 40 percent of disclosing companies purchase third-party assurance services, and that just over half of these purchase these services from accounting firm providers; however, this purchasing behavior differs significantly between countries.
    • The authors find that assurance is more likely to be purchased by companies in stakeholder-oriented countries and less likely to be purchased as the strength of the legal enforcement system increases. However, further analysis reveals that these relationships are moderated by the strength of company-level corporate governance mechanisms.
    • The authors find that the business culture (stakeholder versus shareholder orientation) of a country significantly affects the choice of accounting firms as assurance providers.
    • The authors find a low adoption rate for U.S. assurance of GHG reports, which is consistent with previous findings regarding the U.S. adoption rate of sustainability reports.
    Category:
    Governance
  • Jennifer M Mueller-Phillips
    When Do Ineffective Audit Committee Members Experience...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.03 Board/Audit Committee Tenure, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    When Do Ineffective Audit Committee Members Experience Turnover?
    Practical Implications:

     Preserving an image of effective monitoring can be just as important as preserving effective monitoring itself. AC-member ineffectiveness due to financial reporting increases the likelihood of AC turnover for both the AC-members who served during the events precipitating the financial reporting failure as well as the “tainted” AC-members (even if they were not serving as AC-members when the events precipitating the financial reporting failure occurred). This result shows that shareholders may take bold and visible actions to “clean house” when such financial reporting failures are revealed. Regarding individual characteristics, under normal circumstances characteristics of an AC-member’s potential ineffectiveness such as multiple board commitments may actually be seen as desirable by shareholders perhaps signaling the quality of the AC-member. However, when shareholder dissent increases these individual characteristics of an AC-member’s potential ineffectiveness increases the likelihood of turnover for that particular AC-members but does not “taint” the other AC-members. That is, characteristics once viewed as slightly positive for specific AC-members become negatives when shareholder dissent increases.

    Citation:

     Kachelmeier, S. J., S. J. Rasmussen, and J. J. Schmidt. 2016. When Do Ineffective Audit Committee Members Experience Turnover?. Contemporary Accounting Review 33 (1): 228-260.

    Keywords:
    Audit Committee, Audit Committee Turnover, Audit Committee Legitimacy Ineffective Governance, Shareholder Dissent, Institutional Theory
    Purpose of the Study:

     The study deepens our understanding of when and why ineffective audit committee members experience turnover and not just that it occurs. The authors broaden the traditional theories used to understand corporate governance to include institutional theory. This theory allows them to predict and observe that the image of effective monitoring can be as important as ensuring effective monitoring itself. Audit committee ineffectiveness is studied from both a broad perspective, financial reporting failures, as well as from a narrower perspective, individual AC-member characteristics. Their analysis focuses not only on the individual ineffective AC-member but also those AC-members “tainted by” (i.e. associated with) the ineffective AC-member. Additionally, the important influence of active shareholders and their dissent on AC-member turnover likelihood due to each type of ineffectiveness is studied.

    Design/Method/ Approach:

     Sample: Hand-collected database of effective, ineffective, and “tainted” AC members from S&P 1500 companies that require annual election of all directors in 2007. Source: Glass, Lewis, & Co proxy service voting recommendations (to infer AC-member effectiveness), Compustat, RiskMetrics, & Audit Analytics Model: Logistic regression with AC-member turnover regressed on ineffectiveness indicators (i.e. financial reporting failure or individual ineffectiveness characteristics) for individual AC-members, indicators if AC-member is “tainted” by another ineffective AC-member, interaction terms for level of shareholder dissent, and governance/company/board-characteristic controls

    Findings:
    • AC-member turnover is associated with financial reporting failures (i.e. main effect)
    • AC-member turnover is not associated with individual AC-member characteristics of ineffectiveness and is, in fact, slightly negative (i.e. main effect)
    • AC-member turnover is associated with shareholder dissent (i.e. main effect)
    • When proxies for shareholder dissent is interacted with financial reporting failure, the main effect loses significance, but the interactive effect is statistically positive.
    • When proxies for shareholder dissent is interacted with individual AC-member characteristics of ineffectiveness, the non-association becomes significantly positive.
    • New AC-members who serve with AC-members present during events that precipitated a financial reporting failure are “tainted” and are associated with increased turnover.
    • AC-members who serve with AC-members who have individual characteristics of ineffectiveness are not “tainted” and are not any more likely to face turnover.
    Category:
    Corporate Matters, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight, Board/Audit Committee Tenure
  • Jennifer M Mueller-Phillips
    The Efficacy of Shareholder Voting in Staggered and...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections
    Practical Implications:

     This study contributes to the accounting landscape in many different ways. First, the results suggest that, through voting and differentiating between AC and non-AC directors, shareholders can influence the AC’s oversight over financial reporting. Second, the study complements previous research on similar topics by showing that dissatisfaction with AC members is also associated with subsequent turnover of accounting financial experts and that low auditor ratification and AC votes are both associated with a reduction in auditor-provided tax services. Finally, the results show that going forward all studies examining the efficacy of shareholder votes should separately consider staggered and non-staggered boards.

    Citation:

     Gal-Or, R., Hoitash, R., and Hoitash U. 2016. The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections. Auditing: A Journal of Practice and Theory 35 (2): 73-95.

    Keywords:
    staggered boards, director elections, audit committee, and proxy advisors
    Purpose of the Study:

    Previous accounting research provides evidence that certain characteristics of audit committees (ACs) are associated with improved effectiveness, finding that features such as size, independence, and member expertise all contribute to the quality and effectiveness of the audit committee. Research on the influence of shareholders on audit committee effectiveness is scarce, so this paper examines whether shareholders voting on audit committee members and the frequency of those elections (staggered versus non-staggered) can influence the effectiveness of the audit committee. Because of the way shareholder votes are cast, the votes in director elections provide an important mechanism to monitor and discipline directors.

                Despite the majority of directors standing for election every year, a significant number of firms have staggered boards, in which only a fraction of members face election every year. Under the staggered board regime, shareholders can typically voice their opinion on any given director only once every three years, making it conceivably possible that directors on staggered boards who do not face election following poor performance will be insulated from the scrutiny of shareholder votes. This could lead to a decrease in accountability, responsiveness, and the overall efficacy of shareholder votes. This paper separates itself from others because prior research has not considered the issue of diminished efficacy of shareholder voting and has not examined whether the effectiveness of shareholder votes is similar across staggered and non-staggered boards. 

    Design/Method/ Approach:

    The authors used cross-sectional time-series data spanning the years 2004 to 2010. The final sample contains over 18,296 director elections taking place in more than 6,786 firm-year observations. The authors also use several measures to test the reaction of ACs to low shareholder approval rates separately for non-staggered and staggered ACs. 

    Findings:
    • The authors find that most AC members serve on non-staggered boards, which typically have higher shareholder votes than staggered boards.
    • The authors find that, consistent with former research, firms with non-staggered boards perform better than those with staggered boards and are more likely to have majority voting rather than plurality voting.
    • The authors find that companies do not necessarily respond to low votes by indiscriminately replacing AC members; instead, they remove and replace financial accounting experts on the AC when shareholders express dissatisfaction with the AC. This appears to only be the case in non-staggered boards; staggered boards do not react to low votes in the same manner.
    • The authors find that low shareholder support is associated with an improvement in the composition and diligence of the AC; however, these associations are prominent only in non-staggered firms.
    • The authors’ findings suggest that dissatisfaction with the AC and the auditor expressed through low votes is associated with a decrease in the tax NAS ratio.
    • The authors’ findings suggest that low shareholder votes in firms with non-staggered boards are associated with changes to the composition and diligence of the AC, changes to the relationship with the auditor and gradual changes to financial reporting quality. 
    Category:
    Corporate Matters, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight
  • Jennifer M Mueller-Phillips
    Attracting Applicants for In-House and Outsourced Internal...
    research summary posted April 18, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting 
    Title:
    Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors.
    Practical Implications:

    This study offers insights into why internal auditing is experiencing a shortage of qualified job candidates and offers a potential solution to the problem. The authors find that external auditors have negative perceptions about internal auditing, and these negative perceptions are associated with a (1) decreased desire to apply for internal auditing positions, (2) lower likelihood of recommending an in-house internal auditing career to high-performing students, and (3) higher likelihood of recommending an in-house internal auditing career to mediocre students. Internal auditors can try solving this problem by improving perceptions about internal auditing via a media campaign that raises awareness about the true internal audit career path.

    Citation:

    Bartlett, G.D., J. Kremin, K.K. Saunders, and D.A. Wood. 2016. Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons 30 (1): 143-156.

    Keywords:
    internal audit, hiring decisions, outsourcing, external auditors
    Purpose of the Study:

    The internal audit function can help organizations strengthen their risk management and corporate governance, yet the demand for qualified candidates to fill internal audit job openings exceeds the supply of interested applicants. Consequently, the internal audit function may find itself short-staffed and/or staffed with lower quality candidates, which may limit its ability to add value to the organization. In order to correct this problem, it is important to fully understand its scope and its root cause(s). Prior research attempting to gain this understanding has focused on investigating how accounting students’ beliefs about internal audit impact their interest to pursue an internal audit career. The authors of this paper extend this research by:

    • Investigating how external auditors’ beliefs about internal audit impact (1) their interest to pursue an internal audit career and (2) their recommendations to students about pursuing an internal audit career,  
    • Investigating differences in external auditor’s perceptions of in-sourced versus out-sourced internal audit, and
    • Asking external auditors to suggest what needs to be done to improve their perceptions of internal audit.
    Design/Method/ Approach:

    The authors use data from three sources. First, the authors performed an experiment using experienced external auditorsmostly seniors or associateswho were asked whether they would apply for a job described as either an accounting, in-house internal audit, or outsourced internal audit position. Second, the authors performed another experiment using experienced external auditorsmostly managers or directorswho were asked whether they would recommend that a high-performing (mediocre performer) student pursue an external audit, in-house internal audit, or outsourced internal audit career. Third, the authors surveyed high-ranking former/current external auditors who never worked in internal audit about what would make internal auditing a more appealing career for them.

    Findings:
    • When the same job opening is labeled as either accounting, in-house internal auditing, or outsourced internal auditing, the accounting label is likely to attract two times as many external auditor applicants as the other two labels.
    • External auditors are equally willing to apply for in-house internal auditing or outsourced internal auditing positions.
    • External auditors have more negative perceptions of in-house internal auditors than outsourced internal auditors.
    • External auditors have negative perceptions of the internal auditing profession. They believe that (1) others have negative stereotypes about the profession, (2) business professionals do not respect internal auditors, and (3) internal auditors do boring work.
    • Those less interested in applying for internal audit jobs have negative perceptions of internal auditing.
    • The average external auditor willing (unwilling) to apply for an internal audit position would want to receive at least 124% (149%) of his current salary before being willing to switch from his current external audit job to an internal audit job.  
    • External auditors will be most likely to recommend that top-performing students work in external audit and mediocre students work in in-house internal audit.
    • External auditors will equally recommend that top-performing students and mediocre students should consider outsourced internal audit as a second best career path.
    • External auditors have more negative perceptions of outsourced internal auditing than external auditing on most dimensions, except in regards to work-life balance. They believe that work-life balance is better for outsourced internal auditors.
    • Current and former external auditors believe that internal auditing could become more appealing if internal auditors do more interesting work, receive more respect, perform value-added tasks, receive better compensation, and have better promotion opportunities. Because internal auditors appear to already be following these suggestions, internal auditors may benefit from giving others a better understanding of internal audit careers.
    Category:
    Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors, Staff Hiring - Turnover & Morale

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