Given that REM often causes significant auditor discomfort, the authors’ paper provides broader REM and auditor comfort-related questions pertaining to the effects of management’s focus on short-term results, the extent to which REM is a problem that can or needs to be fixed, and the possibility that REM is a gateway to more serious forms of accounting manipulation.
Commerford, B. P., D. R. Hermanson, R. W. Houston, and M. F. Peters. 2016. Real Earnings Management: A Threat to Auditor Comfort? Auditing: A Journal of Practice and Theory 35 (4): 39 – 56.
The model offers a simple explanation of why the world, for so long after the height of the global financial crisis, is still mired in slow growth. During a prolonged and excessive boom bank profits and capital were materially increased by unrealized FVA profits. These profits justified the pay-out of liquid assets weakening the financial system. The additional capital further justified more debt financed asset expansion. With the crisis bank management realized that these unrealized capital items were not permanent. Management was able to postpone the recognition of FVA losses by using the flexibility inherent in FVA regulations, but lending was slowed to a point reflective of “safe” capital levels. Lending activity will stay subdued until all of these marked-up items have been worked off banks’ balance sheets.
de Jager, P. 2014. Fair value accounting, fragile bank balance sheets and crisis: A model. Accounting, Organizations & Society 39 (2): 97-116.
While prior research has investigated audit effects in for profit industries, this study investigates audit effects at nonprofit organizations. Nonprofits in general and PHAs in particular are largely served by smaller auditors frequently classified in prior research as lower quality. Further, nonprofits in general represent low litigation risks for the auditors and the threat of litigation and associated economic loss is generally considered one motive for an audit firm to perform a high quality audit. The evidence suggests that audits matter in the nonprofit industry. So even in a setting where research would suggest there would be low audit quality, when the auditor is smaller and the risk of litigation is low, auditors make significant adjustments to pre-audited data and help to constrain management bias toward meeting pre-established financial thresholds.
For more information on this study, please contact Barbara Grein.
Grein, B. M., and S. L. Tate. 2011. Monitoring by Auditors: The Case of Public Housing Authorities. The Accounting Review 86 (4):1289-1319.
Our study evaluates a provision of Dodd-Frank which provided permanent exemption from Section 404b compliance to non-accelerated filers. Our results show that these small firms did not improve their reporting quality to the same extent as large firms implying that the Dodd-Frank exemption will probably serve to keep the reporting quality of the exempted firms at lower than achievable levels.
We also note that as part of the Dodd-Frank legislation, the SEC was given a mandate to investigate raising the Section 404b exemption requirements from $75 million to $250 million in market capitalization (Dodd Frank 2010). While the SEC eventually decided to leave the exemption criterion at $75 million, this matter is still considered to be an open topic (SEC 2011). Our study informs this ongoing debate.
For more information on this study, please contact
Anthony D. Holder, PhD, CPA
Assistant Professor, Department of Accounting - MS 103
University of Toledo
Toledo, OH 43606-3390
Email: Anthony.Holder@utoledo.edu
Web: http://homepages.utoledo.edu/aholder4/
Phone: 1.419.530.2560
Fax: 1.419.530.2873
Holder, A., K. Karim, and A. Robin. 2013. Was Dodd-Frank Justified in Exempting Small Firms from Section 404b Compliance? Accounting Horizons 27 (1): 1-22.
The results of this study suggest that auditors spend a greater effort on analyzing income-increasing items compared to income-decreasing items. They also suggest that auditors compensate for greater risk associated with income-increasing items by requiring greater verification of such items. Because of the limitations placed on the results of this study due to the specific context of the experiment, future research should try and examine such differences in auditors’ decision-making processes.
For more information on this study, please contact Naman K. Desai.
Desai, N. K., and G. J. Gerard. 2013. Auditors’ Consideration of Material Income-Increasing versus Material Income-Decreasing Items during the Audit Process. Auditing 32 (2).