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  • Jennifer M Mueller-Phillips
    Do Small Firms Benefit from Auditor Attestation of Internal...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 12.0 Accountants’ Reports and Reporting, 12.07 Attestation Services 
    Title:
    Do Small Firms Benefit from Auditor Attestation of Internal Control Effectiveness?
    Practical Implications:

    This study can inform regulators, investors, and others of the potential consequences of exempting non-accelerated filers from Section 404(b) of SOX. The results of this study support the notion that an auditor’s opinion on the effectiveness of internal control over financial reporting adds value beyond certifications provided by management. Additionally, the results of the study support the notion that investors in small public firms regard auditors’ assessment of the effectiveness of internal controls as adding value via higher revenue quality relative to firms that are not required to submit themselves to additional scrutiny by their auditors. Thus, firms contemplating exiting accelerated status may want to consider that such a move may have an adverse effect on firm valuation.

    Citation:

    Krishnan, G. V., and W. Yu. 2012. Do Small Firms Benefit from Auditor Attestation of Internal Control Effectiveness? Auditing: A Journal of Practice and Theory 31(4): 115-137.

    Keywords:
    Dodd-Frank Act; SOX 404; revenue quality; non-accelerated filers; valuation
    Purpose of the Study:

    Several sections of the Sarbanes-Oxley Act of 2002 (SOX) mandate disclosure of information on the effectiveness of internal control over financial reporting (ICFR):

    • Section 302 requires the CEO and CFO to certify 10-K and 10-Q reports, and establish and maintain internal controls.
    • Section 404(a) requires each company’s annual report to include an internal control report containing management’s assessment of the effectiveness of ICFR (management report).
    • Section 404(b) requires companies to have the auditor evaluate the effectiveness of the internal controls.

    Accelerated filers (public companies with a public float of at least $75 million) and non-accelerated filers are both subject to the provisions of Section 302 and 404(a), but the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 permanently exempts non-accelerated filers from the provisions of Section 404(b). Therefore, the purpose of the study was to examine whether the provisions of Section 404(b) add value incremental to those in Sections 302 and 404(a) for small firms. The authors specifically examined whether there was a difference in the revenue quality (which is discretionary or abnormal revenue) between accelerated filers who are subject to auditor attestation of ICFR and non-accelerated filers. They also examines whether there was a difference in the investor valuation of accelerated filers relative to non-accelerated filers.
     

    Design/Method/ Approach:

    The authors used data between the years 2007 and 2009 from publicly-traded companies. The authors identified accelerated and non-accelerated filers that had beginning assets between $25 million and $125 million. The authors fit this data to a model that estimated discretionary revenues for these firms.

    Findings:
    • On average, discretionary (abnormal) revenues were lower by about 1.5 percent of total assets for accelerated filers relative to non-accelerated filers.
    • After excluding observations that had control deficiencies, the authors found that the discretionary revenues were lower by about 1.9 percent for accelerated filers relative to non-accelerated filers.
    • The authors evaluated firms that had changed from being accelerated filers to non-accelerated filers and found that discretionary revenues had increased by about 1 percent of total assets following the change from accelerated filer to non-accelerated filer.
    • The authors matched non-accelerated filers with accelerated filers by the ratio of audit fees over total assets and found that discretionary revenues were smaller for accelerated filers relative to non-accelerated filers.
    • The book value of equity of accelerated filers was valued more by investors relative to the book value of equity of non-accelerated filers.
       
    Category:
    Accountants' Reporting, Standard Setting
    Sub-category:
    Attestation Services, Impact of 404, Impact of SOX
  • Jennifer M Mueller-Phillips
    Impact of Assurance and Assurer’s Professional Affiliation o...
    research summary posted December 3, 2014 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.07 Attestation Services, 15.0 International Matters, 15.05 Sustainability Services 
    Title:
    Impact of Assurance and Assurer’s Professional Affiliation on Financial Analysts’ Assessment of Credibility of Corporate Social Responsibility Information
    Practical Implications:

    The findings of this study provide evidence on the benefits of assurance of CSR reports in enhancing credibility. Practice indicates that around the world about 50% of organisations have their stand-alone CSR reports independently assured, and that about 50% of these are assured by members of the accounting profession. This research shows that financial analysts in the U.K., U.S. and Australia will perceive an enhanced credibility of these reports when they are independently assured. However, the evidence also indicates that such benefits are context-specific. Assurance will add more credibility to CSR reports for companies that are facing more significant CSR issues. With regards choice of assurance provider, financial analysts in Australia and U.K. perceive improved credibility associated with independent assurance whether or not the assurer came from the accounting profession. In the U.S. it was only assurance from professional accountants that leads to significantly higher perceived CSR report credibility. This will have implications for organisations in their decision to assure and choice of assurance provider. From the assurance firm’s perspective, in countries where CSR assurance is commonly provided by both accounting profession and other providers outside of the profession, accounting firms may wish to more clearly articulate the benefits of their assurance services compared with those from other assurance providers.

    For more information on this study, please contact Roger Simnett.

    Citation:

    Pflugrath, G., P. Roebuck, and R. Simnett. 2011. Impact of assurance and assurer's professional affiliation on financial analysts' assessment of credibility of corporate social responsibility information. Auditing: A Journal of Practice & Theory 30 (3): 239-254.

    Keywords:
    corporate social responsibility; assurance; benefits of assurance; credibility
    Purpose of the Study:

    Globally, the increasing trend of Corporate Social Responsibility (CSR) reporting has led to the growing importance of assurance of nonfinancial reports. While archival research provides insights into the international CSR assurance market as well as the choice of assurance provider, it remains unknown whether assurance impacts financial analysts’ perception of the credibility of CSR information, and if it does, whether the impact differs depending on the assurance providers’ professional affiliation. To provide evidence on the issue, this study uses an experimental design to examine whether assurance of CSR information and the type of assurer (professional accountant or sustainability expert) impact financial analysts’ perception of CSR information credibility. The study motivates its predictions with the documented benefits of assurance in enhancing credibility and the likely benefits of professional accountants’ assurance due to service providers’ expertise and reputation. Additionally, the study examines whether the perception differs for analysts from different countries and whether the results are consistent for CSR-reporting companies across different industries. 

    Design/Method/ Approach:

    The study uses an experimental design. The participants are financial analysts from Australia, U.K. and U.S. In the experiment, the participants are presented with a set of two CSR reports (one from a mining company and the other from a retailer). Whether the reports are assured and, if they are assured, the type of assurance provider, is manipulated across different treatments. The participants are asked to indicate their perception of the credibility of the CSR information after reading the reports, and if appropriate , the assurance report on CSR information. The research instrument was administered as either in hard copy or an electronic version. The experimental data from the hard copies of the research instrument were collected in the last quarter of 2007, while the data from the online instruments were obtained in the second quarter of 2008. 

    Findings:

    The study finds that:

    • Financial analysts consider assured CSR information to be more credible than CSR information that is not assured. 
    • When CSR information is assured, financial analysts perceive CSR information assured by a professional accountant to be more credible than CSR information assured by a sustainability expert. 
    • Assured CSR information from the mining company is perceived by financial analysts to be more credible than the assured information from the retailing company. 
    • Assurance from professional accountants leads to significantly higher perceived information credibility from the U.S. financial analysts. However, Australian and U.K. financial analysts were found to value assurance highly regardless of the type of assurer.
    • Assurance of CSR information, type of assurer, and the industry of CSR reporting company have little impact on investment-type decisions made by financial analysts.  
    Category:
    Accountants' Reporting, International Matters
    Sub-category:
    Attestation Services, Sustainability ServicesTraining & General Experience

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