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  • Jennifer M Mueller-Phillips
    CEO Equity Incentives and Financial Misreporting: The Role...
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.01 Earnings Management, 14.10 CEO Compensation 
    Title:
    CEO Equity Incentives and Financial Misreporting: The Role of Auditor Expertise.
    Practical Implications:

    The evidence documents an important role for financial statement verification in the way managers are incentivized. While the economic consequences of auditing have focused on improvements to the information environment and a lower cost of capital, this study broadens the role of auditing in the efficient functioning of firms. The link between auditor expertise and managerial incentives is an important one because CEO incentives have wide implications for managerial risk-taking.

    This study contributes to the CEO contracting-financial misreporting literature by providing an economic rationale for the inconsistent evidence in prior studies. The authors show that detection mechanisms such as auditor expertise mitigate the effect of equity incentives on misreporting by limiting the ability of managers to misreport financial statements.

    Citation:

    Jayaraman, S., & Milbourn, T. 2015. CEO Equity Incentives and Financial Misreporting: The Role of Auditor Expertise. Accounting Review 90 (1): 321-350. 

  • Jennifer M Mueller-Phillips
    Was Dodd-Frank Justified in Exempting Small Firms from...
    research summary posted November 26, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.08 Impact of SEC Rules Changes/SarbOx, 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.05 Evaluating Accruals/Detection of Abnormal Accruals, 08.06 Earnings Management – Detection and Response, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Was Dodd-Frank Justified in Exempting Small Firms from Section 404b Compliance?
    Practical Implications:

    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 

    Citation:

    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.

  • Jennifer M Mueller-Phillips
    Capital Structure, Earnings Management, and Sarbanes-Oxley:...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Capital Structure, Earnings Management, and Sarbanes-Oxley: Evidence from Canadian and U.S. Firms
    Practical Implications:

    This study is important because an increase in a firm’s debt level also increases the probability that the firm goes bankrupt.  Thus, it behooves managers and auditors to understand the way that SOX and earnings management impact the percentage of one component of debt (here, long-term debt) in a firm.

    The result contained in the first bullet of the “Findings” section suggests that, even though SOX spurs managers to report more accurate financials, which tend to lower the cost of equity financing, managers still find it cheaper to use debt.  The result in the second bullet of the “Findings” section suggests that managers anticipate a higher cost of debt after SOX and acquire debt while it is relatively cheap.  This result is consistent with research papers that find that market participants rationally expect Congress to pass legislation (e.g., SOX) that protect investors and improves firm behavior in the aftermath of financial or accounting scandals.  Thus, managers rationally expect long-term debt to be more expensive after SOX and, accordingly, take on more of it before SOX. 

    The result contained in the third bullet of the “Findings” section suggests that SOX requires managers who reported less transparent financial statements before SOX to report more transparent financials after SOX.  Since the more transparent financials are likely to be more volatile than and weaker than earlier financials, many managers will not be able to issue bonds to fund projects.  Thus, if those managers wish to take on projects, they will need to finance those projects by issuing equity, leading to lower long-term debt ratios.  Oppositely, SOX’s disclosure requirements will prompt managers who reported transparent earnings before SOX to continue to do so after SOX.  Thus, lenders will reward those managers by allowing them to take on additional long-term debt to finance the projects that the managers wish to undertake.

    For more information on this study, please contact Kelly E. Carter.

    Citation:

    Carter, K. 2013. Capital structure, earnings management, and Sarbanes-Oxley:  Evidence from Canadian and U.S. firms. Accounting Horizons 27 (2): 301-318.

  • Jennifer M Mueller-Phillips
    CEO and CFO Equity Incentives and the Pricing of Audit...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 14.0 Corporate Matters, 14.01 Earnings Management, 14.07 Executive Compensation 
    Title:
    CEO and CFO Equity Incentives and the Pricing of Audit Services
    Practical Implications:

    Our study highlights the importance of taking into account executive incentive plans in improving the understanding of auditors’ risk assessment and pricing decisions, in support of the current professional audit standards. The findings that auditors respond to CEO and CFO equity incentives differently have significant implications for the corporate governance reforms and the design of optimal corporate executive compensation policies. Following the accounting scandals in the early 2000s, there has been increased regulatory and legislative scrutiny on corporate governance. Especially, regulators have recognized CFOs as the individuals bearing responsibilities for the integrity of financial information. Our paper lends support to the regulatory inclusion of CFOs as accountable individuals, and to concerns that firms should exercise caution in compensating CFOs using equity-based tools.

     

    For more information on this study, please contact Yonghong Jia.

    Citation:

    Billings, B. A., X. Gao, and Y. Jia. 2014. CEO and CFO Equity Incentives and the Pricing of Audit Services. AUDITING: A Journal of Practice & Theory 33 (2): 1-25

  • Jennifer M Mueller-Phillips
    Revenue Recognition, Earnings Management, and Earnings...
    research summary last edited May 25, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry
    Practical Implications:

    The results of this study suggest that manufactures that sell products through the distribution channel should defer revenue recognition until product return and pricing adjustment uncertainties are resolved. This information is potentially informative for regulators and standard-setters. This study also extends upon a growing stream of research that examines the implications of revenue recognition for firms in different industries and can help students, practitioners, and other financial statement users better understand revenue recognition methods and their associations with earnings management and earnings informativeness.

     

    For more information on this study, please contact Stephanie J. Rasmussen.

    Citation:

    Rasmussen, S. J. 2013. Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry. Accounting Horizons 27 (1).

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  • Jennifer M Mueller-Phillips
    Revenue Recognition, Earnings Management, and Earnings...
    research summary posted April 28, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry
    Practical Implications:

    The results of this study suggest that manufactures that sell products through the distribution channel should defer revenue recognition until products until product return and pricing adjustment uncertainties are resolved. This information is potentially informative for regulators and standard-setters. This study also extends upon a growing stream of research that examines the implications of revenue recognition for firms in different industries and can help students, practitioners, and other financial statement users better understand revenue recognition methods and their associations with earnings management and earnings informativeness.

    For more information on this study, please contact Stephanie J. Rasmussen.
     

    Citation:

    Rasmussen, S. J. 2013. Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry. Accounting Horizons 27 (1).

  • Jennifer M Mueller-Phillips
    Discontinuities and Earnings Management: Evidence from...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management, 14.05 Earnings Targets and Management Behavior 
    Title:
    Discontinuities and Earnings Management: Evidence from Restatements Related to Securities Litigation
    Practical Implications:

    The results of this study provide important evidence to the earnings management literature. Recent studies provide several plausible alternative explanations for the discontinuities in earnings distributions near earnings benchmarks. Though the findings of this study cannot readily be extrapolated to a broader sample of firms, the authors found evidence that firms commit less egregious earnings management in order to meet earnings benchmarks. This study is therefore important in considering whether earnings management plays a role in the discontinuities in various earnings distributions documented by prior studies.

    For more information on this study, please contact Dain C. Donelson.
     

    Citation:

    Donelson, D. C., J. M. McInnis, and R. D. Mergenthaler. 2013. Discontinuities and Earnings Management: Evidence from Restatements Related to Securities Litigation. Contemporary Accounting Research 30 (1).

  • Jennifer M Mueller-Phillips
    Audit Quality and the Trade-Off between Accretive Stock...
    research summary last edited June 21, 2013 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.08 Proxies for Audit Quality, 14.0 Corporate Matters, 14.01 Earnings Management, 14.05 Earnings Targets and Management Behavior 
    Title:
    Audit Quality and the Trade-Off between Accretive Stock Repurchases and Accrual-Based Earnings Management
    Practical Implications:

    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. 

    Citation:

    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.

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  • The Auditing Section
    The Impact of Management Integrity on Audit Planning and...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 02.02 Client Risk Assessment, 02.03 Management Integrity Assessments, 06.04 Management Integrity, 14.01 Earnings Management 
    Title:
    The Impact of Management Integrity on Audit Planning and Evidence
    Practical Implications:

    The results of this study are important because, while severe cases of low integrity may be weeded out during client acceptance, auditor firms tend to retain clients with a wide spectrum of integrity levels that must be managed throughout the audit process. Thus evidence regarding how the integrity of management influences auditors (1) assessment of risk, (2) planning of audit procedures, and (3) identification of misstatements may be useful for developing training materials or best practices for approaching audits on the lower end of the integrity spectrum.

    Citation:

    Kizirian, T.G., B.W. Mayhew, and L.D. Sneathen, Jr. 2005. The impact of management integrity on audit planning and evidence. Auditing: A Journal of Practice & Theory 24 (2): 49-67.

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  • The Auditing Section
    Revenue Manipulation and Restatements by Loss Firms
    research summary last edited May 25, 2012 by The Auditing Section, tagged 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management, 14.05 Earnings Targets and Management Behavior 
    Title:
    Revenue Manipulation and Restatements by Loss Firms
    Practical Implications:

    This study’s results provide auditors and regulators with another potential indicator of managerial incentives to manipulate reported revenues (i.e., continued losses or negative cash flows) and how managers might achieve this result.  The authors demonstrate that this manipulation incentive applies across the general spectrum of firms and is not limited to young or internet-based businesses.

    Citation:

    Callen, J., S.W.G. Robb, D. Segal 2008. Revenue Manipulation and Restatements by Loss Firms. Auditing: A Journal of Practice & Theory 27 (2): 1-29.

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