Posts

Posts

  • 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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
    Whistleblowing in Audit Firms: Organizational Response and...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Whistleblowing in Audit Firms: Organizational Response and Power Distance
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their ethics and whistleblowing policies. The evidence indicates that auditors’ are sensitive to power distance, and while no main effect for prior organizational response was found, prior research suggests that there are other costs associated with the perception that a firm does not respond to reports of ethical violations. Furthermore, it indicates that gender plays a role in an auditor’s sensitivity to power distance, and that the perceived moral intensity of the violation, which influences reporting likelihood, is moderated by the position of the observer, relative to the perpetrator. The study highlights the importance of firm culture and the implementation and enforcement of effective whistleblowing and ethical polices on the likelihood of employees to report observed ethical violations. 

    For more information on this study, please contact Eileen Z. Taylor.

    Citation:

    Taylor, E. Z., and M. B. Curtis. 2013. Whistleblowing in Audit Firms: Organizational Response and Power Distance. Behavioral Research in Accounting 25 (2): 21-43

    Keywords:
    Whistleblowing; ethical dilemma; power distance; gender
    Purpose of the Study:

    Employee fraud is a threat to all organizations, and whistleblowing is the most common way these frauds are detected. This paper investigates whether two factors, prior organizational response and power distance, affect auditors’ likelihood to report observations of colleagues’ unethical behavior. Prior organizational response (to whistleblowing reports) should result in a greater reporting likelihood, since evidence from practice and research indicates that a whistleblower’s primary goal is to stop the unethical behavior from continuing. Organizations that historically pay attention to whistleblowing reports should give potential whistleblowers the confidence that their report will be effective. Power distance, the level of the perpetrator in relation to the level of the potential whistleblower (peer or superior), is also likely important, as employees may be reluctant to whistleblow on someone of higher rank.

    The authors hypothesize that whistleblowing likelihood will be positively associated organization responsiveness to prior reports and that such likelihood is also associated with the relative position of the observer—individuals are more likely to report on peers than on superiors. They also investigate whether gender of the observer (potential whistleblower) matters, in relation to power distance, hypothesizing that females are more sensitive to power distance than are males.    

    Design/Method/ Approach:

    One hundred and eight audit seniors from Big-4 firms completed an experimental survey in Fall 2009. All participants read the same vignette of an ethical dilemma they observed within their firm, with modifications made for the different treatments. In the “responsive organization treatment”, participants were told that in the past, when the organization received a whistleblower report, they had taken appropriate action, whereas in the “nonresponsive treatment”, participants were told that in the past, when the organization received a whistleblower report, they had not taken appropriate action. To examine power distance, in the vignette, the perpetrator was referred to either as a “manager” (superior) or as a “fellow in-charge” (peer). The unethical behavior entailed observing the perpetrator destroy a page of review comments without addressing them.

    After reading the vignette, participants rated the seriousness of the unethical behavior and their responsibility to report it, as a measure of moral intensity. In order to assess whistleblowing likelihood, participants also rated how likely they were to report the violation to the employee hotline, using a scale of 0 to 100, if (1) your identity could be protected, and (2) your report could be anonymous

    Findings:
    • The authors find that auditors in this study were sensitive to power distance, such that they were significantly more likely to whistleblow on their peers than on their superiors. 
    • Additionally, the authors find that power distance and prior organizational response interact, such that auditors are were more likely to report on their peers when the organization’s prior response was weak or negative, than when it was responsive. However, auditors were less likely to report superiors when the organization’s prior response was weak or negative, than when it was responsive.
    • The authors find that men appear relatively less sensitive to power distance than do women.
    • The authors find that the perceived moral intensity of the case is significantly related to reporting likelihood, and that power distance moderates the effect such that those with a lower perception of moral intensity are much more influenced by power distance.
    Category:
    Governance, Independence & Ethics
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reporting Ethics Breaches - Self & Others