Category Archives: Accounting

The heterogeneity of board-level sustainability committees and corporate social performance

Jenna J Burke, Rani Hoitash, Udi Hoitash
Journal of Business Ethics,Vol. 154, Issue 4, Pages: 1161-1186.
This paper explores an increasingly prevalent element of board-level commitment to sustainability. We propose a theoretical framework under which the existence and associated actions of board-level sustainability committees are motivated by shared value creation, where the interests of a diverse group of stakeholders are satisfied and sufficient profit is achieved. Using hand-collected data, we find that sustainability committees are heterogeneous in focus and vary in their effectiveness. Specifically, we disaggregate the sustainability committee construct based on stakeholder group focus (i.e., community, employee, environment, and consumer/supplier) and find that associations between sustainability committees and performance outcomes are stronger when committees focused on a specific stakeholder group are paired with relevant performance outcomes. We generally find that sustainability

The Importance of Audit Partners’ Background

Jenna Burke, Rani Hoitash, Udi Hoitash
The CPA Journal,Vol. 89, Issue 2, Pages: 13-14.
The research, forthcoming in Auditing: A Journal of Practice and Theory, is enabled by a new rule from the PCAOB that requires CPA firms to disclose the name of the partner in charge of each public company audit. Gender, Education, and Social Connections Although an estimated 50% of CPA firm employees are female, reported data shows that women make up only 17% of public company audit partners (Exhibit 1). Whether Form AP will have a longterm impact on the performance of audits or the retention of auditors remains to be seen, but this first year of data provides a baseline for investors and others interested in understanding more about who leads the audits of public companies and whether this population will change over time. Jenna Burke, PhD, CPA, is an assistant professor at the University of Colorado Denver.

Audit partner identification and characteristics: Evidence from US Form AP filings

Jenna J Burke, Rani Hoitash, Udi Hoitash
Auditing: A Journal of Practice and Theory,
This paper investigates the overall impact of and the information made available by the recent audit partner disclosure requirement in the U.S. After a contentious comment period, the PCAOB released Rule 3211, which requires registered public accounting firms to disclose the name of the audit partner for every audit report it issues. In the first year of adoption, we find a significant increase in audit quality and audit fees and a significant decrease in audit delay. Furthermore, we collect information on partner gender, busyness, education, and social connections to explore whether these newly observable characteristics are associated with audit outcomes. We find that several of these characteristics are associated with variations in audit fees and audit delay, but no evidence of an association with audit quality. Overall, our findings suggest that the disclosure of partner name in Form AP enhances the audit information

Auditor-provided lobbying service and audit quality

Brian Burnett, Hui Chen, Katherine Gunny
Journal of Accounting, Auditing & Finance,Vol. 33, Issue 3, Pages: 402-434.
Regulators and the public have expressed concerns about accounting firms lobbying politicians and regulators on behalf of their own audit clients because it could pose an advocacy threat to auditor independence. In this study, we examine whether these lobbying activities by accounting firms are associated with their clients’ audit quality. As required disclosures of lobbying activities under the Lobbying Disclosure Act are very limited, we construct a proxy to capture auditor lobbying on behalf of audit clients. Using our proxy for lobbying, we find that perceived audit quality (measured using earnings response coefficients) is negatively related to lobbying. However, we fail to find that actual audit quality is lower for these clients (measured as the propensity to restate earnings, propensity to issue a going-concern opinion, and discretionary accruals). Our findings suggest that investors perceive auditors’ lobbying for

How Busyness Influences SEC Compliance Activities: Evidence from the Filing Review Process and Comment Letters

Katherine A Gunny, Judith M Hermis
Contemporary Accounting Research,
The U.S. Securities and Exchange Commission (SEC) reviews firm filings and issues comment letters on those filings. These comment letters play an important role in the assessment of firm value. These activities are seasonally compressed because over 70 percent of registrants have a December fiscal yearend. Research in other settings finds that busyness leads to negative outcomes. We examine how busyness impacts the frequency, scope, and timeliness of comment letters. We find that the SEC issues fewer comment letters when busy, the SEC focuses its limited resources on the most severe cases of disclosure noncompliance, and extends the amount of time between receiving a firm’s filing and issuing a comment letter. Despite this, we find no evidence that the SEC misses more serious compliance issues when busy. Our results have implications for policymakers responsible for allocating resources to the

Individual Performance Measures: Effects of Experience on Preference for Financial or Non-Financial Measures

Michael L Roberts, Bruce R Neumann, Eric Cauvin
Advances in Management Accounting,Pages: 191-221.
Purpose Prior research identified conflicts in implementing performance measurement systems that include both financial and non-financial measures. Attempts to incorporate non-financial measures, for example, balanced scorecards (BSCs), have shown short-term success, only to be replaced with systems that rely on financial measures. We develop a theoretical model to explore evaluators’ choice and use of the most important performance measurement criterion among financial and non-financial measures. Methodology/approach Our model links participants’ prior evaluation experiences with their attitudes about relative accounting qualities and with their choice of the most important performance measure. This choice subsequently affects their evaluation judgments of managers who perform differentially on financial versus non-financial measures. Findings Experimental testing of our structural equation

The impact of litigation risk on auditor pricing behavior: Evidence from reverse mergers

Lawrence J Abbott, Katherine Gunny, Troy Pollard
Contemporary Accounting Research,Vol. 34, Issue 2, Pages: 1103-1127.
We use reverse mergers to examine the impact of litigation risk on audit fees. In a reverse merger, a private company merges with a public company, and the private company’s management takes over the resulting publicly traded firm. Reverse mergers create a unique test setting to provide estimates on the litigation risk premium because, while the litigation risk for formerly private firms whose equity becomes publicly traded increases, the remaining auditee and auditorrelated characteristics remain virtually unchanged. We document a litigation risk premium of approximately 27 percent. Moreover, we document that equity dispersion impacts the audit fee pricing of litigation risk and this relation is dramatically magnified in the publicly traded realm. Finally, we find that institutional investors demand higher audit effort in the form of higher audit fees in both the private and publicequity settings.

The Heterogeneity of Board-Level Sustainability Committees and Corporate Social Performance

Jenna J Burke, Rani Hoitash, Udi Hoitash
Journal of Business Ethics,Pages: 1-26.

This paper explores an increasingly prevalent element of board-level commitment to sustainability. We propose a theoretical framework under which the existence and associated actions of board-level sustainability committees are motivated by shared value creation, where the interests of a diverse group of stakeholders are satisfied and sufficient profit is achieved. Using hand-collected data, we find that sustainability committees are heterogeneous in focus and vary in their effectiveness. Specifically, we disaggregate the …
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When are outside directors more effective monitors? Evidence from real activities manipulation

Jeff Zeyun Chen, Marc Cussatt, Katherine A Gunny
Journal of Accounting, Auditing & Finance,Pages: 0148558X17692691.
A large body of the corporate governance literature examines the disciplinary role of outside directors in overseeing the CEO. Although it is certainly a critical factor in effective monitoring, independence alone is not sufficient. Fulfilling the monitoring role also requires a skilled and knowledgeable board (Acharya, Myers, & Rajan, 2011; Adams & Ferreira 2007; Raheja, 2005). The skills and knowledge needed for monitoring vary with the type of CEO activity being monitored. For certain managerial actions that require sufficient firm-specific knowledge and expertise to exercise discipline, board informedness could be at least as critical as board independence. Given the trade-off between informedness and independence, outside directors are not necessarily better monitors than inside directors due to information disadvantages. 1 In this study, we examine whether and to what extent an independent board constrains

The impact of tax rate changes on intercorporate investment

Robert F. Gary, Jared A. Moore, Craig A. Sisneros, and William D. Terando
Advances in Accounting, Volume 34, Pp. 55–63

We examine how tax rates impact investment by corporations in the stock market. We regress changes in intercorporate investment on changes in the various individual and corporate top statutory marginal tax rates (MTRs). We find a significant negative association between changes in individual capital gains MTRs and changes in intercorporate investment, while no such association is evident for changes in either individual ordinary or dividend MTRs. These results support the notion that corporations respond to the after-tax rate of return and/or market efficiency consequences brought about by a change in individual capital gains MTRs. We find a significant positive relation between changes in intercorporate investment and changes in corporate MTRs on ordinary income. These results are consistent with corporations scaling back expansion plans and instead investing free cash flows in equity securities as MTRs increase.

The business case for integrated reporting: Insights from leading practitioners, regulators, and academics

Jenna J Burke, Cynthia E Clark
Business Horizons,Vol. 59, Issue 3, Pages: 273-283.

Integrated reporting, a new development in the reporting landscape, seeks to concisely communicate a firm’s value through a more holistic picture that integrates financial and non-financial information. This practice is in its infancy in the United States and Europe, with many firms unsure of what integrated reporting is, what its benefits are, and even how to set it up. Drawing upon transcripts from 19 unstructured panel interviews at a global symposium on the subject, we discuss the business case for integrated reporting, as well …
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The Terminology of Going Concern Standards: How Subtle Differences in Wording Can Have a Big Impact

Brian Daugherty, Carol Callaway Dee, Denise Dickins, Julia Higgs
The CPA Journal,Vol. 86, Issue 1, Pages: 34.

Applicable to auditors as well, it proscribes,” The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond he date of the financial statements being audited [hereinafter referred to as,? a reasonable period of time'”[emphasis added].[…] the going concern criteria in ASU 2014-15 are less aligned with IAS 1 than when first proposed.
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Boards and shareholders: Bridging the divide

Jenna Burke, Cynthia Clark
Shareholder Empowerment (Book Chapter),Pages: 137-154.
Today’s corporate environment, and the interactions among its participants, are increasingly complex and dynamic. The market has responded with expansive regulations, listing rules, and bylaws aimed at empowering shareholders. With this empowerment, shareholders can now voice their discontent and demand necessary corrections. Notably, corporate constituents have not only more information, but also more ways to access it (e.g., formal reporting, public filings, Twitter, blogs, e-mails, listservs, etc.), creating both greater transparency and greater scrutiny of organizational behaviors.

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Concept Release on Audit Quality Indicators, No. 2015-005, July 1, 2015: Participating Committee Members

Zabihollah Rezaee, John Abernathy, Monika Causholli, Paul N Michas, Pamela B Roush, Stephen Rowe, Uma K Velury
Current Issues in Auditing,Vol. 10, Issue 1, Pages: C11-C27.

On July 1, 2015, the Public Accounting Oversight Board (PCAOB) issued its Concept Release seeking comments by September 29, 2015 on a portfolio of 28 potential Audit Quality Indicators (AQIs). The Auditing Standards Committee of the Auditing Section of the American Accounting Association is pleased to provide comments on the PCAOB Rulemaking Docket Matter No. 041. The committee wholeheartedly supports the development, implementation, and disclosure of AQIs, and commends the PCAOB for its …
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Do Colleges Get What They Pay For? Evidence on Football Coach Pay and Team Performance

Gary J. Colbert and E. Woodrow Eckard
Journal of Sports Economics, Vol. 16. Issue 4, 335-352

We use a data set of Football Bowl Subdivision (Division-IA) universities to investigate the hypothesis that higher coach pay leads to improved team performance. Our analysis finds that pay and team performance are positively correlated and that, when schools change coaches, higher pay is associated with improved performance. The evidence suggests that additional rating points are increasingly valuable, perhaps over US$1 million for top teams. Our descriptive analysis reveals the median 2011 head coach pay of US$1.2 million, significant increases over our 2006-2011 study period, and large disparities among schools and conferences. We conclude that administrators perceive highly ranked football teams have significant value.

Cognitive Responses to Partitioned Pricing of Consumption Taxes: Consequences for State and Local Tax Revenues

Cynthia Blanthorne and Michael L. Roberts
The Journal of the American Taxation Association, Vol. 37, Issue 1, pp. 183-204

How do taxpayers respond cognitively to add-on sales taxes versus all-inclusive excise taxes? If structural variations produce cognitive differences, then do the differences affect buying behavior? These are important questions because consumer spending drives the U.S. economy and directly determines the amount of tax revenues collected from consumption taxes.

If the negative opinion that people have about taxes (Tax Foundation 2009) increases the saliency of the tax, then an add-on sales tax might decrease consumer spending more than an all-inclusive excise tax pricing structure. Instead, results suggest that demand is higher when the add-on component is a sales tax as compared to an excise tax that is embedded into the total price. The effects on demand are even more pronounced and people recall lower prices when the add-on sales tax is presented as a percentage of the base price—as is generally the case in the U.S.—rather than as an additional currency component.

Infer, predict, and assure: Accounting opportunities in data analytics

Gary P Schneider, Jun Dai, Diane J Janvrin, Kemi Ajayi, Robyn L Raschke
Accounting Horizons,Vol. 29, Issue 3, Pages: 719-742.

The business use of data analytics is growing rapidly in the accounting environment. Similar to many new systems that involve accounting information, data analytics has fundamentally changed task processes, particularly those tasks that provide inference, prediction, and assurance to decision-makers. Thus, accounting researchers and practitioners must consider data analytics and its impact on accounting practice in their work. This paper uses the organizing principles from Mauldin and Ruchala’s (1999) meta-theory …
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Who did the audit? Audit quality and disclosures of other audit participants in PCAOB filings

Carol Callaway Dee, Ayalew Lulseged, Tianming Zhang
The Accounting Review,Vol. 90, Issue 5, Pages: 1939-1967.

We empirically test whether audit quality is affected when part of an SEC issuer’s audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using …
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Do managers use meeting analyst forecasts to signal private information? Evidence from patent citations

Katherine Gunny, Tracey Chunqi Zhang
Journal of Business Finance & Accounting,Vol. 41, Issue 7-8, Pages: 950-973
This study examines whether firms manage earnings to meet analyst forecasts to signal superior future performance. Prior research finds that firms use earnings management to just meet analyst forecasts and that these firms have a positive association with future performance (Bartov et al., 2002). There are two potential explanations for the positive association ” signaling and attaining benefits that allow for better future performance (i.e., the real benefits explanation). Prior studies cannot provide evidence of signaling because they do not control for the real benefits explanation. Our research design enables us to control for the real benefits explanation because we can identify potential signaling firms within the sample of firms that just meet analyst forecasts. We use a unique database from the National Bureau of Economic Research to construct a proxy for the manager’s belief about future firm value due to patents

Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation

Carol Callaway Dee, Cindy Durtschi, and Mary P. Mindak
Issues in Accounting Education, Volume 29, Issue 3, pp. 443-458.

Grand Teton Candy Company (GTCC) is considering an initial public offering (IPO). To go public, GTCC will need an audit by a large accounting firm with a solid reputation and experience in audits of IPOs. As a precursor to the formal audit, Elsie Driggs, one of the owners of GTCC, has hired her brother’s CPA firm to ensure the books are in order. Her brother notices some red flags of fraud, so he forms a team of young accountants from his firm to carefully comb through his sister’s records to ensure she does not have problems when the formal audit takes place. You have been placed on the team and your task is to investigate your boss’ suspicions that there is fraud at Grand Teton Candy Company. You are to prepare a written report for your boss that includes the name of the fraudster(s), what he or she did, and how the perpetrator(s) benefited from the crime.