Business Commons^™

Internal Control Opinion Shopping And Audit Market Competition, Nathan J. Newton, Julie Persellin, Dechun Wang, Michael S. Wilkins

Michael S Wilkins

This study examines whether audit clients engage in internal control opinion shopping activities and whether audit market competition appears to facilitate those activities. Regulators have long been concerned about the impact of both audit market competition and opinion shopping on audit quality. We adopt the framework developed in Lennox (2000) to construct a proxy to measure the tendency that clients engage in internal control opinion shopping activities. Our empirical results suggest that clients are successful in shopping for clean internal control opinions. In addition, we find evidence that successful internal control opinion shopping occurs primarily in competitive audit markets. Finally, …

The Pricing Of Assurance Services In Secondary Equity Offerings, Neil L. Fargher, Brian W. Mayhew, Michael S. Wilkins

Michael S Wilkins

This paper examines the pricing of assurance services in secondary equity offerings (SEOs). Our empirical model extends initial public offering (IPO) fee specifications to include variables that are unique to, or more relevant for, secondary offerings. We document an inverse relationship between SEO fees and a client's ability to delay its secondary offering, suggesting that auditors do not charge as much for SEOs made by relatively mature firms. The relationship reverses, however, when the client is required to use more comprehensive types of filings (i.e., when assurance effort is higher). We also show that fees are higher when the SEO …

The Reputational Penalty For Aggressive Accounting: Earnings Restatements And Management Turnover, Hemang Desai, Chris E. Hogan, Michael S. Wilkins

Michael S Wilkins

In this paper we investigate the reputational penalties to managers of firms announcing earnings restatements. More specifically, we examine management turnover and the subsequent re-hiring of displaced managers at firms announcing earnings restatements during 1997 or 1998. In contrast to prior research (Beneish 1999 and Agrawal, Jaffe and Karpoff, 1999), which does not find increased turnover following GAAP violations or revelation of corporate fraud, we find that 60% of restating firms experience a turnover in at least one top manager within 24 months of the restatement compared to only 35% among age-, size- and industry-matched firms. Moreover, 85% of the …

Arachnophobia: A Case On Impairment And Accounting Ethics, Julie Persellin, Mike Shaub, Michael S. Wilkins

Michael S Wilkins

This case requires students to apply accounting and ethical decision-making within the context of a potential land impairment decision. Students are required to research the relevant professional literature and provide appropriate FASB Codification references and IAS cites as they investigate the significant uncertainties that frequently are associated with valuation and impairment analyses. Students also are required to evaluate the ethical implications of the decisions that could be made regarding the necessity of impairment. The case provides an opportunity for students to extend their research and financial accounting abilities, to consider the consequences associated with a set of potentially reasonable accounting …

Articulation In Cash Flow Statements: A Resource For Financial Accounting Courses, Michael S. Wilkins, Martha L. Loudder

Michael S Wilkins

Recent accounting research (Bahnson, P., Miller, P., & Budge, B. (1996). Nonarticulation in cash flow statements and implications for education, research and practice. Accounting Horizons, 10, 1–15 has shown that firms implementing the indirect method for reporting cash flows under SFAS 95 rarely produce financial statements that articulate cleanly. The purposes of this paper are (1) to provide financial accounting educators with a list of companies for which articulation does exist, (2) to describe the process by which educators can update the list in the future, or modify it to suit their own preferences, and (3) to present an …

Refinancing Pressure And Earnings Management: Evidence From Changes In Short-Term Debt And Discretionary Accruals, L. Paige Fields, Manu Gupta, Michael S. Wilkins

Michael S Wilkins

Refinancing pressure may entice a very specific form of managerial misbehavior on the part of borrowers. Borrowers utilizing a greater amount of short term debt in one period may feel pressure to make their firms look as attractive as possible leading into the next period when refinancing may take place. In other words, potential refinancing pressure may lead managers to manipulate earnings. We examine the relation between changes in debt in current liabilities (short-term debt) and discretionary accruals as an indicator of the propensity to manage earnings. Our results show that (i) firms have higher discretionary accruals during periods of …

Audit Firm Industry Specialization As A Differentiation Strategy: Evidence From Fees Charged To Firms Going Public, Brian W. Mayhew, Michael S. Wilkins

Michael S Wilkins

This paper examines IPO assurance fees to assess the use of industry specialization as a differentiation strategy by audit firms. Theory suggests that as an audit firm’s share of a client industry increases their costs will decrease and their service quality to that industry will increase. In this setting, the impact of industry specialization on fees is indeterminate. We extend existing theory by considering both the supply and the demand for industry specialization. We conclude that the market for audit services is generally price-competitive, suggesting that auditors will be forced to share cost savings with clients. However, when an audit …

Internal Control Opinion Shopping And Audit Market Competition, Nathan J. Newton, Julie Persellin, Dechun Wang, Michael S. Wilkins

Michael S Wilkins

This study examines whether audit clients engage in internal control opinion shopping activities and whether audit market competition appears to facilitate those activities. Regulators have long been concerned about the impact of both audit market competition and opinion shopping on audit quality. We adopt the framework developed in Lennox (2000) to construct a proxy to measure the tendency that clients engage in internal control opinion shopping activities. Our empirical results suggest that clients are successful in shopping for clean internal control opinions. In addition, we find evidence that successful internal control opinion shopping occurs primarily in competitive audit markets. Finally, …

The Interaction Among Multiple Governance Mechanisms At Young, Newly Public Firms, Tammy K. Berry, L. Paige Fields, Michael S. Wilkins

Michael S Wilkins

We focus on the relations among inside ownership, board composition, unaffiliated block ownership, and compensation structure for a sample of firms following their IPOs. Specifically, we follow firms for up to eleven years after their IPOs and examine the full sample and subsamples of firms that survive, are acquired, or that file for bankruptcy during the sample period. We find that as CEO ownership declines, board independence, board seats held by venture capitalists, and unaffiliated block ownership increase. Our findings suggest that as inside ownership decreases alternative governance mechanisms evolve to help mitigate the resulting increase in agency costs. Interestingly, …

The Information Content Of Withdrawn Audit Qualifications: New Evidence On The Value Of "Subject-To" Opinions, L. Paige Fields, Michael S. Wilkins

Michael S Wilkins

Statement on Auditing Standards No. 58 (AICPA 1988) effectively eliminated the "subject-to" audit opinion which auditors used to highlight financial statement uncertainties. Elimination of the "subject-to" report implied the Auditing Standards Board's belief that the opinion conveyed no material information to users. Several market-based studies of the value of "subject-to" opinions have yielded mixed results. A major limitation in most of these studies was a lack of precision in identifying the exact date upon which information, if any, was revealed to the market.

This study extends the previous work by examining the common share price reactions to public announcements of …

Tests Of A Deferred Tax Explanation Of The Negative Association Between The Lifo Reserve And Firm Value, Dan Dhaliwal, Robert Trezevant, Michael S. Wilkins

Michael S Wilkins

Guenther and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last-in, first-out (LIFO) reserve and the market value of its equity. In this paper, we test a deferred tax explanation of this negative association. Specifically, we argue that investors, conditional on adjusting inventory to as-if first-in, first-out (FIFO), estimate a firm's future LIFO liquidation tax burden as its LIFO reserve multiplied by the appropriate corporate tax rate and include this tax-adjusted LIFO reserve in the valuation of a LIFO firm's net assets. On the basis of this argument, the tax-adjusted LIFO reserve is …