Business Commons^™

Financial Statements Are About To Get A New Look, Clemense Ehoff Jr.

All Faculty Scholarship for the College of Business

In October 2008, The FASB and the IASB issued a discussion letter for comment proposing a complete redesign of financial statements. This was the result of a project that began for both boards in 2001. More than 200 comment letters were received from individuals, accounting firms, professional societies, corporations, and others from the business community. The FASB and IASB have analyzed the input, and are currently preparing an exposure draft scheduled for release in early 2011. This paper reviews the proposed changes to the financial statements, summarizes the favorable and unfavorable responses contained in the comment letters, and examines the …

Why 'Democracy' And 'Drifter' Firms Can Have Abnormal Returns: The Joint Importance Of Corporate Governance And Abnormal Accruals In Separating Winners From Losers, Koon Boon Kee

Research Collection School Of Accountancy

No abstract provided.

The Abcs Of Communicating Results, Deborah S. Archambeault, Morgen Rose

Accounting Faculty Publications

Communicating results is an integral part of the internal auditor's job, and The IIA's International Standards for the Professional Practice of Internal Auditing recognizes its importance by specifying in Standard 2420 that communications should be "accurate, objective, clear, concise, constructive, complete, and timely." In its 2009 survey. The Biggest Internal Audit Challenges in the Next Five Years, Protiviti, a global consulting firm, ranked communication with management and the audit committee as one of the biggest challenges facing internal auditing through 2012. Their subsequent 2010 Internal Audit Capabilities and Needs Survey identified presentation skills as the top "need to improve" personal …

Developing A Culturally Responsive Classroom Collaborative Of Faculty, Students, And Institution, Paul J. Colbert

MBA Faculty Conference Papers & Journal Articles

Culture is integral to the learning process. It is the organization and way of life within the community of students and teachers and directs the way they communicate, interact, and approach teaching and learning. Although founded in particular values and principles, the academy, like most organizations, is impacted day-to-day by its culture. Yet, the traditional higher education institution has not been designed to operate within a racially or ethnically diverse student population. The social, political, economic, and cultural forces that support the institution influence the teaching and learning environments. To better address cultural diversity in the classroom, faculty must first …

Do Abnormally High Audit Fees Impair Audit Quality?, Jong-Hag Choi, Jeong-Bon Kim, Yoonseok Zang

Research Collection School Of Accountancy

This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings …

The Uneasy Case For The Inside Director, Lisa Fairfax

All Faculty Scholarship

In the wake of recent scandals and the economic meltdown, there is nearly universal support for the notion that corporations must have independent directors. Conventional wisdom insists that independent directors can more effectively monitor the corporation and prevent or otherwise better detect wrongdoing. As the movement to increase director independence has gained traction, inside directors have become an endangered species, relegated to holding a minimal number of seats on the corporate board. This Article questions the popular trend away from inside directors by critiquing the rationales in favor of director independence, and assessing the potential advantages of inside directors. This …

Maintaining A Flexible Payout Policy In A Mature Industry: The Case Of Crown Cork And Seal In The Connelly Era, James Ang, Tom Arnold, C. Mitchell Conover, Carol Lancaster

Finance Faculty Publications

As related in these pages, the history of Crown Cork and Seal (hereafter known as “Crown”) provides us with a case of a company that stopped paying dividends but establish a disciplined share repurchase policy and did so for all the right reasons. Under family ownership in the 1950s, Crown lost market share and was on the brink of bankruptcy when its largest shareholder, John Connelly, was elected chairman of the board in 1957. Under John Connelly’s leadership, the firm restructured its operations and began a payout policy based solely on stock repurchases. During the Connelly era, the firm did …

Auditor Reputation And Earnings Management: International Evidence From The Banking Industry, Kanagaretnam Kiridaran, Chee Yeow Lim, Gerald J. Lobo

Research Collection School Of Accountancy

We examine the relation between auditor reputation and earnings management in banks using a sample of banks from 29 countries. In particular, we examine the implications of two aspects of auditor reputation, auditor type and auditor industry specialization, for earnings management in banks. We find that both auditor type and auditor industry specialization moderate benchmark-beating (loss-avoidance and just-meeting-or-beating prior year’s earnings) behavior in banks. In addition, we find that once auditor type and auditor industry specialization are included in the same tests, only auditor industry specialization has a significant impact on constraining benchmark-beating behavior. In separate tests related to income-increasing …

Carrots And Sticks: By Auditing Executive Compensation And Benefits, Auditors Can Help Their Organization Move From Risk To Rewards Management, Sridhar Ramamoorti, Usha R. Balakrishnan

Accounting Faculty Publications

Although the focus of risk management traditionally has been on downside risk, the time is right to focus this dialogue on upside risk — the management of value-creation opportunities through "rewards management." After all, rewards such as bonuses and stock options are typically greater for those who identify and leverage new value-creation opportunities. For-profit organizations favor those individuals who are well-connected and leverage their relationships to bring in clients and attract customers. Their selling ability, revenue-generating strategies, and overall modus operandi quickly earn them the coveted title of "rainmakers."

Nevertheless, rewards and incentives can encourage undesirable behaviors. Executives quickly learn …

The New Financial Deal: Understanding The Dodd-Frank Act And Its (Unintended) Consequences, David A. Skeel Jr.

All Faculty Scholarship

Contrary to rumors that the Dodd-Frank Act is an incoherent mess, its 2,319 pages have two very clear objectives: limiting the risk of the shadow banking system by more carefully regulating derivatives and large financial institutions; and limiting the damage caused by a financial institution’s failure. The new legislation also has a theme: government partnership with the largest Wall Street banks. The vision emerged almost by accident from the Bear Stearns and AIG bailouts of 2008 and the commandeering of the bankruptcy process to rescue Chrysler and GM in 2009. Its implications for derivatives regulation could prove beneficial: Dodd-Frank will …

Auditor Independence: Third Party Hiring And Paying Auditors, Silvia Romero

Department of Accounting and Finance Faculty Scholarship and Creative Works

Purpose – Although the Sarbanes Oxley Act (SOX) has introduced rules to avoid auditor independence impairment, there are still issues that are not sufficiently solved. The purpose of this paper is to discuss the problems of auditor independence that arise by auditors being hired and paid by the auditee, and by SOX requiring rotation of only the lead audit partner. Design/methodology/approach – The paper takes the form of a discussion paper, exploring alternatives to overcome the mentioned issues of independence. Findings – The paper presents an alternative where auditors are hired and paid by an external third party. Besides this …

Does Auditor Tenure Improve Audit Quality? Moderating Effects Of Industry Specialization And Fee Dependence, Chee Yeow Lim, Hun-Tong Tan

Research Collection School Of Accountancy

We investigate whether the relation between auditor tenure and audit quality is conditional on auditor specialization and fee dependence. Although prior studies have investigated the relation between extended auditor-client tenure and audit quality, none has examined how this relation is jointly influenced by both auditor specialization and fee dependence. Our main analyses, using accrual quality as a measure of audit quality, show that firms audited by specialists (vs. non-specialists) have relatively higher audit quality with extended auditor tenure, and that this relation is negatively moderated by auditors’ fee dependence on clients. These results are robust to sensitivity tests, and alternative …

Did Sarbanes-Oxley Lead To Better Financial Reporting?, Dennis Chambers, Dana R. Hermanson, Jeff L. Payne

Faculty and Research Publications

The article describes and summarizes five studies that examined whether the landmark Sarbanes-Oxley Act of 2002 (SOX) was beneficial or not to financial reporting. The U.S. Congress is stated to have passed the legislation on July 25, 2002 in reaction to a series of financial accounting scandals involving such companies as Enron and WorldCom, as well as the demise of the accounting firm Arthur Andersen LLP. The author asserts that all five of the studies provide evidence of a significant improvement in the financial reporting environment since SOX.

Investing Into The Abyss: The Continued Misclassification Of Multi-Sector Managed Funds, John R Watson, N. Allen, Kok Fai Phoon, J. Wickramanayake

Research Collection Lee Kong Chian School Of Business

The objective of this paper is to assess whether Australian multi-sector managed funds are misclassified, and then, having found this to be the case, determine if this misclassification has any impact on fund performance. We adopt a strong form of returns based style analysis to investigate a monthly sample of Australian multi-sector funds over the five-year sample period 2003:04-2008:03. The evidence provided demonstrates that insufficient attention has been paid as to whether fund managers are able to keep within their tactical asset allocation ranges and presents that misclassification exist for Australian multi-sector managed funds but that the effect on fund …

Managing Corporate Federalism: The Least-Bad Approach To The Shareholder Bylaw Debate, Christopher M. Bruner

Scholarly Works

Over recent decades, shareholders in public corporations have increasingly sought to augment their own power - and, correlatively, to limit the power of boards - through creative use of corporate bylaws. The bylaws lend themselves to such efforts because enacting, amending, and repealing bylaws are essentially the only corporate governance actions that shareholders can undertake unilaterally. In this Article I examine thecontested nature of bylaws, the fundamental issues of corporate power and purpose that they implicate, and the differing ways in which state and federal lawmakers and regulators may impact the debate regarding thescope of the shareholders' bylaw authority.

The …

2010 Private Capital Markets Report (Summer), John K. Paglia

Pepperdine Private Capital Markets Report

The Pepperdine private cost of capital survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey specifically examined the behavior of senior lenders, asset‐based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately‐held businesses, investment bankers, business brokers, limited partners, and business appraisers. The Pepperdine survey investigated, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic …

Corporate Valuation Around The World: The Effects Of Governance, Growth, And Openness, Choong Tze Chua, Cheol S. Eun, Sandy Lai

Research Collection Lee Kong Chian School Of Business

The purpose of this paper is to provide a comprehensive analysis of corporate valuation around the world. Specifically, we (i) document and compare corporate valuation around the world, and (ii) identify the key factors that drive cross-country differences in valuation. In doing so, we utilize the country-level Tobin's q (CTQ), computed as the ratio of the aggregate market value to book value of all assets held by all public firms domiciled in a country, which amounts to the Tobin's q for the [`]market portfolio' of the country. The key findings of the paper are: First, CTQ varies greatly across countries, …

Industry Recommendations: Characteristics, Investment Value, And Relation To Firm Recommendations, Ohad Kadan, Madureira Leonardo, Rong Wang, Tzachi Zach

Research Collection Lee Kong Chian School Of Business

We study analysts’ industry recommendations. We find that the distribution of industry recommendations is quite balanced. Analysts show more optimism towards industries with high levels of R&D, past profitability and past returns. Industry recommendations possess investment value as portfolios based on these recommendations generate risk-adjusted abnormal returns. Finally, industry recommendations contain information which is orthogonal to that included in firm recommendations, and more so for brokers who benchmark their firm recommendations to industry peers. Consequently, the investment value of analysts’ recommendations is enhanced when both industry and firm recommendations are used.

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

All Faculty Scholarship

The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means …

Speed Of Issuance, Lender, Specialization, And The Rise Of The 144a Debt Market, Rongbing Huang, Gabriel G. Ramirez

Faculty and Research Publications

Using a large sample of convertible and straight debt issues in the public, 144A, and bank loan markets from 1991 to 2004, we find that the 144A market has risen largely at the expense of the nonshelf public market, the overwhelming majority of the 144A issues are subsequently registered, and straight debt issuers with the highest credit quality and transparency tend to use the shelf public market. Our findings suggest that firms’ preference for speed of issuance drives the growth of the 144A market, and banks and qualified institutional buyers have advantages over public lenders in handling credit risk and …

Audit Fees: To Disclose Or Not To Disclose?, Teng Aun Khoo, Soo Chiat Hwang

Research Collection School Of Accountancy

The authors argue that the disclosure of audit fees can provide a more level playing field in Singapore, and would also be consistent with the other major capital markets in the world. Auditors' independence is the cornerstone of the auditing profession, because without auditor's independence investors would not be able to rely on the so-called "audited" financial statements. Currently in Singapore, audit-fee disclosure is not mandatory except for banks as stipulated by the Monetary Authority of Singapore (MAS).

Corporate Philanthropic Giving, Advertising Intensity, And Industry Competition Level, Ran Zhang, Jigao Zhu, Heng Yue, Chunyan Zhu

Research Collection School Of Accountancy

This article examines whether the likelihoodand amount of firm charitable giving in response tocatastrophic events are related to firm advertising intensity,and whether industry competition level moderatesthis relationship. Using data on Chinese firms’ philanthropicresponse to the 2008 Sichuan earthquake, we findthat firm advertising intensity is positively associated withboth the probability and the amount of corporate giving.The results also indicate that this positive advertisingintensity-philanthropic giving relationship is stronger incompetitive industries, and firms in competitive industriesare more likely to donate. This study thus provides evidencesuggesting that even in the wake of catastrophicevents, corporate philanthropic giving is strategic.

The Roles That Forecast Surprise And Forecast Error Play In Determining Management Forecast Precision, Jong-Hag Choi, Linda A. Myers, Yoonseok Zang, David A. Ziebart

Research Collection School Of Accountancy

Studying the determinants of management forecast precision is important because a better understanding of the factors affecting management’s choice of forecast precision can provide investors and other users with cues about the characteristics of the information contained in the forecasts. In addition, as regulators assess the regulation of voluntary management disclosures, they need to better understand how managers choose among forecast precision disclosure alternatives. Using 16,872 management earnings forecasts collected from 1995 through 2004, we provide strong evidence that forecast precision is negatively associated with the magnitude of the forecast surprise and that this negative association is stronger when the …

Maximized Monitoring, Constance M. Lehmann, Sridhar Ramamoorti, Marcia Weidenmier Watson

Accounting Faculty Publications

During the last few years, global financial companies and investment banks have taken billions of dollars in write-downs owing to exposure in the subprime lending market. Lack of risk function visibility, insufficient communication of risks to top management, and siloed risk approaches have been cited as reasons for these failures. New York University finance professor Nouriel Roubini, one of the few who predicted the crisis, famously observed at the World Economic Forum's 2009 Davos Summit that risk cannot be priced correctly "when the opacity and lack of transparency of financial firms and new instruments lead to unpriceable uncertainty rather than …

Direct And Indirect Effects Of Internal Control Weakness And External Audit Effort On Accruals Quality: Evidence From A Unique Canadian Regulatory Setting, Hai Lu, Gordon D Richardson, Steven Salterio

Research Collection School Of Accountancy

Public disclosure about effectiveness of internal control systems is subject to much controversy in Canada, resulting in Canadian disclosures being made in Management Discussion and Analysis (MD&A). These disclosures are provided to investors without a definition of the weaknesses to be reported, without implementation effectiveness testing, no direct management certification and no external audit of such disclosures. Though the cost of such SOX North disclosures are lower than in the U.S setting, the credibility of these disclosures is far from assured, posing an important empirical issue for regulators interested in the cost versus benefit trade-off of various disclosure regimes. We …

Do Shareholders Or Stakeholders Appropriate The Rents From Corporate Diversification? The Influence Of Ownership Structure, Parthiban David, Jonathan P. O'Brien, Toru Yoshikawa, Andrew Delios

Research Collection Lee Kong Chian School Of Business

Prior work on the performance consequences of corporate diversification has treated all powerful owners as seeking the same benefits from diversification (i.e, higher profit rather than growth) and therefore limiting value appropriation by other stakeholders such as employees and managers. In contrast, we distinguish between domestic "relational" owners and foreign "transactional" owners in Japanese corporations. Although transactional owners do indeed prioritize profitability when diversifying, relational owners primarily seek growth rather than profits from diversification. Furthermore, relational owners also allow managers and employees to appropriate more of the rents arising from diversification than do transactional owners.

30 Years Of Foreign Direct Investment To China: An Interdisciplinary Literature Review, Marc Fetscherin, Hinrich Voss, Philippe Gugler

Faculty Publications

The purpose of this paper is to examine how scholarly research on Foreign Direct Investment (FDI) to the People’s Republic of China has evolved and been shaped using bibliometrics analysis of 422 journal articles published in 151 journals between 1979 and 2008 on that topic. The literature is dominated by the fields of Economics, followed by Business and Management, Planning and Development and International Relations, which together account for 95% of all publications. Ten percent of the most productive journals are responsible for 40% of all publications and 63% of all citations received. By means of citation mapping, four main …

Corporate Governance Reform In A Time Of Crisis, Christopher M. Bruner

Scholarly Works

In this article I argue that crisis-driven corporate governance reform efforts in the United States and the United Kingdom that aim to empower shareholders are misguided, and offer an explanation of why policymakers in each country have reacted to the financial crisis as they have. I first discuss the risk incentives of shareholders and managers in financial firms, and examine how excessive leverage and risk-taking in pursuit of short-term returns for shareholders led to the crisis. I then describe the far greater power and centrality that U.K. shareholders have historically possessed relative to their U.S. counterparts, and explore historical and …

Audit Office Size, Audit Quality And Audit Pricing, Jong-Hag Choi, Francis Kim, Jeong-Bon Kim, Yoonseok Zang

Research Collection School Of Accountancy

Using a large sample of U.S. audit client firms over the period 2000-2005, this paper investigates whether and how the size of a local practice office within an audit firm (henceforth, office size) is a significant, engagement-specific factor determining audit quality and audit fees over and beyond audit firm size at the national level and auditor industry leadership at the city or office level. For our empirical tests, audit quality is measured by unsigned abnormal accruals, and the office size is measured in two different ways: one based on the number of audit clients in each office and the other …

Fair Value Accounting: Affect On The Auditing Profession, Danny A. Pannese, Alan Delfavero

WCBT Faculty Publications

During this period of global markets, multinational corporations are demanding financial accounting standards with enhanced uniformity. In an effort to achieve this objective, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together on the Convergence Project, aiming to develop accounting standards that closely correlate with international financial reporting standards. In September 2006 and February 2007, the FASB issued two key fair value accounting (FVA) standards which focused on providing guidelines for fair value measurement (through a classification hierarchy), expanding disclosure requirements, and also allowing business entities to increase FVA's application. However, the …