Business Commons^™

Accounting Reporting Complexity, Audit Engagement Partner Mandatory Rotation, And Audit Quality, Clement Chen, Zhenfeng Liu, Wenye Tang, Ling Tuo

Accounting Faculty Publications

This paper investigates the influence of a firm's accounting reporting complexity (ARC) on financial statement audit quality. We predict and find that there is a non‐linear relationship between a firm's ARC and audit quality. Specifically, a more complex accounting environment—measured by ARC—leads to higher quality audits, but this effect diminishes when ARC continues to increase. Further analyses reveal that the effect is more salient among client firms that do not purchase non‐audit services (NAS). We also examine whether ARC affects audit quality in the circumstance of mandatory audit partner rotation. Empirical results show a moderating effect of ARC on the …

Living Up To Your Codes? Corporate Codes Of Ethics And The Cost Of Equity Capital, Hong Kim Duong, Marco Fasan, Giorgio Gotti

Accounting Faculty Publications

Purpose-

Previous literature provides mixed evidence about the effectiveness of a code of ethics in limiting managerial opportunism. While some studies find that code of ethics is merely window-dressing, others find that they do influence managers' behavior. The present study investigates whether the quality of a code of ethics decreases the cost of equity by limiting managerial opportunism.

Design/methodology/approach-

In order to test the hypothesis, the authors perform an empirical analysis on a sample of US companies in the 2004–2012 period. The results are robust to a battery of robustness analyses that the authors performed in order to take care …

The Effect Of Professional Identity Salience And Leadership Climate On Accountants' Ethical Decisions, Yin Xu, Karl J. Wang, Doug Ziegenfuss

Accounting Faculty Publications

The purpose of this study was to examine the influence of contextual factors in organizations on accountants’ ethical decisions. Specifically, the study investigated whether professional identity salience and ethical leadership climate affected accountants’ ethical judgments and intentions to act more ethically. A study is conducted, in a 2 x 2 between-factorial design, by using certified public accountants (N=375) as participants. The findings show that accountants made more ethical judgments when professional identity salience was increased by highlighting the professional code of ethics. Accountants intended to act more ethically only when the leadership climate was positive. The results suggest that a …

Innovation Capacity: A Firm Level Response To Subsidy Activity In A National Setting, Assyad Al-Wreiket, Royce D. Burnett, Christopher J. Skousen, Ouadie Akaaboune

Accounting Faculty Publications

The purpose of this paper is to investigate the effect subsidies have on firm-level innovation across Eastern European and Central Asian countries and to assess if these effects move to increase firm-level capability. Specifically, we investigate the extent subsidy programs act to shape and guide firm-level innovative capabilities and how the presence of such capabilities affect operational performance. We employ a Probit model to investigate firm-level innovation and OLS regression to assess how subsidies, in association with the decision to adopt foreign technology and in-house research and development (R&D) affect firm productive capacity. Results suggest subsidies promote innovation and that …

Business Education Of Ceo-Cfo And Annual Report Readability, Ling Tuo, Yu (Tony) Zhang, Zhenfeng Liu, Ruixue Du

Accounting Faculty Publications

Financial report readability captures the transparency and effectiveness of information communicated by firms’ executives. It’s interesting to investigate whether business knowledge, cognitive preferences, and professional ethics taught by a business education will shape the CEO/ CFO’s thinking in determining words, languages, paragraphs, and contents presented in financial reports when the self-interested CEO/CFO tends to influence the interpretation of financial information users. Using a sample of S&P 1500 CEOs and CFOs, we find that the CEO (CFO) with a business degree is associated with better (worse) readability of annual reports and the positive (negative) relation is strengthened (moderated) by internal corporate …

Fixed Costs, Audit Production, And Audit Markets: Theory And Evidence, Tracy Gu, Dan A. Simunic, Michael T. Stein

Accounting Faculty Publications

We analyze the role of discretionary joint fixed costs in audit production. Given such costs, the investment decision and production of audit services must be analyzed over a client portfolio. We model this problem, and use monotone comparative statics (Milgrom and Shannon [1994]) to show the implications of variations in client-specific losses and the number of clients for the optimum level of fixed investment and auditassurance. We develop four hypotheses concerning the relations between audit quality and (1) the magnitude of potential client-specific losses; (2) average client losses in a portfolio; (3) the number of clients in a portfolio; and …

Is Cash Compensation For Long-Tenured Ceos Efficiently Allocated?, Yoshie Saito Lord

Accounting Faculty Publications

Uncertainty about a CEO’s ability is related to his/her length of service to a firm. Accordingly, monitoring systems should vary depending upon CEOs’ tenure. Long-tenured CEOs require less monitoring because their ability has been revealed over time. However, as CEOs advance in their careers, they are more likely to acquire power to influence board decisions. To analyze this implication, I use the previously reported differential sensitivity of CEO cash compensation to income-increasing and decreasing disposals. Contrary to prior findings, I find that cash compensation for long-tenured CEOs is positively associated with both income-decreasing but is shielded from income-increasing divesture decisions.

Accounting Administrator Perceptions Of Impediments To Seeking Aacsb Accounting Accreditation, Michael E. Bitter, Laurie J. Henry

Accounting Faculty Publications

As of April, 2012, only 168 U.S. institutions had attained and maintained AACSB accounting accreditation. Our objective was to determine why more U.S. institutions have chosen not to pursue AACSB accounting accreditation by identifying accreditation-related issues that are perceived to reduce an institution’s interest in seeking and/or ability to attain it.

Surveys were returned by 103 of the 303 accounting program administrators at U.S. institutions with AACSB business (but not accounting) accreditation. The 86 respondents from units not pursing accounting accreditation neither agreed nor disagreed attainment of accounting accreditation would be valued by their institution’s internal constituencies or would enhance …

Do Industry Specialist Auditors Add Value In Mergers And Acquisitions?, Ho-Young Lee, Vivek Mande, Jong Chool Park

Accounting Faculty Publications

This study examines whether the stock market returns surrounding announcements of mergers and acquisitions (M&A) are higher for acquiring firms audited by industry specialists. External auditors are uniquely positioned to provide assurance on the financial statements of their acquiring clients both before and after an acquisition. Also, an important aspect of due diligence in M&A transactions is the external auditors review of the accounting records, financial statements, internal controls and information systems of the target company. Using a sample of 4,283 M&A announcements between 1988 and 2011 in the United States of America, we report the results from our main …

Consistent Earnings Growth And The Credibility Of Management Forecasts, Adam S. Koch, Jong Chool Park

Accounting Faculty Publications

This paper examines the relation between a series of past earnings increases and the credibility of voluntary management earnings forecasts. We demonstrate that both analyst forecast revisions and stock price reactions around management earnings forecasts that contain good news are more pronounced when the firm has posted a string of recent earnings increases. These results are consistent with our primary hypothesis that voluntary management earnings forecasts are more believable when they are made by firms with a history of consistent growth in earnings. This effect is more pronounced when firms are not widely followed by analysts. Additional analysis suggests that …

Industry Specialization And Auditor Quality In Us Markets, Brian Cadman, Michael T. Stein

Accounting Faculty Publications

This study investigates the relation between audit quality, auditor industry market share, and audit fees. Prior literature has asserted that audit providers with high market shares can be designated as industry specialists and that the fee premiums that sometimes attach to these auditors is evidence of a quality differentiated audit product. Using data from the U.S. audit market for the fiscal year 2003 we extend this literature by investigating the relationships among audit fee premiums, auditor market shares, and two dimensions of audit quality: external reporting and economies of scope in providing joint audit and non-audit services. We find little …

Payroll Tax Incidence: An Empirical Investigation Of Shifting The Payroll Tax Burden, Ted D. Englebrecht, Laurie J. Henry, Govind S. Iyer

Accounting Faculty Publications

The payroll tax earmarked for the financing of social security benefits has been the leading growth tax on small businesses over the past few decades. Small businesses pay more in payroll tax than in any other form of tax. Indeed, these taxes are levied on small businesses irrespective of their profits. The statutory incidence of one-half of the payroll tax being paid by the employer and one-half by the employee may be very different from the actual incidence of the tax due to employer shifting mechanisms.

While there has been considerable conjecture about the shifting of the payroll tax burden, …