Abnormal Fees and Timely Loss Recognition - A Long-Term Perspective

This is the author accepted manuscript. The final version is available from the American Accounting Association via the DOI in this recordWe examine the relation between timely loss recognition and abnormal audit, non-audit, and total fees over a long period (2001–2007 and 2010–2015). We use positive abnormal audit fees as a measure of abnormal audit effort, and positive abnormal non-audit fees as a measure of economic bond between the auditor and the auditee. Using the Ball and Shivakumar (2006) model, we report some evidence suggesting audit effort is associated with slower loss recognition in accruals before the Sarbanes–Oxley Act (SOX) became effective. However, we find stronger evidence that audit effort is associated with slower loss recognition post-SOX when clients raise substantial external funds or when the auditor is not an industry specialist. Using C_Score, we find a negative association between changes in abnormal audit fees and total fees, and changes in C_Score post-SOX, but not pre-SOX. We find no sample-wide evidence that abnormal non-audit fees are associated with the speed of loss recognition. Collectively, the results suggest post-SOX auditors exert more effort when losses are delayed and that non-audit services do not compromise auditor independence

Multigrid Analysis of Scattering by Large Planar Structures

Abstract Fast iterative analysis of two-dimensional scattering by a large but finite array of perfectly conducting strips requires efficient evaluation of the electric field. We present a novel multigrid algorithm that carries out this task in CN computer operations, where C depends logarithmically on the desired accuracy in the field, and N is the number of spatial gridpoints. Numerical results are presented, and extensions of the algorithm are discussed

Accounting for Human Capital When Labor Mobility is Restricted

Is human capital an asset? We empirically address this question using the accounting concept of assets – costs should be capitalized as assets if they are expected to generate future measurable benefits with reasonable certainty. Also, holding the investment opportunity set constant, disposal of these assets should lead to a reduction in future benefits. The analysis concentrates on the UK football industry, as it represents a case where human capital is highly significant, data on investment in human capital is available, and where investment in human capital is significant due to restrictions on labor mobility. Using a sample of 58 football clubs during 19902000, we examine the relation between measures of benefits that accrue to the firm on one hand and current and lagged transfer fees paid for new players and transfer fees received from selling players on the other hand. Results suggest that certain measures of future benefits are positively (negatively) associated with current and lagged transfer fees paid (received). That is, investing in human capital is capable of increasing future benefits and selling it may reduce them. Also, regression analysis demonstrates that the explanatory power of old investments is lower than that of more recent ones, consistent with the notion of amortization. Additional tests demonstrate the reliability of future sales but indicate uncertainty of other future benefits. Market values are positively (negatively) associated with transfer fees paid (received), suggesting that equity investors, on average, associate investments in players’ contracts with future benefits

The association of R&D and capital expenditures with subsequent earnings variability

We estimate the association of investments in R&D and in physical assets (CAPEX) with subsequent earnings variability. We estimate these relations in different time periods and across industries. We find that R&D contributes to subsequent earnings variability more than CAPEX only in relative R&D-intensive industries - industries in which R&D is relatively more intensive than physical capital. In physical assets-intensive industries, we do not find similar relations. The findings suggest that with respect to subsequent earnings variability, fundamental differences between investment information about R&D and CAPEX exist. However, they are mainly noticeable in firms that operate in relatively R&D-intensive industries. The evidence also suggests there was a shift in the relations between R&D and CAPEX over time. Our findings contribute to the debate on accounting for R&D expenditures. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd.link_to_subscribed_fulltex

The association between auditor independence and conservatism

Session 7.12 - IndependenceWe examine the association between accounting conservatism and external auditor independence using measures of conditional, unconditional and overall conservatism. We find positive relations between auditor independence and all types of accounting conservatism. These findings suggest that greater auditor independence bolsters both long-term unconditional conservative accounting policies and conditional conservatism. Contextual analysis shows that the independence-conservatism association is stronger in Big-4 audit firms whose income from non-audit services is unexpectedly low, in clients involving high litigation risk, as well as in clients raising cash from external sources; this relation is weaker in R&D and advertising intensive firms where GAAP-induced conservatism likely reduces incentives for independent auditors to require conservative accounting treatments.The 2009 Annual Meeting of the American Accounting Association (AAA), New York, N.Y., 1-5 August 2009

Do firms underreport information on cyber-attacks? Evidence from capital markets

Firms should disclose information on material cyber-attacks. However, because managers have incentives to withhold negative information, and investors cannot discover most cyber-attacks independently, firms may underreport them. Using data on cyber-attacks that firms voluntarily disclosed, and those that were withheld and later discovered by sources outside the firm, we estimate the extent to which firms withhold information on cyber-attacks. We find withheld cyber-attacks are associated with a decline of approximately 3.6% in equity values in the month the attack is discovered, and disclosed attacks with a substantially lower decline of 0.7%. The evidence is consistent with managers not disclosing negative information below a certain threshold and withholding information on the more severe attacks. Using the market reactions to withheld and disclosed attacks, we estimate that managers disclose information on cyber-attacks when investors already suspect a high likelihood (40%) of an attack