Opinion Shopping and Audit Committees

This paper tests whether companies engage in opinion shopping and examines the role of audit committees when auditors are dismissed (1996-98). There are three findings. First, US companies strategically dismiss when incumbent auditors are more likely to issue unfavorable audit opinions compared to newly appointed auditors. I estimate opinion shopping motivates 17% of auditor dismissals, and I find opinion shopping dismissals occur significantly later in the reporting period than other dismissals. Second, audit committees are more likely to disapprove of auditor dismissals that are motivated by opinion shopping. This is consistent with the argument that audit committees help maintain the integrity of the audit reporting process. Third, independent audit committee members are more likely to leave committees that disapprove of opinion shopping. This suggests either senior management dismiss audit committee members who oppose opinion shopping, or committee members resign because they do not wish to be associated with opinion shopping.

Are audit fees discounted in initial year audit engagements?

Many studies report that audit fees are discounted in the year of an auditor change and regulators have long been concerned that such fee discounting could impair audit quality. We find significant bias in the way studies have tested for fee discounting. The bias exists because interim procedures are usually performed by both the predecessor and successor auditors but only the successor’s fee needs to be disclosed. Accordingly, the disclosed fee during the auditor change year usually relates to a partial year of auditing services. We find that the evidence for fee discounting disappears after correcting for this measurement bias

The Role of Industry, Geography and Firm Heterogeneity in Credit Risk Diversification

In theory the potential for credit risk diversification for banks could be substantial. Portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. We propose a model for exploring these dimensions of credit risk diversification: across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity matters a great deal for capturing differences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity greatly reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity

Racial integration, ethnic diversity, and prejudice : empirical evidence from a study of the British National Party

Does contact with ethnic minorities exacerbate or lower the racial prejudice of whites? To provide empirical evidence on this question, I examine the recruitment of members by the British National Party (BNP), which has a long history of supplying hate-creating stories about ethnic minorities. I find that the BNP recruits fewer white members from communities in which: (i) whites interact more frequently with nonwhites, (ii) whites are exposed to greater racial diversity within the nonwhite population, and (iii) there are more mixed-race offspring from white and nonwhite parents. Further tests suggest that these results are not attributable to self-segregation or economic conditions. Overall, there is compelling evidence that contact with ethnic minorities reduces the racial prejudice of whites

The Accuracy and Incremental Information Content of Audit Reports in Predicting Bankruptcy

The efficiency of investment decisions depends on the accuracy of information available to investors. Auditing provides a means of ensuring that companies provide accurate information ± one role of an auditor being to warn investors when a company faces

The consequences of protecting audit partners’ personal assets from the threat of liability

This study investigates the audit firm’s decision to protect its partners’ personal assets by becoming a limited liability partnership (LLP). We find that the likelihood of an audit firm switching from unlimited to limited liability is increasing in its size and exposure to litigation risk. We find no evidence that audit firms supply lower audit quality, lose market share, or charge lower audit fees after they become LLPs. However, the mix of public and private clients in audit firms’ portfolios exhibits a significant shift toward riskier publicly traded companies after the switch to limited liability