The Effect of Audit Committee Independence on the Distribution of Earnings Levels and Changes

This study investigates whether audit committee independence affects the distribution of earnings levels and changes. We compare the distribution of earnings levels and changes of firms with majority independent audit committees to those of firms with minority independent audit committees. We use the distribution of earnings between the two types of firms to examine whether the high frequency of small earnings increases (and/or profits) relative to small earnings decreases (and/or losses) reported by public firms will be attenuated by the existence of the independent audit committee. We expect that audit committee independence effectively monitors management\u27s discretionary behavior so that firms with majority independent audit committees have smoother earning distributions around zero than firms with minority independent audit committees. Consistent with this expectation, we find that relative to firms with majority independent audit committees, firms with minority independent audit committees (1) report fewer small earnings declines (and/or losses), and (2) report more small earnings increases (and/or profits). These results suggest that the asymmetric pattern of more small earnings increases (and/or profits) than decreases (and/or losses), first documented by Burgstahler and Dichev (1997), can be attributed to earnings management, and the discontinuity of earnings around zero can be attenuated by effective monitoring by an independent audit committee

Ultrafast light-induced response of photoactive yellow protein chromophore analogues

The fluorescence decays of several analogues of the photoactive yellow protein (PYP) chromophore in aqueous solution have been measured by femtosecond fluorescence up-conversion and the corresponding time-resolved fluorescence spectra have been reconstructed. The native chromophore of PYP is a thioester derivative of p-coumaric acid in its trans deprotonated form. Fluorescence kinetics are reported for a thioester phenyl analogue and for two analogues where the thioester group has been changed to amide and carboxylate groups. The kinetics are compared to those we previously reported for the analogues bearing ketone and ester groups. The fluorescence decays of the full series are found to lie in the 1–10 ps range depending on the electron-acceptor character of the substituent, in good agreement with the excited-state relaxation kinetics extracted from transient absorption measurements. Steady-state photolysis is also examined and found to depend strongly on the nature of the substituent. While it has been shown that the ultrafast light-induced response of the chromophore in PYP is controlled by the properties of the protein nanospace, the present results demonstrate that, in solution, the relaxation dynamics and pathway of the chromophore is controlled by its electron donor–acceptor structure: structures of stronger electron donor–acceptor character lead to faster decays and less photoisomerisation

Lung localized protective responses to heterosubtypic influenza challenge

Influenza A virus (IAV) is one of the most ubiquitous respiratory viruses in the world, causing significant disease burden in the United States and abroad. Current vaccination strategies that target the generation of humoral immunity offer limited heterosubtypic protection; T cells offer cross-strain protection and the promise of universal immunity against IAV. Local tissue immunity plays a key role in pathogen clearance and tissue protection, particularly in the form of tissue resident memory T cells (TRM), which are a non-circulating memory T cell subset that have been shown in a variety of tissue sites to be superior mediators of protection compared to circulating memory T cells. At the same time, T cell immunity has been associated with inflammatory processes that may also lead to lung immunopathology. How lung tissue localized T cell immunity mediates its protection during a recall response to IAV challenge is not well understood. Using the lymphocyte sequestering drug FTY720, we show that primary infection with H3N2 IAV strain X31 provides tissue localized heterosubtypic immunity independently of humoral immunity against an H1N1 PR8 IAV strain. Within the lung resident niche, the recall response drives faster CD4+ and CD8+ T cell expansion compared to a primary infection. This rapid T cell expansion resulted from in situ TRM proliferation that was augmented by the migration of peripheral T cells. By tracking a naïve T cell population specific for the IAV strain used in secondary challenge, we demonstrate that influenza-specific T cells, including those specific for newly introduced antigens, migrate to the lung niche from the local mediastinal lymph node (medLN) where both CD4+ and CD8+ T cells experience enhanced priming and proliferation. We further show that primary infection fortifies the medLN with persistently increased numbers of T cells as well as both CD103+ and CD103- conventional dendritic cells (cDCs) that are transcriptionally similar to cDCs in an infection naïve mouse. By depleting Zbtb46+ cDCs, we determine that cDC fortification is a crucial mechanism for enhanced T cell priming and expansion in the medLN during a recall response. We also found that lung localized CD4+ T cell responses exhibit significant immunomodulatory function. Polyclonal lung CD4+ TRM generated by influenza infection as well as lung OT-II TRM exhibit increased production of antiviral inflammatory cytokines in addition to enhanced IL-10 family cytokine production compared to splenic CD4+ effector memory T cells (TEM). During a heterosubtypic challenge, we further observed that lung niche non-TRM CD4+ T cells produce significantly more in situ IL-10 compared to a primary infection, which modulated airway IFN-ɣ and TNF-α production without any depreciation in viral clearance. Immunomodulatory characteristics of a recall response was reflected in lung tissue-wide transcriptional downregulation of innate responses such as type I IFN responses compared to a primary infection. This work demonstrates the dual antiviral and immunomodulatory protective role of enhanced tissue-localized T cell responses during the recall response to IAV challenge

Corporate social responsibility performance and outsourcing: The case of the Bangladesh tragedy

Multinational firms frequently outsource the manufacturing of their products to factories in less- developed countries to take advantage of much lower labor costs. A tragic disaster occurred in Bangladesh in April 2013 when a clothing factory building collapsed, killing more than a thousand workers. Subsequently, textile companies in the U.S. and in Europe who outsource their manufacturing in Bangladesh had to decide whether to commit to better working conditions by signing one of two worker safety agreements (WSAs) born in the after-math of the tragedy. Although many firms signed one of these agreements, many more did not. This study explores the relationship between an actual corporate social responsibility (CSR) commitment and firm performance, using a sample of companies who signed one of the WSAs after the Bangladesh disaster and those who did not. The results suggest that the decision to sign is positively associated with social visibility, prior CSR performance, and impact in stock price after the tragedy. Regarding subsequent performance, investors favorably responded to the news of firms’ signing on to the WSA agreement

Instructional Case: Can Management Accounting Help Aid Associations Make Tough Choices in Haiti?

Based on an actual situation, this case explores the use of management accounting analysis in a difficult make-or-buy decision in the real world of humanitarian aid. An aid organization produces a specially designed, highly nutritious peanut butter medicine to save the lives of Haiti’s malnourished children. The challenge is deciding whether to source the peanuts from Haitian farmers and pay more or from foreign suppliers and pay less. Students perform both quantitative and qualitative cost-benefit, break-even, operating leverage, and product costing analysis. Performance measurement, incentive issues, short-term versus long-term thinking, micro and macroeconomics, and ethical issues are also considered. The case is best suited for cost accounting and managerial (particularly MBA managerial) accounting courses

The Association Between Audit Fees and Accounting Restatement Resulting from Accounting Fraud and Clerical Errors

Restatements of financial reporting arise from many sources including changes in accounting rules, changes in reporting entity, accounting errors, and fraud (or “irregularities”). Theory predicts that audit effort (measured by audit fees) and financial report restatements should be negatively associated because more audit effort means that auditors should be more likely to find errors or other issues that could lead to later restatement (Shibano 1990; Matsumura and Tucker, 1992; Lobo and Zhao, 2013). However, other studies have found either a positive association or no association between audit fees and subsequent restatements (Kinney et al., 2004; Stanley and DeZoort, 2007; Cao et al., 2012; Hribar, Kravet, and Wilson, 2014). There is an ongoing inconsistency between the theory and empirical findings in this area (Lobo and Zhao, 2013). In this study, we investigate the relationship between audit fees and two specific types of restatements: those caused by either fraud or errors. Whereas errors are unintentional misapplications of GAAP, or mistakes in data analysis, fraud is intentional and deliberate misreporting. Prior research provides evidence that investors differentiate between errors and irregularities (e.g., Palmrose, et al., 2004) and market reaction is greater to irregularities than to errors

A Study of Long-Lived Asset Impairment Under U.S. GAAP and IFRS Within the U.S. Institutional Environment

This paper explores whether differences in accounting standards influence reporting behavior within the U.S. institutional environment where both IFRS and U.S. GAAP are used for reporting purposes. We focus on the accounting for impairment of long-lived assets, an area where significant differences exist between U.S. GAAP and IFRS. We identify all U.S.-listed firms who have recognized long-lived asset impairment losses during the 2004–2012 period. From these firms, we identify firms following IFRS, then develop a matched sample of U.S. GAAP firms, using a propensity score matching procedure. We examine the relation between impairment loss and unexpectedly high or low earnings in the year of impairment using a two-stage Heckman regression model, controlling for industry, country, year of write-down, and firm-level economic factors. We find that the association between impairment losses and unexpectedly high and low earnings is significantly greater for U.S. GAAP firms as compared to IFRS reporting firms, implying differences in accounting standards influence firm financial reporting. Our findings are robust to alternative measures of country level institutional factors and macro-economic variables, as well as inclusion of asset impairment reversals

Materiality Thresholds: Empirical Evidence from Change in Accounting Estimate Disclosures

This paper provides empirical evidence on the materiality thresholds adopted in “change in accounting estimate” (CAE) disclosures. We also investigate the characteristics of the disclosing firms and their auditors, as well as the characteristics of the CAEs, such as the effect on income, the accounts affected, and disclosure venue. U.S. GAAP requires firms to disclose a CAE if its effect on the financial statements is deemed to be “material” (ASC 250-50-4). We analyze 4,335 CAE disclosures from 2006 to 2016 and provide the first descriptive evidence of the actual materiality thresholds used for CAE disclosures in practice. Our main finding is that quantitative materiality thresholds for CAE disclosures are significantly lower than conventional materiality thresholds, such as 5 percent of pretax income, and that firms may not only apply quantitative materiality thresholds more conservatively, but that other qualitative considerations play an important role in determining CAE materiality. Our results also show that there exists considerable variation in CAE disclosure across firm size, industry membership, auditor, financial statement account effected and the direction of the effect on income

Loan purpose and accounting based debt covenants

Purpose The purpose of this paper is to investigate the association between the purpose of a loan and the type of debt covenants, separated into balance sheet-based and income statement-based covenants. Design/methodology/approach Using private loan deal observations obtained from the DealScan database over the period between 1996 and 2013, the authors classify the sample loan deals into three categories based on the purpose of borrowing, namely, borrowings for corporate daily operating purposes, financing purposes and acquisition and investing purposes. The authors conduct multinomial logistic regression analysis to test the relationship between the choice of financial ratios in a debt covenant and the purpose of a loan, controlling for financing constraints and other factors that have been identified as important to debt covenant analysis in prior studies. Findings The results provide evidence that the purpose of the loan is significantly associated with the type of debt covenants, suggesting that the lender and the borrower have considered the loan purpose when structuring their debt agreements. More specifically, the results indicate that the loans borrowed to fund acquisitions or long-term investment projects are more likely to have income statement-based covenants and less likely to have balance sheet-based covenants. In contrast, the loans borrowed for corporate daily operating purposes or financing purposes are more likely to contain balance sheet-based covenants relative to income statement-based covenants. Research limitations/implications The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency. The results are limited to the US market with its institutional structure. In future studies, it would be interesting to perform similar investigations on firms in other countries. Practical implications The findings contain important and economically significant implications indicating that loan lenders and borrowers agree to include different types of accounting information (that is, income statement- versus balance sheet-based financial ratios) in their loan covenants for different purpose loans. Social implications Overall, the results provide important evidence regarding the connection between debt covenant structure and loan purpose. In doing so, it contributes to the literature on debt contract design (Dichev and Skinner 2002; Chava and Roberts 2008; Demerjian 2011; Christensen and Nikolaev 2012). Despite much interest in debt contract design, Skinner (2011) argues that there still exists incomplete knowledge of the economic factors that structure debt contracts. Income statement-based covenants depend on measures of profitability and efficiency and act as trip wires that transfer control rights to lenders when borrowing firms’ performance deteriorates. On the other hand, balance sheet-based covenants rely on information about sources and uses of capital and align interests between borrowing firms and lenders by restricting the borrower’s capital structure. The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency. Originality/value This study is the first to identify differences in trends over time for the use of income statement- and balance sheet-based covenants as it relates to different loan purposes. The authors build on prior research to examine the degree to which loan purpose is associated with the choice between income statement-based and balance sheet-based covenants