The Interrelation between Audit Quality and Managerial Reporting Choices and Its Effects on Financial Reporting Quality

Two distinct lines of research have been dedicated to empirically testing how financial reporting quality (measured as the earnings response coefficient or ERC) is associated with management's choice of reporting bias and with audit quality. However, researchers have yet to consider how ERCs are affected by either the auditor's reaction to changes in the manager's reporting bias or the manager's reaction to changes in audit quality. Our study provides theoretical guidance on these interrelations and how changes in the manager's or the auditor's incentives affect both reporting bias and audit quality. Specifically, when the manager's cost (benefit) of reporting bias increases (decreases), we find that expected bias decreases, inducing the auditor to react by reducing audit quality. Because we also find that the association between expected audit quality and ERCs is always positive, changes in managerial incentives for biased reporting lead to a positive association between ERCs and expected reporting bias. When the cost of auditing decreases or the cost of auditor liability increases, we find that expected audit quality increases, inducing the manager to react by decreasing reporting bias. In this case, changes in the costs of audit quality lead to a negative association between ERCs and expected reporting bias. Finally, we demonstrate the impact of our theoretical findings by focusing on the empirical observations documented in the extant literature on managerial ownership and accounting expertise on the audit committee. In light of our framework, we provide new interpretations of these empirical observations and new predictions for future research

The Effects of Auditor Tenure on Fraud and Its Detection

We examine the strategic effects of auditor tenure on the auditor's testing strategy and the manager's inclination to commit fraud. Most empirical studies conclude that longer tenure improves audit quality. Proponents of restricting tenure argue that longer tenure impairs auditor independence and a "fresh look" from a new auditor results in higher audit quality. Validating this argument requires testing whether the observed difference in audit quality between a continuing auditor and a change in auditors is less than the theoretically expected difference in audit quality without impairment. Our findings provide the guidance necessary for developing such tests. Our results show that audit risk (the probability that fraud exists and goes undetected) is lower in both periods for the continuing auditor than with a change in auditors. More importantly, we show that across both periods, expected undetected fraud is lower for the continuing auditor than with a change in auditors

How Changes in Expectations of Earnings Affect the Associations of Earnings Overstatements and Audit Effort with Audit Risk and Market Price

In this study, we provide theoretical guidance for both analytical research and empirical research by considering how changing expectations of earnings affect a dishonest manager's strategy to overstate earnings and an auditor's strategy to exert effort in a two-period setting. We expect our study's insights on changing economic conditions to help shape future research. We model the manager type as either honest or dishonest, which allows us to differentiate audit risk from audit effort. The key takeaways for future research are the insights on how changes in payoffs and expected earnings affect the associations that involve earnings overstatements and audit effort with audit risk and market price. For instance, researchers typically assume audit effort and audit risk are negatively associated, but we find the association can be positive when, for example, the auditor chooses a period 2 strategy based on the changes in period 1 game parameters. The results of our study provide two additional key insights on the design of future empirical tests. First, by dichotomizing, we show the importance of estimating the intercept in the market pricing equation when studying earnings quality, because market price also adjusts for expected bias through changes in the intercept. Second, our multiperiod setting demonstrates that the effects from a change in the manager's or auditor's incentives in period 1 may reverse in period 2. Empirical studies typically examine the contemporaneous effects of these changes on market price and/or audit risk but fail to identify the cross-temporal effects we document in our study

Intended Consequences Statement in Conservation Science and Practice

As the biodiversity crisis accelerates, the stakes are higher for threatened plants and animals. Rebuilding the health of our planet will require addressing underlying threats at many scales, including habitat loss and climate change. Conservation interventions such as habitat protection, management, restoration, predator control, trans location, genetic rescue, and biological control have the potential to help threatened or endangered species avert extinction. These existing, well-tested methods can be complemented and augmented by more frequent and faster adoption of new technologies, such as powerful new genetic tools. In addition, synthetic biology might offer solutions to currently intractable conservation problems. We believe that conservation needs to be bold and clear-eyed in this moment of great urgency

Patterns of Coral Disease across the Hawaiian Archipelago: Relating Disease to Environment

In Hawaii, coral reefs occur across a gradient of biological (host abundance), climatic (sea surface temperature anomalies) and anthropogenic conditions from the human-impacted reefs of the main Hawaiian Islands (MHI) to the pristine reefs of the northwestern Hawaiian Islands (NWHI). Coral disease surveys were conducted at 142 sites from across the Archipelago and disease patterns examined. Twelve diseases were recorded from three coral genera (Porites, Montipora, Acropora) with Porites having the highest prevalence. Porites growth anomalies (PorGAs) were significantly more prevalent within and indicative of reefs in the MHI and Porites trematodiasis (PorTrm) was significantly more prevalent within and indicative of reefs in the NWHI. Porites tissue loss syndrome (PorTLS) was also important in driving regional differences but that relationship was less clear. These results highlight the importance of understanding disease ecology when interpreting patterns of disease occurrence. PorTrm is caused by a parasitic flatworm that utilizes multiple hosts during its life cycle (fish, mollusk and coral). All three hosts must be present for the disease to occur and higher host abundance leads to higher disease prevalence. Thus, a high prevalence of PorTrm on Hawaiian reefs would be an indicator of a healthy coral reef ecosystem. In contrast, the high occurrence of PorGAs within the MHI suggests that PorGAs are related, directly or indirectly, to some environmental co-factor associated with increased human population sizes. Focusing on the three indicator diseases (PorGAs, PorTrm, PorTLS) we used statistical modeling to examine the underlying associations between disease prevalence and 14 different predictor variables (biotic and abiotic). All three diseases showed positive associations with host abundance and negative associations with thermal stress. The association with human population density differed among disease states with PorGAs showing a positive and PorTrm showing a negative association, but no significant explanatory power was offered for PorTLS

Moving in the anthropocene: global reductions in terrestrial mammalian movements

Animal movement is fundamental for ecosystem functioning and species survival, yet the effects of the anthropogenic footprint on animal movements have not been estimated across species. Using a unique GPS-tracking database of 803 individuals across 57 species, we found that movements of mammals in areas with a comparatively high human footprint were on average one-half to one-third the extent of their movements in areas with a low human footprint. We attribute this reduction to behavioral changes of individual animals and to the exclusion of species with long-range movements from areas with higher human impact. Global loss of vagility alters a key ecological trait of animals that affects not only population persistence but also ecosystem processes such as predator-prey interactions, nutrient cycling, and disease transmission

Cerebral microbleeds and intracranial haemorrhage risk in patients anticoagulated for atrial fibrillation after acute ischaemic stroke or transient ischaemic attack (CROMIS-2):a multicentre observational cohort study

Background: Cerebral microbleeds are a potential neuroimaging biomarker of cerebral small vessel diseases that are prone to intracranial bleeding. We aimed to determine whether presence of cerebral microbleeds can identify patients at high risk of symptomatic intracranial haemorrhage when anticoagulated for atrial fibrillation after recent ischaemic stroke or transient ischaemic attack. Methods: Our observational, multicentre, prospective inception cohort study recruited adults aged 18 years or older from 79 hospitals in the UK and one in the Netherlands with atrial fibrillation and recent acute ischaemic stroke or transient ischaemic attack, treated with a vitamin K antagonist or direct oral anticoagulant, and followed up for 24 months using general practitioner and patient postal questionnaires, telephone interviews, hospital visits, and National Health Service digital data on hospital admissions or death. We excluded patients if they could not undergo MRI, had a definite contraindication to anticoagulation, or had previously received therapeutic anticoagulation. The primary outcome was symptomatic intracranial haemorrhage occurring at any time before the final follow-up at 24 months. The log-rank test was used to compare rates of intracranial haemorrhage between those with and without cerebral microbleeds. We developed two prediction models using Cox regression: first, including all predictors associated with intracranial haemorrhage at the 20% level in univariable analysis; and second, including cerebral microbleed presence and HAS-BLED score. We then compared these with the HAS-BLED score alone. This study is registered with ClinicalTrials.gov, number NCT02513316. Findings: Between Aug 4, 2011, and July 31, 2015, we recruited 1490 participants of whom follow-up data were available for 1447 (97%), over a mean period of 850 days (SD 373; 3366 patient-years). The symptomatic intracranial haemorrhage rate in patients with cerebral microbleeds was 9·8 per 1000 patient-years (95% CI 4·0–20·3) compared with 2·6 per 1000 patient-years (95% CI 1·1–5·4) in those without cerebral microbleeds (adjusted hazard ratio 3·67, 95% CI 1·27–10·60). Compared with the HAS-BLED score alone (C-index 0·41, 95% CI 0·29–0·53), models including cerebral microbleeds and HAS-BLED (0·66, 0·53–0·80) and cerebral microbleeds, diabetes, anticoagulant type, and HAS-BLED (0·74, 0·60–0·88) predicted symptomatic intracranial haemorrhage significantly better (difference in C-index 0·25, 95% CI 0·07–0·43, p=0·0065; and 0·33, 0·14–0·51, p=0·00059, respectively). Interpretation: In patients with atrial fibrillation anticoagulated after recent ischaemic stroke or transient ischaemic attack, cerebral microbleed presence is independently associated with symptomatic intracranial haemorrhage risk and could be used to inform anticoagulation decisions. Large-scale collaborative observational cohort analyses are needed to refine and validate intracranial haemorrhage risk scores incorporating cerebral microbleeds to identify patients at risk of net harm from oral anticoagulation. Funding: The Stroke Association and the British Heart Foundation