Auditing the auditors: oversight or overkill?

A growing number of high-profile companies have had to restate their earnings at substantially lower levels to correct the prior use of "aggressive" and even fraudulent accounting practices. Because the companies’ auditors approved the original reports, policymakers have questioned the capacity of public accounting firms to promote fair financial reporting. In response, recent legislation has instituted several reforms, including the creation of the Public Company Accounting Oversight Board, which together with the Securities and Exchange Commission will investigate alleged lapses in accounting practices. But how much oversight is really necessary? Jeffery Gunther and Robert Moore examine recent events in the light of research findings. Based on this analysis, they conclude that market forces have tended, over time, to shape the role of auditors to match or correspond to the needs of investors in monitoring individual companies’ performance. Despite current sentiment to the contrary, substantial government involvement in the business of auditing appears to be needed only when other types of government intervention, such as bank deposit insurance, have already disrupted market-based incentives for effective audits. In the more typical situation, both government and industry policymakers should avoid restrictive measures that unnecessarily increase audit costs, instead taking into account market forces’ successful track record in disciplining ineffective auditors and promoting an effective audit function.>Securities and Exchange Commission ; Accounting

Has the housing boom increased mortgage risk?

Adjustable rate mortgages

Financial statements and reality: do troubled banks tell all?

Each quarter, banks file a call report, or Report of Condition and Income, containing hundreds of accounting items pertaining to their financial condition. This article analyzes call report revisions to assess the extent to which regulatory exams promote accurate data. The findings indicate banks with new or emerging difficulties often significantly underreport these problems, intentionally or not. In addition, the findings point to a significant role for exams in uncovering financial problems and ensuring bank accounting statements reflect them. To the extent the loan-loss accounting in call reports is widely used to assess loan quality, these results support the view that exams are important in the public dissemination of accurate information on banks' financial condition.

Loss underreporting and the auditing role of bank exams

Using a unique set of banking data containing both originally reported and subsequently revised financial variables, we study the incidence of adverse revisions to accounting statements. As might be expected, our findings indicate banks are more likely to underreport financial losses when their financial performance is substandard. In addition, we provide evidence that supervisory exams have an important role in uncovering financial problems and ensuring bank accounting statements reflect them. Specifically, our estimations point to a significant auditing effect, through which exams can lead to a restatement of financial results to reflect a greater degree of financial difficulty than originally reported. Interestingly, this auditing role of exams is evident not only for institutions previously identified as supervisory concerns, but also at highly rated banks, where financial problems are only just emerging. Because a banking downturn would increase not only the number of problem institutions requiring additional supervisory attention, but also the incidence of loss underreporting at highly rated banks, our findings stress the value of efforts to maintain or bolster the supervisory system's capacity to expand exam activity quickly and substantially.Banks and banking - Accounting

Universal access, cost recovery, and payment services

We suggest a subtle, yet far- reaching, tension in the objectives specified by the Monetary Control Act of 1980 (MCA) for the Federal Reserve’s role in providing retail payment services, such as check processing. Specifically, we argue that the requirement of an overall cost-revenue match, coupled with the goal of ensuring equitable access on a universal basis, partially shifted the burden of cost recovery from high-cost to low-cost service points during the MCA’s early years, thereby allowing private-sector competitors to enter the low-cost segment of the market and undercut the relatively uniform prices charged by the Fed. To illustrate this conflict, we develop a voter model for what begins as a monopoly setting in which a regulatory regime that establishes a uniform price irrespective of cost differences, and restricts total profits to zero, initially dominates through majority rule both deregulation and regulation that sets price equal to cost on a bank-by-bank basis. Uniform pricing is dropped in this model once cream skimming has subsumed half the market. These results help illumine the Federal Reserve’s experience in retail payments under the MCA, particularly the movement over time to a less uniform fee structure for check processing.Payment systems ; Check collection systems

Can the stock market tell bank supervisors anything they don't already know?

This article provides evidence consistent with recent policy proposals calling for a greater role for market forces in promoting a safe and sound financial system. The authors' empirical results indicate a measure of expected default probability distilled from equity prices helps predict the financial condition of individual banking organizations, as reflected in their supervisory ratings. Moreover, the stock market data have predictive power over and above the information in the quarterly financial statements available to supervisors between inspections. These findings suggest financial markets can provide useful information to supplement supervisory assessments, particularly between inspections, and point to the value of additional research to further clarify the information content of market prices and quantities.Banks and banking ; Bank examination ; Bank supervision

Relative entropy as a measure of inhomogeneity in general relativity

We introduce the notion of relative volume entropy for two spacetimes with preferred compact spacelike foliations. This is accomplished by applying the notion of Kullback-Leibler divergence to the volume elements induced on spacelike slices. The resulting quantity gives a lower bound on the number of bits which are necessary to describe one metric given the other. For illustration, we study some examples, in particular gravitational waves, and conclude that the relative volume entropy is a suitable device for quantitative comparison of the inhomogeneity of two spacetimes.Comment: 15 pages, 7 figure

Complete Genome Sequence of UV-Resistant \u3ci\u3eCampylobacter jejuni\u3c/i\u3e RM3194, Including an 81.08-Kilobase Plasmid

Annually, Campylobacter spp. are responsible for the greatest number of foodborne gastrointestinal bacterial infections in the developed world (1, 2). However, Campylobacter spp. are nutritionally fastidious organisms requiring a microaerobic environment for survival (3). It remains uncertain by what mechanisms Campylobacter survives within multiple hostile environments in sufficient numbers to cause such significant amounts of human disease. Campylobacter jejuni strain RM3194 was isolated from a clinical sample in 1994 from a human enteritis case at the Red Cross War Memorial Children’s Hospital in Cape Town, South Africa, and was supplied to our laboratory by Robert Mandrell (ARS, Albany, CA) (4, 5). In our research, RM3194 demonstrated an increased resistance to both UV (254 nm) and blue light (405 nm) (6). This resistance produced several-log-greater survival after challenge with UVlight compared to the survival of other C. jejuni strains in our collection