Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management

A prime objective of the Sarbanes-Oxley Act and recent changes to stock exchange listing standards is to improve the quality of financial reporting. We examine the associations between audit committee financial expertise and alternate corporate governance mechanisms and earnings management. We find that both accounting and certain types of non-accounting financial expertise reduce earnings management for firms with weak alternate corporate governance mechanisms, but that independent audit committee members with financial expertise are most effective in mitigating earnings management. Importantly we find that alternate corporate governance mechanisms are an effective substitute for audit committee financial expertise in constraining earnings management. Finally, we find either no association or a positive association between financial expertise and real earnings management. Our results suggest that alternate governance approaches are equally effective in improving the quality of financial reporting, and that firms should have the flexibility to design the particular set of governance mechanisms that best fit their unique situations

Audit Committee Financial Experts: A Closer Examination Using Firm Designations

The Sarbanes-Oxley Act (SOX) requires the disclosure of whether the audit committee has a financial expert. We examine disclosures related to audit committee financial experts (ACFEs) in the first year that this disclosure requirement is in effect. We find that virtually all companies disclose whether an ACFE is on the audit committee, although the transparency of the disclosure regarding the ACFE’s background is limited. We also find that most ACFEs do not have a background in accounting or finance, although there are notable differences between stock exchanges on this dimension. In addition, we find that companies designate ACFEs who would not have been identified using extant research methods, and companies fail to voluntarily designate many individuals who appear to qualify as an ACFE, particularly if another audit committee member is already designated as an ACFE. Thus, some companies appear to be extremely conservative in designating directors as ACFEs, possibly due to concerns about the legal liability faced by designated ACFEs. Finally, we identify certain company characteristics that are associated with the designation or type of financial expert on the audit committee

Top 10 Audit Deficiencies

The article focuses on financial statement fraud based on cases wherein the U.S. Securities and Exchange Commission sanctioned auditors for their association with fraudulent financial statements. All of the cases involved public companies, most of which engaged ill fraudulent financial reporting. Only a few engaged in misappropriation of assets or defalcation. The most common problem, alleged in 90% of the cases, was the auditor\u27s failure to gather sufficient evidence. In some instances, this failure was pervasive throughout the engagement while in other instances the allegations were more specific. For example, many of the cases involved inadequate evidence in the areas of asset valuation, asset ownership and management representations. Some cases involved the auditor\u27s failure to examine relevant supporting documents or failure to perform steps listed in the audit program. Overall, this failure contributed to management\u27s success in overstating assets, the most common fraud technique

Just Say \u27No\u27

The article discusses the prevention of financial fraud within corporations and businesses in the United States. The types of individuals named in the U.S. Securities and Exchange Commission (SEC) files are examined. Different fraud techniques are looked at, including sham sales, the recording of conditional sales, and unauthorized shipments. The author discusses the status of firms after fraud disclosure and the implications it has for finance professionals

Fraudulent financial reporting: 1998-2007 : an analysis of U.S. public companies

https://egrove.olemiss.edu/aicpa_assoc/1534/thumbnail.jp

Fraudulent financial reporting: 1987-1997 : an analysis of U.S. public companies : research report

https://egrove.olemiss.edu/aicpa_assoc/1330/thumbnail.jp

Better Environment, Better Staff

The article discusses result of a survey addressing the quality of work life among audit personnel in the U.S. The result shows that dissatisfaction in the work environment affects staff\u27s performance. Creating customer value is one of the issues in business establishment. As stated, clients are demanding the expertise that comes with experiences. The quality of work environment may persuade outstanding staff members to pursue other career options. Financial rewards of public accounting are not the basis for changes in the rating of staff

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multiperiod contracts among managers, directors, shareholders, and creditors

Temporal Changes in Bankruptcy-Related Reporting

Examines whether the tightening of the going-concern professional standards in the United States is associated with the propensity of the Big 8/Big 6 firms modify bankruptcy-related opinions. Auditing Standards Board\u27s SAS 34 and SAS 59; Difference in auditor reporting; Professional standards tightened by SAS 64; Implications for practice and theory