Did Corporate Governance Compliance Have an Impact on Auditor Selection and Quality? Evidence From FTSE 350

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.This paper examines the possible effects of corporate governance (GC) on audit quality (AQ) among the FTSE 350 companies. Using a sample of 180 companies from 2012 to 2017 (i.e., 1080 firm-year observations) a binary logistic model has been employed to investigate the CG-AQ nexus. This analysis was supported by conducting a probit logistic model as a sensitivity analysis. Our findings are associative of a heterogeneous impact of CG on AQ post the implementation of the 2012 CG reforms in the UK. For example, although institutional ownership and management ownership are positively associated with auditor selection and AQ, board independence, non-executive directors and audit committee are not attributed to AQ in the UK. This implies that corporate compliance with good CG practices has a limited impact on the decision to select a Big4 auditor in the UK. Despite the limitations of our study, we hope it can motivate further investigations in this area

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

Noncompliance with Non-Accounting Securities Regulations and GAAP Violations

Using enforcement actions by the Securities and Exchange Commission (SEC) as a proxy for noncompliance with securities regulations, we examine whether a firm’s compliance with non-accounting laws and regulations is associated with GAAP violations. We find that firms that violate securities regulations related to non-accounting issues are more likely to report accounting restatements than control firms that comply with securities regulations. We also find that the difference between the two groups is significant only for the periods subsequent to the start of the noncompliance period but not for periods prior to this date. Our results highlight the interrelation between the accounting and compliance systems, and suggest that managers who are non-compliant with non-accounting regulations are also more likely to be non-compliant with accounting rules

Why Do Some Accelerated Filers with SOX Section 404 Material Weaknesses Provide Early Warning under Section 302?

During the first year of the SOX Section 404 reporting requirements (effective November 15, 2004), many adverse Section 404 audit reports were a surprise\u27\u27 in that management had not previously warned investors of the internal control deficiencies (ICDs) in SEC filings under Section 302 (effective August 29, 2002). Based on 451 accelerated filers with adverse initial Section 404 reports, we look back in time to previous disclosures under Section 302 and find that only 27 percent of the companies provided early warning of any of the ICDs during the fiscal year. We examine the association of early warning during the fiscal year under Section 302 with material weakness characteristics, litigation risk, subsequent financing, auditor characteristics, and management and governance traits. We find that early warning of ICDs is positively associated with the severity and number of material weaknesses, prior earnings re-statements, auditor independence and effort, CFO change, the number of institutional investors, and the number of audit committee meetings, and negatively associated with future equity financing activities and CEO/board chair duality. Overall, the results underscore previous research documenting the effect of management incentives on disclosure behavior and the benefits of rigorous auditing and monitoring. We offer implications and directions for future research