Regulation, Auditor Litigation and Settlements

This paper aims to understand the determinants of lawsuits against auditors in securities class action litigation and the settlement pattern by auditors when the suit is not dismissed. The issues we consider are: (i) when are auditors named as defendants (ii) when do auditors choose to settle and (iii) what proportion of the settlement do auditors pay in relation to the settlement by all the other parties; and (iv) differences in settlement strategies among the big-n firms. This paper also examines how the lawsuit and settlement patterns have changed following the enactment of major regulation such as the Private Securities Litigation Reform Act (PSLRA), Sarbanes Oxley Act (SOX). Following prior literature, we first establish that auditors are more likely both to be named and to settle in cases involving restatement of earnings, accusations of violation of GAAP or accounting improprieties. We then show that the likelihood of suit and settlement increase in a measure that we construct measuring the complexity of litigation. We then examine differences in settlement patterns across periods preceding and after the passage of PSLRA and SOX. We find that auditors are named less often in the post PSLRA period (relative to the pre-PSLRA period), settle with the same frequency in both periods but pay less proportional damages. The same set of comparisons show that auditors are just as likely to be sued post-SOX as pre-SOX, but settle with lower frequency and pay the same proportion of damages. Overall this study documents the beneficial role of both PSLRA and SOX on reducing the litigation burden on auditors. With regard to settlement strategies, we document the varying strategies employed by the Big-n firms that settle at different rates, vary in their aggressiveness and time to settle signaling the willingness to fight or cooperate in the settlement

R&D Reporting Biases and their Consequences

The immediate expensing of R&D expenditures is often justified by the conservatism principle. However, no accounting procedure consistently applied can be conservative throughout the firm' life. We ask the following questions: (a) When is the expensing of R&D conservative and when is it aggressive, relative to R&D capitalization? and (b) What are the capital market implications of these reporting biases? To address these questions we construct a model of profitability biases (differences between reported profitability under R&D expensing and capitalization) and show that the key drivers of the reporting biases are the differences between R&D growth and earnings growth (momentum), and between R&D growth and return on equity (ROE). Companies with a high R&D growth rate relative to their profitability (typically early cycle companies) report conservatively, while firms with a low R&D growth rate (mature companies) tend to report aggressively under current GAAP. Our empirical analysis, covering the period 1972-2003, generally supports the analytical predictions. In the valuation analysis we find evidence consistent with investor fixation on the reported profitability measures: we detect undervaluation of conservatively reporting firms and overvaluation of aggressively reporting firms. These misvaluations appear to be corrected when the reporting biases reverse from conservative to aggressive and vice versa

Financial Statements Insurance

The largest corporate bankruptcy filed in the U.S., that of Enron in 2001, was preceded by a string of disclosures about errors in and corrections to their financial statements. The presence of such errors creates uncertainty about the quality of the financial statements, can lead to pricing distortions, and inefficient market allocations. Several causes have been suggested for the current state of affairs. Most important, perhaps, are managers' tendency to inflate stock prices for personal gain through deceit, "cooking the Books" - misrepresentations in financial reporting - and other unethical behavioral practices, and auditors' failure to fulfill their role as independent gatekeepers. Currently, the incentives driving auditors' behavior may not elicit unbiased reports. Auditors are paid by the companies they audit which creates an inherent conflict of interest that is endemic to the relation between the firm (the principal) and the auditor (the agent). Unfortunately, remedying these problems is not simple. Prosecution and punishment may not adequately deter wrongdoing, as intentional misrepresentation is difficult to discover or prove. Overhauling the regulatory structure and adding layers of supervision and monitoring by the government would be inefficient and socially wasteful. In addition, little can be done in the short run to cultivate ethical personalities. Rather, the solution lies in market mechanisms that eliminate the perverse incentives of gatekeepers, most notably the auditors. We present a financial statement insurance institutional mechanism that eliminates the conflict of interest auditors face and properly aligns their incentives with those of shareholders. We show analytically that the introduction of financial statement insurance can significantly mitigate market inefficiencies arising from uncertainty regarding the quality of financial statements. The basic structure of Financial Statement Insurance (FSI) can be described as follows. Instead of appointing and paying auditors, companies would purchase financial statement insurance that provides coverage to investors against losses suffered as a result of misrepresentation in financial reports. The insurance coverage that the companies are able to obtain is publicized, as are the premiums paid for that coverage. The insurance carriers would then appoint and pay the auditors who attest to the accuracy of the financial statements of the prospective insurance clients. Those firms announcing higher limits of coverage and smaller premiums would distinguish themselves in the eyes of the investors as companies with higher quality financial statements. In contrast, those with smaller or no coverage or higher premiums will reveal themselves as those with lower quality financial statements. Every company will be eager to get higher coverage and pay smaller premiums lest it be identified as the latter. A sort of Gresham's law in reverse would be set in operation, resulting in a flight to quality

R&D Reporting Biases and their Consequences

The immediate expensing of R&D expenditures is often justified by the conservatism principle. However, no accounting procedure consistently applied can be conservative throughout the firm' life. We ask the following questions: (a) When is the expensing of R&D conservative and when is it aggressive, relative to R&D capitalization? and (b) What are the capital market implications of these reporting biases? To address these questions we construct a model of profitability biases (differences between reported profitability under R&D expensing and capitalization) and show that the key drivers of the reporting biases are the differences between R&D growth and earnings growth (momentum), and between R&D growth and return on equity (ROE). Companies with a high R&D growth rate relative to their profitability (typically early cycle companies) report conservatively, while firms with a low R&D growth rate (mature companies) tend to report aggressively under current GAAP. Our empirical analysis, covering the period 1972-2003, generally supports the analytical predictions. In the valuation analysis we find evidence consistent with investor fixation on the reported profitability measures: we detect undervaluation of conservatively reporting firms and overvaluation of aggressively reporting firms. These misvaluations appear to be corrected when the reporting biases reverse from conservative to aggressive and vice versa

R&D Reporting Biases and their Consequences

The immediate expensing of R&D expenditures is often justified by the conservatism principle. However, no accounting procedure consistently applied can be conservative throughout the firm' life. We ask the following questions: (a) When is the expensing of R&D conservative and when is it aggressive, relative to R&D capitalization? and (b) What are the capital market implications of these reporting biases? To address these questions we construct a model of profitability biases (differences between reported profitability under R&D expensing and capitalization) and show that the key drivers of the reporting biases are the differences between R&D growth and earnings growth (momentum), and between R&D growth and return on equity (ROE). Companies with a high R&D growth rate relative to their profitability (typically early cycle companies) report conservatively, while firms with a low R&D growth rate (mature companies) tend to report aggressively under current GAAP. Our empirical analysis, covering the period 1972-2003, generally supports the analytical predictions. In the valuation analysis we find evidence consistent with investor fixation on the reported profitability measures: we detect undervaluation of conservatively reporting firms and overvaluation of aggressively reporting firms. These misvaluations appear to be corrected when the reporting biases reverse from conservative to aggressive and vice versa

Endocrine-disrupting chemicals used as common plastic additives: Levels, profiles, and human dietary exposure from the Indian food basket

Endocrine-disrupting chemicals (EDCs) such as phthalic acid esters (PAEs) and bisphenol A (BPA) are the most widely used plastic additives in polymeric materials. These EDCs are ubiquitously distributed in the environment. Hence selected PAEs and BPA were investigated in twenty-five food types and drinking water (supply and packaged) from the metropolitan city, Delhi, and the peri-urban areas of a non-metropolitan city, Dehradun. Except cabbage and orange, the sum of thirteen PAEs (∑13PAEs) and BPA in all the other food types were significantly higher in Delhi over Dehradun (p < 0.01). Highest mean ∑13PAEs (665 ng/g) and BPA (73 ng/g) were observed in cottage cheese and potatoes, respectively followed by fish (PAEs - 477 ng/g, BPA - 16 ng/g). Supply water from the west zone of Delhi was found to contain the highest concentration of BPA (309 ng/L) and ∑13PAEs (5765 ng/L) with the dominance of diethyl phthalate (DEP). Based on the compositional profile and compound-wise principal component analysis, environmental contamination and food processing were attributed as significant sources of most priority PAEs in food samples. Di-ethyl hexyl phthalate (DEHP) was over 100-fold higher in the bottled water from local brands than composite bottled water samples. Packaging material was identified as a source for di-n-butyl phthalate (DnBP) in packaged food. This study observed the highest estimated daily dietary intake (EDI) in the high-fat-containing food products viz., cottage cheese, and fish from north Delhi. High bioaccumulation of BPA can be a possible reason for elevated EDI in vegetables and local fish of Delhi. Unlike Dehradun, EDI for ∑13PAEs and BPA was slightly higher for the non-vegetarian adult when compared to the vegetarian adult. DEHP and DnBP exhibited the highest estimated estrogenic potential for bottled water from local brands. Dietary exposure due to six priority PAEs contamination in food stuffs was two to four-fold higher in Delhi than Dehradun for adult man and woman.acceptedVersio

Influence of Al Content on the Corrosion Behavior of Biodegradable Magnesium Alloys in Simulated Physiological Solution

Magnesium (Mg) and its alloys have gained wide popularity in the biomedical field as promising candidates for degradable implant applications. Among Mg alloys, AZ (aluminum and zinc) series alloys are the most widely investigated for implant applications and reported in the literature. In all AZ series Mg alloys, aluminium content is the influencing factor that imparts different properties to the Mg alloys. In the present study, pure Mg, AZ31 and AZ91 Mg alloys were selected and the effect of aluminium content on the biocorrosion has been investigated in Ringer’s solution. It was a clear observation that the increased aluminum content has a severe effect on the degradation behavior of magnesium. From the weight loss measurements, AZ31 has shown lower corrosion rate compared with pure Mg and AZ91. The surface morphologies also showed the formation of more pits on pure Mg and AZ91 Mg alloy compared with AZ31 Mg alloy. By correlating the degradation behavior with the microstructure, galvanic corrosion was found to be the main reason behind the accelerated corrosion rate in AZ91 Mg alloy compared with AZ31 alloy. The phases on the corroded sample surfaces were examined by X-ray diffraction (XRD) method and scanning electron microscopy (SEM) and found that the corrosion products which were deposited on the surfaces provided protection against the chloride ions which was indicated by the decreased corrosion rates as immersion time was increased

Some properties of modules

Bibliography: p. 61