Intellectual Capital Reporting: Academic Utopia or Corporate Reality in a Brave New World?

Intellectual capital creates company value but generally this value is not recognised in the financial statements of companies. This report moves forward the debate on how intellectual capital should be recognised and/or disclosed in the annual reports of companies by offering new evidence regarding the views of finance directors, human resources specialists and marketing specialists, all of whom have a particular interest in intellectual capital resources. The issues investigated include: the relative importance of intellectual capital components to the generation of company value; the level of internal management use compared to external disclosure of intellectual capital; the incentives and disincentives for disclosure; and the effectiveness of the annual report and other forms of corporate communication for the disclosure of intellectual capital. The generally high level of variation in responses shows that there is considerable diversity in the extent of company value attributable to intellectual capital and in disclosure incentives and disincentives and hence in disclosure content and the communication channels used. The authors conclude that it is this diversity which represents the most significant challenge to standard-setters as they consider how to address intellectual capital reporting

Audit Market Structure, Fees and Choice following the Andersen Break-up: Evidence from the UK

This paper presents evidence on audit market concentration and auditor fee levels in the UK market in the crucial period of structural change following the PricewaterhouseCoopers' (PwC) merger and encompassing Andersen's demise (1998-2003). Given the current interest in auditor choice, analysis is also undertaken at the individual audit firm level and by industry sector. There is evidence of significant upward pressure on audit fees since 2001 but only for smaller auditees. Audit fee income for top tier auditors (Big 5/4) did not change significantly while the number of auditees fell significantly, consistent with a move towards larger, less risky, clients. Andersen's demise markedly reduced the level of inequality among the top tier firms but PwC retained its position as a 'dominant firm'. On switching to the new auditor, former Andersen clients experienced audit fee rises broadly in line with inflation, with no evidence of fee premia or discounting. They also reported significantly lower NAS fees, consistent with audit firms and auditees responding to public concerns about perceptions of auditor independence. There is no general evidence of knowledge spillover effects or cross-subsidisation of the audit fee by NAS. The combined findings provide no evidence to indicate that recent structural changes have resulted in anticompetitive pricing; the key concern remains the lack of audit firm choice

Factors Affecting Audit Quality in the 2007 UK Regulatory Environment: Perceptions of Chief Financial Officers, Audit Committee Chairs and Audit Engagement Partners

In line with global changes, the UK regulatory regime for audit and corporate governance has changed significantly since the Enron scandal, with an increased role for audit committees and independent inspection of audit firms. UK listed company chief financial officers (CFOs), audit committee chairs (ACCs) and audit partners (APs) were surveyed in 2007 to obtain views on the impact of 36 economic and regulatory factors on audit quality. 498 usable responses were received, representing a response rate of 36%. All groups rated various audit committee interactions with auditors among the factors most enhancing audit quality. Exploratory factor analysis reduces the 36 factors to nine uncorrelated dimensions. In order of extraction, these are: economic risk; audit committee activities; risk of regulatory action; audit firm ethics; economic independence of auditor; audit partner rotation; risk of client loss; audit firm size; and, lastly, International Standards on Auditing (ISAs) and audit inspection. In addition to the activities of the audit committee, risk factors for the auditor (both economic and certain regulatory risks) are believed to most enhance audit quality. However, ISAs and the audit inspection regime, aspects of the ‘standards-surveillance compliance’ regulatory system, are viewed as less effective. Respondents commented that aspects of the changed regime are largely process and compliance driven, with high costs for limited benefits, supporting psychological bias regulation theory that claims there is overconfidence that a useful regulatory intervention exists

Diversity and Determinants of Corporate Financing Decisions: Survey Evidence

Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in 192 UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory, but 60% claim to follow a financing hierarchy, consistent with pecking order theory. These two theories are not viewed by respondents as either mutually exclusive or exhaustive, since some firms adopt (at least partially) both strategies, while a significant number of firms do not appear to follow either of these strategies. Such observations raise concerns about the usefulness of large-scale regression modelling of capital structure determinants. In normal usage, these models can only describe whether a particular theory is consistent with the observed capital structure of the 'average firm' in the population. They are not typically used to model the diversity of capital structure practice. As found in many regression-based determinant studies, there is clear evidence here that company size affects corporate financing decisions. For example, large companies are more likely to adopt a target debt level and to maintain financial slack (though not more likely to follow a hierarchy of finance). Similarly, current high levels of gearing encourage a greater focus on particular issues, such as projected cash flows, loan covenants and non-interest tax shields. This contingency on debt levels suggests that empirical studies of capital structure dynamics may be particularly fruitful. Investigation of debt level determinants shows that many of the theoretical arguments are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry

Financial regulation of public limited companies in the UK: A way forward post-Enron

Argues that the collapse of Enron Corp. provides an opportunity for regulators to consider fundamental issues associated with the regulatory framework for financial reporting, auditing and corporate governance in Great Britain. Details of the changes that have been introduced to the regulatory framework of financial reporting and auditing in Great Britain from 1991 to 1992; Patterns of behavior among non-executive directors who influence the effectiveness of corporate governance

And then there were four: a study of UK market concentration - causes, consequences and the scope for market adjustment

While concentration measures are a good indicator of market structure, the link with competitiveness is more complex than often assumed. In particular, the modern theory of industrial organisation makes no clear statement regarding the impact of concentration on competition - the focus of this paper is concentration and no inferences are made about competitive aspects of the market. The extent and nature of concentration within the UK listed company audit market as at April, 2002 and, pro forma, after the collapse of Andersen is documented and analysed in detail (by firm, market segment and industry sector). The largest four firms held 90 per cent of the market (based on audit fees) in 2002, rising to 96 per cent with the demise of Andersen. A single firm, Pricewaterhouse-Coopers, held 70 per cent or more of the share of six out of 38 industry sectors, with a share of 50 per cent up to 70 per cent in a further seven sectors. The provision of non-audit services (NAS) by incumbent auditors is also considered. As at April 2002, the average ratio of non-audit fees (paid to auditor) to audit fees was 208 per cent, and exceeded 300 per cent in seven sectors. It is likely, however, that disposals by firms of their management consultancy and outsource firms, combined with the impact of the Smith Report on audit committees will serve to reduce these ratios. Another finding is that audit firms with expertise in a particular sector appeared to earn significantly higher nonaudit fees from their audit clients in that sector. The paper thus provides a solid empirical basis for debate. The subsequent discussion considers the implications for companies and audit firms of the high level of concentration in the current regulatory climate, where no direct regulatory intervention is planned

Perceptions of auditor independence: U.K. evidence

The reality and perception of auditor independence is fundamental to public confidence in financial reporting. A new Independence Standards Board was set up in the U.S. in 1997 and the European Union (EU) is currently seeking to establish a common core of independence principles. The general setting within which audit decisions are made and independence perceptions are formed is evolving rapidly due to competitive and regulatory changes. Policy-makers must work continuously to evaluate the critical threat factors and develop appropriate independence principles. This paper explores the potential of recent regulatory reforms in the United Kingdom (U.K.), many of which are unique to that country, to strengthen the independence framework. Using a questionnaire instrument, U.K. interested parties' perceptions of the influence on auditor independence of a large set of 45 economic and regulatory factors are elicited. Most factors have a significant impact on independence perceptions for all groups (finance directors, audit partners, and financial journalists). The principal threat factors relate to economic dependence and non-audit service provision, while the principal enhancement factors relate to regulatory changes introduced in the early 1990s (the existence of an audit committee, the risk of referral to the Financial Reporting Review Panel and the risk to the audit firm of loss of Registered Auditor status). Exploratory factor analysis reduces the factor set to a smaller number of uncorrelated underlying dimensions

Publishing patterns within the UK accounting and finance academic community

This study reports on publishing patterns in the UK and Irish accounting and finance academic community for the 2-year period 1998-1999 using the data contained in the BAR Research Register. It is found that the community has been growing modestly since 1991, with a doubling in the number of PhD-qualified staff (to 30%) and a reduction in the number with a professional qualification (from 81 to 58%). Nearly half of all outputs appear in other than academic journals. The mean number of publications is 1.76 per capita, with significantly more staff active in publishing than in 1991 (44% compared to 35%). However, only 17% publish in a subset of 60 'top' journals. Just over half of all articles are published in the core discipline journals, the rest appearing mainly in management, economics, sociology, education and IT journals. This may indicate a growing maturity in the disciplines, whereby applied research findings are flowing back into related foundation and business disciplines. Nearly two-thirds of academic articles are co-authored, with 25% of contributions coming from outside the community, indicating an openness to interdisciplinary collaboration, collaboration with overseas academics and collaboration with individuals in practice. The findings of this study will be of assistance to those making career decisions (either their own career or decisions involving other people's careers). They also raise awareness of the way in which the accounting and finance disciplines are developing

International lease accounting reform and economic consequences: the views of UK users and preparers

In response to perceived difficulties with extant lease-accounting standards in operation worldwide, the G4+1 issued a discussion paper which proposes that all leases should be recognized on the balance sheet [ASB (1999). Leases: Implementation of a new approach, discussion paper. London: Accounting Standards Board]. Leasing is now on the active agenda of the IASB. A major difficulty faced by standard setters lies in overcoming the preparer/user lobbying imbalance and obtaining ex ante evidence on the likely impact of regulatory reform. This paper contributes to the ongoing international debate by conducting a questionnaire survey of U.K. users and preparers to assess their views on proposals for lease-accounting reform and on the potential economic consequences of their adoption. The results, based on 132 responses, indicate that both groups accept that there are deficiencies in the current rules, but they do not agree on the way forward and believe that the proposals would lead to significant economic consequences for key parties. The impact on respondents' views of familiarity with the proposals, level of lease usage, and company size, is also examined