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

Audit Partner Industry Specialization and Audit Quality: Evidence from Spain

We investigate the impact of the industry specialization of individual auditors on audit quality. We aim to contribute to a quickly growing line of research examining the importance of audit partners as determinants of audit quality. To provide robust results, we use several proxies of both industry specialization and audit quality. We conduct the empirical analysis with a sample of Spanish listed companies for the research period between 2005 and 2013. Our main result is the lack of a significant impact of the industry specialization of audit partners on audit quality. This result seems sound, as it holds for the several measures of industry specialization and audit quality used in the empirical study. Our main result, which contradicts most of the scarce available evidence, would stress the importance of the institutional context in the study of the industry specialization-audit quality relationship and advocates the need for further research

The effect of audit committee characteristics on intellectual capital disclosure

This paper, using data from 100 UK listed firms, investigates the relationship between audit committee characteristics and intellectual capital (IC) disclosure. We find that IC disclosure is positively associated with audit committee characteristics of size and frequency of meetings, and negatively associated with audit committee directors’ shareholding. We find no significant relationship between IC disclosure and audit committee independence and financial expertise. We also observe variations in the association between audit committee characteristics and IC disclosure at its component level, which suggest that the underlying factors that drive various forms of IC disclosure, i.e. human capital, structural capital and relational capital, are different. These results have important implications for policy-makers who have a responsibility to ensure that shareholders are protected by prescribing appropriate corporate governance structures and accounting regulations/guidelines

Big 4 Audit Fee Premiums for National and City-Specific Industry Leadership in the United Kingdom:Additional Evidence

This study investigates the relationship between Big 4 auditor industry specialisation and audit pricing in the U.K. in a period of many changes having taken place in the market for audit services. Using a large dataset between 2004 and 2011, our empirical results show a significantly higher fee premium for the Big 4 firms who are national industry leaders as compared to city-specific industry leaders, and that the fee premium for industry leadership is only earned by the city-specific industry leaders if and when they are also the national leaders. Neither the national nor city level industry leadership alone is priced anymore in the U.K. audit market. These findings hold for the pre- and the post-GFC period only and for a number of additional analyses. The evidence suggests that the Big 4 industry leadership in the U.K. has moved away from the previously documented premium for the Big 4 cityspecific industry leadership alone, and is now driven solely by the joint Big 4 industry expertise at the national and city-specific levels concurrently. The study’s results indicate that there is a progression from city-specific industry expertise to national-specific industry expertise, and they imply that there has been an improvement in the sharing and transferability of industry knowledge and expertise among the city offices of the Big 4 firms in the U.K. in the period of investigation