ABSTRACT This paper examines the relation between investor protection and real earnings managemen... more ABSTRACT This paper examines the relation between investor protection and real earnings management. We build on the work of La Porta et al. (2000), who found that countries with different legal systems protect investors differently. Using a sample of more than 13,000 unique firms in over 54 countries, for a testing period of 2000–2011, we find evidence that companies in countries that have a lower level of investor protection engage in real earnings management. Our findings contribute to the literature on the quality of financial reporting and the importance of the protection of investors from actions that managers take that deviate from normal business practices.
ABSTRACT We examine whether U.S. public firms that file internal control weakness (ICW) disclosur... more ABSTRACT We examine whether U.S. public firms that file internal control weakness (ICW) disclosure reports with the Securities and Exchange Commission, as part of the reporting requirements under Section 404 of the Sarbanes-Oxley (SOX) Act, exhibit higher levels of real activities manipulation compared to firms that do not file such reports. Using firm-level data for the post-SOX period, 2004-2010, we find a positive relationship between firms reporting internal control weaknesses and real activities manipulation. However, our results also provide further evidence that there are trade-offs involved between the use of discretionary accruals and real activities manipulation because they are not substitutes. Overall, our findings suggest that ICW-firms are more prone to using real activities manipulation, beyond discretionary accruals, as a form of earnings management.
An auditor gives a going concern uncertainty opinion when the client company is at risk of failur... more An auditor gives a going concern uncertainty opinion when the client company is at risk of failure or exhibits other signs of distress that threaten its ability to continue as a going concern. The decision to issue a going concern opinion is an unstructured task that requires the use of the auditor's judgment. In cases where judgment is required, the auditor may benefit from the use of statistical analysis or other forms of decision models to support the final decision. This study uses the generalized reduced gradient (GRG2) optimizer for neural network learning, a backpropagation neural network, and a logit model to predict which firms would receive audit reports reflecting a going concern uncertainty modification. The GRG2 optimizer has previously been used as a more efficient optimizer for solving business problems. The neural network model formulated using GRG2 has the highest prediction accuracy of 95 percent. It performs best when tested with a small number of variables on...
In this paper, we examine the performance of an impact investing strategy using the most ethical ... more In this paper, we examine the performance of an impact investing strategy using the most ethical companies to build an impact investing portfolio. We test the time-series and cross-sectional returns of the impact portfolio, explore the financial analyst coverage of the most ethical firms, and run regressions to analyze the valuation of the most ethical firms. Our empirical results reveal that the portfolio consisting of the most ethical firms has a higher risk-adjusted return and that the most ethical firms have lower stock valuations than comparable stocks. We attribute our findings to the incomplete information in business ethics norms.
The concern over accounting regulation has resulted in studies of auditor independence and audit ... more The concern over accounting regulation has resulted in studies of auditor independence and audit quality, as measured by auditor tenure, accounting conservatism, and the type of audit firm the client employs (Big 4 or non-Big 4).In this study, we continue the line of research on conservatism and auditor tenure by examining whether accounting conservatism is related to auditor tenure for Chinese firms. We extend the studies by Jenkins and Velury (2008) and Li (2010) in order to examine Chinese firms that have non-Big 4 auditors, and we investigate whether the association exists for the most important and least important clients of these audit firms. Our findings indicate that least important clients employ more conservative accounting techniques as auditor tenure increases. For the most important clients, there is less conservatism, compared to the least important clients, in the early years of the auditor’s tenure. Our study provides more information about the regulatory issue of ma...
Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors ... more Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors be able to first anticipate and then detect fraud? Even if fraud cases are relatively few among the number of audits performed each year, they certainly get the most attention. Fraudulent financial reporting (FFR) arises because the top managers reporting accounting numbers intentionally misrepresent underlying economic conditions to advance their own economic interest. The auditing profession over the years has developed its own set of tools to unravel such misrepresentations and to ensure that financial statements are in accordance with generally accepted accounting principles. However, when major fraudulent events have escaped detection by auditors, these standards have often been supplemented with additional rules by the SEC and by the U.S. Congress (Baker et al., 2006). In addition, accounting practitioners and researchers have formulated various decision models to aid in the detect...
The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting fo... more The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting for publicly traded companies in the United States. SOX established the Public Company Accounting Oversight Board (PCAOB). One mandate of the PCAOB is to perform inspections of audit firms. By analyzing results of recent PCAOB inspections, this paper develops a categorization of the outcomes for the Review of the Audit Engagement (RAE). Further, the remarks on deficiencies are categorized into several areas. The study finds that companies whose auditor was cited for failure to identify GAAP issues, expenses and liabilities, or revenues and assets were larger clients with lower debt. Only when audit firms were cited for a lack of documentation of internal controls were the client companies smaller, and had often received an audit opinion with modified language. These findings raise the issue of whether increased documentation required by SOX is necessary given certain client characteristics.
It is important that the auditor properly plan engagements for several reasons: to obtain suffici... more It is important that the auditor properly plan engagements for several reasons: to obtain sufficient competent evidence for the circumstances, to keep audit costs reasonable, and to avoid misunderstandings with the client (Arens and Loebbecke, 1997). The student learns about audit planning through the audit risk model. An intelligent worksheet, designed for student use, has been developed using information from a previously written hybrid system for going concern evaluation (Lenard et al., 1998). The expert system logic and the statistical program that were part of the hybrid system have been incorporated into a menu-driven spreadsheet that uses the technology of Excel (statistical modeling, links, and logical statements) to provide the student with a summary of important concepts of audit planning. Introduction The auditor learns the basics of audit planning as the first standard of field work (SAS 1, AICPA). It is important that the auditor properly plan engagements for several re...
The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting fo... more The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting for publicly traded companies in the United States. SOX established the Public Company Accounting Oversight Board (PCAOB). One mandate of the PCAOB is to perform inspections of audit firms. By analyzing results of recent PCAOB inspections, this paper develops a categorization of the outcomes for the Review of the Audit Engagement (RAE). Further, the remarks on deficiencies are categorized into several areas. The study finds that companies whose auditor was cited for failure to identify GAAP issues, expenses and liabilities, or revenues and assets were larger clients with lower debt. Only when audit firms were cited for a lack of documentation of internal controls were the client companies smaller, and had often received an audit opinion with modified language. These findings raise the issue of whether increased documentation required by SOX is necessary given certain client characteristics.
Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors ... more Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors be able to first anticipate and then detect fraud? Even if fraud cases are relatively few among the number of audits performed each year, they certainly get the most attention. Fraudulent financial reporting (FFR) arises because the top managers reporting accounting numbers intentionally misrepresent underlying economic conditions to advance their own economic interest. The auditing profession over the years has developed its own set of tools to unravel such misrepresentations and to ensure that financial statements are in accordance with generally accepted accounting principles. However, when major fraudulent events have escaped detection by auditors, these standards have often been supplemented with additional rules by the SEC and by the U.S. Congress (Baker et al., 2006). In addition, accounting practitioners and researchers have formulated various decision models to aid in the detect...
Purpose The purpose of this paper is to examine whether companies with female executives and dire... more Purpose The purpose of this paper is to examine whether companies with female executives and directors are less likely to be involved in financial reporting fraud litigation. Design/methodology/approach The authors build a data set comprised of companies from the Stanford Securities Class Action Clearinghouse database that were involved in fraud litigation along with a control set of companies listed on the Compustat database for the time period 2007-2013. The authors use a logistic regression model to determine the likelihood of fraud when there is at least one woman in an executive position or on the board of directors. Findings The authors find that the presence of at least one female leader decreases the likelihood that the company will be involved in litigation for financial reporting fraud. The results are robust after controlling for sample selection bias by using a propensity score matched sample. Practical implications The findings add to the literature which indicates that...
... 37. 37. O'Leary, DE Validation of expert systems--with applications to auditing ... more ... 37. 37. O'Leary, DE Validation of expert systems--with applications to auditing and accounting expert systems. Decision Sciences, 18, 3 (Summer 1987), 468-486. 38. 38. ... Collaborative Colleagues: Mary Jane Lenard: colleagues. Gregory R. Madey: colleagues. ...
Using a model developed by Young (2000), this paper explores the relationship between performance... more Using a model developed by Young (2000), this paper explores the relationship between performance in the Accounting Information Systems course, self-assessed computer skills, and attitudes toward computers. Results show that after taking the AIS course, students experience a change in perception about their use of computers. Females' self-evaluation of their computer skills improved significantly after the course, while males' self-evaluation showed no change. Females also received significantly higher grades compared to males. There was a significant relationship between confidence and self-assessed computer skills. This study shows that the AIS course is successful in developing students' confidence in using computers. Training that results in accurate self-assessment of skills may influence the choice of careers and one's future success in those careers.
Purpose – The purpose of this paper is to study gender diversity on the board of directors and th... more Purpose – The purpose of this paper is to study gender diversity on the board of directors and the relation to risk management and corporate performance as measured by the variability of stock market return. Design/methodology/approach – The sample consists of companies from the RiskMetrics database from 2007 to 2011. This database contains information on corporate board of directors. Financial variables were collected from the Compustat database and CRSP database for the years 2005-2011. The authors then measure the effect of gender diversity on corporate performance in terms of firm risk, using the model by Cheng (2008) which measures the variability of stock market return. Findings – The study shows that more gender diversity on the board of directors impacts firm risk by contributing to lower variability of stock market return. The higher the percentage of female directors on the board, the lower the variability of corporate performance. Originality/value – The research design a...
ABSTRACT This paper examines the relation between investor protection and real earnings managemen... more ABSTRACT This paper examines the relation between investor protection and real earnings management. We build on the work of La Porta et al. (2000), who found that countries with different legal systems protect investors differently. Using a sample of more than 13,000 unique firms in over 54 countries, for a testing period of 2000–2011, we find evidence that companies in countries that have a lower level of investor protection engage in real earnings management. Our findings contribute to the literature on the quality of financial reporting and the importance of the protection of investors from actions that managers take that deviate from normal business practices.
ABSTRACT We examine whether U.S. public firms that file internal control weakness (ICW) disclosur... more ABSTRACT We examine whether U.S. public firms that file internal control weakness (ICW) disclosure reports with the Securities and Exchange Commission, as part of the reporting requirements under Section 404 of the Sarbanes-Oxley (SOX) Act, exhibit higher levels of real activities manipulation compared to firms that do not file such reports. Using firm-level data for the post-SOX period, 2004-2010, we find a positive relationship between firms reporting internal control weaknesses and real activities manipulation. However, our results also provide further evidence that there are trade-offs involved between the use of discretionary accruals and real activities manipulation because they are not substitutes. Overall, our findings suggest that ICW-firms are more prone to using real activities manipulation, beyond discretionary accruals, as a form of earnings management.
An auditor gives a going concern uncertainty opinion when the client company is at risk of failur... more An auditor gives a going concern uncertainty opinion when the client company is at risk of failure or exhibits other signs of distress that threaten its ability to continue as a going concern. The decision to issue a going concern opinion is an unstructured task that requires the use of the auditor's judgment. In cases where judgment is required, the auditor may benefit from the use of statistical analysis or other forms of decision models to support the final decision. This study uses the generalized reduced gradient (GRG2) optimizer for neural network learning, a backpropagation neural network, and a logit model to predict which firms would receive audit reports reflecting a going concern uncertainty modification. The GRG2 optimizer has previously been used as a more efficient optimizer for solving business problems. The neural network model formulated using GRG2 has the highest prediction accuracy of 95 percent. It performs best when tested with a small number of variables on...
In this paper, we examine the performance of an impact investing strategy using the most ethical ... more In this paper, we examine the performance of an impact investing strategy using the most ethical companies to build an impact investing portfolio. We test the time-series and cross-sectional returns of the impact portfolio, explore the financial analyst coverage of the most ethical firms, and run regressions to analyze the valuation of the most ethical firms. Our empirical results reveal that the portfolio consisting of the most ethical firms has a higher risk-adjusted return and that the most ethical firms have lower stock valuations than comparable stocks. We attribute our findings to the incomplete information in business ethics norms.
The concern over accounting regulation has resulted in studies of auditor independence and audit ... more The concern over accounting regulation has resulted in studies of auditor independence and audit quality, as measured by auditor tenure, accounting conservatism, and the type of audit firm the client employs (Big 4 or non-Big 4).In this study, we continue the line of research on conservatism and auditor tenure by examining whether accounting conservatism is related to auditor tenure for Chinese firms. We extend the studies by Jenkins and Velury (2008) and Li (2010) in order to examine Chinese firms that have non-Big 4 auditors, and we investigate whether the association exists for the most important and least important clients of these audit firms. Our findings indicate that least important clients employ more conservative accounting techniques as auditor tenure increases. For the most important clients, there is less conservatism, compared to the least important clients, in the early years of the auditor’s tenure. Our study provides more information about the regulatory issue of ma...
Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors ... more Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors be able to first anticipate and then detect fraud? Even if fraud cases are relatively few among the number of audits performed each year, they certainly get the most attention. Fraudulent financial reporting (FFR) arises because the top managers reporting accounting numbers intentionally misrepresent underlying economic conditions to advance their own economic interest. The auditing profession over the years has developed its own set of tools to unravel such misrepresentations and to ensure that financial statements are in accordance with generally accepted accounting principles. However, when major fraudulent events have escaped detection by auditors, these standards have often been supplemented with additional rules by the SEC and by the U.S. Congress (Baker et al., 2006). In addition, accounting practitioners and researchers have formulated various decision models to aid in the detect...
The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting fo... more The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting for publicly traded companies in the United States. SOX established the Public Company Accounting Oversight Board (PCAOB). One mandate of the PCAOB is to perform inspections of audit firms. By analyzing results of recent PCAOB inspections, this paper develops a categorization of the outcomes for the Review of the Audit Engagement (RAE). Further, the remarks on deficiencies are categorized into several areas. The study finds that companies whose auditor was cited for failure to identify GAAP issues, expenses and liabilities, or revenues and assets were larger clients with lower debt. Only when audit firms were cited for a lack of documentation of internal controls were the client companies smaller, and had often received an audit opinion with modified language. These findings raise the issue of whether increased documentation required by SOX is necessary given certain client characteristics.
It is important that the auditor properly plan engagements for several reasons: to obtain suffici... more It is important that the auditor properly plan engagements for several reasons: to obtain sufficient competent evidence for the circumstances, to keep audit costs reasonable, and to avoid misunderstandings with the client (Arens and Loebbecke, 1997). The student learns about audit planning through the audit risk model. An intelligent worksheet, designed for student use, has been developed using information from a previously written hybrid system for going concern evaluation (Lenard et al., 1998). The expert system logic and the statistical program that were part of the hybrid system have been incorporated into a menu-driven spreadsheet that uses the technology of Excel (statistical modeling, links, and logical statements) to provide the student with a summary of important concepts of audit planning. Introduction The auditor learns the basics of audit planning as the first standard of field work (SAS 1, AICPA). It is important that the auditor properly plan engagements for several re...
The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting fo... more The Sarbanes-Oxley Act (SOX) was passed in 2002 to apply new controls over financial reporting for publicly traded companies in the United States. SOX established the Public Company Accounting Oversight Board (PCAOB). One mandate of the PCAOB is to perform inspections of audit firms. By analyzing results of recent PCAOB inspections, this paper develops a categorization of the outcomes for the Review of the Audit Engagement (RAE). Further, the remarks on deficiencies are categorized into several areas. The study finds that companies whose auditor was cited for failure to identify GAAP issues, expenses and liabilities, or revenues and assets were larger clients with lower debt. Only when audit firms were cited for a lack of documentation of internal controls were the client companies smaller, and had often received an audit opinion with modified language. These findings raise the issue of whether increased documentation required by SOX is necessary given certain client characteristics.
Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors ... more Why are auditors unable to detect fraudulent financial reporting in some audits? Should auditors be able to first anticipate and then detect fraud? Even if fraud cases are relatively few among the number of audits performed each year, they certainly get the most attention. Fraudulent financial reporting (FFR) arises because the top managers reporting accounting numbers intentionally misrepresent underlying economic conditions to advance their own economic interest. The auditing profession over the years has developed its own set of tools to unravel such misrepresentations and to ensure that financial statements are in accordance with generally accepted accounting principles. However, when major fraudulent events have escaped detection by auditors, these standards have often been supplemented with additional rules by the SEC and by the U.S. Congress (Baker et al., 2006). In addition, accounting practitioners and researchers have formulated various decision models to aid in the detect...
Purpose The purpose of this paper is to examine whether companies with female executives and dire... more Purpose The purpose of this paper is to examine whether companies with female executives and directors are less likely to be involved in financial reporting fraud litigation. Design/methodology/approach The authors build a data set comprised of companies from the Stanford Securities Class Action Clearinghouse database that were involved in fraud litigation along with a control set of companies listed on the Compustat database for the time period 2007-2013. The authors use a logistic regression model to determine the likelihood of fraud when there is at least one woman in an executive position or on the board of directors. Findings The authors find that the presence of at least one female leader decreases the likelihood that the company will be involved in litigation for financial reporting fraud. The results are robust after controlling for sample selection bias by using a propensity score matched sample. Practical implications The findings add to the literature which indicates that...
... 37. 37. O'Leary, DE Validation of expert systems--with applications to auditing ... more ... 37. 37. O'Leary, DE Validation of expert systems--with applications to auditing and accounting expert systems. Decision Sciences, 18, 3 (Summer 1987), 468-486. 38. 38. ... Collaborative Colleagues: Mary Jane Lenard: colleagues. Gregory R. Madey: colleagues. ...
Using a model developed by Young (2000), this paper explores the relationship between performance... more Using a model developed by Young (2000), this paper explores the relationship between performance in the Accounting Information Systems course, self-assessed computer skills, and attitudes toward computers. Results show that after taking the AIS course, students experience a change in perception about their use of computers. Females' self-evaluation of their computer skills improved significantly after the course, while males' self-evaluation showed no change. Females also received significantly higher grades compared to males. There was a significant relationship between confidence and self-assessed computer skills. This study shows that the AIS course is successful in developing students' confidence in using computers. Training that results in accurate self-assessment of skills may influence the choice of careers and one's future success in those careers.
Purpose – The purpose of this paper is to study gender diversity on the board of directors and th... more Purpose – The purpose of this paper is to study gender diversity on the board of directors and the relation to risk management and corporate performance as measured by the variability of stock market return. Design/methodology/approach – The sample consists of companies from the RiskMetrics database from 2007 to 2011. This database contains information on corporate board of directors. Financial variables were collected from the Compustat database and CRSP database for the years 2005-2011. The authors then measure the effect of gender diversity on corporate performance in terms of firm risk, using the model by Cheng (2008) which measures the variability of stock market return. Findings – The study shows that more gender diversity on the board of directors impacts firm risk by contributing to lower variability of stock market return. The higher the percentage of female directors on the board, the lower the variability of corporate performance. Originality/value – The research design a...
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