Do Auditors Accurately Predict Litigation and Reputation Consequences of Inaccurate Accounting Estimates?

To effectively manage audit risk, auditors must correctly predict the potential litigation and reputation consequences associated with inaccurate accounting estimates. Accurate predictions are critical because underestimation of negative consequences leads to excess legal exposure and overestimation leads to overauditing. Our paper examines whether auditors correctly anticipate these litigation and reputation outcomes. We provide manager‐ and partner‐level auditors with case facts from an auditor negligence lawsuit and ask them to predict the proportion of juries that will return verdicts against their firm. We then compare auditors' predictions to the actual verdicts we observe when we provide the same set of case facts to mock jurors who deliberate as part of juries. We find that auditors overestimate the likelihood of negligence verdicts, especially when audit quality is relatively high. Our supplemental measures help explain the reasons for this overestimation: auditors tend to underestimate jurors' perceptions of audit quality and willingness to attribute inaccurate estimates to situational factors. Finally, we examine auditors' predictions about how a news article about the litigation will affect their reputation with the general public. Similar to our litigation results, we find that auditors tend to overestimate the article's negative impact on auditor reputation. Collectively, our findings suggest that auditors overestimate litigation and reputation consequences resulting from inaccurate accounting estimates. This overestimation is consequential as it leads to inefficient allocation of audit resources.     

Future Nonaudit Service Fees and Audit Quality

Prior to the Sarbanes–Oxley Act of 2002, audit partners experienced economic pressure to grow revenue from the sale of nonaudit services to their audit clients. To an auditor who is highly rewarded for revenue generation and growth, nonaudit services may represent a particularly strengthened economic bond with the client. Prior research shows that, in general, nonaudit service fees received in the current period do not impair audit quality. We examine a different setting. We propose that auditor independence can become impaired, and audit quality compromised, when clients that currently purchase relatively low amounts of nonaudit services, increase their purchases of nonaudit services from the auditor in the subsequent period. We test our prediction in the context of earnings management as a proxy for audit quality, measured by (a) performance‐adjusted discretionary accruals and (b) classification shifting of core expenses. Our results indicate that prior to the Sarbanes‐Oxley Act, rewards to the auditor in the form of future additional nonaudit service fees from current‐year high fee‐growth‐opportunity clients adversely affects audit quality. This effect is particularly strong among companies with powerful incentives to manage earnings. Our findings indicate that regulators should consider the multiperiod nature of the client–auditor relationship when contemplating policies that restrict nonaudit services, as well as the overall environment in which audit partners operate. This might include partner compensation arrangements that put pressure on audit partners to focus on increasing revenue at the expense of audit quality.     

Do Client Bankruptcies Preceded by Clean Audit Opinions Damage Auditor Reputation?*

There is a maintained assumption within the accounting literature that client bankruptcies preceded by clean audit opinions (Type II going concern opinion (GCO) errors) damage an auditor's reputation. Consistent with this view, the PCAOB proposes that stakeholders may use Type II GCO errors as indicators of low audit quality. This study examines audit committee and investor responses to Type II GCO errors. I find no evidence that audit offices with Type II GCOs are more likely to be dismissed, have lower subsequent audit fees, or have a lower likelihood of being selected for new audit engagements. These findings are consistent with audit committees not using Type II GCO errors as indicators of low auditor quality. Using event study analysis, I find evidence of modest incremental negative investor responses for clients of audit offices with Type II GCO errors. However, these negative investor responses are found only during the financial crisis period of 2008–2010 and are observed only within windows of 30 days or less. Given this limited evidence that stakeholders do respond to Type II GCO errors, I examine whether stakeholders should respond to Type II GCO errors. I find that audit office Type II GCO errors are positively associated with subsequent restatements, an established measure of low audit quality. Taking the results as a whole, I do not find that audit offices incur substantial reputational costs for Type II GCO errors. However, the negative investor response and the positive association with restatements provide some evidence that Type II GCO errors may serve as indicators of low audit quality.     

Employee Movements from Audit Firms to Audit Clients

Regulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company's financial statements. In contrast, we examine accounting and finance executives who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company's financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover and audit firm turnover. However, there is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment or that these hires are associated with lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms because they reduce the incidence of costly turnover.     

Can Audit Committee Expertise Increase External Auditors' Litigation Risk? The Moderating Effect of Audit Committee Independence

This study examines whether the perceived independence and financial expertise of audit committee members affect external auditors' exposure to legal liability. We use an experiment in which potential jurors make judgments about auditor independence and legal liability for a case involving an audit failure. We find that perceptions of audit committee independence from management are positively associated with judgments of auditor independence and negatively associated with auditor liability. However, financial expertise of audit committee members can be a double-edged sword. Our experiment finds that judgments of auditor liability are higher when the audit committee is perceived to have higher financial expertise but lower independence from management. In assessing litigation risk of current and prospective clients, auditors may want to carefully consider the independence of audit committee members from management, particularly when audit committee members have financial expertise. In the event of an audit failure, the financial expertise of nonindependent audit committee members can negatively affect jurors' perceptions of auditor independence and liability.     

Auditor Responses to Shareholder Activism

In this paper, we investigate how auditors respond to shareholder activism against their clients. Our study is important because activism may be viewed by auditors as a source of increased engagement risk, thereby impacting audit outcomes. The potential relationship between shareholder activism and audit outcomes leads us to predict that activism targets will pay higher audit fees and also will be more likely to receive adverse internal control opinions (ICOs) and first‐time going concern opinions (GCOs). Our results, which support all three predictions, suggest that the public scrutiny associated with activism campaigns heightens auditors' concerns about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting‐related lawsuits. We also find that the increased likelihood of adverse ICOs documented in our baseline tests reflects higher‐quality reporting rather than increased auditor conservatism. Overall, our findings suggest that activism campaigns spur auditor diligence while also increasing the possibility of negative outcomes that may not be fully anticipated by activist investors.     

当前落户城市阶段农民工市民化的风险分析

农民工市民化的顺利推进需要管控相关风险。系统分析当前农民工落户城市阶段的市民化,发现农民工面临落户与未能落户的风险、城市面临落户农民工较少或较多的风险、与农民工市民化相连的农村面临振兴的风险、整个国家面临人的现代化的风险。风险的成因,与市场的非均衡、政策的渐进主义惯性及环境的不确定性等相关。治理相关风险,需要对农民工市民化的主体进行预期引导、行动调节与利益支持。本文可能的贡献,在于提出并系统分析了落户阶段农民工市民化的风险,特别是在落户农民工、落户少的城市、人的现代化等的风险分析上贡献了有新意的观点;同时,对风险的成因与对策的分析在实践中有一定的启发与应用价值。     

日本金融ADR制度:发展与评价

为了保护金融消费者的利益,日本建立了中立、公正、有效、便利的金融ADR制度。该制度以解决金融消费者与金融机构间的具体金融纠纷为中心,提高了金融消费者对整个金融市场的信赖程度,增强了资本市场的活力。作为拓展金融纠纷解决方式的一种尝试,日本金融ADR制度将为我国相关领域的研究与立法提供有益参考。     

Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members,CFOs, and External Auditors

The recent financial crisis has brought to the forefront the need for companies to effectively manage their risks. In this regard, one approach that has gained prominence is enterprise risk management (ERM). Importantly, little is known about the link between ERM and the financial reporting process. This link is critical, because it is imperative that financial reporting adequately depicts the financial status (e.g., valuations, estimates) and associated risks of a company as revealed by ERM. Additionally, from an auditing perspective, ERM affects the risks of misstatement, which should impact audit planning. Accordingly, the objective of this study is to examine the experiences of audit partners, CFOs, and audit committee (AC) members (“the governance triad”) on the link between ERM and the financial reporting process. To determine whether members of the governance triad focus on monitoring, strategy, or both, we also examine their definition of and experiences with ERM with respect to agency and/or resource dependence theory. To address these issues, we conduct semistructured interviews of experienced individuals that form the governance triads from 11 public companies. There are three major findings from our study. First, importantly, all three types of participants see a strong link between ERM and the financial reporting process. Second, despite recognition of the broad nature of ERM, the predominant experiences of the actual roles played by triad members center on agency theory, while resource dependence may be relatively underemphasized by all triad members. Finally, CFOs and AC members indicate that auditors may be especially underutilizing ERM in the audit process, suggesting an “expectations gap.”     

Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients

Our study reports evidence on the dynamic effects of client switches on auditor reputations and fee premia. Offices of large accounting firms that lose (gain) major industry clients experience a reputation shock leading to more same‐industry client losses (gains) over the next two years. There is also a shift in audit fees charged to other same‐industry clients when a major client loss (gain) results in an audit office losing (gaining) city‐level industry leadership. A major client loss or gain also creates a short‐term capacity shock to an audit office's ability to supply high‐quality audits. However, there is no evidence of reputation spillovers to other‐industry clients in the audit office, or to clients in other offices of the accounting firm.     

跨境贸易以人民币结算:路径选择与风险

跨境贸易以人民币结算是人民币国际化的基石,本文重点分析了对外贸易结算货币的不同组合及其对贸易差额的影响,对现阶段中国跨境贸易结算货币的特征进行了讨论。研究发现,中国政府大力推进跨境贸易以人民币作为结算货币,在进口方面将使得国内的进口企业无法利用人民币升值减少实际支出。在出口方面,人民币结算比重的扩大将减缓外汇储备的增长速度,但与保出口的宏观经济目标相冲突,同时这一政策导向对中国企业的出口竞争力也提出了更大的挑战。     

Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality?

We examine the effects of the 1998 merger of Price Waterhouse (PW) and Coopers & Lybrand (CL) on the audit quality of the merged firm PricewaterhouseCoopers (PwC) at both the firm and office levels, where audit quality is surrogated by the auditor's propensity to issue a going‐concern opinion, clients’ likelihood of meeting or beating analysts’ earnings forecasts, and clients’ accrual quality. At the firm level, we find that the merger increased audit quality for PwC relative to the audit quality of the other Big N firms. At the office level, our findings, albeit mixed, collectively suggest that the improvement in firm‐level audit quality was likely driven by the improvement in audit quality at PwC's overlapping offices, that is, offices in cities where both PW and CL had separate offices prior to the merger. Further, our findings suggest that although the PW/CL merger increased auditor concentration in local audit markets with PwC overlapping offices, the merger improved (rather than hurt) audit quality in those markets. Overall, our study contributes to the extant sparse literature on the effect of Big N mergers on audit quality, and is of potential interest to regulators.     

Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

In this study, we examine whether audit committee accounting expertise helps to promote audit quality by motivating auditors to conduct diligent internal control audits and make appropriate internal control assessments because audit committee accounting expertise safeguards auditors from dismissal following adverse internal control opinions. Among clients with existing and likely internal control material weaknesses (as proxied by future restatements of audited financial statements), we find a greater likelihood of adverse internal control audit opinions when the audit committee has greater accounting expertise (measured by the proportion of accounting experts on the audit committee). Among all clients, we find a lower likelihood of subsequent auditor dismissal following an adverse internal control audit opinion when the audit committee has greater accounting expertise. In further analyses, we find that this lower likelihood of subsequent auditor dismissal occurs when at least two audit committee members possess accounting expertise. We also find some evidence that CFO influence (but not CEO influence) over the audit committee negates the increased likelihood of adverse internal control opinions when internal control material weaknesses likely exist, as well as the decreased likelihood of auditor dismissal following adverse internal control opinions. These findings have important implications for regulators and corporate nominating committees interested in promoting audit committee effectiveness.     

A ‘blank cheque'? Portuguese Second World War sterling balances, 1940–73

The British effort in the Second World War required massive external financing which depended on Lend‐Lease and the accumulation of sterling balances. Indebtedness in sterling balances corresponded to almost 38 per cent of this total at the end of the war. Portuguese sterling balances, although a small share of the total, were important because of pre‐emptive purchases, especially of wolfram, and because of the ‘gold clause’ which was to be applied to outstanding balances. Portugal's willingness to finance British purchases contrasts with the requirement of German payments in goods or cash for their purchases in Portugal. The settlement of Portuguese sterling balances in August 1945 was singular as it preceded the Anglo‐American settlement of December 1945 which had important consequences for sterling balance holders, as the US insisted that the US$3.75 billion loan should not be used to settle British war debts. Postwar settlement of British debt through a long‐term loan from Portugal to Britain contrasts with settlements that involved the sale of British assets. Salazar's concerns about the postwar international position of Portugal, the Portuguese Empire, and the survival of the Portuguese regime are relevant in explaining his pro‐British stance during and after the war.     

The Joint Effects of Multiple Legal System Characteristics on Auditing Standards and Auditor Behavior

This paper derives the impacts of legal system characteristics and auditing standards on auditor behavior (audit quality), and analyzes the determination of optimal auditing standards under different legal regimes. Legal regimes are characterized by differences in the uncertainty concerning the outcome of legal proceedings (termed vagueness of legal systems) and differences in the average size of damage awards. Auditing standards as determined by standard setters can vary in both toughness and vagueness. Our analysis provides implications for the adoption of International Standards on Auditing (ISA). Countries, such as the United States, where auditor legal liability is significantly more onerous than the global norm are not likely to adopt ISA, since these standards may not induce auditors to provide the optimal level of audit quality. Conversely, the adoption of ISA by countries, such as China, where the legal system makes the recovery of damages from auditors quite difficult, is not by itself likely to result in a high level of audit quality. Furthermore, our model suggests that auditor rotation can help improve audit quality, but only in certain circumstances.     

Auditors' Fee Premiums and Low‐Quality Internal Controls*

We examine the relation between low‐quality internal controls and audit fee premiums. Using a novel data set of audit hours and audit fees we find, consistent with the audit risk model, that auditors increase their effort (hours) owing to low internal control quality. We find that auditors also charge a significant fee premium to clients with internal control weaknesses. This premium is observed for severe internal control weaknesses and companies with low‐quality alternative governance mechanisms. The results are robust to multiple methods to address endogeneity, including company fixed effects, difference‐in‐differences design, and a propensity score‐matched sample. Taken as a whole, low internal control quality leads to fee premiums, which are a deadweight loss to client companies.     

对解决保险理赔难题的思考

对于保险服务而言,最为引人关注的是理赔问题。在众多保户心中,对保险存在"投保容易,理赔难"的印象,严重影响了保险业的健康发展。笔者拟从保险公司、客户、保险监管部门、保险行业协会、外部环境等角度入手,逐一分析不同因素对保险理赔的影响,并在此基础之上,提出了对应的解决措施,以期望对保险理论与实践有所裨益。     

Implications of the Joint Provision of CSR Assurance and Financial Audit for Auditors' Assessment of Going-Concern Risk

We examine whether the joint provision of corporate social responsibility (CSR) assurance services and financial audit by the same audit firm influences auditors' assessment of going-concern risk. We predict that the provision of CSR assurance and financial audit by the same audit firm creates CSR-related knowledge spillovers from the CSR assurance team to the financial audit engagement team, which helps in the auditor's assessment of going-concern risk. Using more than 28,000 firm-year observations from 55 countries, we document that, relative to audit firms that provide only the financial audit, audit firms that provide both CSR assurance and financial audit for the same client (i) issue more frequent going-concern opinions and have lower Type II going-concern errors, (ii) have clients that book larger environmental and litigation provisions, (iii) report earnings that are more persistent and value-relevant and are less likely to book income-decreasing earnings restatements, and (iv) do not charge higher audit fees or total fees. Our results are important especially because of firms' increasing exposure to CSR risks and the growing number of countries that require assurance of CSR reports.     

论我国证券纠纷的仲裁解决

我国证券市场自上世纪90年代建立以来,发展迅速,为国民经济发展做出了重要贡献。随着证券市场的壮大,大量的证券纠纷亦亟待解决。但长期以来,我国证券纠纷的解决方式主要为证券诉讼,人民法院成为解决证券纠纷的主要场所,更适合解决证券纠纷的证券仲裁制度在理论界和实务界都未得到足够重视。基于此,本文拟对造成此种现象的原因进行分析,并提出完善和发展我国证券仲裁制度的相关建议。     

Expectative land rights, house consolidation and cemetery squatting: Some perspectives from Central Java

With more than 40% of the urban population of the Third World living in informal settlements, quasi- and extralegal adaptations have been utilized to appropriate land for housing. The most direct of these — squatting — has its inherent risks, however, for those who wish to improve their dwellings. Research has shown that house consolidation is more a function of resident perceptions than of strict legal categorization. This paper reports how such perceptions have triggered a greater rate of house consolidation among Javanese cemetery squatters than that in an adjoining area with formal land tenure.