The Political Economy of Public Expenditures in Agriculture: Applications of Concepts to Mozambique

This paper undertakes an investigation of agricultural public investments in Mozambique, drawing on insights from qualitative field interviews conducted in Mozambique, secondary data analysis and examination of the existing empirical literature, and by situating these insights within a political economy conceptual framework. We explore the driving factors behind the amount and allocation of public funds to agriculture, and behind the differential attention that various types of public investments receive in the process of making decisions on resource allocation. Agricultural public investments are more likely to be made that have two key features: higher attributability to politicians and donors of the output of public spending, and a shorter lag time between expenditures incurred and outputs produced. Evidence on geographical targeting of agricultural public funds corresponds more closely with theories suggesting that resources are used to sway communities opposed to the ruling party, rather than to reward political supporters. Examination of the effect of actors' and organisations' incentives and constraints on resource allocation in agriculture points to the importance of not treating “government,” “the ruling party” and other institutions as monolithic bodies; the paper instead highlights how differentiated interests within seemingly coherent institutions drive what gets public expenditure attention in the agricultural sector.     

The impacts of market power on power grid efficiency: Evidence from China

Since 1980s, China has experienced a series of reforms to support the development of electricity industry, and the latest one is in 2015. The essence of this new reform is to improve efficiency and lower energy cost. However, China's electricity market has its particularity. The “provinces as entities” is the main regulation frame in China's electricity sector. The operation of the electricity industry can be seen as a game result and interest compromise between the local government and grid companies, and this “win-win exchange” regulation failure leads to grid market power. The profit mode of the grid enterprises will be gradually changed with the deepening of new electricity reform. How to regulate electricity transmission and distribution sector and improve grid efficiency becomes a crucial problem to address. This paper aims to examine the relationship between market power and power grid efficiency. We calculate the unconditional and conditional efficiency of grid companies by applying a conditional slack-based measure (SBM) model. The empirical results show that grid efficiency is at a low level and the indicators differ among provinces and regions. Moreover, market power indeed has significant negative effects on power grid efficiency. These findings provide some insightful references for the future development of China's power industry and electricity reform.     

The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud*

We examine the interaction between internal control assessments and substantive testing in a model of fraud detection. The purpose of our study is to examine a two‐stage model of the auditor‐manager interaction in which the auditor assesses the “likelihood” or possibility of fraud in the first stage and conducts substantive tests in the second stage. We examine the allocation of audit resources across these two distinct facets of the audit. We find that, regardless of the auditor's allocation, the probability of undetected fraud remains the same, but the allocation of some audit resources to internal control assessment may provide cost savings for the auditor.     

“三维”视角下的城乡公共服务互动机制分析

构建城乡公共服务的一体化机制,是促进城乡公共资源均衡配置的核心要素。它以政府、居民和企业作为其中的参与主体,各以不同的方式形成相应的"三维"机制。文章运用博弈论方法进行了分析:政府监督审计机制,提高审计水平和法制意识,并加大处罚力度;城乡居民参与机制,通过调节分配实现福利最大化;社会企业投资机制,引导其投资公共服务并适当补贴。最后提出了提升"三维"互动机制的政策建议。     

PCAOB Inspections: Public Accounting Firms on “Trial”

The objective of our article is to obtain a better understanding of how auditors anticipate the potential for PCAOB inspection, experience the inspection, cope with the consequences of the inspection, and understand the PCAOB's influence within the context of professionalism. We use a qualitative approach that uses both surveys (55) and interviews (20) of auditors (of varying rank and firm) across a five‐year period (2012–2017). Respondents suggest that PCAOB inspectors are powerful, representing the “prosecution,” “judge,” and “jury” of the auditing profession. We therefore use a structural metaphor of the PCAOB inspection as a judicial “trial.” By controlling the criteria used to evaluate performance, inspectors have the power to repeatedly “subpoena,” “interrogate,” and return a “verdict” on the firm (auditor); those judged as “guilty” require supervised “probation.” This process is perceived as having improved audit quality but at a cost. Passing an inspection is so important that auditors (firms) have resorted to impression management strategies and “functionally stupid” work practices (e.g., excessive documentation, a decrease in critical thinking as a result of a “box ticking” approach to auditing). Furthermore, some respondents believe that being a good auditor has come at the expense of being a good accountant; the emphasis on audit process and concurrent de‐emphasis on technical accounting could ultimately lead to audits themselves falling short. In addition, it is evident that inspectors and auditors differ in their perceptions of risk, likely manifesting because inspectors are standards‐focused while auditors (firms) are methodology‐focused. Finally, the inspection process has created excessive stress and tension, beyond budget and fee pressures, which some auditors perceive as affecting the pool of talented auditors that firms may be able to attract and retain in the future.     

Pricing of Initial Audit Engagements by Large and Small Audit Firms*

We investigate the extent to which auditors of U.S. companies reduce fees on initial audit engagements (“fee discounting”). We hypothesize that rivalries among sellers, in terms of client turnover and price competition, are more intense among small audit firms. The data support this hypothesis. New clients account for 34 percent of all clients for small audit firms, but only 9 percent of all clients for large audit firms. We theorize that differences in client turnover rates between large and small audit firms can be explained by the market structure of the audit industry, which consists of an oligopolistic segment dominated by a few large audit firms and an atomistic segment composed of many small audit firms. We further hypothesize and confirm that fee discounting is more extensive in the atomistic sector, and our results confirm this hypothesis. Our analysis of audit fee changes indicates that clients who switch auditors within the atomistic sector receive on average a discount of 24 percent over the prior auditor's fee. However, clients who switch auditors within the oligopolistic sector receive on average a discount of only 4 percent. Given that price competition is known to be less intense in oligopolistic markets than in atomistic markets, we believe that market structure theory can explain why fee discounting is lower when larger audit firms compete for clients.     

Board Characteristics and Audit Fees*

This paper examines the relations between three board characteristics (independence, diligence, and expertise) and Big 6 audit fees for Fortune 1000 companies. To protect its reputation capital, avoid legal liability, and promote shareholder interests, a more independent, diligent, and expert board may demand differentially higher audit quality (greater assurance, which requires more audit work) than the Big 6 audit firms normally provide. The audit fee increases as the auditor's additional costs are passed on to the client, such that we expect positive relations between audit fees and the board characteristics examined. We find significant positive relations between audit fees and board independence, diligence, and expertise. The results persist when similar measures of audit committee “quality” are included in the model. The results add to the growing body of literature documenting relations between corporate governance mechanisms and various facets of the financial reporting and audit processes, as well as to our understanding of the determinants of audit fees.     

“金税三期”税收征管对上市公司审计费用的影响

税收征管作为公司外部治理手段,能够作用于公司经营环节,进而影响审计师面临的业务风险和审计风险,由此影响到公司的审计费用。但目前鲜有文献研究税收征管对公司审计费用的影响。本文借助"金税三期"工程这一"准自然实验",以2010—2019年A股上市公司为样本并使用双重差分法,研究发现"金税三期"工程提高了上市公司的审计费用。机制分析表明,"金税三期"工程推高了上市公司实际税率,降低了上市公司的盈利水平,提高了审计师的业务风险,进而提高了审计费用。同时,"金税三期"工程强化涉税信息监管,提高了上市公司会计信息质量,降低了审计师的审计风险,从而降低了审计费用。综合来看前者对审计费用的影响大于后者,导致了上市公司审计费用的提高。进一步分析发现,"金税三期"工程对审计费用的这一影响,在非国有上市公司和由非国际四大会计师事务所审计的上市公司中更为显著。     

Learning by Doing and Audit Quality*

In this study, we present a nonstrategic, dynamic Bayesian model in which auditors' learning on the job and their choice of professional services jointly affect audit quality. While performing audits over time, auditors accumulate client‐specific knowledge so that their posterior beliefs about clients are updated and become more precise (that is, precision is our surrogate for audit quality) — what we call the learning effect. In addition, auditors can enrich their knowledge accumulation by performing nonaudit services (NAS) that, in fact, may influence clients' managerial decisions — what we call the business advisory effect. This advisory effect permits auditors to anticipate and to learn about changes in clients' business models, which in turn improves their advisory capacity. These dual “learning” and “advisory” effects are interdependent and mutually reinforcing. The advisory effect of NAS may increase or reduce auditors' engagement risk. We show that large professional fees can induce auditors to provide NAS that increase engagement risk and diminish audit quality. However, when NAS reduce engagement risk and increase audit quality, auditors may provide NAS without charging clients. The feature that distinguishes our study — the interdependence between the learning and advisory effects — provides new insight into the trade‐off between audit fees and audit quality. Consequently, our analysis helps explain why the scope of the audit has evolved over time and why the boundaries between audit and NAS are constantly shifting. A recent example of such a shift is that the Sarbanes‐Oxley Act adds control attestation to audits for public companies traded in U.S. markets.     

Patrimoines productifs,secteur et territoire

The paper deals with sector and territory as productive entities. We have adopted an historical institutionnalist approach encompassing both economics of organization and economics of knowledge. In reference to the concept of activity, both sector and territory are envisaged as “container of resource” (Giddens), with positive externalities of a patrimonial nature.Sector and territory are differenciated as follows: the sector's acces to patrimony is based on the embodiment of activity in the division of labour; the territory's access to patrimony is based on the integration of activity in space. Therefore, a production system is defined as the coupling of these two dimensions: it is a whole structuring of productive activities in a territory, whether this territory is local, regional, national or continental.     

Resource Allocation Decisions in Audit Engagements*

Abstract. We examine the empirical relationship between auditors' resource allocations and selected engagement characteristics. Our measure of resources is hours of grades of labor (partner, manager, etc.) “charged” to audit activities (planning, internal control evaluation, etc.). Engagement characteristics examined are client size, industry affiliation, client complexity, risk, auditor provision of management advisory services to the auditee, and degree of control reliance. The data were obtained from publicly available sources and a survey developed and administered by an international public accounting firm. We find the cross-sectional variation in the labor charged to various audit activities can be explained by engagement characteristics found to be important in prior studies on audit fees, total labor inputs, and the mix of labor inputs. Measures of client size, industry, complexity, risk, and services provided are associated with changes in the allocation of labor among audit activities. We find no substitution of internal control review/testing for substantive testing on reliance audits. Task assignments vary by rank. Measures of client size, complexity, risk, and services provided are associated with activity-specific changes in the labor mix.     

Bias and Accuracy of Management Earnings Forecasts: An Evaluation of the Impact of Auditing*

This paper assesses how the bias and accuracy of managers' earnings forecasts in prospectuses were affected by a 1989 regulation that required the forecasts to be audited by public accountants. Theory suggests that auditors' association with the forecasts would reduce positive (optimistic) bias, by reducing moral hazard. Regulators expected that the audit requirement would also improve the accuracy of the forecasts. Both predictions were tested using management earnings forecasts disclosed in prospectuses of Canadian initial public offerings. The results show that audited forecasts contained significantly less positive bias than reviewed forecasts, but there was only a marginally significant improvement in accuracy.     

The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys

Prior research indicates that most audit legal disputes settle. There is, however, little evidence of the factors that drive the settlement norm and its exceptions in audit legal disputes. To better understand these factors, we rely on theory related to how professionals manage risks and, as a result, how professions defend jurisdictional claims. We use this theoretical lens to help motivate four research questions that we probe by interviewing 27 prominent attorneys experienced in audit litigation. Consistent with our lens, our interview data indicate that attorneys manage their risks, including the risk of reputational loss, by settling based on their expectations of trial verdicts. Unlike trials, settlements simultaneously enable attorneys on both sides to limit costs and avoid catastrophic jury verdicts and, by doing so, claim “wins” for their clients. Attorneys also stress that they settle many audit disputes without any legal filings. Thus, a large subset of disputes is invisible to the public and researchers. Attorneys characterize trials as exceptions to the settlement norm that emerge due to abnormal conditions sometimes present in disputes. However, trial verdicts in these abnormal conditions help attorneys justify the use of settlements to clients, as attorneys stress that by settling they can avoid the dreaded possibility of extreme unfavorable verdicts. We conclude that as individual attorneys manage their risks, especially the risk of reputational loss, their profession maintains its public image and thereby defends its jurisdictional claims. Among the many questions we pose for future research is whether the settlement norm reduces society's ability to monitor the audit profession and, more generally, whether this norm's benefits outweigh its drawbacks.     

An Examination of Factors Affecting Audit Practice Development*

In this study, we examine the possibility that audit managers' judgments may be affected by practice development objectives. Given the competitive nature of public accounting, the extent to which auditors are inclined to be aggressive in the domain of practice development may be a function of their superiors' preferences. This study builds on the exploratory work of Hooks, Cheramy, and Sinich 1994 and Asare, Hackenbrack, and Knechel 1994 by examining the delicate balance that exists between a public accounting firm's need to “grow its business” and its need to maintain its objectivity and professionalism. An experiment is conducted to determine whether the auditor's willingness to tender a bid on an engagement is affected by (1) the nature of the auditor-auditee relationship (i.e., do existing clients receive the same treatment as potential clients?), or (2) the audit partner's aggressiveness with respect to practice development, which also includes elements of ethics and competence. Seventy-four audit managers from two Big-Six firms participated in the study. The results indicate that the type of client (current or potential) and the type of partner (more or less aggressive with respect to practice development) significantly affected the auditors' judgments. Specifically, subjects in the “current client” condition, as well as those who are accountable to a more aggressive partner, are more likely to recommend bidding for the client. The experimental results of this study are based on a case where the client was proposing a relatively aggressive position with respect to accounting for research and development (R&D) costs. Our findings also suggest that the judgements related to bidding on the client are not independent of the auditor's willingness to accept the client's accounting treatment. These results also provide further evidence that the influence of accountability is important in the professional audit environment.     

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.     

Building Trust in Crisis Management: A Study of Insolvency Practitioners and the Role of Accounting Information and Processes

This paper seeks to understand how insolvency practitioners attempt to build trust with a heterogeneous creditor body during the crisis of formal insolvency and the role accounting information and processes play. Accounting information is mobilized in different ways according to how insolvency practitioners believe the information will be interpreted and valued. This paper suggests specific qualitative characteristics, accounting principles, and processes which appear to enhance trust building in a crisis context. These include perceived objectivity, comparability, cash flow accounting, “matching” of secured liabilities with secured assets, and “crisis” audit. The value ascribed by insolvency practitioners to maintaining specific creditor relationships also appears relevant to trust-building activities. A “tit-for-tat” strategy emerges with secured creditors, whereby insolvency practitioners engage in demonstrable fee write-offs, but on the implicit understanding that future, lucrative work will come their way. This study points to the importance for researchers and policymakers of understanding the “desirable” properties of accounting through informed understandings of how and why that information is mobilized and received in specific relationships between people.     

Buchanan,Popular Myths,and the Social Responsibility of Economists

This article presents and discusses “The ‘Politics’ of Economic Policy,” an essay that remains unpublished and that James Buchanan wrote in 1953. In this essay, Buchanan, for the first time, claimed that politicians and bureaucrats are not benevolent despots—it was not an assumption. This helps to understand that Buchanan had abandoned the “romantic” belief that politicians were acting for the interest of the public early in his career, much earlier than usually acknowledged and even earlier than his first works in “nonmarket decision-making.” Beyond this historical insight, we show that Buchanan wrote his article in response or echo to Knight's “The Rôle of Principles in Economics and Politics” (1951). Comparing Buchanan's and Knight's texts, we show that Buchanan adopted a Knightian perspective while criticizing Knight and departing from his views. Of particular importance is what Buchanan wrote on how economists should frame their policy recommendations and on how they may need to avoid very sophisticated theories.     

U.S. Auditors' Perceptions of the PCAOB Inspection Process: A Behavioral Examination

This study examines U.S. auditors' observations of the PCAOB inspection process, and its impact on their work, in order to understand the current U.S. regulatory audit climate. Using 20 interviews with experienced auditors, we consider behavioral factors (e.g., perceived power of and trust in the PCAOB) that can impact the level and form of auditor compliance according to theory from the slippery slope framework on audit regulation (Kirchler et al. 2008; Dowling et al. 2018). Our participants described an audit climate with a powerful regulator. They reported that their desire to receive “clean” inspection reports has had a substantial impact on audit procedures and quality control. However, our participants do not appear to have high trust in the PCAOB, as they questioned aspects of the inspection process and its expectations. Accordingly, we conclude that U.S. public company auditors operate in an antagonistic environment in which auditors perceive the PCAOB has high coercive power. In other words, they comply due to fear of enforcement rather than agreement with the PCAOB's views on audit quality. Some auditors also indicated that they consider both the costs and benefits of compliance. Theoretical intuition implies that any future increases to perceived costs relative to perceived benefits of compliance could ultimately decrease the PCAOB's coercive power and reduce U.S. auditor compliance. Our findings have implications for regulators and researchers interested in understanding behavioral factors that may influence regulatory compliance.