Audit committee financial expertise,corporate governance,and the voluntary switch from auditor-provided to non-auditor-provided tax services

A prime objective of the SOX is to safeguard auditor independence. We investigate the relation between audit committee quality, corporate governance, and audit committees' decision to switch from permissible auditor-provided tax services. We find that firms with more independent boards, audit committees with greater accounting financial expertise, higher stock ownership by directors and institutions, that separate the CEO and Chairman of the board positions, and with higher tax to audit fee ratios are more likely to switch to a non-auditor provider. Further, we document that firms are more likely to switch prior to issuing equity. We find no evidence that broad financial expertise on audit committees is related to the switch decision, suggesting that the SEC's initial narrow definition of expertise is more consistent with the objective of the SOX. Overall, our results suggest that accounting financial expertise and strong corporate governance contribute to enhanced audit committee monitoring of auditor independence.     

Auditor quality,audit fees,organizational structure,and risk taking in the US life insurance industry

Using a system of simultaneous equations, this study examines the relation among external audit monitoring, in the US life insurance industry. We find insurers with higher leverage risk and surplus risk are more likely to use Big‐4 auditors and to pay higher fees. In return, insurers hiring Big‐4 auditors and paying higher audit fees have lower leverage risk and surplus risk. Second, the results suggest that mutual life insurers have a higher leverage risk and surplus risk than stock life insurers. This evidence is in contrast to that for property–liability insurance companies. Third, we find insurers are less likely to hire Big‐4 auditors and to pay higher audit fees after implementation of the Sarbanes–Oxley Act (SOX). Finally, life insurers with Big‐4 auditors or paying higher audit fees are more likely to take lower risks after the implementation of SOX.     

Corporate Governance and Agency Conflicts

I investigate whether corporate governance is associated with the level of agency conflicts in firms. I employ exploratory principal components analysis on 22 individual governance variables to obtain seven factors that represent the different dimensions of governance for a firm. I measure the level of agency conflicts in firms based on seven proxies for agency conflicts used in the literature. I find that firms with greater agency conflicts have better governance mechanisms in place, particularly those related to the board, audit committee, and auditor. I also find that the composition and functioning of the board, the independence of the auditor, and the equity‐based compensation of directors are significantly associated with firm performance, but primarily for firms with high agency conflicts. Overall, the results support the theory that the existence and role of various governance mechanisms in a firm are a function of the level of agency conflicts in the firm.     

审计委员会特征与会计师事务所变更的经验研究

本文以会计师事务所变更为视角,探讨具备怎样特征的审计委员会才能有效履行其职责。研究表明:审计委员会的独立性和专业性与会计师事务所变更显著负相关;审计委员会的开会次数与会计师事务所变更没有显著关系,说明审计委员会的存在有助于减少会计师事务所变更。但在对会计师事务所变更的进一步研究中,我们并没有发现会计师事务所变是为了追求更高审计质量的进一步证据,也说明审计委员会对会计师事务所变更的影响仍然有限。这些研究结论为完善我国审计委员会制度提供了经验证据。     

Role of corporate governance in mitigating the selective disclosure of executive stock option information

We examine the nature and extent of statutory executive stock option disclosures by Australian listed companies over the 2001–2004 period, and the influence of corporate governance mechanisms on these disclosures. Our results show a progressive increase in overall compliance from 2001 to 2004. However, despite the improved compliance, the results reveal managements’ continued reluctance to disclose more sensitive executive stock option information. Factors associated with good internal governance, including board independence, audit committee independence and effectiveness, and compensation committee independence and effectiveness are found to contribute to improved compliance. Similarly, certain external governance factors are associated with improved disclosure, including external auditor quality, shareholder activism (as proxied by companies identified as poor performers by the Australian Shareholders’ Association) and regulatory intervention.     

Investor perceptions of the earnings quality consequences of hiring an affiliated auditor

The Sarbanes–Oxley Act (SOX) requires that firms wait 1 year before hiring an individual employed as a member of the external audit team. SOX’s intent is to reduce the perceived loss of auditor independence due to affiliated hiring. SOX also requires fully independent audit committees and disclosure of directors with financial expertise. Using a sample of financial executive hires during the pre-SOX period, we find that earnings response coefficients (ERCs) decline following hires of individuals recently employed by the firm’s external auditor, but ERCs do not decline following hires not recently employed by the external auditor. We also find smaller ERC declines following affiliated hires for firms with audit committee compositions consistent with subsequently imposed SOX requirements. Further investigation using measures of earnings quality suggests that differences in ERC changes are attributable to perceived, rather than real, changes in earnings quality following affiliated hires.     

Innate and discretionary accruals quality and corporate governance

This paper extends previous research on the association between corporate governance mechanisms and accruals quality. We derive measures of the discretionary and innate components of accruals quality and regress them against corporate governance characteristics. For discretionary accruals, we find use of a Big 4 audit firm and a larger audit committee as the primary governance mechanisms associated with higher accruals quality. For innate accruals quality, we find that higher quality is associated with an independent board of directors, a larger, more independent and more active audit committee, and use of a Big 4 audit firm. Our findings suggest a stronger relation between sound governance mechanisms and innate accruals quality than discretionary accruals quality.     

Internal governance structures and earnings management

This paper investigates the role of a firm's internal governance structure in constraining earnings management. It is hypothesized that the practice of earnings management is systematically related to the strength of internal corporate governance mechanisms, including the board of directors, the audit committee, the internal audit function and the choice of external auditor. Based on a broad cross‐sectional sample of 434 listed Australian firms, for the financial year ending in 2000, a majority of non‐executive directors on the board and on the audit committee are found to be significantly associated with a lower likelihood of earnings management, as measured by the absolute level of discretionary accruals. The voluntary establishment of an internal audit function and the choice of auditor are not significantly related to a reduction in the level of discretionary accruals. Our additional analysis, using small increases in earnings as a measure of earnings management, also found a negative association between this measure and the existence of an audit committee.     

Do independent directors cause improvements in firm transparency?

Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.     

Audit committee,board of director characteristics,and earnings management

This study examines whether audit committee and board characteristics are related to earnings management by the firm. A negative relation is found between audit committee independence and abnormal accruals. A negative relation is also found between board independence and abnormal accruals. Reductions in board or audit committee independence are accompanied by large increases in abnormal accruals. The most pronounced effects occur when either the board or the audit committee is comprised of a minority of outside directors. These results suggest that boards structured to be more independent of the CEO are more effective in monitoring the corporate financial accounting process.     

Costs and Returns on Graduates of the University of Bradford

Global repercussions of the Enron scandal and particularly the enactment of the Sarbanes–Oxley Act (SOX) in the USA, resulted in significant changes in the UK regulatory regime for audit and corporate governance, including an increased role for audit committees and independent inspection of audit firms. UK-listed company chief financial officers, audit committee chairs (ACCs) and audit partners were surveyed in 2007 to obtain views on the impact of 36 economic and regulatory factors on audit quality post-SOX. Four hundred and ninety-eight 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. However, International Standards on Auditing (ISAs) and the audit inspection regime, aspects of the ‘standards-surveillance-compliance’ regulatory system, are viewed as less effective. Exploratory factor analysis reduces the 36 factors to nine independent dimensions: 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, ISAs and audit inspection. Post-SOX regulations have introduced additional dimensions to the factors influencing audit quality. Respondents commented that aspects of the changed regime are largely process and compliance driven, with high costs for limited benefits, a finding consistent with regulatory over-reaction.     

Corporate governance,SFAS 157 and cost of equity capital: evidence from US financial institutions

This study examines the association between fair value measurements and the cost of equity capital under different fair value valuation methods, and assesses the impact of corporate governance on this relationship for US financial firms. We find that firms’ cost of equity capital is negatively associated with more verifiable fair value assets and positively related to less verifiable fair value assets. Furthermore, the positive association between less verifiable fair value assets and the cost of equity capital is mitigated under better corporate governance. The differential impact between more and less verifiable assets becomes smaller for firms with stronger governance. Our findings contribute to the ongoing debate on fair value regulation by investigating the economic consequences of adopting Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) and the importance of audit committee financial expertise on fair value reporting. We also provide evidence on the importance of board independence, internal control strength, auditor industry specialists, and audit committee financial experts in fair value reporting.     

Crossed-listed foreign firms' earnings informativeness, earnings management and disclosures of corporate governance information under SOX

The passage of the Sarbanes-Oxley Act (SOX) marks the beginning of the mandatory disclosure of audit-committee composition and other corporate governance information for cross-listed foreign firms. We posit that the provisions of SOX improve the effectiveness of an independent audit committee and other corporate-governance functions in monitoring the earnings quality of cross-listed foreign firms, and we use cross-listed firms' earnings informativeness and earnings management to measure earnings quality. Our findings show earnings informativeness is significantly associated with audit-committee independence as well as with board independence in the post-SOX period. In contrast, we do not find a significant association between earnings informativeness and audit-committee independence in the pre-SOX period. Our findings also show a consistently negative association between earnings management and audit-committee independence after SOX, an association that is not found in the pre-SOX period. Similarly, a negative association between earnings informativeness and the CEO duality as the chair of the board is only found in the post-SOX period. Furthermore, our results show a positive (negative) association between earnings informativeness (earnings management) and an aggregate corporate-governance score as a measure of overall corporate-governance functions in both the pre- and post-SOX periods. Our findings on the change of magnitude in the relationship between earnings informativeness (earnings management) and corporate governance suggest that the SOX provisions improve the effectiveness of cross-listed foreign firms' corporate-governance functions in monitoring the quality of accounting earnings.     

Audit Committee Financial Expertise,Litigation Risk,and Auditor‐Provided Tax Services*

The Sarbanes‐Oxley Act (SOX) greatly expanded audit committees' oversight responsibilities by requiring that they preapprove all non‐prohibited non‐audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT‐FEs) serve on the audit committee, suggesting that ACT‐FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex ante litigation risk, ACT‐FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by subperiod (2003–2006 vs. 2007–2011) shows that this result is significant only in the second period. ACT‐FEs' differential evaluation of the trade‐off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post‐SOX years.     

Does the independence of independent directors matter?

This paper analyzes the characteristics of firms that declare board directors as independents, although the directors are not strictly independent, and examines the consequences in terms of performance and corporate governance outcomes. Based on publicly available information, eight criteria of “independence” used to examine a panel of Spanish listed firms classify 14.2% of the directors as strictly independent, whereas the firms classify 32.5% of the board as independent directors. Firms with dispersed ownership structures misclassify directors more frequently than do firms with large controlling owners. In terms of consequences, we find weak evidence of a negative relation between misclassification and a firm's future operating performance. However, no relation is found between independents' misclassification and several relevant outcomes of the primary delegated committees with monitoring roles: the audit committee and the nomination and remuneration committee. There is no significance with regard to the non-strictly independent measures explaining executive directors' compensation, CEO turnover, audit qualifications or earning management behavior.     

The Relevance of Western Corporate Governance in Mitigating Management Misconduct in Thailand

This article provides empirical evidence on the relevance of structures central to Western models of corporate governance in mitigating management misconduct in Thailand. We find no evidence supporting the effectiveness of Western-based corporate governance structures such as board independence, audit committee effectiveness, and separating the roles of CEO and Board Chair in limiting management misconduct. However, we do find evidence supportive of independent directors with more experience and longer tenure, the presence of institutional ownership, and concentrated controlling ownership in limiting management misconduct. This provides some support for the validity of resource dependency theory in an emerging economy setting.     

审计委员会制度与中国上市公司治理创新

本文研究中国上市公司现行治理结构中的企业会计事务控制权安排及其缺陷,并提出改进措施。我们研究发现,在中国上市公司现行治理结构中,企业经理人不仅拥有企业内部会计事务的积极权力,而且实质拥有企业外部会计事务的积极权力,其中的作为董事会下设专门委员会的审计委员会不是我们所设计的本原性质的审计委员会,而是接近于美国现行公司治理结构中的审计委员会。这一安排不符合关于现代企业会计事务控制权安排的分权制衡原则,难以保证注册会计师审计的独立性。我们在分析中国上市公司治理中的监事会监督为什么会流于形式的基础上,提出应进行中国上市公司治理的创新,即取消监事会(制度),设立独立于董事会与之平行的符合本原性质的审计委员会,或将监事会改造为符合我们界定的本原性质的审计委员会。     

Do corporate governance attributes affect adverse selection costs? Evidence from seasoned equity offerings

We examine the relation between corporate governance attributes and perceived information asymmetry. In a sample of seasoned equity offerings between 1996 and 2001, we find that board independence, size of the audit committee, and officer and director ownership mitigate the negative effect of the equity offering announcement on share prices. These results are consistent with the notion that investors perceive certain governance systems to better align manager and shareholder incentives, which improves firm access to capital markets.     

Board Characteristics,Firm Profitability and Earnings Management: Evidence from India

The present paper explores the association between earnings management and specific board characteristics and the firm's profitability in the Indian context. In India, the corporate ownership model is the promoter dominated shareholders model. This is the first study based on a panel data framework that employs a fixed effect model to control for time‐invariant endogeneity. It also contributes to the literature by exploring the role of the firm's profitability in transmitting the impact of audit committee independence on earnings management. The study finds that profitability is an important variable, as it moderates the association between audit committee independence and earnings management. Managers of a profit‐making company would have little need to modify their earnings. This signifies that independent audit committees are more effective monitors of earnings management in profitable firms than in non‐profitable firms. Independent directors with multiple directorships are also found to be ineffective monitors. The findings are of material significance to policymakers in analysing board effectiveness and earnings management and improving policymaking for corporate governance by using profitability and related variables.     

A study of the relationship between corporate governance structures and the extent of voluntary disclosure

The primary objective of this study is to test a theoretical framework relating four major corporate governance attributes with the extent of voluntary disclosure provided by listed firms in Hong Kong. These corporate governance attributes are the proportion of independent directors to total number of directors on the board, the existence of a voluntary audit committee, the existence of dominant personalities (CEO/Chairman duality), and the percentage of family members on the board. Using a weighted relative disclosure index for measuring voluntary disclosure, the results indicate that the existence of an audit committee is significantly and positively related to the extent of voluntary disclosure, while the percentage of family members on the board is negatively related to the extent of voluntary disclosure. The study provides empirical evidence to policy makers and regulators in East Asia for implementing the two new board governance requirements on audit committee and family control.