Audit Market Response to PCAOB Censures of US Big 4 Firms

Abstract

Subsequent to the first-ever Public Company Accounting Oversight Board (PCAOB) censure of a US Big 4 firm (Deloitte) in December 2007, there were two other PCAOB US Big 4 firm censures as of 2016 year-end. We examine whether these two post-2007 PCAOB censures of US Big 4 firms conveyed new information to the audit market. For both censures, we find little or no evidence of any change in the factual audit quality of the censured firm over a three-year window surrounding the censure. Our findings suggest that the quality control deficiencies (identified during inspection of specific audit engagements) that triggered the PCAOB censure were isolated occurrences rather than systemic to the firm at large, i.e., the censures do not imply an impairment in the US Big 4 firm's overall factual audit quality. We also find that the negative response of investors and audit committees documented in prior research for the 2007 Deloitte censure disappeared for the later US Big 4 firm censures. Given that the PCAOB inspects (and can censure) non-US auditors who audit US-listed foreign companies, our findings are of potential interest to regulators, investors and audit committees outside the US.     

On the ambiguous economic freedom–inequality relationship

Previous research on the relationship between economic freedom and income inequality has produced mixed results. We provide a short survey of this literature, identifying potential causes for this empirical heterogeneity. Next, we replicate the results from two significant studies using six alternative measures of income inequality for an updated dataset of up to 112 countries over the period 1970–2010. Notably, we use the latest release of the Standardized World Income Inequality Dataset, which allows us to account for the uncertainty of the estimated Gini coefficients. We find that the results of previous studies are sensitive to the choice of country sample, time period and/or inequality measure used. We conclude with suggestions for future research in the area.     

‘Post‐Third‐World City' or Neoliberal ‘City of Exception'? Rio de Janeiro in the Olympic Era

This article considers processes of urban development within the context of mega‐event preparations in Rio de Janeiro. We begin with a brief overview of these development processes, highlighting their connections to political and economic change in recent years. Proponents of these mega‐event‐led initiatives argue that Rio is undergoing a period of inclusive growth and integration: a perspective we call here a ‘post‐Third‐World city' narrative of urban renewal. Critics, however, contend that urban officials are harnessing mega‐events (e.g. the 2014 World Cup and the 2016 Olympic Games) to push forward a neoliberal agenda of socially unjust policies benefiting the interests of capital and marginalizing the city's poor and especially its favelas (i.e. the ‘city‐of‐exception' thesis). In this article we explore the insights of these two perspectives and consider why they have grown popular in recent years. Though we side generally with the city‐of‐exception thesis, we argue that important geographic and historical particularities must also be accounted for. Without carefully situating analytical perspectives empirically—in particular, cases in which theoretical models are drawn from European and North American contexts—urban researchers risk concealing more than they reveal in analyses of rapidly developing countries like Brazil.     

Length of stay and economic consequences with rivaroxaban vs enoxaparin/vitamin K antagonist in patients with DVT and PE: findings from the North American EINSTEIN clinical trial program

Objective:

Venous thromboembolism (VTE) (deep vein thrombosis [DVT] and pulmonary embolism [(PE]) represents a substantial economic burden to the healthcare system. Using data from the randomized EINSTEIN DVT and PE trials, this North American sub-group analysis investigated the potential of rivaroxaban to reduce the length of initial hospitalization in patients with acute symptomatic DVT or PE.

Methods:

A post-hoc analysis of hospitalization and length-of-stay (LOS) data was conducted in the North American sub-set of patients from the randomized, open-label EINSTEIN trial program. Patients received either rivaroxaban (15?mg twice daily for 3 weeks followed by 20?mg once daily; n?=?405) or dose-adjusted subcutaneous enoxaparin overlapping with (guideline-recommended ‘bridging’ therapy) and followed by a vitamin K antagonist (VKA) (international normalized ratio?=?2.0–3.0; n?=?401). The open-label study design allowed for the comparison of LOS between treatment arms under conditions reflecting normal clinical practice. LOS was evaluated using investigator records of dates of admission and discharge. Analyses were carried out in the intention-to-treat population using parametric tests. Costs were applied to the LOS based on weighted mean cost per day for DVT and PE diagnoses obtained from the Healthcare Cost and Utilization Project dataset.

Results:

Of 382 patients hospitalized, 321 (84%), had acute symptomatic PE; few DVT patients required hospitalization. Similar rates of VTE patients were hospitalized in the rivaroxaban and enoxaparin/VKA treatment groups, 189/405 (47%) and 193/401 (48%), respectively. In hospitalized VTE patients, rivaroxaban treatment produced a 1.6-day mean reduction in LOS (median?=?1 day) compared with enoxaparin/VKA (mean?=?4.5 vs 6.1; median?=?3 vs 4), translating to total costs that were $3419 lower in rivaroxaban-treated patients.

Conclusion:

In hospitalized North American patients with VTE, treatment with rivaroxaban produced a statistically significant reduction in LOS. When treating DVT and PE patients, clinicians should consider newer anti-coagulants with less complex treatment regimens.     

Small-holders and Water Resources: A Review Essay on the Economics of Locally-managed Irrigation

A vast literature on locally-managed irrigation systems provides important lessons regarding the experience of irrigators with community management. This review draws upon research in sociology, anthropology, political science, engineering and economic theory to suggest a framework for understanding institutions for governing irrigation systems. The review assesses measures of irrigation system performance, the importance of co-operation, the impact of heterogeneity among the water users on performance and co-operation, and the breadth of institutional forms observed in the field study literature. The review closes with a call for more structured qualitative measures of group performance and for more large-scale research of many irrigation systems to complement the case study focus of the existing literature.     

Do managers make takeover financing decisions that circumvent more effective outside blockholders?

Consistent with agency theory, we find that bidder managers make takeover financing decisions in ways that circumvent more effective monitors. Bidder managers are more likely to use cash rather than stock when targets have aggressive outside blockholders. We also find that the likelihood of a cash offer decreases when aggressive outside bidder block ownership is relatively low. However, the likelihood of a cash offer increases when aggressive outside bidder blockholding is in the intermediate range, a range of ownership where their continued influence over managerial decisions is threatened by a stock offer. Furthermore, we find that bidder management tends to use cash when its outside bidder blockholders are less aggressive. Overall, our findings indicate that managerial decisions on financing takeovers are motivated to prevent aggressive outside blockholders from gaining more control.     

Living next to godliness: Residential property values and churches

This article extends the analysis concerning the impact of neighborhood churches on residential property values by investigating nearly 5,000 residential property transactions in Henderson, Nevada, between January 1986 and December 1990. We find that real property values decrease, at a decreasing rate, as distance from a neighborhood church increases. This result is the opposite of that reported by Do, Wilbur, and Short in a previous edition of this journal. We bolster our findings by showing that distance from the site of a future church has little or no impact on residential property values, whereas distance from an existing church is associated with lower property values. Our evidence indicates that neighborhood churches are amenities that enhance the value of neighborhood residential property. Finally, we demonstrate that larger churches (as measured by square foot of lot size) tend to have a greaterpositive impact on residential property values.     

Older age underwriting: frisky vs frail

The speed of the aging process is variable. Some individuals remain exceptionally fit beyond age 90, while others become frail and fragile early. Survival is better predicted by biological age (state of health, status of reserves) rather than chronological age (age in years since date of birth). The frail group shows a higher mortality compared to the robust group. When assessing the elderly in underwriting, it is important to note the usual chronic diseases such as cardiovascular disease, COPD, cancer risk, and so on. But because of its strong impact on prognosis, it is also important to assess frailty. Key features of frailty are social isolation, dependency in managing life activities and self-care, cognitive decline, shrinking of bone and muscle mass, and slow weight loss.     

Pension roulette: have you bet too much on equities?

In the 1990s, funding pension obligations by investing in stocks looked smart. By 1999, the bull market had poured a collective $260 billion surplus into the pension coffers of the S&P 500, permitting the companies to record the year-to-year increases as additional income. But just two years later, the bear market had obliterated those gains, replacing them with a cavernous $240 billion deficit--which had to be offset by the unlucky firms' ongoing cash flows, wreaking havoc on their earnings, debt levels, and stock prices. Corporate executives may be blamed for this debacle. But they were only following the rules. Current accounting guidelines keep companies from recording pension liabilities and assets on their balance sheets, instead relegating them to the footnotes. That makes it hard to see the risk that market drops expose companies to. Board members and top executives need to look beyond distorted accounting numbers to the economic realities of pension plans. Once they do, they may be surprised to find that they would gain far greater value and flexibility by passively investing their pension funds entirely in bonds. A bond portfolio can be designed to meet precisely, and with virtual certainty, a company's pension obligation, thus eliminating the chance of a funding gap. The predictability of bond investments also stabilizes earnings and cash flow. The expanded corporate debt capacity that results can then be used to fuel growth or reduce the firm's overall cost of capital. Even without an overhaul of today's misguided accounting rules, there's little reason for companies' pension funds to hold anything other than bonds.     

Stock exchange governance initiatives: Evidence from the Italian STARs

Can a stock exchange improve corporate governance and transparency by designating companies that exhibit superior corporate governance? In 2000, the Borsa Italiana created a mid-cap segment with strong listing standards, which is composed of firms (called STARS) that follow stricter standards of transparency, disclosure, monitoring and liquidity. We find that STAR firms exhibit governance characteristics not observed in non-STAR firms, such as a higher incidence of audit and executive committees and higher debt ratios. They experienced a modestly favorable share price response upon the implementation of the STAR initiative. Moreover, they experienced significantly higher buy and hold returns and transparency after the initiative. Several governance characteristics are cross-sectionally associated with performance following the STAR initiative. Overall, the results suggest that firms may be willing to improve governance when they are endorsed by a credible agency for doing so, and such improvements may lead to better performance. The STAR initiative may serve as a model that can be adapted by other stock exchanges to promote transparency and governance.