The Joint Effect of Ethical Idealism and Trait Skepticism on Auditors’ Fraud Detection

Journal of Business Ethics - Although regulators have identified ethical lapses as a key factor contributing to auditors’ failure to detect their clients’ fraudulent financial reporting...     

The Assimilative and Contrastive Effects of Word-of-Mouth Volume: An Experimental Examination of Online Consumer Ratings

The popularity of online rate-and-review websites has increased the importance of word-of-mouth (WOM) volume (number of ratings) yet the retail literature has not paid adequate attention to understanding its impact. This paper highlights WOM volume as a high-scope, decision-making cue upon which the influence of other WOM-relevant characteristics on a WOM message's persuability depends. We begin, via a pretest, by demonstrating the intuitive expectation that high volume, relative to low volume, accentuates or assimilates perceptions of positivity or negativity of WOM targets. Then, through two experimental studies, we show that depending upon how high volume interacts with WOM consensus and consumer decision precommitment, it can contrast preference away from the valence of a target also. In our third and final experimental study, we demonstrate that consumers differ in their susceptibility to the influence of high volume. Those with a higher desire to be different from others, compared to those with a higher desire to be similar, are resistant to high volume's assimilative sway and do not show the valence-accentuating effects demonstrated in the pretest. Retail managers and researchers should find these insights about the different roles of WOM volume beneficial.     

Smallholder Demand for Maize Hybrids in Zambia: How Far do Seed Subsidies Reach?

We add to an emerging body of literature on input subsidies in Africa south of the Sahara. Our analysis focuses on demand for seed, characterising smallholders with a high predicted demand for hybrid seed who were not reached by the subsidy programme. We use cross‐sectional data from the 2010 agricultural season and an instrumented control function approach to test the hypothesis that the subsidy on hybrid maize seed in Zambia is selectively biased. Consistent with other literature, we find that the subsidy is a recursive determinant of seed demand, but in 2010, its recipients had more land, more assets, and lower poverty rates. Findings illustrate the social costs of the programme as currently designed and highlight the need to build alternative supply channels if poorer maize growers are to grow hybrid seed.     

A Note on the Interdependence between Hypothesis Generation and Information Search in Conducting Analytical Procedures*

This study examines the linkage among the initial hypothesis set, the information search, and decision performance in performing analytical procedures. We manipulated the quality of the initial hypothesis set and the quality of the information search to investigate the extent to which deficiencies (or benefits) in either process can be remedied (or negated) by the other phase. The hypothesis set manipulation entailed inheriting a correct hypothesis set, inheriting an incorrect hypothesis set, or generating a hypothesis set. The information search was manipulated by providing a balanced evidence set to auditors (i.e., evidence on a range of likely causes including the actual cause ‐ analogous to a standard audit program) or asking them to conduct their own search. One hundred and two auditors participated in the study. The results show that auditors who inherit a correct hypothesis set and receive balanced evidence performed better than those who inherit a correct hypothesis set and did their own search, as well as those who inherited an incorrect hypothesis set and were provided a balanced evidence set. The former performance difference arose because auditors who conducted their own search were found to do repeated testing of non‐errors and truncated their search. This suggests that having a correct hypothesis set does not ensure that a balanced testing strategy is employed, which, in turn, diminishes part of the presumed benefits of a correct hypothesis set. The latter performance difference was attributable to auditors' failure to generate new hypotheses when they received evidence about a hypothesis that was not in the current hypothesis set. This demonstrates that balanced evidence does not fully compensate for having an initial incorrect hypothesis set. These findings suggest the need for firm training and/or decision aids to facilitate both a balanced information search and an iterative hypothesis generation process.     

The effect of non-audit services on client risk, acceptance and staffing decisions

The Sarbanes Oxley Act of 2002 prohibited auditing firms from providing certain non-audit services to audit clients and left open the possibility that other currently non-prohibited services could also be banned. This prohibition hinges, in part, on regulatory concerns that auditors were willing to accept prospective higher risk clients in order to obtain more profitable non-audit service engagements. Accounting firms rejected this claim. Given the prospect that more non-audit services could be prohibited, we revisit this debate by examining these competing claims in an experiment in which we manipulate risk and the potential to sell non-audit services and then observe the impact of these variables on auditors’ client acceptance and subsequent staffing decisions. Specifically, audit partners received client information and were asked to make an acceptance decision and propose a staffing plan for a potential engagement. We find that a higher (lower) level of risk decreased (increased) the likelihood of acceptance and this relation did not vary with the potential to provide non-audit services. These results do not support the regulators’ claims but are consistent with the firms’ claims. Further, we found that more experienced auditors were assigned to the prospective client whose management had lower integrity. This staffing plan is consistent with a risk adaptation strategy for the client with lower integrity. The prohibition of certain non-audit services has been justified on the grounds that auditors might engage in systematic opportunistic behavior. However, our results do not find such behavior which should inform the current PCAOB deliberation over whether additional services should be banned. Alternatively, different justification must be found for the prohibitions.     

Hypothesis revision strategies in conducting analytical procedures

A number of accounting tasks require an evaluation of competing hypotheses. For instance, a management accountant considers alternative reasons for a significant standard cost variance while an auditor must determine whether an unexpected fluctuation in a client's account balance was caused by an error, irregularity or a change in economic conditions. In spite of the prevalence of hypothesis evaluation in practice, little is known about the process. In this paper we provide evidence on two issues that could compromise effective and efficient hypothesis evaluation: (1) the revision of beliefs over competing hypotheses given diagnostic evidence; and (2) whether an eliminated hypothesis is subsequently resuscitated (i.e. reconsidered as plausible). To address these issues, 55 auditors were provided audit test results and were asked to evaluate five potential hypotheses that may have caused a material fluctuation in the gross margin ratio of a client. The findings indicate that, when presented with diagnostic evidence about a target hypothesis, auditors were prone to adjusting the likelihood of the target hypothesis but not revising the likelihoods of the competing hypotheses. This non-Bayesian revision strategy, which we label the “one-hypothesis syndrome”, appears to represent a trade-off reflecting competing forces of cognitive strain, efficiency and accountability. While our preliminary results indicate high performance (in identifying the actual cause), additional research in less controlled settings is needed to fully evaluate the effect of this trade-off on efficiency and effectiveness. Finally, contrary to anecdotal evidence from an SEC release, auditors were reluctant to eliminate hypotheses and those who did, did not regard their eliminations as permanent.     

Explaining Interest Rate Spreads in Ghana*

Abstract: The question of the optimal spread between bank lending rates and rates that banks pay on deposits, which is fair to bankers, depositors and borrowers, has dogged economies for some time. In Ghana, there is widespread perception that the spread is too wide. Bankers, on the other hand justify the spread on the basis of economic variables that affect them. This paper contributes to the literature by identifying, in the case of Ghana, the short‐run response of the net interest margin of banks to changes in bank‐specific, industry‐specific and macroeconomic variables within the broad framework of Ho and Saunders (1981) . We find that increases in the following factors significantly increase net interest margin — bank market power (or concentration), bank size, staff costs, administrative costs, extent of bank risk aversion and the rate of inflation. On the other hand, increases in the following variables decrease net interest margin significantly — bank excess cash reserves, the central bank lending rate, management efficiency and the passage of time. To help reduce interest rate margins, we recommend that banks should not get too big, the central bank should consider lowering the capital adequacy ratio and banks should be required to pass on to borrowers the full extent of reductions or increases in the central bank lending rate. Continued efforts at keeping inflation at bay will also help.     

Operationalization of Ghana’s civil service code of conduct

ABSTRACT

This paper examines the internal and external challenges to the implementation of the code of conduct in the Ghana’s civil service using the Controller and Accountant Generals’ Department (CAGD) as a case study. The main internal challenges to the implementation of the civil service code of conduct at CAGD were found to be: the categories of staff affected by the code of conduct; ‘immunity’ from sanctions, nepotism; and limited checks on enforcement mechanisms. The key external challenges to the implementation of the civil service code of conduct at the CAGD are discussed in the paper and the authors make five important policy suggestions to enhance effectiveness of the implementation process. The suggestions will have value in countries with developing administrative systems.     

Looking back and moving forward: 50 years of soil and soil fertility management research in sub-Saharan Africa

Low and declining soil fertility has been recognized for a long time as a major impediment to intensifying agriculture in sub-Saharan Africa (SSA). Consequently, from the inception of international agricultural research, centres operating in SSA have had a research programme focusing on soil and soil fertility management, including the International Institute of Tropical Agriculture (IITA). The scope, content, and approaches of soil and soil fertility management research have changed over the past decades in response to lessons learnt and internal and external drivers and this paper uses IITA as a case study to document and analyse the consequences of strategic decisions taken on technology development, validation, and ultimately uptake by smallholder farmers in SSA. After an initial section describing the external environment within which soil and soil fertility management research is operating, various dimensions of this research area are covered: (i) ‘strategic research’, ‘Research for Development’, partnerships, and balancing acts, (ii) changing role of characterization due to the expansion in geographical scope and shift from soils to farms and livelihoods, (iii) technology development: changes in vision, content, and scale of intervention, (iv) technology validation and delivery to farming communities, and (v) impact and feedback to the technology development and validation process. Each of the above sections follows a chronological approach, covering the last five decades (from the late 1960s till today). The paper ends with a number of lessons learnt which could be considered for future initiatives aiming at developing and delivering improved soil and soil fertility management practices to smallholder farming communities in SSA.