A Research Note on the Use and Perceived Usefulness of Analytical Procedures by Australian Auditors

This paper provides Australian evidence on the use and perceived usefulness of analytical procedures (AP) by both Big 6 and non-Big 6 auditors. The following questions are posed in the paper. First, what is the extent of usage of AP? Second, which AP are used most frequently? Third, at what stage of the audit are AP used most frequently? Fourth, how effective are AP? Fifth, do auditors expect more or less use of AP in the future? In the context of these questions comparisons are drawn between Big 6 and non-Big 6 auditors and with two recent overseas studies.     

Professionalism, organizational commitment and job satisfaction in an accounting organization

With growth in the number of professionals employed in organizations, concern has been expressed over potential conflict between the professionalism of these employees and their commitment to the organization. Empirical studies examining the relationships between professionalism, organizational commitment and job satisfaction have reported inconsistent results. This paper examines these variables in an organization setting involving several field offices of a “Big Eight” U.S. accounting firm. Accountants who reported high levels of professionalism also reported high levels of organizational commitment. Additionally, both professionalism and organizational commitment were strongly related to job satisfaction.     

The interaction between national and organizational cultures in accounting firms

This paper reports the results of an empirical study of the interaction between national and organizational cultures at the firm level. Using Hofstede's Value Survey Module, the concept of culture was operationalized in six accounting firms in The Netherlands. Three of these firms were local offices of international “Big Eight” accounting firms with a strong U.S.-orientation in their organizational philosophies and policies, whereas the other three firms were Dutch in origin and organization. All six firms work virtually entirely with Dutch employees. We were specifically interested in any influences of the U.S. culture upon the Big Eight firms. For two Hofstede's four cultural dimensions, i.e. Uncertainty Avoidance and Masculinity, significant effects of the U.S. culture upon the organizational cultures of the Big Eight firms were found. Further analysis showed that these results may rather be due to (self-)selection than to socialization mechanisms.     

No System Is Perfect: Understanding How Registration‐Based Editorial Processes Affect Reproducibility and Investment in Research Quality

The papers in this volume were published through a Registration‐based Editorial Process (REP). Authors submitted proposals to gather and analyze data; successful proposals were guaranteed publication as long as the authors lived up to their commitments, regardless of whether results supported their predictions. To understand how REP differs from the Traditional Editorial Process (TEP), we analyze the papers themselves; conference comments; a survey of conference authors, reviewers, and attendees; and a survey of authors who have successfully published under TEP. We find that REP increases up‐front investment in planning, data gathering, and analysis, but reduces follow‐up investment after results are known. This shift in investment makes individual results more reproducible, but leaves articles less thorough and refined. REP could be improved by encouraging selected forms of follow‐up investment that survey respondents believe are usually used under TEP to make papers more informative, focused, and accurate at little risk of overstatement.     

Accounting based valuation models: what have we learned?

The present survey article formed the basis of a presentation by G. Richardson to the 8 July 2003 plenary session of the Accounting and Finance Association of Australia and New Zealand Conference in Brisbane, Australia. The present article reconciles the historical and forecasting branches in the published accounting literature. Prior survey articles have primarily focused either on the historical branch or the forecasting branch. While these approaches have yielded useful insights, they do not attempt to synthesize the link between the two branches of the published literature. An obvious link between the two branches is that the Ohlson model begins with the Residual Income Model as an initial assumption. We believe that there are other links that need further emphasis. In the process, we also review the empirical issues and the evidence within these two branches. We know of no paper to date that has surveyed the empirical evidence on both the historical and forecasting branches of the published literature. In particular, we draw inferences on the following question: on balance, what have we learned from nearly a decade of research on accounting based valuation models and its applications?     

Determinants of going concern opinions and audit fees for development stage enterprises

Startup entities have been the focus of much political and academic interest recently. Development stage enterprises (DSEs), as defined by SFAS 7, are startup entities for which some publicly available information exists. New accounting standards have removed the DSE designation and related extra reporting requirements, and placed more responsibility on owners and managers to assess the ability of entities to continue as a going concern. We examined information from financial statements and audit reports of companies previously reporting as DSEs to investigate what increases the likelihood of receiving a going concern modification in auditors' opinions (GCO) and what affects audit fees. Our overall analyses indicate that the asset size of DSEs, negative working capital, and prior-year going concern modifications consistently influence going concern modifications to auditors' opinions. Managers should clearly consider these conditions when making their assessment of their companies' future going concern status. Our results indicate that the size of the audit firm did not influence the going concern modification decision, but Big4 auditors charge significantly higher fees than other auditors. Thus, managers/owners of DSEs should weigh the benefits of having a Big4 firm audit on their financial statements against the higher fees charged by those firms.     

Auditor quality,corporate risk,and the valuation of new issues

This paper tests two hypotheses derived from the Data et al. (1991) theoretical model of auditor choice by companies newly listing on the stock exchange. The results offer support to their predictions of the demand for auditor quality. In particular, higher-risk companies are associated with the selection of a high-quality auditor, as proxied by a Big Eight firm of accountants. Additionally, companies who employed Big Eight firms had higher market valuations of their stock at the time of listing.     

Transfer pricing as a tax compliance risk

This paper studies the role of transfer pricing as a critical compliance issue. Specifically, we analyse whether and to what extent the perceived risk associated with transfer pricing responds to country-, industry- and firm-specific characteristics. Empirically, transfer pricing risk awareness is measured as a professional assessment reported by the person with ultimate responsibility for transfer pricing in their company. Based on a unique global survey conducted by a Big 4 accounting firm in 2007 and 2008, we estimate the number of firms reporting transfer pricing being the largest risk issue with regard to subsequent tax payments. We find that transfer pricing risk awareness depends on variables accounting for general tax and transfer pricing specific strategies, the types and characteristics of intercompany transactions the multinational firms are involved in, their individual transfer pricing compliance efforts and resources dedicated to transfer pricing matters.     

Audit market concentration,audit fees,and audit quality: A cross-country analysis of complex audit clients

Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit pricing and quality. However, results in the overall literature have failed to reach consensus on this issue. We contribute to this debate by arguing that the audit market is segmented and that concentration in the Big 4 segment of the market leads to higher audit pricing. Accordingly, our analyses use international data and focus on concentration within the Big 4 group of firms across countries. We find that audit fees are increasing in our concentration measure for clients where the barriers to entry by competing auditors are higher, as proxied by client size, international operations, and IFRS use. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration for these types of engagements. This indicates a wealth transfer from shareholders to audit firms when auditor concentration is high because these complex clients are charged more, but receive audits that are of lower quality.     

Alternative work arrangements and perceived career success: Current evidence from the big four firms in the US

This study examines the influences of alternative work arrangements (AWAs), subordinate gender, and supervisor attitudes and beliefs regarding AWAs on performance evaluation judgments in public accounting. One hundred and forty-two experienced professionals from two US Big Four firms evaluated a hypothetical subordinate’s performance in an experimental setting. Results indicated that subordinate gender and AWA participation were significantly related to supervisors’ perceptions of the subordinate’s career success. We also found that individual differences in supervisors’ attitudes and beliefs regarding AWAs were systematically related to their performance evaluation judgments, and indicate that cultural support for AWAs is not uniform among experienced Big Four professionals. Further, the association between these attitudes and beliefs and performance evaluation judgments are consistent with an organizational justice interpretation of AWA use. Implications of these results for the Big Four’s work-life balance initiatives in the US are discussed.     

The Value of Management Letters to Unlisted Companies

This paper reports the results of research on the value of management letters to unlisted companies. The aims of the research were: (1) to identify the issues raised in management letters; (2) to assess the value of management letters to unlisted companies; and (3) to assess the value of management letters to auditors. Within these aims we investigated whether the size of the audit firm (Big 5, Top 20, or other) or the length of audit tenure had any effect on the contents of management letters or their value to unlisted companies. We conclude that the issues most frequently raised in management letters related to internal control and accounting systems but that other issues, such as taxation and general business advice, are often included. There was little difference in the contents of management letters issued by Big 5 audit firms and other firms. Unlisted companies generally considered that the advice given in management letters was valuable. Again, there was little difference between clients of Big 5 audit firms and other firms. Similarly, the length of audit tenure had no statistically significant effect. Finally, auditors considered that the most important benefit of the management letter to themselves was its potential for enhancing clients’ perceptions of the auditor. The potential for reducing costs was relatively unimportant. These results were similar both for Top 20 and non-Top 20 audit firms.     

Summary of Results of Survey of Seminar Attendees

Abstract

The Society of Actuaries undertook a three-phase research project on mortality improvement in the three NAFTA countries: Canada, Mexico, and the U.S. Phase 1 consisted of a literature review of papers on projecting mortality levels in the future and a study of the trend in mortality improvement during this century. Phase 2 consisted of a discussion of different facets of modeling mortality rates at a seminar attended by 79 experts (actuaries, demographers, economists, and medical researchers) representing different countries. The last session of the seminar consisted of the completion of a survey by the attendees to obtain input for Phase 3, which would analyze the impact of mortality improvement on the social security system of each country. This paper summarizes the results of the survey.

The survey results illustrate the difficulty in forecasting mortality levels, because the effects of many factors that could have significant impact on mortality rates are unknown. This suggests the need for dynamic forecasting, which allows for the possibility of random shocks. A majority of the survey respondents believe that stochastic forecasting models, despite their complexity, have significant potential to add value. Respondents also believe that both historical data and cause-specific mortality forecasts are useful as input and also in validating forecasts of the aggregate levels of mortality. The challenge is to develop more sophisticated forecasting models to produce results that are relatively easy to interpret and to communicate these results to the desired audiences, including the public and policymakers.

The survey results suggest that the aggregate effect of lifestyle changes, medical advances, diseases, catastrophe, and physical environmental changes is an increase in life span. However, there is much uncertainty about the future. Respondents expect that beyond the year 2020 the mean annual rate of reduction in mortality for males age 65 and over will average about 0.58% for Canada, 0.76% for Mexico, and 0.67% for the U.S. The results for the female age 65 and over population are 0.64%, 0.83%, and 0.70%, respectively. The age 65 and over population is expected to see larger percentage reductions in mortality than the 0–14 and 15–64 populations. The reductions in male and female mortality will be ultimately the same, and the mortality levels in the three countries will ultimately converge, although differences may persist for decades.     

“Long-Term Yield Rates for Actuarial Valuations”, Jacques F. Carriere,July, 1999

Abstract

This paper explores the relative significance of aging as a determinant of financial cost of health care beyond age fifty, with particular attention to the effect for ages 65 and over. The paper presents concepts of aging factors and aging curves, which define relative values between ages for utilization or cost of health care services. General conclusions are drawn from Medicare data that utilization and cost differ by age, but that aging factors vary across services and may be less significant at the very old ages. The author then turns to the question of measuring the significance of an aging curve assumption and what accuracy is lost in the simpler alternative of a single value across an age range. The practical effects of relative value aging curves are examined through hypothetical examples of increasing complexity in a retiree health valuation. A method to measure the impact is put forth. Three important variables are discussed in some detail. A survey to ascertain aging curve findings and preferences of health actuaries is introduced and discussed, with one representative curve presented. This curve is then measured to understand its impact vis-à-vis other curves.

It may be important to note this is not a study deriving a recommended aging curve. Rather, it is an exploration of the significance of an assumption that has not received much public actuarial scrutiny. A conclusion places the paper-s findings in a context of a dynamic health care economy in an aging society.     

Bond covenants,bankruptcy risk,and the cost of debt

Are all covenants equally effective at reducing the bondholder-shareholder conflict? Examining the most frequently used bond covenants, we document that four out of 24 restrictions are associated with significantly higher bankruptcy risk. The use of these Default Indicating covenants can be partly explained by faulty contract design, greater recovery in bankruptcy, or within-creditor conflicts. Firms that use In-House Counsel to help structure their bond issue and those that use Big 4 Auditors are also less likely to include Default Indicating covenants in their bonds. Further tests show that the use of these Default Indicating covenants is associated with higher bond and CDS spreads. Overall, the results help explain the prior evidence on the relation between covenant use and the cost of debt.     

Restructuring and innovation in pharmaceuticals and biotechs: The impact of financialisation

In this paper we explore whether a financialisation perspective can provide a more empirically satisfying account of recent developments in the pharmaceutical industry than the more commonly used resource-based or transaction cost approaches. Specifically, we note the evolution of the pharmaceutical industry structure from giant vertically integrated firms, selling patent protected blockbuster products at premium prices, to greater vertical disintegration. Big Pharma¹ now sources a significant volume of early stage R&D activity externally, through outright acquisitions or alliances, especially with biotechnology firms. Much of the reason for such vertical disintegration is to be found in the fundamental tension experienced between the high R&D spend necessitated by the cost of pharmaceutical innovation and declining returns on this expenditure in terms generating new product sales and FDA approval rates, which have remained broadly constant at an average of 20–35 approvals per year. The new R&D outsourcing strategy has not delivered an increase in marketable drug discoveries or new ‘blockbuster’ profits. Instead, shareholder returns have been maintained through Big Pharma's decision to distribute cash back to shareholders via share buybacks and dividends (as advocated by Jensen). Thus we conclude that such developments within Big Pharma worldwide are best explained through the lens of a financialisation, as opposed to a resource-based or transaction cost framework.     

Strategic pricing by Big 4 audit firms in private client segments

We examine how Big 4 auditors compete for new private clients. We find evidence suggesting that Big 4 auditors offer fee discounts to attract non‐Big 4 private clients to experience attributes of their brand name audit services. We also find that to attract clients from competing Big 4 suppliers, Big 4 auditors target fee discounts at clients in industries where they are the market leader. Our results further indicate that the Big 4 industry leaders target fee discounts to fast‐growing clients and are able to charge these clients significant price fee increases in the second mandate period (after 3 years).     

New generations of futures methods

This paper presents and further explores the issues discussed during the “New generations of futures methods” session at the WFSF 19th World Conference, Budapest, Hungary. The generational interplay has many different facets and can be looked at from many various perspectives. This paper looks at a broader role of young people as agents of cultural change in societies, their relation to futures studies and the implications of their fresh ways of thinking for futures methods. Also, the past evolution of futures methods and the challenges facing the present and future generation of futurists in regard to methodological as well as general development are reviewed. In an effort to draw together these issues and provide practical ways forward for futurists and their field four integrating themes are addressed:

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Allowing for differences, how do we develop solidarity between generations?

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What does the near-future outlook tell us that might help to achieve this?

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What personal, organisational and social capacities are needed?

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What methods are available for building social foresight?

     

Reproducibility in Accounting Research: Views of the Research Community

We have little knowledge about the prevalence of irreproducibility in the accounting literature. To narrow this gap, we conducted a survey among the participants of the 2019 JAR Conference on their perceptions of the frequency, causes, and consequences of irreproducible research published in accounting journals. A majority of respondents believe that irreproducibility is common in the literature, constitutes a major problem, and receives too little attention. Most have encountered irreproducibility in the work of others (although not in their own work) but chose not to pursue their failed reproduction attempts to publication. Respondents believe irreproducibility results chiefly from career or publication incentives as well as from selective reporting of results. They also believe that practices like sharing code and data combined with stronger incentives to replicate the work of others would enhance reproducibility. The views of accounting researchers are remarkably similar to those expressed in a survey by the scientific journal Nature. We conclude by discussing the implications of our findings and provide several potential paths forward for the accounting research community.