Capital mobility and international sharing of cyclical risk

This paper investigates whether the international globalization of financial markets allows for significant cross-country risk-sharing at the business cycle frequency. We find that cross-country risk-sharing is still limited and this is unlikely to be the result of financial frictions that limit state-contingent contracts. Part of the limited international risk sharing could be the consequence of frictions that de-facto reduce the short-term mobility of financial capital. But even with these frictions we find significant divergence between model predictions and the data.     

The joint impact of accountability and transparency on managers’ reporting choices and owners’ reaction to those choices

We report the results of an experiment designed to investigate the fundamental conflict of interest between managers and owners in a financial reporting setting. In our setting, owners seek accurate reports of financial performance whereas managers have incentives to distort performance reports in a self-serving fashion. Regulatory responses to such conflicts often call for improved disclosure, including more accountability and transparency (e.g., Sarbanes-Oxley Act and Dodd-Frank Act). We use the term accountability to imply answerability—wherein managers are required to reconcile the difference between reported and actual performance. We predict and find that when managers’ incentives are transparently disclosed, accountability does not rein in managers’ opportunistic reporting. By comparison, when managers’ incentives are less transparently disclosed (opaque), accountability dampens managers’ propensity to misreport. However, this reduction in opportunistic reporting due to accountability comes about because managers offset higher reporting bias in compensation periods with lower reporting bias in other periods. Therefore, not only are the benefits of accountability restricted to the setting where managers’ incentives are opaque, but the reduced reporting bias might arise due to window-dressing. Although managers seem to care enough about accountability to engage in window-dressing, financial incentives seem to dominate accountability, at least in our setting. We also find that managers’ payoffs are higher when their incentives are opaque, but owners’ payoffs are invariant regardless of whether incentives are transparent or opaque. Our analyses suggest that owners may be relying on accountability to curb opportunistic reporting by managers—a reliance that may be misplaced. Our findings have implications for regulatory responses aimed at addressing conflicts of interest.     

An accountability framework for financial statement auditors and related research questions

We address the following overarching questions: What kind of accountability framework could regulators use to (a) motivate auditors to improve audit quality, and (b) evaluate how well auditors have carried out their duties? We draw on research in accounting, economics, psychology, and neuroscience to critique the accountabilities, incentives, and learning opportunities embedded in auditors’ extant regulatory environment. We first establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain, which increases the challenges faced by auditors. We propose an accountability framework with two dimensions: rewards versus penalties and processes versus outcomes. We show that auditors’ current regulatory accountabilities generally are in the form of penalties rather than rewards and primarily depend on audit outcomes rather than attributes of auditors’ judgment processes. We provide evidence from a range of disciplines that questions the suitability of the present system for improving the quality of auditors’ judgments and the quality of evaluations of those judgments made by inspectors. We identify four potential changes for improvement in audit quality based on our framework. Each of these identified changes has an impact on one or both of the two dimensions in our framework. For each of these changes, we outline JDM research questions that could be addressed to inform our overarching questions and to provide empirical evidence to help refine our accountability framework and improve audit quality.     

The division of expert labour in the European audit market: The case of Germany

The implementation of three EU company law directives in Germany in the 1980s triggered a bitter dispute over the audit jurisdiction. This was fought out between an established “elite” occupational group of state-recognised auditors and aspiring related, but less qualified competitors. It ended with a compromise imposed by politicians. Our paper aims to contribute to the understanding of accounting professionalisation in different local and historical contexts by examining how the dynamics between the competing interest groups shaped the outcome in this particular episode. We base our analysis on the framework proposed by Abbott [Abbott A. The system of professions. An essay on the division of expert labour. Chicago/London: University of Chicago Press; 1988], but find that it requires refinement to explain the interactions between all actors, including the state and third parties. These interactions were complicated by simultaneous inter-and intraprofessional conflict, as well as by the peculiar complexity of ambiguous professional and jurisdictional boundaries, both in terms of work performed and professional qualifications held. Our discussion supports prior suggestions that Anglo-American theories may not be sufficient to explain professionalisation projects elsewhere, and considers additional dimensions which may be useful in explaining such projects also in other national and historical settings.     

Muslim religiosity and purchase intention of different categories of Islamic financial products

Considering the rapid growth of Islamic Financial Products (IFPs) worldwide and the limited research on Muslims’ buying behaviour of such products, this research examines the relationship between religiosity, consumer buying attitude and purchase intention towards different categories of IFPs. The findings suggest that buying attitude has full mediation for deposit, credit and capital market products and partial mediation for insurance products on the association between Muslim religiosity and their purchase intention. Interestingly, religiosity influenced positively even for insurance and capital market products. This is in contrast with our hypothesised relationships for capital and insurance products. The study contributes to the literature by enhancing our understanding of the complex mediating religiosity – buying attitude – purchase intention relationships for different categories of IFPs.     

Internationalizing audit education

Audit education is typically offered only to accounting majors. We argue that auditing provides a way of thinking that could serve as a framework for an accounting curriculam. We describe two parts of a course content that could be incorporated into an existing auditing course or a begining accounting course. The first section emphasizes accountability; the second emphasizes the role of the auditor in the accountability process. The concepts are best taught within an international paradigm that permits examination of various institutional environments.     

A commentary on “Why DCF capital budgeting is bad for business and why business schools should stop teaching it”

‘Towards a conceptual framework for auditing’ suggest a conceptual framework, which it is hoped may help in the teaching and understanding of external attest auditing. Briloff's (1986) view that ‘as concern for ecology and the wellbeing of consumers in posterity intensifies, this responsibility (accountability) will extend to the total society and environment’ is taken as the philosophical departure point for the conceptual framework.

The paucity of attempts to develop a unifying theory of auditing is noted and a brief history of developments is traced commencing with Mautz and Sharaf in 1961. Flint's 1988 work (The Philosophy and Principles of Auditing) is adopted and developed. Each of Flint's concepts is examined in some detail to consider its significance in the conceptual framework and its implications for audit practice. Reasons for changes from earlier frameworks are offered.

In order to illustrate the effectiveness of the framework as an holistic tool of analysis, the concepts identified are then related to the Auditing Standards and Guidelines of our national professional accounting association, the New Zealand Society of Accountants (NZSA). Whilst considerable correlation is noted, some inconsistencies are also identified. It is suggested that the standards and guidelines may not have derived from any philosophical analysis and that the inconsistencies between the concepts and the standards appear to have resulted from a lack of a clear theory as to what constitutes a standard and what constitutes a guideline; higher and lower order ideas would appear to fall somewhat indiscriminately in both. It is noted that this analysis may be repeated in respect of the auditing standards of any professional organization.

It is concluded that the application of these concepts can lead to more informed discussion of some of the controversial issues that face the auditing profession at this time, and to an holistic understanding of the discipline of auditing as well as of professional audit promulgations. It is recommended that standard setters should give thought to the adoption of a more holistic approach to standard setting, grounded in a conceptual framework, and that auditing educators should adopt such a framework in order to assist students towards an understanding of the role and process of auditing and away from the memorizing of techniques.     

Sustainability reporting: The role of “Search”, “Experience” and “Credence” information

Corporate sustainability reporting quality has been frequently criticised as being unbalanced, presenting an overly positive view or failing to address material issues. The purpose of this article is to provide a fresh explanation for poor quality sustainability reporting and to propose how quality issues may be addressed. The theoretical framework combines the legitimacy and accountability perspectives using Akerlof's (1970) Market for Lemons theory. Akerlof's approach is extended by differentiating between three types of information in sustainability reports namely search, experience and credence. The article concludes that the type of information must be considered when determining measures to improve report quality.     

Accountability and Transparency in English Local Government: Moving from ‘Matching Parts’ to ‘Awkward Couple’?

Although excessive transparency and accountability demands can have a counterproductive effect on organisational performance (Bovens, 2005), longstanding hierarchical accountability structures to ensure financial conformance in English local government continue to endure. Interestingly however, the previously top‐down regime for performance accountability in English local government has been replaced by bottom‐up mechanisms such as greater transparency and a more open market for public services. Using the framework developed by Hood (2010), this paper will show how such reforms mean that transparency and accountability are moving from being ‘matching parts’ to an ‘awkward couple’, and how this has significant implications for public services.     

Revisiting fast profit investor sentiment and stock returns during Ramadan

Using stochastic dominance (SD) approach, this paper revisits the Ramadan effect in the stock returns of 15 Muslim countries and altogether as a portfolio. Our study is motivated by the preferred statistical attributes of SD analysis. Specifically, SD requires no normal distribution of returns assumption and it imposes few restrictions on investors' risk-return tradeoff preference. Our results indicate that the Ramadan effect exists in most of Muslim countries used in the study during the sub-periods 1996–2000 and 2001–2006 and in the portfolio during the sub-period 1995–2007. However, its magnitude diminishes during the global financial crisis period (2007–2012). The findings of this paper indicate that previous results are not an artifact deriving from violations of distributional assumptions. We conclude that risk-averse investors would benefit from increased utility by switching from non-Ramadan to Ramadan.     

Sustainable finance: A new paradigm

We argue that our current approach to shareholder wealth maximization is no longer a valid guide to creation of sustainable wealth: An emphasis on short-term results has had the unintended consequence of forcing many firms to externalize their social and environmental costs. An unwavering faith in markets' ability to efficiently uncover long-term value implications of short-term results has created many unacceptable outcomes. Given the social and environmental challenges ahead, such practices and their unacceptable outcomes cannot be sustained. Therefore, a shift in paradigm is called for. We propose a sustainable value creation framework, within which all social and environmental costs and benefits are to be explicitly accounted for.     

Learning ahead of time: how evaluation of foresight may add to increased trust,organizational learning and future oriented policy and strategy

Evaluation of futures research (foresight) consists of three elements: quality, success, and impact of a study. Futures research ought to be methodologically and professionally sound, should to a certain extent be accurate, and should have a degree of impact on strategic decision making and policy-making. However, in the case of futures studies, the one does not automatically lead to the other. Quality of method does not ensure success, just as quality and success do not guarantee impact. This article explores the new paths for understanding evaluating of futures studies that are provided by the various articles in this special issue and sets out an agenda for next steps with regard to evaluation of futures research. The more structural and systematic evaluation can result in an increased level of trust in futures research, which may in turn lead to more future oriented strategy, policy and decision making. Therefore, evaluation should be seen as more than a burden of accountability – albeit important as accountability is – but as an investment in the credibility and impact of the profession. It may set in motion a cycle of mutual learning that will not only improve the capacity of futures-researchers but will also enhance the capacity and likeliness of decision-makers to apply insight from futures research.     

Innovation in urban political leadership. Reflections on the introduction of a directly-elected mayor in Bristol,UK

In May 2012, 10 of England's largest cities, outside London, were required to hold referendums giving citizens the option of introducing a directly-elected mayor. Bristol was the only city to vote in favour of the mayoral model. This paper outlines the main themes that feature in current debates about urban leadership. It presents a framework for understanding place-based leadership and, by drawing on a current researchproject on mayoral governance in Bristol, highlights the existence of very different perceptions of how to improve city leadership and democratic accountability.     

On portfolio optimization: Imposing the right constraints

We reassess the recent finding that no established portfolio strategy outperforms the naively diversified portfolio, 1/N, by developing a constrained minimum-variance portfolio strategy on a shrinkage theory based framework. Our results show that our constrained minimum-variance portfolio yields significantly lower out-of-sample variances than many established minimum-variance portfolio strategies. Further, we observe that our portfolio strategy achieves higher Sharpe ratios than 1/N, amounting to an average Sharpe ratio increase of 32.5% across our six empirical datasets. We find that our constrained minimum-variance strategy is the only strategy that achieves the goal of improving the Sharpe ratio of 1/N consistently and significantly. At the same time, our developed portfolio strategy achieves a comparatively low turnover and exhibits no excessive short interest.     

Australian not‐for‐profit sector views on the conceptual framework,accounting standards and accounting information

In this paper, we examine the conceptual framework, accounting standards and accounting information relevant to the not‐for‐profit (NFP) sector. Based on the responses of 242 Australian NFP managers, we find support for the inclusion of accountability in the conceptual framework, and for a common set of accounting standards across NFP and for‐profit sectors with additional standards or paragraphs to recognise NFP specific issues. Respondents also rated information within general‐purpose financial reports to be useful for decision making within their organisations. We offer suggestions as to what our findings mean for the development of accounting standards for the NFP sector.     

Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages

We employ Amortizing Participation Mortgage (APM) to offer a novel ex post renegotiation method of a foreclosure. APM belongs to the family of home loan credit facilities advocated in the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010. In our framework, APMs reduce the endemic agency costs of debt by improving affordability. These benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures. We evaluate APMs in a stochastic control framework and provide solutions for an optimal amortization schedule. We generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments. Finally, we provide concrete numerical examples of home loan modifications. We also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates.     

Political systems and the financial soundness of Islamic banks

We investigate whether and how political systems affect the financial soundness of conventional and Islamic banks. Using factors extracted from principal component analysis, we find that Islamic banks underperform their conventional counterparts in more democratic political systems but outperform them in hybrid and Sharia’a-based legal systems. The findings reflect the challenges Islamic banks face in Western countries in terms of perception, financial infrastructure, and regulatory constraints while mirroring the recognition of their specificities and their cultural and religious compliance with Sharia’a law in Muslim countries. The findings are robust to a battery of alternative estimation techniques and methods of correcting standard errors.     

Corporate silence: environmental disclosure and the north american free trade agreement

This paper uses the highly politicized passage of the North American Free Trade Agreement (NAFTA) and its environmental side agreement as a venue to explore the nature of accountability and environmental disclosure. The components of accountability (account-giver, relationships, power and conduct that matters) are outlined. While notions of accountability would lead us to expect a modicum of relevant disclosure, the empirical results are otherwise. Environmental disclosure was drawn from the database, Disclosure, for US and Canadian companies for year ends covering the period 1990 to 1995. Only nine references to the effect of NAFTA on the ecological environment were found. The conclusion is reached that managers and companies do not see themselves as accountable for or liable to speak about their environmental performance in connection with NAFTA. Aspects of power and accountability are discussed and a few comments are offered on a way forward.