The World Has Changed—Have Analytical Procedure Practices?

Analytical Procedures (APs) provide a means for auditors to evaluate the “reasonableness” of financial disclosures by comparing a client’s reported performance to expectations gained through knowledge of the client based on past experience and developments within the company and its industry. Thus, APs are fundamentally different than other audit tests in taking a broader perspective of an entity’s performance vis‐à‐vis its environment. As such, APs have been found to be a cost‐effective means to detect misstatements, and many have argued that a number of prior financial frauds would have been detected had auditors employed effective APs. With several dramatic and far‐reaching developments over the past decade, the current study examines whether and how APs have changed during this period. In particular, we focus on the impact of significant “enablers” and “drivers” of change such as technological advancements and the enactment of the Sarbanes‐Oxley Act. We also compare our findings to an influential study of the practices of APs by Hirst and Koonce (1996) that was conducted over 10 years ago. We interview 36 auditors (11 seniors, 13 managers, and 12 partners) from all of the Big 4 firms using a structured questionnaire. The data reveal some similarities in findings when compared to prior research (e.g., auditors continue to use fairly simple analytical procedures). However, there are a number of significant differences reflecting changes in AP practices. For instance, as a result of technology auditors now rely more extensively on industry and analyst data than previously. Further, auditors report that they develop more precise quantitative expectations and use more non‐financial information. They also appear to rely more on lower level audit staff to perform APs, conduct greater inquiry of non‐accounting personnel, and are willing to reduce substantive testing to a greater extent as a result of APs conducted in the planning phase. Finally, the Sarbanes‐Oxley Act has had an impact in greater consideration and knowledge of internal controls, which is seen as the most important factor driving the use and reliance on APs.     

The Sarbanes‐Oxley Act of 2002 and Capital‐Market Behavior: Early Evidence*

The Sarbanes‐Oxley Act of 2002 (“the Act”) was enacted in response to numerous corporate and accounting scandals. It aims to reinforce corporate accountability and professional responsibility in order to restore investor confidence in corporate America. This study examines the capital‐market reaction to the Act and finds a positive (negative) abnormal return at the time of several legislative events that increased (decreased) the likelihood of the passage of the Act. We interpret this finding as evidence supporting the notion that the Act is wealth‐increasing in the sense that its induced benefits significantly outweigh its imposed compliance costs. We also find that the market reaction is more positive for firms that are more compliant with the provisions of the Act prior to its enactment.     

THE SOCIAL SECURITY SYSTEM IN HONG KONG: ESTABLISHMENT AND READJUSTMENT OF THE LIBERAL WELFARE MODEL

Hong Kong's social security system has followed a “liberal” welfare state regime. The system has undergone changes along with the high economic growth, changes in the labor market, and transformation of the political environment, but has retained the fundamental principle of a social security system led by the private sector. In recent years, Hong Kong has responded to the aging population and growing unemployment by introducing the Mandatory Provident Fund Scheme that requires individuals to join private‐sector pension schemes and by intensifying cooperation with nongovernmental organizations. This indicates the deep‐seated nature of the influence of the liberal regime in Hong Kong.     

EXPLORING THE IMPORTANCE OF EXCESS FEMALE MORTALITY AND DISCRIMINATION IN “NATALITY” IN EXPLAINING THE “LOWNESS” OF THE SEX RATIO IN INDIA

The beginning of the present century has been marked by a shift in attention from “excess” female mortality to discrimination in natality in explaining the “lowness” of the sex ratio or proportion of women in India's population. Such a shift in focus seemingly suggests that discrimination in intra‐family allocation of resources has reduced substantially in India. In this context, an attempt has been made to decompose the observed lowness of the sex ratio in India vis‐à‐vis that of the stable population into that attributable to: (1) age structure difference, (2) excess female mortality, and (3) abnormalities in sex ratios at birth in India. Estimated contributions by each factor suggest that, as late as 2001, excess female mortality or the lowness of the relative survival advantage of women is the single most important determinant of “missing” women in India. The results also point to the importance of age structure difference, which accounts for a little more than 17% of the lowness of the sex ratio in India in 2001.     

PCAOB Inspections: Public Accounting Firms on “Trial”

The objective of our article is to obtain a better understanding of how auditors anticipate the potential for PCAOB inspection, experience the inspection, cope with the consequences of the inspection, and understand the PCAOB's influence within the context of professionalism. We use a qualitative approach that uses both surveys (55) and interviews (20) of auditors (of varying rank and firm) across a five‐year period (2012–2017). Respondents suggest that PCAOB inspectors are powerful, representing the “prosecution,” “judge,” and “jury” of the auditing profession. We therefore use a structural metaphor of the PCAOB inspection as a judicial “trial.” By controlling the criteria used to evaluate performance, inspectors have the power to repeatedly “subpoena,” “interrogate,” and return a “verdict” on the firm (auditor); those judged as “guilty” require supervised “probation.” This process is perceived as having improved audit quality but at a cost. Passing an inspection is so important that auditors (firms) have resorted to impression management strategies and “functionally stupid” work practices (e.g., excessive documentation, a decrease in critical thinking as a result of a “box ticking” approach to auditing). Furthermore, some respondents believe that being a good auditor has come at the expense of being a good accountant; the emphasis on audit process and concurrent de‐emphasis on technical accounting could ultimately lead to audits themselves falling short. In addition, it is evident that inspectors and auditors differ in their perceptions of risk, likely manifesting because inspectors are standards‐focused while auditors (firms) are methodology‐focused. Finally, the inspection process has created excessive stress and tension, beyond budget and fee pressures, which some auditors perceive as affecting the pool of talented auditors that firms may be able to attract and retain in the future.     

Accounting Discretion and Managerial Conservatism: An Intertemporal Analysis*

Accounting discretion and the principle of conservatism are two salient features embedded in financial reporting systems. Arguably, the practice of conservative accounting choices can never be well understood without incorporating their effect on future periods (the intertemporal effect). This paper provides one explanation for managerial conservatism in a two‐period agency model with hidden information (a binary project type) and hidden actions (the agent's efforts). A piece‐wise linear incentive scheme with accounting earnings as the performance measure is employed. The agent's discretion is the choice of a depreciation method. Discretion is valuable if and only if the agent's marginal productivity of a “bad” project is greater than that of a “good” project, but not to an extreme degree. A conservative depreciation method decreases current compensation in exchange for a “bet” on future compensation and, hence, serves as a commitment device for the agent to signal that the prospect is indeed good. The accounting mechanism replicates the performance of the optimal direct mechanism.     

THE REVENUE-EXPENDITURE NEXUS: HISTORICAL EVIDENCE FOR SOUTH AFRICA

Results from unit root and cointegration tests suggest that, allowing for structural breaks, government revenue and expenditure in South Africa during 1895‐2005 were I(1) series and cointegrated. Results from Granger‐type causality tests suggest that a bidirectional Granger‐causal relation existed between revenue and expenditure for the full sample period and for sub‐periods up to the 1960s, consistent with the so‐called “fiscal synchronisation hypothesis”. However, in the 1960s the causal relation appears to have shifted to run from expenditure to taxation, consistent with Peacock and Wiseman's “displacement effect”. In the context of the recent fiscal consolidation literature, the South African fiscal experience would appear to be generally consistent with either revenue‐ or expenditure‐led fiscal consolidation efforts, but with the more recent evidence favoring expenditure‐led consolidations.     

MANAGERIAL STRUCTURE OF BUSINESS GROUPS IN TAIWAN: THE INNER CIRCLE SYSTEM AND ITS SOCIAL ORGANIZATION

This paper examined the management structure of Taiwan's business groups. The objective was to determine how independent group firms coordinate their business. Employing longitudinal data of the top 100 groups, I investigated the “inner circle” system and its evolution. I found that group leaders occupied overlapped positions at the director rather than at the manager level, which implied a separation of strategic planning and routine administration. Secondly, the dynamics of inner circle management did not hinge upon the group president as in the Korean chaebol, nor on the norm of corporate community as in the Japanese keiretsu, but on the social ties in the inner circle. Analyzing the background of the leaders indicated that family never dominated the scene even in the early years, and their significance decreased along with environmental changes. The transition in Taiwan in the late 1980s motivated business groups to introduce more “outside” talent into decision‐making.     

TAX REFORM AND THE PROGRESSIVITY OF PERSONAL INCOME TAX IN SOUTH AFRICA

This paper investigates the progressivity of personal income tax in South Africa over the period 1989 to 2003. We use the effective, redistributive and disproportionality measures of progressivity and find that progressivity of the tax system increased over the period 1990 to 1994. However, during the first phase of the reform programmes the results are inconclusive with the Kakwani index (disproportionality measure) showing increased progressivity. The redistributive effect measure, on the other hand, indicates a marginal decline in progressivity. During the second phase of the reform programmes, both techniques suggest a worsening in progressivity. One explanation for the decline in progressivity during the latter period in the analysis is the fact that many more “new” taxpayers entered the tax net (higher income groups in our database) which made the distribution of pre‐tax income more unequal thus impacting on progressivity. On the other hand, the disproportionality measure shows a continuous, albeit volatile increase in progressivity over the latter period under investigation.     

A REVIEW OF THE CONCEPT OF THE “DUAL ECONOMY”*

The primary object of this paper is to present a methodological study which is concerned with how to clarify and evaluate the characteristics of that social and economic structure which is called “dual economy” in today's developing countries. It attempts a critical review of the concepts developed by J. H. Boeke, J. van Gelderen, J. S. Furnivall, H. Frankel, H. Myint, G. Myrdal and C. Geertz, among those who have taken the view of “social dualism.” It concludes that the concept of a dual economy should be perceived in terms of “colonial social dualism” as a system; and that it is solely from this point of view that the nature and direction of economic development in the context of economic nationalism in developing countries can adequately be explained.     

THE CYCLICALITY OF MONETARY AND FISCAL POLICY IN SOUTH AFRICA SINCE 1994

This paper uses a structural vector‐autoregression approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over “neutral” base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro‐cyclicality, especially in the more recent period, though the policy simulations suggest that the pro‐cyclicality of fiscal policy has had little destabilising impact on real output.     

GOVERNANCE INSTITUTIONS AND PRIVATE INVESTMENT: AN APPLICATION TO THE MIDDLE EAST AND NORTH AFRICA

This paper addresses the issue of the low level of private investment in the Middle East and North Africa (MENA) region, with special emphasis on the role of governance. Based on the existing published reports, we categorize what types of governance institutions are more detrimental to entrepreneurial investments. We then estimate a simultaneous model of private investment and governance quality where economic policies concurrently explain both variables. Our empirical results show that governance plays a significant role in private investment decisions. This result is particularly true in the case of “administrative quality” in the form of control of corruption, bureaucratic quality, investment‐friendly profile of administration, law and order, as well as for “political stability.” Evidence in favor of “public accountability” is also found. Our estimations also stress that structural reforms like financial development, trade openness, and human development affect private‐investment decisions directly, and/or through their positive effect on governance.     

Health insurance generosity and conditional coverage: Evidence from medicaid managed care in Kentucky

This article estimates the impact of the introduction of Medicaid managed care (MMC) on the formal Medicaid participation of children. We employ a quasi‐experimental approach exploiting the location‐specific timing of MMC implementation in Kentucky. Using data from the March Current Population Survey from 1995 to 2003, our findings suggest that the introduction of MMC increases the likelihood of being uninsured and decreases formal Medicaid participation. This finding is consistent with an increase in “conditional coverage,” waiting until medical care is needed to sign up or re‐enroll in Medicaid. These effects are concentrated among low‐income children and absent for high‐income children. We find no evidence of “crowd‐in,” substituting private coverage for Medicaid. These results are robust to multiple placebo tests and imply the potential for less formal participation (i.e., more conditional coverage) among the Affordable Care Act‐Medicaid expansion population (which is likely to be primarily covered under MMC) than is typically predicted.     

THE LONG‐TERM ECONOMIC CONSEQUENCES OF AGRICULTURAL MARKETING LEGISLATION IN SOUTH AFRICA

The marketing of most agricultural products in South Africa was subject to intervention by statutory bodies over a period of some 60 years. At the time of the promulgation of the first legislation there was a vigorous debate on the predicted economic effects; in 1983 one of the architects of these instruments published a justification in these pages, followed in 2000 by a “post‐mortem,” which confirmed most of the negative predictions that had been made. The purpose in this article is to revisit this debate and to provide a first assessment of the long‐term impacts of the legislation.     

PRODUCTIVITY IMPACT OF THE MODERN VARIETIES OF RICE IN INDIA

The present paper analyzed the long‐term yield growth and total factor productivity (TFP) growth by applying Tornqvist‐Theil index method for two periods, namely, 1970–85 (early Green Revolution) and 1986–2000 (late Green Revolution), for major rice‐growing states of India. The yield data shows an increasing long‐term growth trend throughout the Green Revolution period in irrigated states where modern variety (MV) adoption was nearly complete. However, yield advances started to slow down for intensive irrigated rice systems in the 1990s, whereas rainfed ecosystems have increased during the late Green Revolution period. The domestic spillovers of MV from irrigated to rainfed states is likely to be one of the contributing factors to increased TFP growth in ranifed areas after the 1980s. This implies that the MV of rice developed for irrigated ecosystems have also benefited substantially the rainfed‐dominant eastern Indian states in the long run where partial irrigation facilities such as shallow tube wells were created after the mid‐1980s.     

RESEARCH NOTE: ERRORS IN THE OCTOBER HOUSEHOLD SURVEY 1994 AVAILABLE FROM THE SOUTH AFRICAN DATA ARCHIVE1

The on‐line electronic documentation supplied with the 1994 October Household Survey by the South African Data Archive (SADA) appears to be incorrect. In particular, the electronic version of the questionnaire does not correspond to the hard copy in the possession of the author. The most serious error is that the race classification in the electronic copy is different from the classification on the hard copy. Researchers relying on the electronic copy will erroneously interchange the categories “Coloured”, “White” and “Black”. This could lead to seriously misleading analyses. The reason for this mistake can probably be attributed to a retyping of the questionnaire using the 1993 OHS as a template.     

ECONOMIC INTERDEPENDENCE AND INTERNATIONAL INTERACTIONS : THE IMPACT OF MARKET POWER ON DYADIC CONFLICT AND COOPERATION

This article presents a theoretical approach to analysing how a country with market power could affect international relations. The liberal view and trade‐conflict model claim that if countries seek to protect their trade gains, trade will reduce conflict between pairs of countries, designated “actors” and “targets”. The main purpose of this paper is to examine the effect of market power on the gains from trade. Once the distribution of trade gains is changed between countries, the conflict and cooperation relationships between countries will also alter. We apply the trade‐conflict model to derive two propositions as follows: (1) the more monopoly power over exports a monopolistic target has, the greater the amount of actor‐to‐target conflict; (2) the more monopsony power over imports a monopolistic target has, the greater the amount of actor‐to‐target conflict. To summarise, these hypotheses will predict that a country with market power reaps the gains from trade and will exhibit less conflict and more cooperation, whilst the country that is exploited will exhibit more conflict and less cooperation.     

THE NATURE OF THE RECTIFICATION MOVEMENT IN CHINA

The Rectification (Cheng Feng) Movement carried on by the Yenan Government between 1941 and 1945 is the archetype of the Movements of the present day. The Rectification Movement is carried out on the basis of the three necessities of (1) re-education of the Party member, (2) mobilizing everyone for production, and (3) overcoming “right” or “left” deviations within the Party, and is an intra-Party educational movement which spreads outwards from the Party among the masses who are not members of the Party. Although the Rectification Movement was an intra-Party movement it differed from a “purge,” and had as its aim the re-education of the opposition.     

Capital Flows: The South African Experience

There has been a significant rise in the empirical work distinguishing between episodes of sharp slowdowns and surges in capital inflows. Much of this analysis has centred on gaining a better understanding of the cyclical behaviour of capital flows. This paper continues in this vein by identifying capital flow episodes for South Africa and analyses the nature and main drivers of cross‐border flows during these episodes. This paper makes two major contributions to the empirical work on South African capital flows. First, specific attention is given to some pertinent measurement issues in the identification of capital flow episodes for South Africa. The post capital account liberalisation period (post‐1995‐period) is delineated into a “normal” period (when capital inflows were close to historical averages) and an “abnormal” period (when capital inflows deviated significantly from the historical average). Second, the paper identifies some defining characteristics during these two periods. In this regard, the behaviour of domestic and foreign agents as drivers of capital flows and the probability of capital flow reversals across asset classes are given particular attention. Although these issues have significant policy implications, they have, to date, been given limited attention in the empirical work on South African capital flows.     

THE POTATO MARKETING SYSTEM AND ITS CHANGES IN BANGLADESH: FROM THE PERSPECTIVE OF A VILLAGE STUDY IN COMILLA DISTRICT

This paper analyzes the marketing system of potato in Bangladesh, especially the economic relations among farmers, traders, and cold storage owners and elucidates the structural changes in the rural economy through a village study. Investment in the potato market is capital‐intensive and risky, and is often considered to be vertically linked. The present study shows that farmers and cold storage owners do not invest in trading because of lack of time and “skill” to deal with urban traders. Besides, farmers face capital constraints and the amount of potatoes produced is too small to meet the demand of urban areas. Cold storage owners are confronted with increasing competition, which forces them to attempt to reach the storage capacity. Traders invest in the risky potato‐storage business. The return from it is declining but still high due to the “cheap” credit supply from the cold storage owners. There is no tied relation among the market agents any more.