Discussion of ‘The antecedents of the use of continuous auditing in the internal auditing context’

Gonzalez et al. (2012) apply the Unified Theory of Acceptance and Use of Technology (UTAUT, Venkatesh et al., 2003) to the issue of adoption of continuous auditing (CA) by internal auditors. The authors make a very convincing case for the slow evolution of CA and propose that this can be explained by the four factors contained in the UTAUT as well as annual sales and voluntariness of use. They find, in their revised model, that effort expectancy and social influence directly impact intentions to use the technology, while performance expectancy is moderated by annual sales and social influence is moderated by voluntariness of use. Interestingly, the authors also identify geographical differences in these influences. I offer commentary on these findings and suggest avenues for future research in the domain of technology adoption and use in accounting.     

Accounting and Finance Degrees: Is the Academic Performance of Placement Students Better?

The relationship between placement and academic performance on accounting and finance degrees is significantly under-researched. This paper examines the relationship between a number of factors, including placement, and academic performance as measured by average marks. Readily available data on placement status, gender, and prior achievement for the academic years ended 2004, 2005, and 2006 for students reading for an accounting and finance degree were used. Linear regression models were constructed using two versions of the data—one with all students in it and the second with graduates only. Placement students perform significantly better than full-time students do and, in the Graduates model, the female placement students perform significantly better than their male counterparts do. Most recent prior academic performance is significant in all models whereas gender had no separate significant effect on performance in the second and final years of the degree. The paper concludes with suggestions for further research into placement.     

Management quality and the cost of debt: Does management matter to lenders?

This paper investigates the effect of organizational capital, typified by various management practices within a firm, on the cost of external debt financing. Using a sample of medium-sized manufacturing firms in the US, we find that better management practices enhance a firm’s external financing capacity by lowering the firm’s cost of bank loans. We do not find any evidence that the lower loan cost of a high-quality-management firm is associated with more restrictive non-price contract terms such as greater collateral requirements and stricter covenants. These results suggest that banks explicitly take into account the risk arising from poor management practices when pricing and designing debt contracts.     

Do the Big 4 and the Second-tier firms provide audits of similar quality?

In this paper, we examine audit quality for Big 4 and Second-tier auditors during 2003–2006. We utilize the auditor’s propensity to issue a going concern audit report for distressed clients as a measure of audit quality. In addition, since the purpose of an audit is to improve financial reporting quality, we utilize abnormal accruals as an observable proxy for audit quality. Further, we utilize the client- and year-specific ex ante equity risk premium as a proxy for audit quality as perceived by investors. We control for auditor self-selection bias using the matched-pairs sample approach discussed by Francis and Lennox (2008). We find weak evidence that the Big 4 have a higher propensity to issue going concern audit opinions for distressed companies. However, the level of performance-adjusted abnormal accruals for Big 4 and Second-tier audit firm clients appears to be similar. With respect to investor perceptions, we find the client-specific ex ante equity risk premium to be lower for Big 4 clients than for Second-tier audit firm clients. Overall, our findings suggest little difference in actual audit quality but a more pronounced difference in perceived audit quality. Collectively, the evidence we provide informs the current discourse on audit quality, auditor choice, and the viability of Second-tier auditors as an alternative to the Big 4.     

Does high-quality auditing decrease the use of collateral? Analysis from the perspective of lenders’ self-protection

We examine the association between audit quality and the use of collateral in a sample of Chinese firms from 2005 to 2011. Using the full sample, we document a negative relationship between audit quality and the use of collateral that is consistent with lenders' interests. We also show that audit quality and collateral are regarded as alternative means of reducing debt credit risk. Our conclusions are robust after using an auditor-switching test, the Heckman two-stage model and a propensity-score matching model to address endogeneity issues. China's institutional background is also considered. First, we find that in the group of firms in which large shareholders are able to control borrowers' activities, the substitution effects between collateral and audit quality are reduced when the degree of separation between large shareholders' control and ownership is high. Second, these substitution effects are greater when the borrowers' ultimate controller is a state-owned enterprise(SOE) rather than a non-state-owned enterprise(NSOE). Third, the differences in substitution effects between NSOEs and SOEs are smaller in areas with a high marketdevelopment index. We conclude that the substitution effects are smaller in high credit risk firms than in low credit risk firms.     

Performance auditing—addressing real or perceived expectation gaps in the public sector

The growth of performance auditing in Australia (and in many other countries) has led to a range of seemingly conflicting observations about their contribution to better public administration, which basically reflect differing political and public expectations of such audits. Confusion also revolves around the question of just what value is being assessed, reflecting differing perceptions of assurance and performance and of the coverage of administrative and policy effectiveness. A better understanding of what needs to be achieved by those responsible and acceptance of accountability for the required results would improve confidence in public administration and in the value that it delivers.     

Why regulate private firm disclosure and auditing?

Private firms face differing financial disclosure and auditing regulations around the world. In the US and Canada, for example, private firms are generally neither required to disclose their financial results nor have their financial statements audited. By contrast, many firms with limited liability in most other countries are required to file at least some financial information publicly and are also required to have their financial statements audited. This paper discusses and analyzes the reasons for differential financial reporting regulation of private firms. We first discuss various definitions of a private firm. Next, we examine theoretical arguments for regulating the financial reporting of these firms, particularly related to public disclosure and auditing. We then provide new survey-based evidence of firms’ and standard setters’ views of regulation. We conclude by identifying future research opportunities.     

The Bigger the Better? Merger and Acquisition Performance of Financial Holding Corporations

This study investigates the performance of the merger and acquisition activities of 14 financial holding corporations (FHCs) in Taiwan before and after their establishment in 2002. We find weak evidence of improved performance of FHCs. The findings have implications for other reforming emerging countries in East Asia with similar economic structures and financial environment.     

Towards democratic governance of uncertainty? Contesting notions of participation,control and accountability

Managing risk in international society has posed a new challenge not only to states and international organisations, but also to experts, scientists and citizens. It has generated a demand for new sets of laws, regulations, instruments and governing bodies to tackle various risks such as natural disasters, economic and financial crises, and unintended consequences of policy reforms. Accordingly, new modes of interactions between states, experts and citizens seem to be emerging across countries and in different high-risk sectors. Little research has been done to illuminate interactive and dynamic aspects of emerging governance and regulatory arrangements and their impact on participation, control and accountability in liberal democracies. This special issue has assembled research papers and commentaries from practitioners and academics which critically examine these themes and explore what future research on the ‘world risk society’ could offer to political science and beyond.     

Section 45 of the Auditing Profession Act: Blowing the whistle for audit quality?

This study responds to the calls for more practically-orientated research which does not hesitate to open the ‘black box’ of audit practice. Using detailed interviews, the research provides insights into how a legislated duty for South African auditors to report certain irregularities to an independent regulator may be a means of improving audit quality and widening the scope of information made available to stakeholders. The legislation is not, however, without its limitations. Where the reporting requirement is applied in a legalistic fashion, or adhered to merely for the sake of professional appearance, notions of the auditor blow the whistle in the public interest may be more symbolic than pragmatic. This is relevant, not only for academics wanting to understand the functioning of the audit practice in the largely neglected African context. The reporting requirement, as an example of the interaction between audit practice and external regulation of the profession, has implications for policy makers when examining how arms-length regulation can be used as a means of enhancing the quality of audit engagements and relevance of audit reports.     

Do auditing standards improve the accounting disclosure and information environment of public companies? Evidence from the emerging markets in China

In this paper, we investigate the impact of the implementation of a set of new auditing standards in 1996 on the information environment in the emerging markets in China. Because the implementation of such standards can increase the quality and/or quantity of accounting disclosures, it can be conceptualized as an improvement in the information environment of public companies. We investigate the improvement in accounting disclosure and information environment from both the market perspective and the accounting perspective. First, consistent with the information economics literature (e.g., [Holthausen, R., & Verrecchia, R., (1990). The effect of informedness and consensus on price and volume behavior. The Accounting Review, 65, 191–208]), we find that companies experience a significant increase in trading volume and price volatility subsequent to the implementation of the standards. Second, consistent with the literature on earnings management (e.g., [Chen, C. W. K., & Yuan, H. Q., (2004). Earnings management and capital resource allocation: evidence from China's accounting-based regulation of right issue. The Accounting Review, 79, 645–665, Jian, M., & Wong, T. J., (2004). Earnings management and tunneling through related party transactions: evidence from Chinese corporate groups. Working Paper, Nanyang Technological University and Hong Kong University of Science and Technology]), we find a decrease in earnings management and, hence, an increase in quality of earnings. Finally, we find a decrease in the synchronicity of stock prices and, hence, an increase in the quality of firm-specific information available to investors, which is consistent with the literature on price synchronicity (e.g., [Morck, R., Yeung, B., & Yu, W., (2000). The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58, 215–260]). Our results have significant implications for standard setters, regulators, researchers, managers, and investors in general and those in the emerging markets in particular.     

Was audit quality of Laventhol and Horwath poor?

Laventhol and Horwath (L&H), the then seventh largest accounting firm in the US, declared bankruptcy in November 1990. The firm claimed that its bankruptcy was due to the perception of it being a deep pocket rather than inherent deficiencies in its performance. In this study, we examine whether the audit quality of L&H was lower than other auditors. Results do not show that L&H is associated with lower quality audits either in terms of lower likelihood of issuing modified audit opinion, higher levels of discretionary accruals for its clients, or lower predictability of discretionary accruals for future non-discretionary net income for its clients than for clients of other auditors. Results of additional tests also do not suggest that auditors that take up clients of L&H report differently from L&H. This evidence does not support the proposition that L&H’s audit quality was less than audit quality of other audit firms during the period leading up to the bankruptcy.     

The death of the deal: Are withdrawn acquisition deals informative of CEO quality?

To examine the market response to positive revelations of chief executive officer (CEO) quality, this study focuses on CEOs who withdraw acquisition bids when the price becomes increasingly expensive. Firms that withdrawal for price-related reasons earn higher withdrawal returns than firms that withdraw for other reasons. This relation is stronger when CEO uncertainty and discretion is high. CEOs unwilling to increase the offer price are less likely to be replaced and more likely to advance to a larger firm than a control group of CEOs. The finding that the market attaches value to CEO-specific information suggests that unobservable manager characteristics can meaningfully impact firm outcomes.     

Performance indicators and democracy: citizens’ views on the purposes of government websites

Despite the ongoing interest in performance measurement amongst public managers, little is known about citizens’ views on the purposes of performance indicators (PIs). A cross-sectional survey of the Australian adult population was used to examine citizens’ views on government websites which provide PIs. Citizens identified three distinct purposes for these: evaluation and improvement; transparency and accountability; and reward and punishment. These different purposes were found to be related to political attributes, indicating how PIs might support democratic empowerment.     

Environmental regulation,green innovation,and export product quality: What is the role of greenwashing?

To facilitate sustainable growth, green innovation, and industrial upgrading, it is important to explore the relationship between environmental regulations and firm performance. Green innovation is increasingly being recognized as an important determinant of the quality of export products, which plays a critical role in international business and finance. Therefore, this paper empirically examines the impact of green innovation on export product quality at the firm level using relevant data from Chinese exporters. First, we identify a positive relationship between green innovation and export product quality. Second, environmental regulations are observed to have a negative effect on green innovation for highly-polluting firms but do not significantly impact those with lower levels of pollution. Third, our research reveals that the negative effects only exist in those highly-polluting firms that exhibit greenwashing behavior, with financial constraints strengthening these impacts. Therefore, this study reveals that the greenwashing suppression effect curbs the efficiency of environmental regulations on green innovation.     

Large shareholders’ power and the quality of corporate governance: An analysis of Brazilian firms

This paper analyzes the incentives of large shareholders to implement the corporate governance system that favors their interests within a framework of highly concentrated ownership and poor legal protection for investors. A metric for corporate governance based on the fulfillment of non-mandatory rules of good corporate governance is used. System GMM (Generalized Method of Moments) estimates for a balanced panel data of Brazilian firms reveal that the ownership concentration is detrimental to corporate governance quality and the quality of board composition. In accordance with the expropriation effect on principal-principal agency conflicts, by weakening the corporate governance system and board composition, large controlling shareholders may use private benefits of control. As proposed by the substitution effect, in a complementary way, controlling shareholders may renounce strong boards and directly perform management monitoring, mitigating agency conflicts with managers. Finally, the ability of large shareholders other than the main blockholder is not enough to contest his/her power to shape the corporate governance system. The work provides evidence of the prominence of the principal–principal agency problem in an emerging market, by analyzing the effect of ownership concentration over the quality of the corporate governance system, and also that other large non-controlling shareholders are not able to contest the power of the main blockholder.     

Environmental regulation and firm product quality improvement: How does the greenwashing response?

With the growing requirements for green development, a firm's product quality matters greatly for targeting sustainable growth and industry improvements, thus it is vital to clarify the subtle relationship between environmental regulation and how firms improve product quality. This paper discusses the internal mechanisms of environmental regulation to improve the product quality during this green transformation period by enhancing the greenwashing capabilities of firms. Through matching and constructing a unique database including firm-level fundamental variables, product quality, and ESG information, we obtained a firm-level unbalanced dataset for the years 2013 and 2015. From this, we drew several findings. First, environmental regulations can help improve the quality of products. Specifically, environmental regulations cannot significantly and directly improve the product quality for heavy-pollution firms, and there is a positive and significant relationship between environmental regulation and product quality for low-pollution firms. Second, for heavy-pollution firms, environmental regulation has a negative and significant impact on product quality, which illustrates that greenwashing strongly motivates heavy-pollution firms and results in decreasing product quality. Third, financial constraints motivate the heavy-pollution firms to significantly decrease their product quality rather than improve it. Finally, there is a negative and significant effect on SOEs toward product quality improvement caused by environmental regulation for heavy-pollution industries. In the contrast, for low-pollution firms, SOEs are more incentivized to increase product quality.     

Does the quality of acquisitions inform bond rating revisions?

A bond rating upgrade (downgrade) is more likely when preceded by acquisitions that meet with positive (negative) announcement-period abnormal returns suggesting that decisions of rating agencies are partly influenced by the quality of investments undertaken by companies. Parsing the sample along takeover motives reveals that rating upgrades are more likely in value-creating acquisitions motivated by synergy while acquisitions motivated by agency considerations are more likely to elicit a rating downgrade. Following a rating downgrade however, firms seem to significantly alter their investment policies as such firms tend to make fewer but higher quality acquisitions. In addition, value creation through synergy seems to be the dominant motive in acquisitions for downgraded firms post rating downgrade.