A hierarchical approach to the external auditor's evaluation of the internal auditing function*

Abstract. The objective of this study was to examine the external auditor's evaluation of the internal audit function. A hierarchy of the attributes that enter into this decision process was developed based on prior research and with the assistance of Big 8 audit managers. An experiment which used the Analytic Hierarchy Process was conducted with 22 audit supervisors and managers. Contrary to previous studies, the results indicated that the competence of the internal auditors was the most important factor, followed by the objectivity and work of the internal auditors. The AHP methodology allowed us to assess which specific attributes were most important to the external auditor's assessment of these factors. However, the variability of the weights of these attributes indicates low agreement among the practitioners as to which attributes are most important. Résumé. Les auteurs de la présente étude avaient pour objectif d'examiner l'évaluation de la fonction de vérification interne par le vérificateur externe. La hiérarchie des attributs qui entrent en ligne de compte dans ce processus de décision a été dressée à partir de travaux de recherche antérieurs et avec la collaboration de chefs de groupe en vérification des huit grands cabinets. Vingt-deux chefs d'équipe et chefs de groupe ont participé à une expérience faisant appel au processus de hiérarchie analytique. Contrairement aux résultats des études précédentes, les résultats de cette étude ont révélé que la compétence des vérificateurs internes était le facteur primordial, suivi de l'objectivité et du travail des vérificateurs internes. La méthodologie du processus de hiérarchie analytique a permis d'évaluer quels attributs précis étaient les plus importants dans l'évaluation de ces facteurs par les vérificateurs externes. Toutefois, l'importance des écarts relevés dans la pondération de ces attributs indique que l'unanimité est loin d'être faite chez les praticiens quant à l'importance relative des attributs.     

Saving and Portfolio Allocation Before and After Job Loss

We investigate the development of household labor income, financial wealth, and asset holdings over a 9‐year period around job loss, using unique administrative panel data from Norway. Consistent with predictions from theory, the data show additional saving and a shift toward safer assets in the years leading up to unemployment, and depletion of savings after job loss. In the years after job loss, the households' after‐tax labor income is reduced by about USD 12,500. Over the same time period, households deplete USD 3,000 of their financial assets, of which one third is accumulated prior to the job loss. This suggests that at least some households can foresee and prepare for the upcoming unemployment, which indicates that private savings can, to some extent, serve as a substitute for publicly provided unemployment insurance.     

THE EFFECTS OF ENDOGENOUS MARKET ENTRY OF PHYSICIAN‐OWNED HOSPITALS ON MEDICARE EXPENDITURES: AN INSTRUMENTAL VARIABLES APPROACH

This study examines the effect of physician‐owned hospitals (POHs) on Medicare per enrollee expenditures at the metropolitan area (MSA) level nationwide, spanning the 8‐year time period from 1998 to 2005. The study uses fixed effects panel data estimation with instrumental variables to account for the bias introduced by endogenous POH market entry (i.e., POHs may be more likely to open in high‐growth/high‐demand markets with high levels of Medicare per enrollee expenditures). After controlling for other variables that are likely to affect expenditures (especially the age and sex distribution of the MSA), we find no association between POH presence and Medicare expenditures per enrollee at the MSA level. The results are robust to changes in model specification, estimation technique, and definition of geographic market. These findings suggest that the “demand inducement” aspects of physician ownership of acute care hospitals (if any) have no meaningful impact on market‐level Medicare expenditures per enrollee. Current policies based on an assumption that POHs are associated with significant increases in total expenditures may need to be reassessed. (JEL I11, L10, C33)     

Ambiguity, Information Quality, and Asset Pricing

When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.     

Auditors' Generation of Diagnostic Hypotheses in Response to a Superior's Suggestion: Interference Effects*

Abstract. This study investigates the effects of a superior's suggestion on auditors' generation of additional hypotheses from long-term memory (LTM). It investigates whether an inherited hypothesis affects the category membership of additional hypotheses retrieved from LTM, in particular when hypotheses from few alternative categories are considered. Based on research in cognitive psychology, the authors predicted that providing auditors with a superior's suggestion would interfere with their generation of additional hypotheses from the same transaction cycle as that of the superior's suggestion. The experimental results are consistent with the expected interference effect. Auditors who inherited a superior's suggestion from a particular transaction cycle generated fewer additional hypotheses from the same transaction cycle than did auditors who were not provided with a superior's suggestion. Moreover, the effect came into play immediately when auditors inherited a hypothesis involving a typical problem: the first hypothesis generated tended to come from a different transaction cycle than that of the superior's suggestion. Résumé. Dans l'article qui suit, les auteurs se penchent sur l'incidence que peut avoir la suggestion d'un supérieur sur les hypothèses supplémentaires que formulent les vérificateurs en puisant dans la « mémoire à long terme ?. Ils cherchent à déterminer si une hypothèse transmise exerce une influence sur la catégorie à laquelle appartiennent les hypothèses supplémentaires tirés de la mémoire à long terme, en particulier lorsque les hypothèses envisagées proviennent d'un petit nombre de catégories possibles. En s'appuyant sur la recherche en psychologie cognitive, les auteurs supposent que la suggestion communiquée par un supérieur aux vérificateurs perturbera chez ces derniers la formulation d'hypothèses supplémentaires tirées du même cycle d'opérations que celui dont provient la suggestion du supérieur. Les résultats expérimentaux des chercheurs confirment cet effet perturbateur. Les vérificateurs à qui un supérieur a transmis une suggestion d'hypothèse provenant d'un cycle d'opérations donné ont formulé moins d'hypothèses supplémentaires provenant du même cycle d'opérations que les vérificateurs à qui aucune suggestion n'a été faite par un supérieur. En outre, l'effet perturbateur se manifeste immédiatement au moment où les vérificateurs se voient transmettre une hypothèse faisant intervenir un problème type: la première hypothèse formulée tend à provenir d'un cycle d'opérations différent de celui dont la suggestion du supérieur est issue.     

Community-Wide Discount Programs for Older Persons: A Review and Evaluation

An evaluation of a community-wide discount program for elderly people in Richmond, Virginia is reported. The costs and benefits to both the elderly card holders and participating merchants were examined. While some elderly shoppers reported significant savings, many realized little benefit from the program. Most merchants did not vigorously promote the program, and experienced little impact on sales and profits. Implications for program management are explored.     

Organizational Cultures of Corruption

Systematic differences in the incidence of corruption between countries can be explained by models of coordination failure that suggest that corruption can only be reduced by a “big push” across an entire economy. However, there is significant evidence that corruption is often sustained as an organizational culture, and can be combated with targeted effort in individual organizations one at a time. In this paper, we propose a model that reconciles these two theories of corruption. We explore a model of corruption with two principal elements. First, agents suffer a moral cost if their corruption behavior diverges from the level they perceive to be the social norm; second, the perception of the norm is imperfect; it gives more weight to the behavior of colleagues with whom the agent interacts regularly. This leads to the possibility that different organizations within the same country may stabilize at widely different levels of corruption. Furthermore, the level of corruption in an organization is persistent, implying that some organizations may have established internal “cultures” of corruption. The organizational foci are determined primarily by the opportunities and (moral) costs of corruption. Depending on the values of these parameters, the degree of corruption across departments may be relatively uniform or widely dispersed. These results also explain another surprising empirical observation: that in different countries similar government departments such as tax and education rank very differently relative to each other in the extent to which they are corrupt. This is difficult to explain in incentive‐based models if similar departments face similar incentives in different countries.