Competition and Big 6 Brand Name Reputation: Evidence from the Ontario Municipal Audit Market*

The 1991 amendment to the auditor appointment requirement of section 86 of the Ontario Municipal Act removes certain barriers to entry into the Ontario municipal audit market. The purpose of this study is to provide evidence that the amendment has enhanced competition in this market. The results indicate that there is a general reduction in the real municipal audit fees compared with the pre‐amendment levels, and that the market has become more contestable following the amendment. Notwithstanding the heightened competition, the Big 6 audit firms continue to command audit fee premiums over the non‐Big 6 audit firms. This suggests that Big 6 audit fee premiums possibly reflect brand name reputation rather than monopoly/oligopoly rents.     

The neglect of the older consumer

This review of the literature concerning the older consumer discusses the reasons for the neglect of this large, lucrative and growing market by practitioners and academics in the fields of consumer affairs, marketing and gerontology. The authors consider the effects of continuing to ignore these ‘forgotten consumers’, and the possible benefits of recognizing and supplying the important market they constitute.     

Managing Insurance Company Financial Statements to Meet Regulatory and Tax Reporting Goals*

This study investigates the extent to which property-casualty insurers select levels of loss reserves, net capital gains, and net stock transactions to meet solvency and tax reporting goals. Insurer solvency is reflected in financial measures known as IRIS (Insurance Regulatory Information System) ratios. IRIS ratios are generally enhanced by underestimating loss reserves, accelerating the realization of capital gains, postponing the realization of capital losses, issuing stock, and cutting dividends. Taxable income is reduced by reporting higher reserves and lower net capital gains on investments. We use simultaneous equations to model the three discretionary choices individually, while controlling for potential tradeoffs among the decisions. During the sample period of the study (1990-95), there is a shift in the regulatory environment that we argue tends to reduce incentives to meet IRIS goals. Specifically, risk-based capital (RBC) requirements were adopted in 1994. Although IRIS ratios continued to be used for solvency screening, their effect is expected to be diluted in the post-RBC period. Our results provide qualified support for this claim. Evidence of the phenomenon is stronger when the choice variables are net capital gains and stock transactions, and weaker when loss reserves are considered. Two of the three discretionary choices affect taxable income: loss reserves and capital gains. We find that tax incentives are significantly associated with the loss reserve estimate throughout the sample period. In contrast, our results are only weakly consistent with the view that capital gains are timed to achieve tax relief.     

Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms

We use novel data from a leading online job search platform to examine the impact of corporate distress on firms’ ability to attract job applicants. Survey responses suggest that job seekers accurately perceive firms’ financial condition, as measured by companies’ credit default swap prices and accounting data. Analyzing responses to job postings by major financial firms during the Great Recession, we find that an increase in an employer's distress results in fewer and lower quality applicants. These effects are particularly evident when the social safety net provides workers with weak protection against unemployment and for positions requiring a college education.     

Note on Self‐Selection of Auditors in the Municipal Sector*

The objective of this article is to revisit the literature on Big‐N audit fee premiums in the municipal setting using a methodology that controls for self‐selection bias. Because auditor choices can be predicted based on certain client characteristics, using standard one‐stage ordinary least squares regressions to draw inferences about the presence or absence of such a premium in the extant public‐sector audit fee studies may not be appropriate. Results indicate that, after controlling for a self‐selection bias, Big‐6 (non‐Big‐6) municipal clients on average pay a fee premium, compared to the case if they were to retain a non‐Big‐6 (Big‐6) auditor. Results continue to hold when we conduct further analyses on a subset of municipalities with access to both Big‐6 and non‐Big‐6 auditors in a local market defined by a 60‐km radius, rather than over a province‐wide audit market. The existence of non‐Big‐6 audit fee premiums has not been documented previously in the private‐ or public‐sector audit fee literature. We surmise that it may be caused by the dominance (79.4 percent) of non‐Big‐6 auditors in the Ontario municipal market, compared to most private‐sector audit markets where their market share generally does not exceed 20 percent. The strong market position of non‐Big‐6 firms in turn may have allowed these auditors to command a fee premium for the subset of municipalities that self‐selects to be audited by them. An implication from our study is that Ontario municipalities often choose to be audited by more costly auditors, even though they could have paid lower audit fees by switching to an alternative auditor type. These results do not support those reported by Chaney et al. (2004) , who find that U.K. private firms are audited by the least costly auditor type. The conflicting findings may be attributable to the fact that the Ontario municipal audit market is subject to regulation by not just the audit profession but also the Ontario government and that, unlike business corporations, municipalities receive funding from provincial governments to fulfil much of their financial requirements. Thus, municipal clients may be relatively more willing to accept higher audit fees provided their chosen auditor (or auditor type) matches their needs.