Understanding Audit Quality: Insights from Audit Professionals and Investors

Projects seeking to define, measure, and evaluate audit quality are on the agendas of auditing standards setters as well as audit firms. The Public Company Accounting Oversight Board (PCAOB) currently provides information regarding audit quality through the release of inspection reports, and the Board intends to establish and report audit quality indicators. To provide additional perspective on audit quality, we obtain auditors' and investors' views, definitions, and indicators of audit quality. We find that investors' definitions of audit quality focus more on inputs to the audit process than do auditors', and that investors view the number of PCAOB deficiencies as an indicator of overall firm quality. We find a consensus that auditor characteristics may be the most important determinants of audit quality, and that restatements may be the most readily available signal of low audit quality. We relate responses to a general audit quality framework, provide support for archival audit research, and identify additional disclosures that participants suggest could signal audit quality. Taken together, we provide evidence regarding the construct of audit quality in the post‐SOX environment, evaluate many of the audit quality indicators proposed by the PCAOB, and suggest avenues for future research.     

The effect of general counsel prominence on the pricing of audit services

We investigate the effect of corporate general counsel (GC) ascension to the senior management team on the pricing of audit services. Prior research suggests that the GC position may have a significant influence in setting the tone at the top by promoting corporate integrity, ethics, and serving as a governance and monitoring mechanism, but also recognizes that prominent GCs may face ethical dilemmas, causing them to disregard professional responsibilities to curry the favor of the CEO and other executives. Using audit fees to proxy for audit engagement risk, we find a negative association between GC ascension to top management and audit fees. We investigate the mechanisms behind this relation and find GC ascension is associated with a reduction in both default risk and financial misstatement risk, which supports auditors’ perceived reduction in client business risk and audit risk, respectively.     

Analysis of Systemic Risk in the Insurance Industry

In this paper, we discuss the systemic relevance of the insurance sector. Systemic risk is defined as the propensity of a financial institution to be undercapitalised when the financial system as a whole is undercapitalised. By the law of large numbers, traditional lines of insurance with idiosyncratic non-catastrophic risks cannot be systemic. On the contrary, undiversified insurers specialised in activities whose insured risks are highly correlated with GDP are systemic. In the life insurance sector, some contractual clauses such as unhedged minimum guarantees and free options to surrender raise the chance of systemic relevance. On the contrary, life insurers satisfying the classic solvency capital requirements contribute to the liquidity of financial markets thanks to the long-termist approach of their portfolio management. Finally, using historical data in the U.S. on the contribution of different sectors to the aggregate volatility of the economy, we show that investment banking is almost twice as volatile as aggregate GDP, while insurance is one fifth as volatile as aggregate GDP. The insurance sector thus appears to be a stabilising force of the economy.     

Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry

Demand uncertainty is thought to influence irreversible capacity decisions. Suppose that local demand can be sourced from domestic (rigid) production or from (flexible) imports. This paper shows that the optimal domestic capacity is either increasing or decreasing with demand uncertainty, depending on the relative level of the costs of domestic production and imports. We test this relationship with data from the U.S. cement industry, in which the difference in marginal cost between domestic production and imports varies across local U.S. markets because cement is costly to transport over land. Industry data for 1999 to 2010 are consistent with the predictions of the model. The introduction of two technologies to the production set—one rigid and one flexible—is crucial to understanding the relationship between capacity choice and uncertainty in this industry because there is no relationship between these two variables in aggregated U.S. data. Our analysis reveals that the relationship is negative in coastal districts, and significantly more positive in landlocked districts.     

Theory of Monetary Intelligence: Money Attitudes—Religious Values,Making Money,Making Ethical Decisions,and Making the Grade

This study explores (1) the effect of a short ethics intervention—a chapter of business ethics in a business course—on perceptions of business courses and personal values toward making money and making ethical decisions and (2) Monetary Intelligence (MI). Since attitudes predict intentions and behaviors, Monetary Intelligence, a form of social intelligence, is defined as the extent to which individuals monitor their own monetary motive, behavior, and cognition; apply the information to evaluate critical concerns and options; select strategies to achieve financial goals; and reach ultimate success and subjective well-being. I theorize that the affective (love of money motive) aspect of MI is unrelated to perceptions of “course work,” yet it is positively related to their “personal values” toward making money, but negatively related to making ethical decisions. Individuals with high MI (low affective love of money motive) have low interests in making money, but high levels of intrinsic religiosity and recall of the Ten Commandments and high interests in making ethical decisions and making the grade (objective academic performance). Based on data from multiple panels and multiple sources, this study provides the following discoveries. Contrary to expectations, there are no differences in students’ perceptions of course work and their personal values toward making money and making ethical decisions between two measures—before and after the ethics intervention. Results of this study not only provide empirical supports for the bright side of theory of Monetary Intelligence (MI, Monetary Quotient, MQ) but also reveal a new paradox—recall of the Ten Commandments (the priming effect) is positively related to making ethical decisions, but negatively related to making money. Results illustrate important theoretical, empirical, and practical implications to the literature of money attitudes, religiosity, intrinsic motivation, and business ethics.     

Does a marching band impact college Football game attendance? A panel study of Division II

Marching bands are an integral part of the college football game-day experience by increasing both the quantity and quality of entertainment. Academic music programs could enhance a band’s entertainment value via better-trained members and recruitment of more highly skilled musicians. The impact of these influences on game-day attendance is explored using data from nine years of regular season games in Division II. The regression model controls for economic factors, home-team performance, demographic influences and game characteristics and employs boot-strap clustering methods for calculating standard errors of coefficients. Results suggest that a marching band, the existence of an academic music program and being a historically black college each exerts an independent positive impact on attendance after controlling for all other factors.     

Healthcare utilization and costs among relapsed or refractory multiple myeloma patients on carfilzomib or pomalidomide as monotherapy or in combination with dexamethasone

Aim: To compare monthly healthcare resource utilization (HRU) and costs among adult patients with multiple myeloma (MM) receiving second or subsequent line of treatment (LOT) with carfilzomib or pomalidomide as monotherapy or in combination with dexamethasone.

Methods and materials: Adult MM patients who received carfilzomib or pomalidomide as second/subsequent LOT between 2006 and 2014 were selected from the MarketScan databases. LOT was determined using Medical/pharmacy claims using a published algorithm. For each patient, first LOT with carfilzomib or pomalidomide was defined as index LOT. Patients with first LOT as index LOT, who received other chemotherapy in combination with carfilzomib or pomalidomide, or who underwent stem cell transplant (STC) during index LOT were excluded. Monthly HRU and costs during index LOT were compared using inverse probability of treatment weights (IPTW) based on propensity scores for receipt of carfilzomib estimated by logistic regression with LOT, patient demographics, Charlson index, comorbidities, pre-index healthcare cost, and receipt of prior SCT as covariates.

Results: After weighting, baseline characteristics were well balanced among 114 carfilzomib and 144 pomalidomide patients. Mean (95% CI) numbers of outpatient visits per month were 7.1 (5.2–8.0) with carfilzomib and 4.7 (3.9–6.1) with pomalidomide (p?=?0.006). Otherwise, there were no statistically significant differences between the groups in mean monthly HRU and costs or median time to therapy discontinuation. Mean (95% CI) monthly total healthcare costs were $19,776 (15,322–27,748) with pomalidomide and $17,321 (12,412–21,874) with carfilzomib (p?=?0.522).

Limitations: Comparison of carfilzomib vs pomalidomide may be biased if there are unobserved factors not balanced by IPTW. The relatively small sample size limits the power of analyses to detect potential differences between treatment groups.

Conclusions: Monthly HRU and costs are similar among patients with relapse or refractory MM patients receiving carfilzomib or pomalidomide as monotherapy or in combination with dexamethasone.     

Bottom‐up world climate policies: Preserving fossil fuel deposits vs. capping fuel consumption

The policy of purchasing fossil fuel deposits for preservation is an alternative to the demand‐side climate policies that predominate in practice and in professional studies. This paper analyzes the deposit purchase approach and compares it to the standard demand‐side policy in a model with international trade and non‐cooperative governments that account for the effects of their policies on equilibrium prices. We investigate how the two regimes differ with respect to their equilibrium allocations and, in particular, with respect to the countries’ mitigation effort and welfare. If countries are symmetric, mitigation is stronger in the demand‐side than in the supply‐side regime and the transition from the latter to the former is welfare enhancing for all countries. If countries have different endowments of deposits in a two‐country economy, the country with higher extraction costs does not purchase deposits for preservation, and the country with lower extraction costs is better off with the supply‐side than with the demand‐side policy. Finally, we consider the case of combined policies and find surprisingly that no equilibrium in pure strategies exists, when heterogeneous countries apply both policy instruments.     

Economies, Human Capital, and Natural Assets

Human capital concerns are used to structure links between the economy and the environment. Suggestions for empirical work to explore these structures are provided. Particular attention is devoted to connections between environmental hazards and influences upon parents’ decisions to invest in forming children's human capital.     

Quantal Response Equilibria for Extensive Form Games

This article investigates the use of standard econometric models for quantal choice to study equilibria of extensive form games. Players make choices based on a quantal-choice model and assume other players do so as well. We define an agent quantal response equilibrium (AQRE), which applies QRE to the agent normal form of an extensive form game and imposes a statistical version of sequential rationality. We also define a parametric specification, called logit-AQRE, in which quantal-choice probabilities are given by logit response functions. AQRE makes predictions that contradict the invariance principle in systematic ways. We show that these predictions match up with some experimental findings by Schotter et al. (1994) about the play of games that differ only with respect to inessential transformations of the extensive form. The logit-AQRE also implies a unique selection from the set of sequential equilibria in generic extensive form games. We examine data from signaling game experiments by Banks et al. (1994) and Brandts and Holt (1993). We find that the logit-AQRE selection applied to these games succeeds in predicting patterns of behavior observed in these experiments, even when our prediction conflicts with more standard equilibrium refinements, such as the intuitive criterion. We also reexamine data from the McKelvey and Palfrey (1992) centipede experiment and find that the AQRE model can account for behavior that had previously been explained in terms of altruistic behavior. This revised version was published online in August 2006 with corrections to the Cover Date.