Expanding your accounting classroom with digital video technology

In the past, many activities of accounting professors were restricted or confined by their classroom walls. Bringing in guest speakers, taking students on field trips and teaching students off-campus (either locally or globally) were extraordinary efforts that required significant organization. Today, numerous technological advancements in communication infrastructure, equipment and online tools greatly facilitate such initiatives. Outside experts can now visit the classroom, students can explore or collaborate in distant places and professors can extend the geographical reach of their lessons simply via the means of digital video technology. Based on our 2010 Conference on Teaching and Learning in Accounting (CTLA) Master Class, we share our experiences in exploring the use of digital video in teaching accounting and explain how numerous accounting professors are taking advantage of the capabilities afforded by digital video technologies. Online video clips, student video projects, and online video lecture recordings hold great promise for accounting education. We have created a website that complements and demonstrates the teaching ideas presented in this article and that facilitates video integration into accounting courses. We discuss the pedagogical benefits of using video, including those from general education and accounting literature. The article concludes with suggestions for how accounting faculty can keep current with video technology, areas for future accounting research and a call to action for accounting educators. Our work with digital video technology has led to the 2011 American Accounting Association (AAA) Innovation in Accounting Education Award as well as the 2010 Canadian Academic Accounting Association (CAAA) Howard Teall Innovation in Accounting Education Award.     

Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing

This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.     

Statistical tests of distributional scaling properties for financial return series

Existing empirical evidence of distributional scaling in financial returns has helped motivate the use of multifractal processes for modelling return processes. However, this evidence has relied on informal tests that may be unable to reliably distinguish multifractal processes from other related classes. The current paper develops a formal statistical testing procedure for determining which class of fractal process is most consistent with the distributional scaling properties in a given sample of data. Our testing methodology consists of a set of test statistics, together with a model-based bootstrap resampling scheme to obtain sample p-values. We demonstrate in Monte Carlo exercises that the proposed testing methodology performs well in a wide range of testing environments relevant for financial applications. Finally, the methodology is applied to study the scaling properties of a data-set of intraday equity index and exchange rate returns. The empirical results suggest that the scaling properties of these return series may be inconsistent with purely multifractal processes.     

Do insurers respond to active purchasing? Evidence from the Massachusetts health insurance exchange

Health insurance markets face continued challenges with high premiums and limited insurer competition. We describe a unique set of “active purchasing” policies used by Massachusetts' pioneer health insurance exchange to shape the rules of competition and reward lower-price insurers with additional customers. We provide evidence that these policies significantly influenced insurer pricing. Between 2010 and 2013, over 80% of insurer prices were set exactly at or within 1% of pricing thresholds created by active purchasing policies. A key “limited choice” policy was associated with a 16%–20% reduction in average insurance prices relative to comparison markets in 2012–2014. Insurers achieved these price cuts partly through cost reductions via narrower provider networks and partly through reduced profit margins.     

An accountability framework for financial statement auditors and related research questions

We address the following overarching questions: What kind of accountability framework could regulators use to (a) motivate auditors to improve audit quality, and (b) evaluate how well auditors have carried out their duties? We draw on research in accounting, economics, psychology, and neuroscience to critique the accountabilities, incentives, and learning opportunities embedded in auditors’ extant regulatory environment. We first establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain, which increases the challenges faced by auditors. We propose an accountability framework with two dimensions: rewards versus penalties and processes versus outcomes. We show that auditors’ current regulatory accountabilities generally are in the form of penalties rather than rewards and primarily depend on audit outcomes rather than attributes of auditors’ judgment processes. We provide evidence from a range of disciplines that questions the suitability of the present system for improving the quality of auditors’ judgments and the quality of evaluations of those judgments made by inspectors. We identify four potential changes for improvement in audit quality based on our framework. Each of these identified changes has an impact on one or both of the two dimensions in our framework. For each of these changes, we outline JDM research questions that could be addressed to inform our overarching questions and to provide empirical evidence to help refine our accountability framework and improve audit quality.     

Price Clustering in the U.S. Dollar/Taiwan Dollar Swap Market

Price clustering in financial markets is pervasive. Using transaction‐level data from the world's largest financial market, this study is the first to examine price clustering behavior in the foreign exchange swap market. In addition to existing hypotheses, we investigate new determinants of price clustering including the expected return, contract liquidity, and trader's identity. The results support both negotiation and price resolution hypotheses. We find a positive effect from the level of expected return on price clustering. Markets with greater liquidity experience reduced clustering. Transactions involving domestic banks have less clustering suggesting an information advantage over foreign banks.     

Price Discovery in the Treasury‐Bill When‐Issued Market

When‐issued (i.e., forward) trading in T‐bills yet to be auctioned provides a unique environment for examining price discovery. Because T‐bills are auctioned in a sealed‐bid process, when‐issued traders cannot observe the spot market price. Yet the forward price must ultimately converge on the auction outcome price. Our results indicate that traders in the when‐issued market “discover” the ultimate auction price. Little evidence is found that standard order flow variables contribute to price discovery. Instead, the ability to observe a few trades with relatively small volume in the when‐issued market is sufficient to discover the auction price resulting from the sealed‐bid process.     

How “Competitive Pay” Undermines Pay for Performance (and What Companies Can Do to Avoid That)

Almost all proxy statements say that the company's pay programs are designed to achieve pay for performance and to provide competitive pay. While companies assume that these objectives are perfectly compatible, attempts to provide competitive pay often have the effect of undermining pay for performance. As currently practiced, competitive pay means that the company's target pay levels match the pay levels of its peer companies regardless of past performance. By targeting the dollar value of an equity award each year, competitive pay plans effectively reward poor performance in a given year by increasing equity grant shares in the following year—and, conversely, such plans penalize superior performance in one year by reducing the number of shares in the next. Likewise, the target share of the annual incentive award increases with poor performance and decreases with superior performance. In this fashion, the competitive pay approach distorts incentives and weakens the link between cumulative pay and cumulative performance. The authors show that the focus on competitive pay is a modern development that replaced the sharing formulas that governed executive pay in the first half of the twentieth century. Companies adopt the competitive pay model because they believe it does a better job of achieving the three main objectives of executive pay: strong incentives; retention; and limited shareholder cost. While competitive pay directly addresses retention risk, it can greatly weaken management incentives. Furthermore, boards tends to rely on competitive pay data to set target compensation because they have no meaningful measure of incentive strength and the actual cost to shareholders. Without quantitative measures of incentive strength and shareholder cost, boards run the risk of retaining poor performers and losing superior performers. Using a case study of Dow Chemical, the authors show how companies can measure the incentive strength of their executive pay plans, and how a simple pay plan using annual grants of performance shares can provide “perfect” pay for performance.     

Economic and Accounting (Book) Rates of Return: Application of a Statistical Model

Harcourt's (1965) classic paper has spawned a considerable literature dealing with the relationship between economic and accounting rates of return. Kay (1976), Ijiri (1979), Salamon (1982) and Kelly and Tippett (1991), for example, can be interpreted as extensions of Harcourt's seminal analysis, while Kay (1976), Salamon (1982, 1985) and Gordon and Hamer (1988) provide empirical evidence on the sustainability of basic propositions. The present paper's focus is on the latter area; we apply the statistical procedures laid down in Kelly and Tippett (1991) to about 200 British companies to assess the correspondence between the ex post accounting rate of return and the prospective economic return. The economic return is estimated using three cash flow definitions. For all three, the accounting rate of return is significantly lower than the economic return. Further tests show the economic return to be inversely related to the accounting rate of return, although the relationship is weak. In addition, ‘large’ firms tend to report lower accounting rates of return than ‘small’ firms, but again the relationship is weak.