What do we know about audit quality?

This paper reviews empirical research over the past 25 years, mainly from the United States, in order to assess what we currently know about audit quality with respect to publicly listed companies. The evidence indicates that outright audit failure rates are infrequent, far less than 1% annually, and audit fees are quite small, less than 0.1% of aggregate client sales. This suggests there may be an acceptable level of audit quality at a relatively low cost. There is also evidence of voluntary differential audit quality (above the legal minimum) along a number of dimensions such as firm size, industry specialization, office characteristics, and cross-country differences in legal systems and auditor liability exposure. The evidence is very positive although there is some indication that audit quality may have declined in the 1990s, in which case there could be merit in recent reforms such as the Sarbanes-Oxley Act of 2002 in the US. However, we do not know from research the optimal level of audit quality and therefore whether we currently have ‘too little’ or ‘too much’ auditing? Despite this lacuna we are entering an era of more mandated auditing in response to high-profile corporate governance failures including the Enron–Andersen affair. Finally, while recent reforms have scaled back the scope of non-audit services due to independence concerns, a case can be made that audit quality will always be somewhat suspect if other services are provided that are perceived to potentially compromise the auditor's objectivity and skepticism. For this reason public confidence in audit quality may be increased by proscribing all non-audit services for audit clients. Recommendations are also proposed with respect to legal liability reform and changes in partner compensation arrangements.     

Estimating global bank network connectedness

We use LASSO methods to shrink, select, and estimate the high‐dimensional network linking the publicly traded subset of the world's top 150 banks, 2003–2014. We characterize static network connectedness using full‐sample estimation and dynamic network connectedness using rolling‐window estimation. Statically, we find that global bank equity connectedness has a strong geographic component, whereas country sovereign bond connectedness does not. Dynamically, we find that equity connectedness increases during crises, with clear peaks during the Great Financial Crisis and each wave of the subsequent European Debt Crisis, and with movements coming mostly from changes in cross‐country as opposed to within‐country bank linkages.     

Random Effects Misspecification Can Have Severe Consequences for Random Effects Inference in Linear Mixed Models

There has been considerable and controversial research over the past two decades into how successfully random effects misspecification in mixed models (i.e. assuming normality for the random effects when the true distribution is non‐normal) can be diagnosed and what its impacts are on estimation and inference. However, much of this research has focused on fixed effects inference in generalised linear mixed models. In this article, motivated by the increasing number of applications of mixed models where interest is on the variance components, we study the effects of random effects misspecification on random effects inference in linear mixed models, for which there is considerably less literature. Our findings are surprising and contrary to general belief: for point estimation, maximum likelihood estimation of the variance components under misspecification is consistent, although in finite samples, both the bias and mean squared error can be substantial. For inference, we show through theory and simulation that under misspecification, standard likelihood ratio tests of truly non‐zero variance components can suffer from severely inflated type I errors, and confidence intervals for the variance components can exhibit considerable under coverage. Furthermore, neither of these problems vanish asymptotically with increasing the number of clusters or cluster size. These results have major implications for random effects inference, especially if the true random effects distribution is heavier tailed than the normal. Fortunately, simple graphical and goodness‐of‐fit measures of the random effects predictions appear to have reasonable power at detecting misspecification. We apply linear mixed models to a survey of more than 4 000 high school students within 100 schools and analyse how mathematics achievement scores vary with student attributes and across different schools. The application demonstrates the sensitivity of mixed model inference to the true but unknown random effects distribution.     

Unpredictable times: the extent,characteristics and correlates of insecure hours of work in Britain

This article presents new British evidence that suggests that cutting working hours at short notice is twice as prevalent as zero-hours contracts and triple the number of employees are very anxious about unexpected changes to their hours of work. The pay of these employees tends to be lower, work intensity higher, line management support weaker and the threat of dismissal and job loss greater. In addition, the well-being of these employees is lower and they are less committed to the organisations that employ them. However, the prevalence of insecure working hours is reduced by workplace level employee involvement exercised individually or through collective representation.     

Audit Committee Effectiveness in Victorian Local Government

This research addressed the questions: do audit committees (AC) in Victorian local government function effectively? Qualitative and quantitative data were collected to measure the perceptions, attitudes and perspectives of mayors, chief executives and chairs of the AC. The results were compared with perceptions of committee members of the Local Government and Shires Association of New South Wales and board members of the Municipal Association of Victoria as the representative bodies of local government in New South Wales and Victoria. There was a similarity of views in relation to: (1) inputs of an AC; (2) the behavioural nuances of the rigour of debate, trust and effective communications; and (3) the relationships with councillors and management. Limitations to effectiveness included: (1) attraction and retention of members; (2) the variability of expertise and the skills of the members; (3) continuing professional development for members; (4) ‘gaming’ behaviours; (5) power games associated with the appointment process; and (6) domination of the AC by members or management. The suggested way forward is the reinforcement of a strong governance culture in local government and an effective AC providing oversight of compliance, governance, internal control and risk processes.     

Supplier qualification for high-value goods and services in Nigeria: a comparison of qualified and non-qualified suppliers

This study set out to understand the capabilities of suppliers of high-value products and services in Nigeria. Supplier capability data were collected from almost 500 potential suppliers across 28 product categories. The findings indicate that only a small minority of potential suppliers achieved the required levels of performance and that very few companies have suitable operational capabilities or corporate citizenship behaviour. Furthermore, significant differences were found between service suppliers and product suppliers with regard to performance. The findings suggest that the majority of suppliers of products and services in Nigeria need to improve their operational capabilities and corporate citizenship behaviours, or else risk losing their ability to compete in a changing market place with new barriers to entry.     

Analysing the performance of managed funds using the wavelet multiscaling method

We propose a new approach for investigating the performance of managed funds using wavelet analysis and apply it to an Australian dataset. This method, applied to a multihorizon Sharpe ratio, shows that the wavelet variance at the short scale is higher than that of the longer scale, implying that an investor with a short investment horizon has to respond to every fluctuation in the realized returns, while for an investor with a much longer horizon, the long-run risk associated with unknown expected returns is not as important as the short-run risk. Using multihorizon Sharpe ratios of six groups of managed funds, we find that none of the fund groups are dominant over all time scales.

The Aggregate Demand for Private Health Insurance Coverage in the United States

This article estimates the aggregate demand for private health insurance coverage in the United States using an error correction model for the period 1966–1999. Both short- and long-run price and income elasticities of demand are estimated. The empirical findings indicate that both private insurance enrollment and the completeness of insurance are relatively inelastic with respect to changes in price and income in the short and long run. Moreover, the results suggest that an increase in the number cyclically and frictionally uninsured generates less welfare loss than an increase in the number of structurally uninsured.