Big Five Audits and Accounting Fraud*

We examine the association between Big Five audits and the incidence of accounting frauds allegedly committed by U.S. public companies between 1981 and 2001. Many commentators argue that the prominent financial reporting failures that led to major corporate governance reforms cast serious doubt on whether the large public accounting firms continue to supply relatively high‐quality audits, especially in recent years. However, in unmatched and matched samples, we provide strong, robust evidence that fraudulent financial reporting becomes less likely with the presence of a Big Five auditor. Importantly, time‐series tests suggest that the Big Five are consistently associated with a lower incidence of fraudulent accounting, including in the last five years of our sample period when the number of frauds soared. Moreover, we find evidence implying that these relations are causal rather than an artifact of endogeneity in auditor choice.     

Opening Up the “Black Box” of Audit Firms: The Effects of Audit Partner Ownership on Audit Adjustments

Audit firms need to provide high-quality audits but they also need to please their clients. We argue that these conflicting incentives become manifest when comparing the incentive effects of equity ownership on engagement quality (EQ) reviewers and audit engagement partners. We predict that EQ reviewers monitor audit quality more closely when they hold greater ownership. In contrast, we expect that equity ownership has conflicting effects on the incentives of engagement partners because they need to please their clients as well as provide high-quality audits. Consistent with these predictions, we find that the associations between audit adjustments and partner equity ownership are (1) significantly positive for EQ reviewers, (2) significantly negative or insignificant for audit engagement partners, and (3) significantly more positive for EQ reviewers than engagement partners. Our findings suggest that larger ownership stakes motivate EQ reviewers to monitor audit quality more closely, whereas larger ownership stakes do not motivate engagement partners to deliver higher quality audits.     

Strategies for Modelling Nonlinear Time-Series Relationships*

Building models of nonlinear relationships are inherently more difficult than linear ones There are more possibilities, many more parameters and thus more mistakes can be made. It is suggested that a strategy be applied when attempting such modelling involving testing for linearity, considering just a few model types of parsimonious form and then performing post-sample evaluation of the resulting models compared to a linear one. The strategy proposed is a ‘simple-to-general’ one and the application of a heteroskedasticity correction is not recommended     

The Probability of Leaving Unemployment: The Influence of Duration,Destination and Demographics*

This paper examines the influences of a number of demographic characteristics and the duration of unemployment on the probability of leaving unemployment. This probability is found to decrease as the duration of unemployment increases, with married females having the highest probability of exit. Various measures of average completed duration suggest that the longest spells of unemployment are incurred by older males. These appear to be longest for males withdrawing from the labour market. The relationship between the duration of unemployment and the probability of exit is important for labour market policy. Some relevant considerations are also explored in the paper.     

RATIONING, SPILLOVER, AND INTERLINKING IN CREDIT MARKETS: THE CASE OF RURAL PUNJAB

A parallel market structure may exhibit extensive rationingin the regulated segment, and hence spillover of unsatisfieddemand into the unregulated segment of the market. In the lattersegment, the borrower can choose to bundle loan contracts withoutput marketing through the lender. Using data on Punjabi cultivators,econometric estimation of such a structure yields three principalfindings: (i) most borrowers and non-borrowers were rationedin the regulated market; (ii) demand for credit was fairly inelasticwith respect to the interest rate; (iii) a contractual provisiontying credit to output marketing made informal lenders willingto advance much bigger loans. One pana and a quarter is the lawful rate of interest per monthon one hundred panas, five panas for purposes of trade, tenpanas for those going through forests, twenty panas for thosegoing by sea. For one charging or making another charge a ratebeyond that, the punishment shall be the lowest fine for violence,for witnesses, each one of them, half the fine. If, however,the King is unable to ensure protection, the Qudge) should takeinto consideration the usual practice among creditors and debtors.The Kautiliya Arthasastra (a fourth century BC work on kingshipand statecraft).