Angela Kate Pettinicchio

IFRS Adoption Among Private Companies: Impact on Earnings Quality

EU gave the opportunity to each Member State to oblige/allow non-listed (i.e., private) companies to use international financial reporting standards (IFRS). Considering a sample of Italian private companies that switched to IFRS in the time span from 2005 to 2008, we compare financial reporting quality between IFRS adopters and a matched sample of companies still using local (Italian) generally accepted accounting principles (GAAP). This should be of interest for the EU Commission in evaluating the impact of the current financial reporting regulation and for EU national regulators, who are left with a certain degree of flexibility in endorsing parts of the European legislation. Overall, our results show that IFRS adoption did not improve reporting quality among private companies but, on the contrary, decreased it. As companies can exploit the level of flexibility embedded in IFRS to pursue their own reporting interests, separate analyses were conducted taking into consideration firms’ incentives. In particular, assuming that entities controlled by listed companies might have switched to IFRS mainly for complying with parent company requirements and/or simplifying the financial reporting process, we run the analyses separately for this sub-sample and other firms. Findings reveal signs of earnings quality deterioration for both groups although the impact seems slightly worse for subsidiaries of listed companies.

External Auditor Reassessment of Client Business Risk Following the Issuance of a Comment Letter by the SEC

Abstract Following Arthur Andersens conviction for obstructing justice, auditors faced a one-time significant change in their regulatory environment because it was clear that (i) major audit partnerships could be closed and (ii) post Sarbanes-Oxley Act (SOX), regulators would take a far more attentive (aggressive) role. In response auditors considered whether the pricing of audits should be revised to take account of the increased risk of regulatory intervention and litigation. Obviously such re-pricing would need to be targeted at those firms for which the risks were greatest. One early warning signal of such events occurring is the issuance by the Security Exchange Commission (SEC) of a Comment Letter (CL). We investigate whether there is any evidence that if a client receives a CL this is used to re-price audit services. Specifically, we investigate whether issuance resulted in upward pressure on audit fees, and whether this effect was simply transient around the issuance period or alternatively persisted some years into the future. This research finds that after a client receives a CL, auditors adjust audit fees upwards in the period in which the CL is received. In addition it is shown that for subsequent periods in which the auditor does not spend time assisting the client respond to a specific CL, an initial rise in audit fee persists. This is consistent with the hypothesis that auditors reassess the reputation and litigation risk of the client on the basis of the SEC issuance of a Comment Letter.

Comment Letter Frequency and CFO Turnover: A Dynamic Survival Analysis

Earlier research on chief financial officer (CFO) turnover considered whether one of detailed regulatory findings, such as restatements, affected the likelihood of CFO turnover. However, since the passing of Sarbanes–Oxley Act (SOX), the Security Exchange Commission (SEC) has revised the regulatory approach it uses. It now investigates companies on a more frequent basis and using Comment Letters (CLs) regularly asks registrants to explain disclosure practice with a view to possibly requiring enhanced or revised disclosures. In this new proactive environment, some registrants may repeatedly receive CLs asking questions about multiple disclosure issues. This research uses a dynamic hazard model specification to investigate whether through time CFO turnover increases as the registrants accumulate more CLs. In addition to CL frequency, a measure of the severity of SEC CLs is introduced to see if it moderates the effect of frequency.

Audit team attributes matter: how diversity affects audit quality

Abstract How audit teams are structured and function plays a crucial role in determining the level of audit service quality. Despite this claim, little empirical research has been conducted on this effect. Using private data from two of the Big 4 audit firms, we fill this gap and document how diversity of audit teams influences audit quality. By combining the existing work in psychology and sociology with that in auditing, we develop our model by arguing that teams are composed not simply of single auditors but of sub-teams of individuals whose various combinations affect team performance. Starting from this premise, we study how the diversity of audit teams in terms of the different mix of work assigned to staff, seniors, managers, and partners influences audit quality and how this effect varies depending upon years of tenure. We also show that the proportion of leading auditors characterized by a common educational background and the percentage of female leading auditors affect audit quality. As an additional analysis, we examine how team diversity affects audit efficiency. The same elements found relevant for audit quality also affect audit efficiency.