Claus Holm

Experienced and Novice Investors: Does Environmental Information Influence Investment Allocation Decisions?

This paper examines the effect of environmental information on investment decisions. The results are based on an experiment in which groups of investors (varied by experience) were asked to make short- and long-term investment allocation decisions based on financial information and on supplementary environmental information (varied between cases). The results suggest that environmental information disclosure influences investment allocation decisions. The results also suggest that potentially mitigating factors such as the investment horizon and the experience level of investors affect investment allocation decisions, but the predicted main effect of positive environmental information holds across different investment horizons and investor types. Hence, the results are not attributable to interaction effects. Interestingly, compared to other company information, environmental information is not rated as being very important by participating subjects even though the results suggest that it influences investment decisions.

Regulating audit quality: Restoring trust and legitimacy

Abstract The global financial crisis, corporate failures and scandals in many countries raise significant questions audit quality. In the UK, the FRC took the unprecedented step of codifying audit quality in its ‘Audit Quality Framework’. We analyze the extent to which audit firms, professional bodies, and investors considered the FRC proposals sufficient for addressing concerns about audit quality. Using impression management and legitimacy as a framework to analyze stakeholder responses we go beyond audit quality drivers identified by the FRC. In contrast to the drivers identified by the FRC, our focus on transparency, expertise, professionalism and commercialization of the audit shows that FRC, audit firms and professional bodies have mainly focused on issues which possibly do not pose a threat to the commercial interest of audit firms. Overall, our analysis shows that regulatory and professional bodies engaged in image management and the promotion of audit quality in an attempt to remedy tarnished image and augment their legitimacy and standing. In attempting to restore trust and legitimacy regulatory bodies, such as the FRC, have to reconcile complex often contradictory stakeholder demands.

Corporate Governance Ratings as a Means to Reduce Asymmetric Information

Abstract Can corporate governance ratings reduce problems of asymmetric information between companies and investors? To answer this question, we set out to examine the information basis for providing such ratings by reviewing corporate governance attributes that are required or recommended in laws, accounting standards, and codes, respectively. After that, we scrutinize and organize the publicly available information on the methodologies actually used by rating providers. However, important details of these methodologies are treated as confidential property, thus we approach the evaluation of corporate governance ratings as a means to reduce asymmetric information in a more general manner. We propose that the rating process may be seen as consisting of two general activities, namely a data reduction phase, and a data weighting, aggregation, and classification phase. Findings based on a Danish data-set suggest that rating providers by selecting relevant attributes in an intelligent way can improve the screening of companies according to governance quality. In contrast, it seems questionable that weighting, aggregation, and classification of corporate governance attributes considerably improve discrimination according to governance quality.

Non-Audit Services and Auditor Independence: Norwegian Evidence

Abstract We examine the effect on auditor independence of auditors providing non-audit services in the Norwegian audit market. We report the results of three tests of independence of mind and one test of independence in appearance. These tests find that there is a positive relationship between audit fees and non-audit fees, which does not suggest loss of independence. Further analysis using two-stage least squares shows that audit and non-audit fees are jointly determined, and the results are still not consistent with loss of independence. There is no relationship between the provision of non-audit services and the frequency with which auditors issue modified audit opinions. There is no association between non-audit services and audit tenure. Finally, we examine the relationship between unexpected or excess non-audit fees and cost of capital. There is no relationship. Our findings fail to find any evidence for loss of independence of mind or loss of independence of appearance as a result of providing non-audit services.

Civil and common law influences on the Danish auditor's responsibilities in relation to fraud

We use a legal perspective to examine how the role of auditors in Denmark has been defined and the auditors responsibilities in relation to fraud have been determined. The study draws on laws, legal cases and documents produced by professional organisations. We show that developments during the twentieth century were conditioned by the central legislative role of the Danish state combined with a hands-off approach to enforcing new law provisions. While the organising role of the state was consistent with the Roman civil law tradition, the implications of legislative absences, and later provisions in the form of ‘general principles legislature’, ensured that the role of the auditor was defined as a result of market forces and the judicial processes of the courts. We observe that in the Danish legal system important interpretative powers are granted to the courts in line with case law traditions in common law systems. An examination of fraud cases handled by the courts and disciplinary tribunals suggests that an important role was played by the professional organisation in Denmark.

Global budgets in Maryland: early evidence on revenues, expenses, and margins in regulated and unregulated services

Maryland implemented one of the most aggressive payment innovations the nation has seen in several decades when it introduced global budgets in all its acute care hospitals in 2014. Prior to this, a pilot program, total patient revenue (TPR), was established for 8 rural hospitals in 2010. Using financial hospital report data from the Health Services Cost Review Commission from 2007 to 2013, we examined the hospitals’ financial results including revenue, costs, and profit/loss margins to explore the impact of the adoption of the TPR pilot global budget program relative to the remaining hospitals in the state. We analyze financial results for both regulated (included in the global budget and subject to rate-setting) and unregulated services in order to capture a holistic image of the hospitals’ actual revenue, cost and margin structures. Common size and difference-in-differences analyses of the data suggest that regulated profit ratios for treatment hospitals increased (from 5% in 2007 to 8% in 2013) and regulated expense-to-gross patient revenue ratios decreased (75% in 2007 and 68% in 2013) relative to the controls. Simultaneously, the profit margins for treatment hospitals’ unregulated services decreased (− 12% in 2007 and − 17% in 2013), which reduced the overall margin significantly. This analysis therefore indicates cost shifting and less profit gain from the program than identified by solely focusing on the regulated margins.

From joint to single audits: – audit quality differences and auditor pairings

This study analyses audit quality differences between audits by a single big audit firm and joint audits with either one or two big audit firms. We exploit the unique situation in Denmark beginning on 1 January 2005, at which time a long-standing mandatory joint audit system for listed companies was replaced by a voluntary joint audit system. First, we report the results of a survey of Danish CFOs’ views on and their experiences with the choice of single or joint audits and their perceptions of audit quality. Second, based on data from the mandatory joint audit abolition year and the following two years, we test the audit quality differences using abnormal accruals. Most CFOs perceive that audit quality by a single big four audit firm is the same as it is in joint audits with either one or two big four audit firms. The results of our empirical analysis are in line with the perceptions. We find no evidence of audit quality differences between audits made by a single big four firm and those conducted by either of the two combinations of joint audits.

Decomposing Fees Paid to Audit Firms -- Assessing Knowledge Spillovers and Independence

We extend prior studies (e.g., Whisenant et al., 2003; Krishnan and Yu, 2011; Chan et al., 2012) by explicitly utilizing a stringent decomposition of total fee paid for audit services and other services in a sample of listed non-financial Danish companies. When controlling for the joint determination of fees pertaining to the statutory audit and non-audit services, we find support for the existence of positive knowledge spillover from non-audit to audit and the possible independence problems related to this economic bonding. In terms of the non-audit components, the knowledge spillover argument holds for tax services provided. Some support is also found for other services provided, but not for the provision of audit-related services. We also consider the implication of new regulation of the provision of non-audit services in EU countries. From the perspective of maintaining independence, there will be no apparent conflict with continued allowance to provide audit-related services. Prohibiting most tax services and a wide array of other services could have detrimental effect on potential knowledge spillover benefits, while our findings also suggest that the potential for economic bonding could be constrained.