Colin Ferguson

Internal Audit, Alternative Internal Audit Structures and the Level of Misappropriation of Assets Fraud

In recent years, the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entitys corporate governance is its internal audit function. At the same time, there has been significant public concern about the level of fraud within organizations. The purpose of this study is to assess whether organizations with an internal audit function are more likely to detect and self-report fraud than those without. In this study, we use a unique self-reported measure of misappropriation of assets fraud for the first time. The fraud data are from the 2004 KPMG Fraud Survey, which reported fraud from 491 organizations in the private and public sector across Australia and New Zealand. The internal audit data are from a separate mail survey sent to the respondents of the KPMG Fraud Survey. We find that organizations with an internal audit function are more likely than those without such a function to detect and self-report fraud. Furthermore, organizations that rely solely on outsourcing for their internal audit function are less likely to detect and self-report fraud than those that undertake at least part of their internal audit function themselves. These findings suggest that internal audit adds value through improving the control and monitoring environment within organizations to detect and self-report fraud. These results also suggest that keeping the internal audit function within the organization is more effective than completely outsourcing that function.

Auditor conservatism and voluntary disclosure: Evidence from the Year 2000 systems issue

This study further examines the phenomenon of conservative auditor behaviour by considering the level of voluntary disclosure of Year 2000 remediation information in company annual reports. Previous studies have provided evidence of conservative auditor behaviour by examining the link between Big 6 auditor choice and accruals (Francis and Krishnan 1999; Becker et al., 1998; Defond and Subramanyam 1998). Protecting their reputation capital increases Big 6 auditor incentives to act conservatively to avoid litigation risk. We propose and find that Big 6 auditor clients disclose more Year 2000 remediation information than non–Big 6 auditor clients.

Electronic Commerce Investments, the Resource-Based View of the Firm,and Firm Market Value

Firms have embraced electronic commerce as a means of doing business, either because they see it as a way to improve efficiency, grow market share, expand into new markets, or because they view it as essential for survival. Recent research in the United States provides some evidence that the market does value investments in electronic commerce. Following research that suggests that, in certain circumstances, the market values noninnovative investments as well as innovative investments in new products, we partition electronic commerce investment project announcements into innovative and noninnovative to determine whether there are excess returns associated with these types of announcements. Apart from our overall results being consistent with the United States findings that the market values investments in electronic commerce projects, we also find that noninnovative investments are perceived as more valuable to the firm than innovative investments. On average, the market expects innovative investments to earn a return commensurate with their risk. We conclude that innovative electronic commerce projects are most likely seen by the capital market as easily replicable, and consequently have little, if any, competitive advantage period. On the other hand, we conclude from the noninnovative investment results that these types of investments are seen as being compatible with a firms assets-in-place, in particular, its information technology capabilities, a view consistent with the resource-based view of the firm.

Corporate Governance and Misappropriation

This study examines the occurrence of misappropriation-type fraud within Australian listed firms and the relation between the incidence of this type of fraud and a firms governance strength. We measure governance strength using factors relating to traditional corporate governance, such as board composition, CEO duality, and audit committee composition, as well as factors relating to information technology governance. In our study, we use actual dollar amount of fraud reported by listed companies responding to the 2004 KPMG Fraud Survey as one of three different misappropriation measures and publicly available firm-specific data to measure the other variables in the model. Our study found that where the chief executive officer (CEO) also holds the position of chairperson of the board of directors, the likelihood of fraud increases. We also find that the greater the number of independent directors on the audit committee, the lower the level of fraud. Taken together, these results are particularly encouraging as they provide support for regulatory bodies such as the Australian Stock Exchange (ASX) and the Australian Securities and Investment Commission (ASIC), which place considerable emphasis on the importance of establishing good corporate governance practices. The study provides empirical evidence that employing good corporate governance reduces the risk of the misappropriation of assets.

Cognitive style factors affecting database query performance

Abstract As end-user computing becomes more pervasive, an organizations success increasingly depends on the ability of end-users, usually in managerial positions, to extract appropriate data from both internal and external sources. Many of these data sources include or are derived from the organizations accounting information systems. Managerial end-users with different personal characteristics and approaches are likely to compose queries of differing levels of accuracy when searching the data contained within these accounting information systems. This research investigates how cognitive style elements of personality influence managerial end-user performance in database querying tasks. A laboratory experiment was conducted in which participants generated queries to retrieve information from an accounting information system to satisfy typical information requirements. The experiment investigated the influence of personality on the accuracy of queries of varying degrees of complexity. Relying on the Myers–Briggs personality instrument, results show that perceiving individuals (as opposed to judging individuals) who rely on intuition (as opposed to sensing) composed queries more accurately. As expected, query complexity and academic performance also explain the success of data extraction tasks.

The effect of transaction costs on the decision to replace ‘off‐the‐shelf’ software: the role of software diffusion and infusion

This study examines the extent to which software diffusion and infusion affect the decision to replace ‘off‐the‐shelf’ software, using the example of spreadsheet software. Transaction cost economics motivates the propositions that higher levels of software diffusion and higher levels of software infusion act as disincentives on the firm’s decision to upgrade or change off‐the‐shelf software. Our focus on software diffusion and infusion extends previous research that only examined hardware infusion and diffusion. Results from the study, using a survey, newsgroups and interviews, generally support the propositions and show that the more software is diffused and infused into a firm, the less likely it is to be changed or upgraded. More specifically, the results also show that, while software infusion acts directly to reduce the likelihood of software replacement, software diffusion only affects it indirectly through its effect on infusion.

An experimental investigation of the effects of artificial intelligence systems on the training of novice auditors

The primary objective of this research is to investigate the impact of task‐technology fit on users’ performance when using artificial intelligence systems for auditing tasks. Four artificial intelligence auditing systems, two problem‐solving programs, and four questionnaires were developed. A laboratory experiment was performed with 292 undergraduate auditing students. The results suggested that the effect of task‐technology fit on accuracy in solving problems was marginal for case‐based reasoning with unstructured tasks. No significant effect was found on problem‐solving accuracy for rule‐based reasoning with structured tasks. The task‐technology fit, however, marginally increased users’ certainty of the correctness of their solutions.

The evolution of audit market structure and the emergence of the Big 4: Evidence from Australia*

We use a long time series from Australia to investigate the determinants and consequences of audit market concentration. The time series begins when the market is still fragmented and extends through recent years, by which time the Big 4 is dominant. We show that increasing skewness in the size of public companies is associated with increased concentration of the audit market. We also show that the emergence of the Big N is associated with the growth in non-audit services, and provide evidence of increasing returns to scale in auditing that become more pronounced over time. The results suggest that the primary driver of concentration is the growth of the largest public companies and the associated need for audit firm scale. The rate of audit switching and the extent of fee discounting increase over time, which provides some assurance that the audit market remains competitive in spite of greater concentration.

Speculation and e-commerce: The long and the short of IT

Over the past 25 years, the development of electronic commerce (e-commerce) has challenged and threatened firms to adapt their business models and processes. Successful adaptation can lead to improved efficiencies, growth in market share, expansion into new markets, or simply survival in competitive markets. Short-window event studies provide evidence that the market places significant value on investments in e-commerce. However, if the market misunderstands how these projects add value, value measurement based on short-run returns could be misleading. We address this possibility by examining the market reaction to e-commerce investment announcements by a sample of mining companies. We argue that this group of companies represents a sample for which, a priori, there is no expected value added to the firm from the type of investment they announce. We find strong evidence that the market reacts positively to these announcements in the days surrounding the information release. However, we find that in the three-year period subsequent to the announcement the firms realize long-run negative abnormal returns. Significant share-price rises leading up to and immediately subsequent to the announcement dates were completely reversed over the subsequent three years. We interpret this result as being consistent with the market not always understanding when e-commerce adds value. While our result is only applicable to equity investments in small, speculative ventures, it suggests some caution in the use of short-run market value changes as a measure of the value added to firms by an e-commerce investment.

Development of a scale for measuring software diffusion

Existing research on diffusion of information technology in firms focuses on the factors that effect the diffusion with little study of diffusion itself. Most of the diffusion research also focuses on hardware diffusion and fails to consider the inter-related area of software diffusion. Consequently, robust measures of the software diffusion construct have not been developed. This paper addresses these omissions by developing a scale for the measurement of software diffusion. Software diffusion is the degree of dispersion of software throughout the firm. The questionnaire used incorporated features designed to increase the validity and reliability of the responses while also maximising the response rate. The resultant 3-item scale satisfies the critical validity and reliability benchmarks normally associated with these types of scales. The scale incorporates both the adoption and implementation aspects of diffusion.