Dana R. Hermanson

Information Technology‐Related Activities of Internal Auditors

Advances in information technology (IT) present important new organizational risks, and the assessment and management of these risks may involve a variety of groups, including internal auditors, external auditors, in‐house IT experts, and outside consultants. To begin to understand how organizations are addressing their IT risks, this exploratory study examines the IT‐related activities of one group—internal auditors. Information gathered from over 100 internal audit directors indicates that internal auditors focus primarily on traditional IT risks and controls, such as IT asset safeguarding, application processing, and data integrity, privacy, and security. Much less work is done on system development and acquisition issues. Several factors are associated with internal auditors performance of IT evaluations, including the nature of the audit objective, the prevalence of computer audit specialists on the internal audit staff, and the existence of new computerized systems. To supplement these results, we ...

Should You Offer a Job to Your External Auditor

Companies searching for senior executive talent often lure partners from the firms that perform their annual audits. But this can be risky, warn the authors. Is it worth it? How can you manage those risks?

The Nominating Committee Process: A Qualitative Examination of Board Independence and Formalization†

The nominating committee (NC) of the board identifies and nominates individuals for board service, thus establishing the boards composition. Despite this important role, relatively little is known about the NC process, including NC members actions and thought processes. Based on interviews of 20 U.S. public company NC members, including 16 chairs, we focus on two primary questions: (1) what is the extent of influence that the Chief Executive Officer (CEO) has over committee processes, and (2) to what extent are committee processes formalized (i.e., framed and acted upon in a mechanistic way)? We find that there is continuing recognition of CEO influence in the director nomination process, the level of which varies widely by company. Also, there is considerable variability in the formalization of the director nomination process (e.g., some NCs use search firms and a matrix/grid approach to assessing director skill sets across the board, while others do not). Finally, we find that many interviewees have professional or personal ties to the CEO and that nearly all of the NCs focus on �chemistry� and comfort in the director nomination process, where the often-stated goal is to enhance the boards ability to function effectively and to reduce risk in the director nomination process. The overall message of the interviews perhaps is best captured by one interviewee, who described a �strange little dance.� Throughout the interviews, we find evidence that the NC must �dance� through a complex decision landscape.

Shareholder Voting in Director Elections and Initial SOX Section 404 Reports

A primary channel for shareholders to express their dissatisfaction with the board is by withholding their votes in director elections. This study examines the relation between shareholders’ voting in director elections and initial Sarbanes-Oxley (SOX) Section 404 reports on internal control. We find that the presence of material weaknesses is associated with shareholder voting, but the effect varies between manager directors and audit committee directors. In the manager sample, shareholders react negatively to the existence of material weaknesses by withholding votes. Additional analysis of companies with material weaknesses reveals greater shareholder dissatisfaction when the number of material weaknesses is higher but less dissatisfaction when the company provided early warning disclosure of internal control problems during the fiscal year. By contrast, audit committee directors are not penalized for material weaknesses, but instead these directors are penalized for accounting restatements. Overall, the results provide new insights into the effects of internal control strength and restatements on shareholder voting for directors, and can potentially motivate directors to be more proactive in ensuring the quality of internal controls and the reliability of financial reporting.

Marketing Academics' Perceptions of the Peer Review Process

Publication in refereed journals is critical to career success for most marketing faculty members, and the peer review process is the gatekeeper for a refereed journal. The study reported here examines marketing academics perceptions of this peer review process. Based on responses from 653 marketing academics, we find favorable overall impressions of the review process as being fair/unbiased, truly double-blind, timely, and successful in improving the quality of research. But the process is not without concerns. In particular, there are concerns about the ability to have (and adhere to) a truly double-blind review process given the close-knit nature of the academy in conjunction with todays interconnected world. Problematically, researchers express dissatisfaction with the lack of timeliness in the review process. Given these concerns, we offer a strategically oriented recommendation for a code of publishing ethics and a tactically oriented recommendation focused on improvements in manuscript turnaround time.

Reply to Discussions of Information Technology‐Related Activities of Internal Auditors

Our paper was reviewed and discussed by both a practitioner (Burton 2000) and an academic (Jackson 2000). We thank both discussants for their time and helpful comments. The response will be organized to address comments made by each discussant. First, we thank Mr. Burton for taking time out of a hectic schedule as a Director of Internal Audit to read and discuss this paper. We felt this was a very constructive review that focused on the practical issues being examined. His comments are particularly helpful, as he holds the same position as the survey respondents. In general, this discussant found the results in our paper to be “pretty much as expected” from his experience in practice. We agree that the results are not surprising. We intended our paper to be a preliminary step in understanding the internal audit and control of IT, and sometimes a first step is a small one. Further, we believe that one of the contributions of academic research is to provide data so that positions can be taken or arguments can be made based on objective rather than anecdotal evidence. The discussant makes several valuable suggestions for future research. He suggests several other

Research Insights About Risk Governance: Implications From a Review of ERM Research

In recent years, expectations for increased risk governance have been placed explicitly on boards of directors. In response, boards are being held responsible for not only understanding and approving management’s risk management processes, but they are also being held responsible for assessing the risks identified by those processes as part of overseeing management’s pursuit of value. These increasing responsibilities have led a number of organizations to adopt enterprise risk management (ERM) as a holistic approach to risk management that extends beyond traditional silo-based risk management techniques. As boards, often through their audit committee, consider management’s implementation of ERM as part of the board’s risk oversight, a number of questions emerge that can be informed by academic research related to ERM. This article summarizes findings from ERM research to provide insights related to the board’s risk governance responsibilities. We also identify a number of research questions that warrant further analysis by governance scholars. It is our hope that this article will spawn varying types of research about ERM and corporate governance.

Shareholder Proposals on the Auditor–Client Relationship: The Case of Nonaudit Service Purchases

This article provides empirical evidence on shareholder proposals seeking to restrict nonaudit service (NAS) purchases by public companies from their independent auditors. Our analysis is based on 104 instances of shareholder proposals seeking to restrict NAS provided by independent auditors, received by 94 firms during a unique period from 2001 to 2004 (when the Securities and Exchange Commission [SEC] allowed such proposals to proceed to shareholder votes), and a control sample that did not receive such proposals. We find that firms targeted by shareholders had higher nonaudit fee ratios. We also find that firms receiving such shareholder proposals are likely to have steeper subsequent declines in the nonaudit fee ratio than firms not receiving such proposals. Finally, considering only the subset of firms that have a shareholder vote on proposals seeking to restrict NAS purchases, the subsequent reduction in the nonaudit fee ratio is positively related to the magnitude of the proportion of votes in favor of the shareholder proposal. Our findings suggest that permitting shareholder participation in issues related to the auditor–client relationship can lead to significant changes in the nature of the auditor’s relationship with the client, and they call into question recent SEC actions permitting companies to restrict shareholder participation in issues related to auditor selection.

The Economic Impact of International Differences in the Accounting and Tax Treatments of Goodwill: How Are Prospective Acquirers of U.S. Hospitality Interests Affected?

ABSTRACT The purpose of this article is to introduce hospitality executives to recent changes in the treatment of purchased goodwill and to the implications that international differences in the treatment of goodwill may have. Goodwill is the difference between the purchase price paid for a company and the fair market value (FMV) of that companys identifiable net assets. This paper provides an eight-country comparison of standards regarding the treatment of goodwill and discusses the implications of the differences that exist among countries. Despite the change in goodwill tax treatment afforded to U.S. firms in the 1993 tax bill, the U.S. continues to have less favorable standards regarding the accounting and tax treatment of purchased goodwill than do some foreign countries. Hence, U.S. firms still may be at a disadvantage in the hospitality acquisitions market when bidding against firms from countries with more favorable goodwill treatment.