David H. Lont

Governance Regulatory Changes, International Financial Reporting Standards Adoption, and New Zealand Audit and Non-Audit Fees: Empirical Evidence

This study examines the association between overseas and New Zealand governance regulatory reforms and New Zealand companies’ audit and non-audit fees. Our models use temporal and International Financial Reporting Standards (IFRS) indicator variables to relate the timing of the fee changes to the incidence of the overseas and local reforms. We find that audit fees increased in New Zealand over 2002–2006. Such increases associate reliably with the transition to and adoption of NZ IFRS and not with earlier overseas governance reforms. Our study also documents a decrease in non-audit fees over the same period, but we find no IFRS effect for non-audit fees.

Corporate Governance and Audit Fees: Evidence of Countervailing Relations

This study derives and tests an economic framework that explains the relation between corporate governance and the fees paid by companies for auditing. Importantly, our framework posits and we find that auditing and governance are co-determined by two countervailing relations, namely, a fee-increasing relation because auditing services provide one means to attain better governance, and a fee-decreasing relation because auditors incorporate the benefits of better governance in pricing their services. The study period provides an interesting setting for testing the framework because it covers the passage of the Sarbanes-Oxley legislation, which imposed substantial cost on many companies to strengthen governance, including increased spending on auditing and internal control. Yet, after controlling for such increased spending, our results also suggest that better governance reduces the cost of auditing. Our framework explains that this offset occurs because even though better governance (including auditing) is costly, it also enhances the quality of financial statements and internal controls, which enables auditors to decrease the price of audit risk and reduce fees.

Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis

This study finds that the agency problems of companies with high free cash flow (FCF) and low growth opportunities induce auditors of companies in the US to raise audit fees to compensate for the additional effort. We also find that high FCF companies with high growth prospects have higher audit fees. In both cases, higher debt levels moderate the increased fees, consistent with the role of debt as a monitoring mechanism. Other mechanisms to mitigate the agency costs of FCF such as dividend payout and share repurchase (not studied earlier) do not moderate the higher audit fees.

Enforcement and Disclosure Under Regulation Fair Disclosure: An Empirical Analysis

While Regulation Fair Disclosure (FD) was designed to benefit investors by curbing the selective disclosure of material non-public information to ‘covered’ investors, such as analysts and institutional investors, it can also impose costs. This paper finds that FD levies three kinds of enforcement and disclosure costs. First, investors cannot recover as part of an SEC enforcement action the gains to covered investors from their alleged use of the non-public information. Second, investors lose because the market responds negatively to an SEC enforcement announcement. Third, investors suffer because some companies post their FD filings well after the due date, without earlier public disclosure.

Issues in financial accounting and reporting: a Pacific Rim focus

Purpose – The purpose of this paper is to provide editorial insight into recent developments in financial accounting issues in the Pacific Rim area. The paper aims to focus on the impact of international financial reporting standards (IFRS) and provide a commentary, as well as context, for the papers that appear in this special issue.Design/methodology/approach – The paper reviews and comments on several relevant academic papers and regulatory releases.Findings – This paper outlines several key developments in the Pacific Rim region since the decision by Australia and New Zealand to adopt IFRS. The proposed adoption of IFRS in other countries is examined, and noted are the successes and tensions that one set of global accounting standards creates. The contributions of four papers are outlined in this special issue to this debate, and provide suggestions for future research.Practical implications – This review should be of relevance to academics, the profession, and regulators, by providing academic insigh...

Non‐Audit Fees and Auditor Independence: New Evidence Based on Going Concern Opinions for U.S. Companies Under Stress

This paper reexamines the long-standing issue of whether the consulting fees earned by auditors affect their independence. The evidence in the United States is far from settled in this regard and continues to vex academics, professionals, and policy makers alike. Our model predicts a negative relation between auditor supplied non-audit fees and auditor independence. We test this model by examining auditors’ propensity to issue a going concern opinion for a sample of U.S. companies experiencing financial stress. Using a grouping approach to reduce potential measurement error in the variables, we document a reliable negative relation between non-audit fees and our proxy for auditor independence, which is consistent with our theory. This new evidence, based on an alternative procedure, may explain why some previous studies on U.S. companies have failed to find a negative relation. We also find that SOX and associated influences on auditor independence, but not auditor tenure, may have moderated this negative relation.

New Zealand Operating Expense Disclosure:The Impact of International Financial Reporting Standards on Early Adopters

Purpose – The purpose of this paper is to examine compliance with operating expense disclosure provisions contained in New Zealand approved accounting standards before and after the move to New Zealand equivalents to international financial reporting standards (NZ IFRS). Prior research showed poor disclosure practices and the paper seeks to determine if this has improved under international accounting standards for those who choose to adopt NZ IFRS prior to mandatory adoption.Design/methodology/approach – An empirical archival approach is used. While the sample size of early adopters is small, it does provide the unique ability to control for any temporal effects on disclosure practices.Findings – Full compliance with operating expenses that are mandated such as depreciation, directors and auditor fees under both NZ financial reporting standards (NZ FRS) and NZ IFRS was found. However, unspecified operating expense disclosures are still poor for those using NZ FRS. A substantial improvement was found in u...

Crude Inventory Accounting and Speculation in the Physical Oil Market

This paper uses inventory data from financial accounts to explore whether companies involved in the physical oil market were speculating in the run-up to 2008. Using quarterly inventory data over the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil companies in the world, we derive an Index of Scaled Physical Inventories (ISPI). We find declining ISPI up to the early 2000s is consistent with firms minimizing inventory for efficiency sake; then ISPI starts to increase, suggesting physical inventories could have contributed to the run-up in oil prices between 2003 and 2008. Highlighting heterogeneity in inventory behaviors amongst the large oil companies, the structural break test on the ratio of inventory to sales and the days to sales for individual companies shows that five companies had positive structural breaks during the speculation period, while the other companies had no or negative structural breaks. Contrary to declining inventory expectations due to a tightening oil market, the positive structural breaks suggest speculative behavior. We also examine the relationship between changes in profitability and changes in oil inventory over the pre-speculation and speculation period. Though some coefficients for inventory do switch from negative to positive over the two periods as hypothesized, they are only significant in a few cases. However, aggregate measures of inventory do switch and are significant, suggesting that, on average, inventory holdings negatively affected profitability in the pre-speculation period and positively affected profitability in the speculation period.

A Variance‐Ratio Test of the Random Walk Hypothesis for the New Zealand Share Market: 1980‐2001

This paper examines the Random Walk Hypothesis (RWH) for aggregate New Zealand share market returns, as well as the CRSP NYSE‐AMEX (USA) index during the 1980‐2001 period. Using several indices, we rely on the variance‐ratio test and find evidence to support the rejection of the RWH with some evidence of a momentum effect. However, we find evidence to suggest the behaviour of share prices to be time‐dependent in New Zealand. For example, we find the indices tested were closer to random after the 1987 share market crash. Further analysis showed even stronger results for periods subsequent to the passage of the Companies Act 1993 and the Financial Reporting Act 1993. We also find evidence that indices based on large capitalisation stocks are more likely to follow a random walk compared to those based on smaller stocks. For the USA index, we find stronger evidence of random behaviour in our sample period compared to the earlier period examined by Lo and Mackinlay (1988)

Stock Price Response to New CEO Earnings News

New-CEO earnings news exhibits asymmetric effects on stock prices. Stock prices rise more on good earnings news announced by firms with new CEOs compared with those with established CEOs. By contrast, stock prices tend to fall by a smaller amount on bad earnings news for new CEOs. Both the new-CEO quality effect and the new-CEO honeymoon effect are more pronounced for CEOs appointed during challenging situations. The new-CEO quality effect is stronger for firms followed by fewer analysts, while the honeymoon effect is stronger for firms followed by more analysts – illustrating the importance of a transparent information environment.