Debra C. Jeter

Cross-sectional estimation of abnormal accruals using quarterly and annual data: effectiveness in detecting event-specific earnings management

Abstract This paper addresses certain methodological issues that arise in estimating abnormal (or discretionary) accruals for detection of event-specific earnings management. Unlike prior studies (e.g., Dechow, Sloan, and Sweeney, 1995; Guay, Kothari, and Watts, 1996) that rely primarily on time-series models, we focus on the specification of cross-sectional models of expected accruals using quarterly as well as annual data. Perhaps more importantly, we present a variation of the Jones model that is shown to be well specified for all cash flow levels. We show that the cross-sectional Jones model yields systematically positive (negative) estimates of abnormal accruals for firms whose cash flows are below (above) their industry median. Using mean squared prediction errors as well as simulation analysis, we show that our model is more powerful than the cross-sectional Jones model in detecting earnings management. In addition, we examine differences in the power of current accrual models in detecting earnings...

The effects of qualified audit opinions on earnings response coefficients

Abstract This study documents that the markets responsiveness to earnings announcements declines significantly after the issuance of qualified audit reports for a sample of ‘subject to’ qualifications and consistency qualifications. The results are consistent with a hypothesis that audit qualifications reduce the markets responsiveness to earnings announcements by altering the markets perception of earnings noise or the persistence of earnings, or both. Alternatively, a decline in earnings response coefficients may be observed because audit qualifications are more likely in firms that have undergone economic or structural changes and these changes, rather than the qualification per se, lead to decreased persistence or increased noise.

The effect of reporting restructuring charges on analysts' forecast revisions and errors

Abstract The frequency and magnitude of restructuring charges have drawn the attention of various groups of users of accounting information. Prior studies on restructuring charges have focused on the markets response to the announcement of the charge. In contrast, we examine the charges from the perspective of financial analysts. We provide evidence that analysts expect declining performance for restructuring firms in the short run but possible improvement over the longer term. When we examine forecast errors in the year following the charge, we find evidence that the analysts’ accuracy has declined and, despite the downward revision, analysts are still optimistically biased.

The effect of deferred taxes on security prices

This paper examines whether an association exists between security returns and the noncurrent deferred tax component of earnings arid explores the reasons for such an association. This component is of particular interest because of the complexity and costliness of accounting for deferred taxes, combined with the debate over their relevance (or lack thereof). In addition, information about the firms income increasing, decreasing, or smoothing choices may be imbedded in the deferred tax component; some of this information is not explicitly disclosed elsewhere in the financial statements. Recent research has led to a conjecture that differences in the valuation implications of various accrual accounts may be so highly contextual that simple descriptions have little or no explanatory power (Bernard and Stober I19891). We attempt to explore one component, deferred taxes, in detail, taking into account the economic context in which the component is interpreted and the composition of the items giving rise to deferred taxes (c.g., the cxtent to which deferred taxes consist of recurring items). We develop tests based on firm-specific characteristics and components of deferred taxes to assess cross-sectional differences in the future cash flow consequences of deferred taxes, and we investigate the potential value of the information imbcddcd in deferred taxes regarding future tax payments and/or other cash flows. Since the issuance of the Financial Accounting Standards Boards (FASB) Statement No. 96 (SFAS No. 96) in 1987, subsequcntly replaced by SFAS No. 109 in 1992, the subject of deferred taxes has received considerable attention. Prior to those pronouncements, accounting for deferred taxes had undergone few changes since the issuance of APB Opinion

Are CSR Disclosures Value Relevant? Cross-Country Evidence

Abstract Using proprietary data that rate corporate social responsibility (CSR) disclosures of firms in 21 countries, this study examines how the strength of nation-level institutions affects the extent of CSR disclosures. We then examine the valuation implications of CSR disclosures and consider how the relation between CSR disclosures and firm value varies across countries. In contrast to prior studies, we separate CSR disclosures into an expected and unexpected portion where the unexpected portion is a proxy for the incremental information contained in CSR disclosures. We observe a positive relation between unexpected CSR disclosure and firm value measured by Tobins Q. We also find that, while countries with strong nation-level institutions promote more CSR disclosures, the valuation of a unit increase in unexpected CSR disclosures is higher when nation-level institutions are weak.

The pricing of industry specialisation by auditors in New Zealand

A number of research papers present evidence of fee premiums paid to specialist auditors. In this paper, we explore for listed and unlisted New Zealand firms not only the question of whether such premiums exist, but perhaps more importantly why they exist. We find evidence of fee premiums for auditor specialisation defined at the city level but not at the national level. We extend testing to examine the issue of self-selection of auditors by clients; we examine several different industry classification schemes and a number of different specialisation measures; and we consider the issue of portfolio specialists. We find from these additional tests that self-selection does not account for the existence of specialisation premiums; various alternative classification schemes all result in premiums at the city level; and portfolio specialists also earn fee premiums when portfolio specialisation is measured at the city level. We find that these specialist premiums apply most consistently to larger client firms and to low-risk firms. We consider various explanations and conclude that this result is consistent with non-specialist auditors providing discounts to attract desirable clients. Desirable clients – those that are large or low risk – are not able to negotiate fees as successfully with auditors who have differentiated themselves via industry specialisation.

Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries

This study examines the audit pricing effects when auditors specialize in industries conducive to transferable audit processes. Our results indicate that industry specialists charge incrementally lower fees in industries with homogenous operations and particularly in industries with both homogenous operations and complex accounting practices. Moreover, we discover audit quality is no lower for clients audited by these specialists offering fee discounts, consistent with a conclusion that the reduction in fees indicates cost efficiencies rather than lower quality audits. Further analysis indicates the shared economies of scale only occur in a subsample of client firms with relatively high bargaining power. When considered in conjunction with prior research using a survivorship approach, our study provides evidence that certain industries lend themselves to specialization because auditors generate cost-based competitive advantages without compromising service quality.

The Role of Auditing in Buyer-Supplier Relations

Supply chain management has emerged as one of the more important topics in managerial accounting. The importance of information exchange between parties involved in supply chains has also been well documented. By addressing the value of audits in this setting, this theoretical paper serves to link two strains of accounting research: the managerial topic of supply chain effectiveness and the value of the audit function, in particular audits of the suppliers conducted by the buyers. We analyze the role of supplier audits with long-term, profit sharing contracts between the buyers and suppliers. Through a stylized model, we demonstrate that when random supplier audits are conducted, the buyer can effectively leave zero informational rents to the supplier, regardless of the suppliers cost type.

The Association between Client-Specific Investment Opportunities and Audit Fees of Industry Specialists

Audit clients’ investment opportunity sets (IOS) include firm-specific opportunities that are unique to the client, as well as opportunities generalizable to the client’s industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm-specific IOS nor how firm-specific IOS affects the premiums charged by industry specialist auditors. We find that firm-specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for the investment in firm-specific knowledge necessary to conduct the audit or for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm-specific IOS. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade-off between firm- and industry-specific knowledge.