Gregory E. Sierra

The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors

The rising prominence of fair values and other estimates (FVOEs) to financial reporting increases their significance to the audit. Based on inspections that report numerous deficiencies, the PCAOB is concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value measurements. In this paper, we first analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research. To organize our discussion, we rely on an established theoretical research framework that examines auditor judgment through an analysis of three critical and interactive factors of the judgment process — the environment, the task, and the person (Bonner 2008). We believe the framework is particularly useful in understanding judgments related to the audits of FVOEs given these areas have unique environmental and task factors such that addressing auditor characteristics alone to improve audit quality is likely to be insufficient. Second, considering the PCAOB-identified practice areas with direct implications for the audits of FVOEs, we develop and present future research lines of inquiry that take into account the important interactions among the three framework factors. We believe empirical evidence within these lines will help identify potential sources of and remedies for observed audit deficiencies.

Are the U.S. Stock Market and Credit Default Swap Market Related?: Evidence from the CDX Indices

This article examines the market-wide relations between the U.S. stock market and the credit default swap (CDS) market for the period 2001–2007. Results indicate that the lead-lag relationship between the U.S. stock market and the CDS market depends on the credit quality of the underlying reference entity. Specifically, this article finds significant mutual feedback of information between the stock market and the high-yield CDS market in terms of pricing and volatility, while the stock market leads the investment-grade CDS index in the pricing process. The CDS market seems to play a more significant role in volatility spillover than the stock market. That is, volatilities of both the investment-grade and high-yield CDS indices seem to lead the stock market volatility, while the latter has a feedback effect to that of the high-yield CDS market only. Overall, the implication is that market participants should seek information in both markets when they are about to engage in trading and/or hedging

The Effect of Insured Liabilities on the Demand for External Audits: The Case of Privately-Held U.S. Banks

This study examines the effect of the government provided insurance on bank debt on the voluntary audit choice made by privately held banks in the United States. By using data available from banking regulators, we are able to overcome data limitations of prior research on voluntary demand for auditing services. Banks have the unique feature of insurance on customer deposits that is provided by the Federal Deposit Insurance Corporation, and these insured customer deposits comprise a significant portion of the debt of most banks. Consistent with prior research we find that the voluntary choice to be audited is positively related to agency costs as measured by the size of bank assets. Prior research has found a mixed association between the demand for auditing and debt, and our results may shed some light on this issue. Our results show a negative association between a bank’s insured deposits and the choice to be audited, but (consistent with prior literature) a positive association with uninsured liabilities. In addition, we also hypothesize and find that the bank’s voluntary audit choice is positively related to the bank’s growth rate and related to the bank’s primary federal regulator. These findings may have policy implications at a time when changes to banking regulation are being considered.