Gregory Shailer

The Value of Big 4 Audits in Australia

Research suggests that equity markets value Big N audits over non-Big N audits. Explanations include the information quality hypothesis, whereby Big N auditors increase information quality, and the insurance hypothesis, whereby investors value the deeper pockets of Big N auditors. Using client firms’ ex ante cost of capital as the dependent variable, we investigate whether capital market participants differentially value Big 4 versus non-Big 4 audits in Australia and whether the value of Big 4 audits in Australia changed as a result of the audit failures of 2001–2002. We find that Big 4 audits reduce the ex ante cost of equity capital until 2001, but not after 2001. We cannot dismiss the insurance hypothesis for the persistence of the loss beyond 2003 because of the establishment of liability caps, but the demise of the Big 4 audit value for 2001–2003 is consistent with the information quality hypothesis and does not support the insurance hypothesis.

Accounting Manipulations and Political Costs: Tooth & Co. Ltd 1910-65

Abstract Positive accounting theory posits that political costs influence accounting choices by large firms. Most studies rely on cross‐sectional analyses of large samples using coarse data. We employ rich archival data to analyse the profit measurement and disclosure practices of Tooth & Co, a large Australian brewing company, from 1910 to 1965. This period provides considerable variation in scope and incentives to manipulate reported profit. Reporting discretion changed significantly from early voluntary disclosure through to the extensive scheduled disclosure requirements of the Companies Act 1961. Varying incentives include changes in excise duties levied on beer production, and dramatic company growth and market dominance resulting from takeovers of competitors and vertical integration. We examine the pattern of reported profit in relation to internal records and the pattern of accruals. We find that Tooths profit‐smoothing practices and understatements were perceived by management as important in justifying dividend policy, while systematic understatements of reported profit were used to avoid potential political costs associated with high profitability and market dominance. The most significant relative increases in profit understatement are shown to occur where dividend policy and political cost motivations coincide.

The relevance of owner-manager signals and risk proxies to the pricing of bank loans

This exploratory study, using a sample of 115 new bank loans to small owner-managed firms, demonstrates that a simple categorical pricing model can explain a substantial part of the variation in interest rate premia. It appears that loan term and size interact (in a categorical schema) in their association with interest rate premia. It is suggested that this is more likely a product of co-determination rather than causation. There appear to be significant categorical pricing effects attributable to human capital, industry, and collateral effects. The role of collateral remains ambiguous, although it appears that source matters as much as form. Although further testing of the model is warranted, the results generally indicate that a simple categorical model may be an appropriate representation of loan pricing for small firms and that this can be used to test the value to borrowers of investing in quality signals and information cues.

Inherent risk and indicative factors: senior auditors’ perceptions

This paper examines the perceptions of senior auditors in large firms in Sydney, Kuala Lumpur and Auckland concerning the nature and assessment of the inherent risk in risk based auditing. The geographic dispersion of participants from internationally linked firms does not appear to result in any cultural and geographic effects. Assessment of inherent risk appears predominantly qualitative and is not necessarily linked to the comprehensive aggregation of risks typically presented in audit risk models. There is some blurring of control risk factors with inherent risk and one‐third of participants assess inherent and control risk jointly. Risk factors appear to be grouped in importance in a manner that suggests different attitudes to management, system‐oriented, environmental and oversight risks. The identification of four possible factors (internal risk, external risk, system risk and oversight threats) may provide a basis for further investigation of how auditors assess inherent risk. There is an apparent division between “internally” and “externally” sourced risk.

The Interaction of Post‐Acquisition Integration and Acquisition Focus in Relation to Long‐Run Performance

We examine the joint influence of post-acquisition integration management and acquisition focus on long-run post-acquisition performance. We develop a financial measure related to integration that is based on changes in net purchases/disposals of physical assets. For a sample of acquisitions by Australian listed firms, we find that the main effects and the interaction of our integration measure and focus are related to performance in the direction suggested by theory. Our results suggest that inconsistencies in previous studies of the focus-performance relation are partly explained by the failure to consider the post-acquisition asset management strategies.

The irrelevance of organisational boundaries of owner-managed firms

Empirical researchers and analysts of small or owner-managed businesses generally behave as if the selected organisational form and the consequent legal and accounting boundaries of owner-managed firms are meaningful. This paper discusses selected aspects of this notion, and provides some empirical evidence concerning loan securities, and treatments of debts and assets, which justify rejecting the relevance of the organisational types and implied boundaries in many contexts relating to owner-managed firms. These include analyses employing traditional accounting disclosures and studies that view the firm as defined by some formal organisational structure. Emphasis is on the treatment and effects of private debts and assets.

Internationalisation of perceptions of litigation risk

This paper investigates the perceptions of senior auditors in large firms in Australia, Malaysia and New Zealand concerning sources of auditor legal liability, what should constitute auditors’ duties and what may be done to reduce litigation exposure. Results are consistent with our conjecture that professional and organisational culture dominates perceptions, even in the presence of quite strong jurisdictional, cultural and institutional differences. The analysis indicates that auditors’ perceptions are strongly affected by international trends, while cultural and institutional effects tend to be more subtle but are identified by detailed and focused analysis.

Information Asymmetry and Dual Distribution in Franchise Networks

We examine whether a dual distribution system that uses both franchisor-operated and franchisee-operated outlets reduces a franchisors information disadvantage when contracting with franchisee retailers. Using detailed qualitative and quantitative managerial data, we find persuasive evidence of the strategic use of performance information obtained from franchisor-operated outlets to reduce information asymmetry and enhance contracting efficiency for franchisee-operated outlets. We test whether the proximity of franchisor-operated retail outlets to franchisee-operated retail outlets reduces underpricing of quasi-franchise contracts. Our results accord with the proposition that information asymmetry reduces contracting efficiency and are consistent with our prediction that a manufacturer can reduce intrinsic information asymmetry by maintaining franchisor-operated outlets that are geographically proximate to the franchisee-operated outlets, and that this improves the franchisors pricing of franchising contracts. We conclude that dual distribution reduces the franchisors information asymmetry and increases their contract pricing efficiency.