Jack W. Dorminey

Internal and external auditor ethical decision‐making

Purpose - The aim of this exploratory research is to compare three sectors of the auditing profession – internal auditors, external auditors from larger international firms, and external auditors from smaller/regional firms – in regard to the influence of situational context on their ethically-related decision-making and judgment evaluations. Design/methodology/approach - Against the backdrop of five vignettes applied with a survey, the paper examines the potential influence of social consensus and magnitude of consequence on the ethical decision path of these three auditor groups. Findings - The paper finds that, in all cases, social consensus and magnitude of consequences exert influence on the ethical decision path. In the case of social consensus, however the paper finds that the ethical decision path is fully mediated for large firm auditors but is only partial mediated for the other two groups of auditors. Originality/value - This research examines responses from both internal and external auditors. Comparison between such groups is unique because these groups have not been well researched in the past literature.

Differential Volume and Price Reactions to Loss Announcements and the Association With Loss Reversals

We examine differential volume–price reactions to loss announcements and their association with loss reversals. Our findings show that differential volume–price reactions are dissimilar between firms reporting profits and losses. In addition, the differential volume–price reactions surrounding loss announcements are useful in predicting loss reversals. When jointly considered, volume and price reactions provide unique information about future profitability for firms currently reporting losses. Overall, our results are consistent with losses generating more investor disagreements and more trading volume and show that a measure based on differential volume–price reactions to loss announcements is informative with regard to predicting subsequent loss reversals.

A Resource-Based View of Using Social Media for Material Disclosures

In April 2013, the Securities and Exchange Commission (SEC) provided explicit guidance to public companies regarding social media use for material disclosures. Social media use is explored in three time periods: (1) prior to public SEC scrutiny of social media, (2) after the SEC filed a formal complaint about the use of social media, and (3) after the April 2013 guidance. Regression is used to test how voluntary social media use for material disclosures is associated with trading volume. The exploratory examination includes a sample of 267 companies (741 observations) across the three time periods. Consistent with RBV theory, results show a positive association between social media use for material disclosures and market valuation only in the post-April 2013 guidance period, suggesting that value does accrue when regulatory oversight is explicit.

Build America Bonds: An Empirical Analysis of Characteristics and Issuer Benefits

We provide a comprehensive empirical analysis of the Build America Bonds (BABs) program. We show that the program benefits issuers in the form of lower yields relative to tax-exempt municipal debt for both general obligation and revenue issues. Our analysis suggests no differences in underwriter gross spreads for BABs issues at issuance relative to tax-exempt debt, and that issuance of BABs did not significantly affect prices of other tax-exempt bonds of the BABs issuers. Our analysis also examines characteristics of BABs issuers and factors influencing yields and gross spreads, and suggests that the BABs program was effective in achieving its objectives.

Litigation Risk and Management Reporting Choice: A Comparative Study of PSLRA and SOX

Abstract This chapter provides evidence that legislation affecting litigation risk has an influence on the financial reporting behavior of corporate management, we address the following research questions: (1) Do firms react to changes in litigation risk that result from the passage of new legislation at the federal level by adjusting their level of conservatism with regard to reporting earnings? (2) How do firms’ levels of conservatism react to changes in litigation risk over time? We analyze the level and trend in conditional conservatism to evaluate the efficacy of legislation in altering managerial reporting choice. Our examination takes place in the context of two distinct pieces of legislation intended to alter the legal environment faced by corporate managers: (1) the PSLRA (1995), and (2) Sarbanes–Oxley Act of 2002. Our findings indicate that the passage of legislation that increases litigation risk is associated with increased timeliness (conservatism) in financial reporting by managers. The increased timeliness, however, begins to subside shortly after the initial effect. While the initial effect of a reduction in litigation risk is negligible, subsequent periods exhibit declining timeliness (conservatism) in financial reporting. Our results indicate that legislative actions can be successful in altering management reporting choice through changes in legal regime. However, our results also demonstrate that the desired influence of these legislative policies may be transient.