Jere R. Francis

Auditor brand name reputations and industry specializations

Abstract The development of both brand name reputation and industry specialization by Big 8 auditors is argued to be costly and therefore to increase audit fees. For a sample of 1484 Australian publicly listed companies we estimate audit fee premia for Big 8 auditors. On average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big 8 auditors, and the Big 8 brand name premium over non-Big 8 auditors averages around 30%. These results support that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation.

Does size matter? The influence of large clients on office-level auditor reporting decisions

Abstract Large clients create an economic dependence that may cause auditors to compromise their independence and report favorably to retain valuable clients. Economic dependence is measured as a clients size relative to the size of the office that contracts for the audit and issues the audit report. We find no evidence economic dependence causes Big Five auditors to report more favorably for larger clients in their offices. However, larger clients also pose greater litigation risk, and we do find that Big 5 auditors report more conservatively for larger clients, suggesting that reputation protection dominates auditor behavior.

The effect of audit firm size on audit prices: A study of the Australian Market

Abstract The effect of audit firm size on prizes is a complex function of competition in the market for audit services, product differentiation, and scale economics to large firms. In this study, a competitive market is supported in Australia with product differentiation to Bif Eight accounting firms. Specially, Big Eight accounting firms have significantly higher audit prices than non-Big Eight firms. This results holds for ‘large’ and ‘small’ auditees. A test is also made of price cutting in the Australian market. Price cutting is defined as lower initial audit fees than continuing engagement fees for a comparable audit. Test results do not evidence price-cutting behavior by accounting firms. There is in fact weak evidence that initial audit fees are higher than continuing engagement fee levels. Higher initial fees suggest that accounting firms may recover at least some of the audit start-up costs immediately.

The role of accounting and auditing in corporate governance and the development of financial markets around the world

Abstract For a sample of 31 countries, we document that financial disclosures are more transparent and national accounting standards require timelier (accrual based) reporting in countries with stronger investor protection. These countries also spend more on auditing enforcement and the Big Five accounting firms audit proportionately more companies in these countries. These results indicate that higher quality accounting standards and the enforcement of such standards through higher quality auditing are more likely to exist in corporate governance in countries with strong investor protection. Higher quality accounting and auditing are also positively associated with financial market development in countries whose legal systems are conducive to the protection of investors. However, we are unable to find systematic evidence that higher quality accounting and auditing alone—independent of a countrys underlying investor protection regime—affects the development of financial markets.

Letting the chat out of the bag: Deconstruction, privilege and accounting research

There are signs on the intellectual scene that we are moving out of an era in the social sciences termed modernism — a belief that separating fact from value, truth from falsity, is just a matter of applying the right version of method. The purpose of this paper is to introduce accounting researchers to a movement termed “deconstruction” which reflects the postmodern view that modernism is an untenable philosophical position. Postmodern thought in general and deconstruction in particular demand self-reflection and abandon any desire to somehow “ground” knowledge in an external and transcendental metaphysic like the positivists faith in observation or the Marxists faith in historical determinism. Deconstruction differs from the academic tradition in which competing metaphysics attack each other with their different dogmas. Instead, it works from within a research paper (text), taking an authors own criteria for privileging his or her work, and then de-constructs the text by pointing out how the author violates his or her own system of privilege. In this study, we both introduce deconstruction and apply it to Michael Jensens “Organization Theory and Methodology” [The Accounting Review(April 1983) pp. 319–339], a text which would suggest that positive theory in accounting should be privileged over other ways of knowing and writing accounting discourses. We show through deconstruction that positive theory and the empirical tradition are not entitled to the kind of epistemic privilege and authority that they have enjoyed in silencing other kinds of writings about accounting. Deconstruction, then, is a moment of resistance to the reductionism of modernism and its desire for knowledge closure. It resists metaphysical author[ity] and restores life to its original difficulty before our obeissance to metaphysics.

Acquisition profitability and timely loss recognition

We investigate if timely loss recognition is associated with acquisition-investment decisions. Using a Basu (1997) piece-wise linear regression model, we find that firms with more timely incorporation of economic losses into earnings make more profitable acquisitions, measured by the bidders announcement returns and by changes in post-acquisition operating performance. These firms are also less likely to make post-acquisition divestitures (consistent with better ex ante investment decisions), but act more quickly to divest. We also find that the positive association between timely loss recognition and acquisition profitability is more pronounced for firms with higher ex ante agency costs.

Auditing, directorships and the demand for monitoring

Abstract Three monitoring mechanisms used for corporate governance are external auditing, internal auditing, and directorships. We consider the three mechanisms as endogenous to the firm and that each firm has an optimal set of monitoring mechanisms the specific mix of which is conditioned by the firms production-investment attributes. Production-investment attributes are proxied by the degree to which firm value is determined by growth options versus assets-in-place. Empirical predictions are then made and tested concerning the total demand for monitoring from all three mechanisms, and substitutions or tradeoffs between 1) auditing and directorships and 2) external and internal auditing. The results support the hypotheses that overall monitoring expenditures decrease as the firm has relatively more assets-in-place, that relatively more auditing (compared to directorships) occurs for firms with greater assets-in-place, and that relatively more internal auditing (compared to external auditing) also occurs for firms with greater assets-in-place. Predictions are also made and tested concerning the general effect of firm size on the demand for auditing and directorships. The study helps to better understand the economic rationale for each monitoring mechanism and the role it plays in the efficient corporate governance of the firm.

After Virtue? Accounting as a Moral and Discursive Practice

Alasdair MacIntyre′s book After Virtue is used as the basis to reflect on possibilities for virtue in accounting and some problems in its realisation. MacIntyre advances a neo‐Aristotelean account of virtue that is grounded in practice and which focuses on the unique internal rewards of a practice. Accounting is suggested to be a practice in this sense and five possible internal rewards are identified: honesty, concern for the economic status of others, sensitivity to the value of both co‐operation and conflict, the communicative character of accounting practice, and the dissemination of economic information. Several potential problems in realising virtue are then discussed including the tendency for external rewards to dominate internal rewards, the corrupting power of institutions, and a confusion between laws (rules) and virtues.

City Markets as a Unit of Analysis in Audit Research and the Re‐Examination of Big 6 Market Shares

Big 6 market shares based on aggregate national data have been used in prior research to infer market leadership and industry expertise, and to differentiate Big 6 accounting firms from one another. In this study it is demonstrated that further differences exist with respect to city-specific audit markets, both between firms and within the same firm across different city markets. The specific finding is that the national market leader is not the city-specific market leader the vast majority of time. Usefulness of the city-level unit of analysis is further demonstrated by re-examining the 1989 mergers creating Ernst & Young and Deloitte Touche. The primary effect of the Ernst & Young merger was to increase market shares in cities in which the pre-merger firms already had significant market shares, resulting in an increase in the number of cities in which the merged firm achieved top ranking. In contrast, the primary effect of the Deloitte Touche merger was an expansionof the number of city-level markets in which the merged firm had significant (though not leading) market shares. The findings of this study suggest that, in order to move beyond our current understanding, important audit research questions such as the reason for particular auditor–client alignments, the competitive nature of markets, audit pricing of reputations, and auditor reporting and independence issues should be investigated in city-level markets where audit contracting occurs and where Big 6 market shares (and presumably reputations) vary widely from city to city.

Lobbying against proposed accounting standards: The case of employers' pension accounting

Abstract An analysis is made of lobbying against the FASBs 1982 pension accounting proposals. The proposed changes would have put a liability/asset on the balance sheet for unfunded/ overfunded pension benefits, reduced flexibility in the measurement of pension expense, and created the potential for yearly volatility in expense measurement. Olsons (1971) analysis, The Logic of Collective Action , suggests that firm-specific benefits of individual lobbying or collective action are proportional to firm size. If the benefits of accounting lobbying, avoiding adverse financial statement effects, are also proportional to firm size, then lobbying should be explained solely by firm size. However, for a sample of 218 lobbying firms and 582 nonlobbying firms, the empirical tests show that potentially adverse effects are cross-sectionally independent of firm size and that both firm size and the potential for adverse financial statement consequences explain the decision to lobby.