K. Raghunandan

Do Non-audit Service Fees Impair Auditor Independence? Evidence from Going-concern Audit Opinions

We find no significant association between non–audit service fees and impaired auditor independence, where auditor independence is surrogated by auditors’ propensity to issue going concern audit opinions. We also find no association between going concern opinions and either total fees or audit fees. In addition, our findings are robust to controlling for unexpected fees, to controlling for endogeneity among our variables, and to several alternative research design specifications. Our results are consistent with market–based incentives, such as loss of reputation and litigation costs, dominating the expected benefits from compromising auditor independence.

An Empirical Investigation of Audit Fees, Nonaudit Fees, and Audit Committees*

This study examines the association between audit committee characteristics and the ratio of nonaudit service (NAS) fees to audit fees, using data gathered under the Securities and Exchange Commissions (SECs) fee disclosure rules. Issues related to NAS fees have been of concern to practitioners, regulators, and academics for a number of years. Prior research suggests that audit committees possessing certain characteristics are important participants in the process of managing the client†auditor relationship. We hypothesize that audit committees that are independent and active financial monitors have incentives to limit NAS fees (relative to audit fees) paid to incumbent auditors, in an effort to enhance auditor independence in either appearance or fact. Our analysis using a sample of 538 firms indicates that audit committees comprised solely of independent directors meeting at least four times annually are significantly and negatively associated with the NAS fee ratio. This evidence is consistent with audit committee members perceiving a high level of NAS fees in a negative light and taking actions to decrease the NAS fee ratio.

Client risk and recent changes in the market for audit services

Abstract Some writers (Berton, 1995, B1; Holland et al., 1993, 76) have suggested that because of increasing litigation costs, public accounting firms are refusing to supply audit services to public companies which are perceived as high-risk. Our paper examines the proportions of certain types of risky clients audited by Big Six and other independent audit firms, and whether the relative proportions have changed during a period of increasing litigation. We examined the audit market for public manufacturing companies with total assets less than

The Relationship Between Student Evaluations of Teaching and Faculty Evaluations

50 million. In the initial period of observation, we found that Big Six audit firms were more likely than small audit firms to have clients who were in financial distress and clients who were in high-tech industries. However, over a period of increasing litigation costs, we observed a significant reduction in the likelihood that Big Six audit firms would audit such clients.

The 150‐hour rule: does it improve CPA exam performance?

Abstract The AACSB, AECC, AAHE and other institutions have recently suggested that colleges and universities reassess their commitment to teaching. Reliance on student evaluations (SEs) of faculty teaching has been criticized in the literature because many SEs include items that students cannot properly assess and exclude demographic and contextual questions that are known sources of response bias. This study surveyed administrators of accounting programs from a cross-section of schools and programs to determine whether there is an association between the weight given teaching and the weight assigned to SEs. The results show a statistically significant inverse relationship between the weight given SEs and the emphasis placed on teaching.

Changes in the Information Efficiency of Stock Prices: Additional Evidence

The American Institute of Certified Public Accountants (AICPA) has established 150 semester hours as the minimum education requirement to qualify to take the CPA examination. This educational requirement is generally believed to impose additional potential costs on students, academic accounting departments, public accounting firms, and audit clients. Since a goal of the 150‐hour rule is to improve the overall quality of work performed by CPAs, it is worthwhile to examine whether an association exists between the number of semester hours of education and performance on the CPA exam. After controlling for SAT scores (verbal and quantitative), accounting credit hours, and enrollment in CPA coaching courses, this study found that first‐time candidates, on a national basis, having a minimum of 150‐semester hours of education performed better on the CPA exam. We interpret these results as indicating that there are benefits to students, CPA firms, and their audit clients from the higher education standard.

Going-concern modified audit opinions for non-profit organizations

Previous research shows, using data from three quarters after the implementation of regulation fair disclosure (Reg FD), that there is an improvement in the informational efficiency of stock prices after Reg FD. We compare the informational efficiency of stock prices in four pre-Reg FD quarters (1999–2000) and 12 post-Reg FD quarters (2002–2005). The improvement in the informational efficiency of stock prices previously reported in the immediate aftermath of Reg FD persists in later periods.

The diligence of audit committees in the healthcare sector

Non-profit organizations constitute an important share of the U.S. economy, and recent audit failures and GAO findings highlight the importance of auditor reporting decisions in this sector. In this study, we examine going-concern modified audit opinions for non-profit organizations. Using audit opinion data for 3,567 non-profits exhibiting some signs of financial stress, we find that non-profits are more likely to receive a goingconcern modified opinion if they are smaller, are in worse financial condition, expend less on program-related activities, and have more internal control related audit findings. Our analysis of the subsequent resolution of the going-concern uncertainties suggest that only 27 percent of the non-profits receiving an initial going-concern modified audit opinion filed for dissolution in the subsequent four fiscal years. Our findings fill a gap in an important area that has received little research attention, and provide a useful benchmark for non-profits and their auditors.

Satyam Failure and Changes in Indian Audit Committees

Problems with governance at non-profit (NP) healthcare organizations have recently led to legislative scrutiny of their audit committee practices. Using data from a survey of chief financial officers of NP healthcare organizations and from the GuideStar database, we examine audit committee interactions with external auditors for a sample of 69 NP healthcare organizations. We find that 71% of the audit committees in our sample meet privately with the external auditor and the mean number of such meetings 1.9. Our results also suggest that audit committee interaction with the external auditor varies in response to resource dependencies, existence of debt, audit quality, audit tenure, and organizational size. These findings suggest that NP healthcare organizations respond to monitoring demands by adopting suitable audit committee related interactions.

Auditors’ Reporting Options and Client Disclosure Quality

Audit committees have received considerable attention globally in recent years. We examine the effects of the Satyam failure on changes in the composition and functioning of Indian audit committees. A corporate collapse that shook India’s markets and regulators, and widely noted of as “India’s Enron,” should have led to major improvements in the functioning of audit committees of Indian companies. Our empirical results show that the Satyam failure had a limited effect on Indian audit committees. We discuss implications for Indian audit committees as India seeks to harmonize its accounting and governance standards with international benchmarks.