Kevin T. Rich

Accounting Restatements, Governance and Municipal Debt Financing

We find that mean municipal debt costs are greater following financial restatement disclosures. Comparisons of the relative use of municipal debt, and of the use of unsecured versus secured debt, corroborate that financial restatements increase the cost of municipal debt financing. Additional analyses indicate that adverse consequences of restatements are mitigated by strong audit oversight and by provisions that encourage direct voter participation in the governance process. The evidence supports the use of restatements as a summary measure of financial reporting quality in the municipal context and informs thinking about auditor and voter oversight in the municipal financial reporting process.

Does Audit Committee Monitoring Matter in the Government Sector? Evidence from Municipal Internal Control Quality

We investigate whether the presence of municipal audit committees is associated with internal control quality in the municipal setting. The evidence shows that only 20% of municipalities in our sample voluntarily maintained an audit committee during the sample period of 2001 through 2004. Our results highlight that municipalities with audit committees are associated with fewer internal control problems, which in turn suggests these cities should be less likely to experience future significant financial reporting failures. These results persist in specifications that use econometric procedures to address concerns about self-selection. Overall, our findings suggest that audit committee presence plays an important role in municipal financial oversight.

Auditor Size and Internal Control Reporting Differences in Nonprofit Healthcare Organizations

We investigate whether auditor size is associated with the disclosure of internal control exceptions among Circular A-133 audits of nonprofit healthcare organizations. Our analysis is motivated by recent growth and transparency concerns within the sector. Using a sample of 1,180 audit reports from 2004 to 2008, we find evidence that audits performed by Big 4 firms are less likely to disclose internal control weaknesses than those performed by smaller firms. Additional analyses indicate this relation only remains statistically significant for a subsample of small organizations, possibly due to greater selectivity or lower efforts by the Big 4 auditors. We discuss the implications of these findings from an audit quality, market dominance, and client size perspective. The results are relevant to hospital financial managers seeking high quality audits at low cost.

IFRS in Introductory Financial Accounting using an Integrated, Comparison-Based Approach

In this paper, we describe our approach to incorporating the basics of International Financial Reporting Standards (IFRS) into introductory financial accounting courses. Prior survey evidence suggests that IFRS receives little coverage in such courses, with two primary reasons being a lack of available time and insufficient IFRS teaching materials tailored for introductory financial accounting (Zhu, Rich, Michenzi, & Cherubini, 2011). The objectives for our IFRS procedures were to provide all business students with a basic knowledge of IFRS and an understanding of the similarities and differences between U.S. GAAP and IFRS. We utilized an integrated, comparison-based methodology, and developed teaching materials that were incorporated into each chapter discussion through short vignettes, brief examples, and a comprehensive exercise. Evidence from a student survey suggests that a strong majority believe that IFRS coverage is important, and that our procedures contributed to their learning on the topic. Furthermore, the student survey suggested that the comparative nature of our IFRS procedures enhanced understanding of U.S. GAAP. As a result, our procedures provide guidance to accounting instructors looking to introduce students to the basics of IFRS or other complex topics within the time constraints of a crowded course.

Linguistic Tone of Municipal Management Discussion and Analysis Disclosures and Future Internal Control Quality

We investigate relations between the textual content of municipal disclosures and future internal control quality. Specifically, we examine whether the linguistic tone of municipal management discussion and analysis (MD&A) disclosures is associated with the likelihood of future internal control weaknesses. Using a sample of 362 municipal MD&A disclosures in fiscal year-end 2011, our empirical analysis suggests that positive (negative) tone in municipal MD&A disclosures is associated with fewer (more) subsequent year internal control weaknesses after controlling for other governance, demographic, and performance factors. Overall, our findings suggest that language in municipal MD&A disclosures plays an important role in signaling confidence in financial reporting systems, indicating that MD&A content contains important information in predicting the quality of future municipal financial reporting.

Municipal audit committees and fiscal policies

We investigate whether council audit committees relate to municipal fiscal policies. We find that municipalities with audit committees are associated with greater levels of own-source revenue, in that they finance municipal operations with locally raised revenues driven by charges and fees compared to municipalities without audit committees. Furthermore, municipalities with audit committees are associated with less new debt than those without audit committees, indicating more conservative use of external financing. Overall, our results are consistent with municipal audit committees, in addition to monitoring the financial reporting function, playing an advisory role in fiscal decisions, especially when the cost of local government to citizens is high.