Krishnagopal Menon

The use of audit committees for monitoring

Abstract The Treadway Commission (National Commission on Fraudulent Financial Reporting 1987, p. 40) has recommended that companies be required to maintain audit committees (ACs). Some recent papers (Eichenseher and Shields 1985; Pincus 1989; Bradbury 1990) in this journal have identified characteristics of firms which voluntarily formed ACs. The mere formation of an AC does not mean that the board of directors actually relies on the AC to enhance its monitoring ability. Companies may form ACs for their image value. In this study, we look for evidence that firms actually rely on ACs. We consider two indicators of a boards reliance on ACs as a mechanism to control management, the frequency of AC meetings and AC composition. Our sample consisted of firms which faced no requirement to form ACs. Although the majority of firms formed ACs, many of these firms did not appear to rely on them. Some ACs did not meet at all or met only once during the year studied. In many instances ACs included at least one manager which is inconsistent with the role of ACs as a monitor of management. The results of the analysis suggest that reliance on audit committees is related to board of directors composition. As the proportion of outside directors on the board increases, firms seem more likely to exclude officers from ACs, and ACs are more active. Our study also found that frequency of meetings is associated with firm size.

The images that have shaped accounting theory

Abstract Accounting theory elaborates imagery. Working within a framework defining a numerical view of reality, accountants draw on different images of the accounting process to elaborate different theories of accounting. This paper examines how different images have shaped developments in financial accounting and considers the implications for future theory and research.

The effect of audit structure on the audit market

Abstract One way in which audit firms have begun to differentiate themselves is in the degree of structure employed in the audit approach. In this paper we argue that audit structure affects the relative competitiveness of the auditor in different client-market segments. No single audit structure represents an optimal choice for all clients. Rather, the attractiveness of each category of audit structure is contingent upon the degree of stability in the clients environment. Trends in intra-Big Eight market shares over the period 1976 to 1986 show that the auditor preferences of consumers of audit services are consistent with the environment in which the clients operate. The clients preference for a structured auditor increases with increased stability in the clients operating environment. Clients in unstable environments seem to have a preference for unstructured auditors. We attribute these changes to cost advantages that structured auditors have in stable environments, and that unstructured auditors have in unstable environments.

The formation and termination of the Cost Accounting Standards Board: Legislative intervention in accounting standard-setting

Abstract This study discusses the circumstances leading first to the formation and later to the termination of the Cost Accounting Standards Board (CASB). The formation of the CASB is analyzed using the regulatory framework presented by Wilson (1974). The legislation enabling the CASB is seen as coming from a diffused benefits-concentrated costs type of situation. The subsequent life of the CASB falls within the general pattern identified by Bernstein (1955) in his well-known theory of the decay of regulatory organizations. It is argued that the inability of the CASB to sustain the support and interest of its advocates left it powerless as an agency, and ultimately led to its termination.

Audit Report Restrictions in Debt Covenants

While the debt-contracting literature has extensively examined financial covenants, there has been little attention paid to audit-related covenants. We focus on a covenant that restricts the borrower from receiving a going-concern audit report (GCAR covenant). We hypothesize that a debt agreement is more likely to include a GCAR covenant as the borrowers credit quality decreases and the length of the loan period increases, and that it is more likely to impose a covenant restricting the choice of auditor when the debt includes a GCAR covenant. Also, we expect that an audit client with a GCAR covenant will be charged a higher audit fee and is more likely to receive a going-concern audit report. We test these hypotheses on a sample of firms that issue private debt. Our results generally support our hypotheses. Our study suggests that lenders rely on the auditors assessment in contracting, and audit-related covenants influence auditor behavior.