Lawrence J. Abbott

The effects of audit committee activity and independence on corporate fraud

Examines whether two key audit committee characteristics combined, activity and independence, reduce likely fraud or aggressive financial statement actions. Utilizes evidence on potential of Blue Ribbon Committee (1999) recommendations regarding composition of audit committees, and further involves a sample of 156 firms — 78 subject to SEC Accounting and Auditing Enforcement Releases and 78 similar sized non‐sanctioned firms. Closes by stating future research may be required regarding young and mature firms ‐ that could affect monitoring.

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.

Financing, dividend and compensation policies subsequent to a shift in the investment opportunity set

Summarizes previous research on the impact of the investment opportunity set (IOS) on firm financing, dividend and compensation policies, develops hypotheses on the effects of IOS changes on these three areas and tests them using 1980‐1989 data from a sample of US firms moving high and low IOS rankings (and vice versa) plus a control (stable) group. Explains the sample selection method and shows that most declining IOS firms were small, high‐tech firms; firms dealing in food and consumer products showed increasing IOS; and control firms were mostly from capital intensive industries. Finds that rising IOS firms generally reduced their dividends and market debt‐to‐equity ratio. Adds that all three groups increased their use of stock option plans but this was only significant for the IOS rising firms. Briefly comments on the underlying reasons for the findings and their implications for further research.

THE EFFECTS OF POST-BANKRUPTCY FINANCING ON GOING CONCERN REPORTING

Abstract We examine whether auditors appear to use information related to client debtor-in-possession (DIP) financing in the going concern decision. DIP financing consists of post-bankruptcy financing which is positively associated with bankruptcy emergence. Statement on Auditing Standards No. 59 (SAS 59) directs auditors’ attention to debt restructuring to mitigate financial distress. Accordingly, we hypothesize that auditors interpret DIP financing as a mitigating factor and are thus less likely to modify the audit opinions of firms receiving DIP financing. We find that auditors are less likely to issue a modification for clients receiving DIP financing, consistent with auditors treating its receipt as a mitigating factor in the going concern decision.