Michael S. Wilkins

Evidence on Risk Changes Around Audit Qualification and Qualification Withdrawal Announcements

Qualifications to an audit report may provide the basis for an auditors claim that the user was warned about an unusual risk. If audit qualifications highlight changes in firm risk that are material, then the announcement of a qualification should be associated with an increase in the risk of the affected firm. In this paper, we test this proposition. Our initial tests do not detect a shift in systematic risk around qualification announcements; however, subsequent analysis shows that firms announcing recurring material uncertainties have higher levels of systematic risk than firms announcing initial qualifications. Furthermore, we document a significant decrease in systematic risk for firms publicly announcing qualification withdrawals. These results are consistent with announcements of qualification withdrawals providing more timely information to capital market participants than announcements of qualification issuances, which are more likely to have been pre-empted by alternative sources of information. Our findings also indicate that unsystematic, or firm-specific, risk changes significantly around qualification and withdrawal announcement dates. Although systematic risk is of primary importance to investors, information regarding company-specific risk may assist other outside users (i.e., lenders, regulators, employees, rating agencies, etc.) in evaluating a given firms ability to satisfy its existing contracts. In total, this paper provides evidence that may be useful to many external parties regarding the association between the material uncertainties that are highlighted in audit reports and changes in firm risk. Copyright Blackwell Publishers Ltd 1998.

Internal Control Opinion Shopping and Audit Market Competition

ABSTRACT This study examines the extent to which audit clients successfully engage in internal control opinion shopping activities and whether audit market competition appears to facilitate those activities. Regulators have long been concerned about the impact of both audit market competition and opinion shopping on audit quality. We adopt the framework developed in Lennox (2000) to construct a proxy to measure the tendency that clients engage in internal control opinion shopping activities. Our empirical results suggest that clients are successful in shopping for clean internal control opinions. In addition, we find evidence that internal control opinion shopping occurs primarily in competitive audit markets. Finally, our results indicate that among auditor dismissal clients, opinion shopping is more likely to occur when dismissals are made relatively late during a reporting period and when audit market competition is high. Our findings have implications for the current policy debate regarding audit qual...

Initial Technical Violations of Debt Covenants and Changes in Firm Risk

The purpose of this paper is to investigate whether initial technical debt covenant violations are associated with significant increases in the equity risk of violating firms. Our results indicate that first-time violations are associated with significant increases in both systematic and unsystematic risk. The increase in systematic risk is attributable primarily to rising levels of financial leverage as opposed to changes in the underlying asset beta. We also find that the change in unsystematic risk experienced by first-time debt covenant violators is a significant predictor of future exchange delisting, even after controlling for other factors typically associated with increasing financial distress. Copyright Blackwell Publishers Ltd 2001.

The impact of audit firm industry differentiation on IPO underpricing

Purpose – The purpose of this paper is to investigate the relationship between auditor industry differentiation (specialization) and the underpricing of initial public offerings (IPOs). The intention is to determine whether IPO firms – particularly those in the small firm segment of the market where information asymmetry is likely to be greatest – can benefit from significantly better IPO pricing by engaging the services of differentiated auditors.Design/methodology/approach – The paper examines a broad sample of initial public offerings made between 1991 and 2000. It also conducts univariate and multivariate tests to assess the relationship between IPO underpricing and auditor industry specialization.Findings – The paper finds that IPOs audited by Big 6 firms experience significantly less underpricing than IPOs audited by non‐Big 6 firms, particularly among small clients. It also finds an additional (and significantly larger) reduction in underpricing when the client engages an auditor that has establish...

The Pricing of Assurance Services in Secondary Equity Offerings

This paper examines the pricing of assurance services in secondary equity offerings (SEOs). Our empirical model extends initial public offering (IPO) fee specifications to include variables that are unique to, or more relevant for, secondary offerings. We document an inverse relationship between SEO fees and a clients ability to delay its secondary offering, suggesting that auditors do not charge as much for SEOs made by relatively mature firms. The relationship reverses, however, when the client is required to use more comprehensive types of filings (i.e., when assurance effort is higher). We also show that fees are higher when the SEO comes to market during the clients annual audit period. This finding is consistent with the shifting of year-end audit fees to SEO engagements in an effort to boost earnings for both clients and auditors (at the expense of shareholders). We cannot, however, unambiguously conclude that fee shifting exists, as the observed fee premium could be explained by other factors.

Articulation in Cash Flow Statements: A Resource for Financial Accounting Courses

Abstract Recent accounting research (Bahnson, P., Miller, P., & Budge, B. (1996). Nonarticulation in cash flow statements and implications for education, research and practice. Accounting Horizons, 10, 1–15 has shown that firms implementing the indirect method for reporting cash flows under SFAS 95 rarely produce financial statements that articulate cleanly. The purposes of this paper are (1) to provide financial accounting educators with a list of companies for which articulation does exist, (2) to describe the process by which educators can update the list in the future, or modify it to suit their own preferences, and (3) to present an analysis of firms’ reporting practices on the cash flow statement, which may be of interest to more advanced students studying the complexities of the statement of cash flows. This analysis of reporting practices involves an assessment of the articulation of individual COMPUSTAT line items (e.g. inventory) and subsets of line items (e.g. inventory, receivables, deferred taxes, and depreciation) for the 1998 data year. The findings indicate that relatively few firms report consistent values for single line items and that very few firms report consistent values across subsets of line items. Although the rate of articulation decreases as firm size, and hence reporting complexity, increases, 74 large, publicly-traded firms for which clean articulation does exist were identified. This list of firms should prove useful to introductory accounting educators who use real-world examples for classroom purposes.

Engagement, Innovation, and Impact: Tracking Faculty Activities Under the 2013 AACSB Standards

ABSTRACT This article describes the process one university followed to develop an efficient way of collecting information related to faculty engagement, innovation, and impact. The purpose of the document (i.e., the tracking record) is to facilitate the production of effective Association to Advance Collegiate Schools of Business (AACSB) Self-Evaluation Reports and Continuous Improvement Review Reports. The experiences recorded and the sample tracking record provided will be of use to accreditation directors, associate deans, and deans across a wide range of universities as they prepare for initial accreditation or maintenance of accreditation under the 2013 AACSB Standards.

The Importance of Call Delays and Cash Flow Positions in Evaluating the Information Content of Convertible Preferred Stock Calls

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct information elements. First, price responses to delayed calls are increasingly negative the larger the cash flow disadvantage to calling. In other words, common investors respond more negatively to calls when the forced conversion results in convertible holders receiving larger dividends than were previously required. Second, both cash flow advantage and cash flow disadvantage firms experience significant downward shifts in earnings growth during post-call periods, suggesting that delayed calls are timely signals of decreasing profitability.

How Do Auditors Respond to FCPA Risk

Using a sample of public firm FCPA violations, we investigate how auditors respond to FCPA risk. We find that audit fees are higher for FCPA violators beginning in the violation period with an additional increase during the period in which regulatory investigations occur. Fees exhibit a greater sensitivity to payables and SG&A expenses for FCPA violators than for non-violators, suggesting that auditors adapt their procedures for accounts that have the highest likely FCPA risk. We also find evidence of a contagion effect with respect to FCPA risk and audit fees among non-violating peers of FCPA violators. Finally, we show that many of the relationships we document for FCPA violators exist among non-violating firms with elevated foreign bribery risk as well, but in magnitudes that are smaller than those of confirmed FCPA violators.