Michael T. Dugan

A century of debate for internal controls and their assessment: a study of reactive evolution

In July 2002, the United States Congress passed the Sarbanes-Oxley Act in an effort to assuage the public outrage over the lax regulatory oversight in light of the high-profile financial scandals. It was hoped that the act would calm the fears of investors and bring confidence back to corporate reporting through a mandated internal control review process. Though the impact of the act on audit procedures and internal control development will be studied for many years, it may be simply one of many developments in the evolution of internal control theory and practice that had occurred over the previous century. Like Sarbanes-Oxley, many of the changes in internal control procedures were a reaction to an event that identified a weakness in current practice. This evolution of the internal control process, as seen through the many laws, regulations and pronouncements of the previous century, has been, in the main, a reactive one resulting from inadequate control measures.

A re-examination of the operating leverage-financial leverage tradeoff hypothesis

Abstract The “tradeoff” hypothesis states that firms trade off their operating leverage and financial leverage to manage their level of overall risk. The objective of this study is to examine whether firms that exhibit a relatively high degree of apparent tradeoff differ in financial attributes from firms that exhibit a relatively low degree of apparent tradeoff. The empirical results provide evidence that the two types of firms differ significantly with respect to certain financial attributes (ratios), though the results are sensitive to the choice of estimation technique for calculating the degree of operating leverage and degree of financial leverage coefficients.

An Empirical Investigation of the Relationship between Audit Structure and Client Attributes

The purpose of this study is to empirically investigate whether a relationship exists between the degree of structure of audit methodologies and client attributes. The motivation of this study stems from recent research in the audit structure area. Recent research suggests that differences exist in the degree of structure of audit methodologies (i.e., audit structure) across audit firms and that these differences might reflect differences in such factors as clientele, size of audit firm, and educational background and experience of personnel. A multivariate explanatory model with the type of audit structure as the response variable and various client attributes as explanatory variables is developed. Client characteristics including risk, business environment, agency factors, and size are considered. It should be noted at the outset that this study is exploratory in nature. Although formal hypotheses statements are presented in the paper, these hypotheses are based on speculative conjectures. Specifically, the formulated hypotheses tested in the explanatory model are based on suggestions of previous research. These suggestions are admittedly speculative because a well-developed theory about the relationship between audit structure and client attributes does not yet exist. Thus, the primary objective of this study is to provide empirical evidence about the relationship that may result in a better understanding of the suggested hypotheses and serve as an initial step toward the development of a theory. Despite continued interest in the differences in the degree of structure of audit approaches across audit firms and suggestions by several researchers (see, for example, Cushing and Loebbecke [9], Kinney [18], and Mutchler and Williams [22]) that an association might exist between

A Simulation-Based Investigation of Errors in Accounting-Based Surrogates for Internal Rate of Return

Accounting-based measures of a firms ex post performance represent accessible, albeit imperfect, surrogates for its internal rate of return (IRR). Using a cross-sectional data set obtained via computer simulation, this study calculated the error with which the accounting rate of return (ARR) and conditional estimate of internal rate of return (CIRR) estimate IRR. The study compared the error with which both surrogates measure IRR, as well as the ability of growth in unit demand (gD), inventory cost flow assumption (INV) and depreciation method (DEP) to explain the measurement error in both surrogates. Copyright Blackwell Publishers Ltd 1997.

The Measurement of Real-Asset Determinants of Systematic Risk and the Likelihood of Receipt of Uncertainty Qualifications

The findings of prior research have been inconsistent about the use of systematic risk (beta) as a surrogate for those aspects of the audit environment related to the likelihood of an uncertainty qualification. The purpose of this study is to refine the theoretical framework and measurement issues of this topic through an examination of the association between two real-asset determinants of systematic risk (the degree of operating leverage and the degree of financial leverage) and the likelihood of receipt of an uncertainty qualification. The results indicate that these two leverage measures are not significantly associated with the receipt of uncertainty qualifications in auditing practice.