Nicholas Dopuch

Abnormal stock returns associated with media disclosures of ‘subject to’ qualified audit opinions

Abstract This paper contains evidence of a significant negative stock price reaction to media disclosures of ‘subject to’ qualified audit opinions. Disclosures of qualifications in the financial news media (the Wall Street Journal and the Broad Tape) are rare relative to the frequency of audit qualifications. Other studies do not detect an impact of qualified opinions on stock prices. None of the explanations for the difference in the results between this study and prior studies is consistent with the data. We are unable to draw strong inferences because we cannot identify the selection process that produces the sample of media disclosures.

Production Efficiency and the Pricing of Audit Services

In this paper, we examine the relative efficiency of audit production by one of the then Big 6 public accounting firms for a sample of 247 geographically dispersed audits of U.S. companies performed in 1989. To test the relative efficiency of audit production, we use both stochastic frontier estimation (SFE) and data envelopment analysis (DEA). A feature of our research is that we also test whether any apparent inefficiencies in production, identified using SFE and DEA, are correlated with audit pricing. That is, do apparent inefficiencies cause the public accounting firm to reduce its unit price (billing rate) per hour of labor utilized on an engagement? With respect to results, we do not find any evidence of relative (within-sample) inefficiencies in the use of partner, manager, senior, or staff labor hours using SFE. This suggests that the SFE model may not be sufficiently powerful to detect inefficiencies, even with our reasonably large sample size. However, we do find apparent inefficiencies using the DEA model. Audits range from about 74 percent to 100 percent relative efficiency in production, while the average audit is produced at about an 88 percent efficiency level, relative to the most efficient audits in the sample. Moreover, the inefficiencies identified using DEA are correlated with the firms realization rate. That is, average billing rates per hour fall as the amount of inefficiency increases. Our results suggest that there are moderate inefficiencies in the production of many of the subject public accounting firms audits, and that such inefficiencies are economically costly to the firm.

Estimation of benchmark performance standards: An application to public school expenditures

Abstract The accounting and management literature reflects an increasing interest in relative performance evaluation (RPE) measures, often called ‘benchmarking’. In this paper we illustrate how stochastic frontier estimation (SFE) can be used to estimate benchmark performance standards which control for differences in the environments of the benchmarked operating units. Our application of SFE uses cross-sectional data reported by school districts in the state of Missouri for the year 1990–1991. The results suggest that the districts may have had as much as

The Effects of Lowballing on Audit Quality: An Experimental Markets Study:

394 million of excess expenditures in their operations.

The Impact of a Heterogeneous Accrual-Generating Process on Empirical Accrual Models

The purpose of this study is to investigate the potential effects of low-balling on audit quality. Critics of the audit industry often allege that the practice of lowballing (charging fees below the marginal cost of an audit) provides a potential incentive for auditors to reduce their audit quality in order to be retained for future engagements with a client. We investigated this issue using experimental methods that had subjects (verifiers) providing a verification service for sellers of assets. Our results indicate that lowballing did not materially reduce service quality, relative to benchmark settings without lowballing when subjects interacted in markets. However, lowballing did have a material effect in a setting with the combined conditions of a high degree of lowballing and no competitive market for the services.

The Effect of Alternative Accounting Rules for Nonsubsidiary Investments

The cross-sectional approach that is typically used to estimate accrual models implicitly assumes that firms within the same industry have a homogeneous accrual-generating process (AGP). In this article, the authors examine this implicit assumption along three dimensions. First, they argue that the relationship between working-capital accruals and changes in sales is more complex than portrayed by existing empirical accrual models. In addition to sales changes, accruals are also affected by accrual determinants such as firms’ inventory and credit policies. Second, the authors provide evidence that the assumption of a uniform AGP is violated in industries whose firms’ accrual determinants are highly dispersed. Third, they document some implications of violating the assumption of a uniform AGP. Firms in industries with high variations in accrual determinants are likely to have large absolute abnormal accruals. The authors show that the previously documented increase in the absolute level of abnormal accruals over time could be attributed, in part, to the increased heterogeneity in industries with respect to their AGPs.

Physician resource utilization in radiation oncology : A model based on management of carcinoma of the prostate

The purpose of this paper is to provide some empirical evidence regarding a controversy over the proper method of valuing and measuring income from nonsubsidiary investments. This controversy is part of the general dispute over whether historical cost or market values should be used as the basis for asset valuation and income determinations Our concern is focused primarily on the support for a shift from historical cost to market values provided by several recent reports of the Concepts and Standards Committees of the American Accounting Association.2 All the reports on inventory, long-lived assets, realization, and matching have acclaimed the virtues of using a market basis of accounting. Their reasons are based upon a priori assessments of the benefits to be gained from this shift. These benefits include the timeliness of reporting gains and losses, better evaluation of managerial efficiency, and less opportunity for manipulation. No empirical evaluations of this controversy have been made, and for one good reason. It is difficult, if not virtually impossible, to obtain

Capital Market Equilibrium, Information Production, and Selecting Accounting Techniques: Theoretical Framework and Review of Empirical Work

PURPOSE To develop a methodology to estimate the comparative cost of physician time in treating patients with localized prostate cancer, using as an example two-dimensional (2D) vs. three-dimensional (3D) conformal irradiation techniques, and to illustrate how current cost-accounting techniques can be used to quantify the cost of physician time and effort of any treatment. METHODS AND MATERIALS Activity-based costing, a recent innovation in accounting, widely recommended for estimating and managing the costs of specific activities, was used to derive physician resource utilization costs (actual cost of the physician services and related support services consumed). RESULTS Patients treated with 3D conformal irradiation consume about 50% more physician time than patients receiving 2D conventional radiation therapy. The average professional reimbursement for the 3D conformal irradiation is only about 26% more than for the 2D treatment. Substantial variations in cost are found depending on the total available physician working hours. In an academic institution, a physician working 40 hours a week would have to spend an average of about 60% of available time on clinical services to break even on a 2D treatment process and over 74% of available time on clinical work to break even on a 3D treatment process. The same physician working 50 hours a week would have to spend an average of about 48% of available time on 2D clinical services and about 60% of available time on 3D clinical work to break even. Current Medicare reimbursement for 3D treatment falls short of actual costs, even if physicians work 100% of a 50-hour week. Medicare reimbursement for 2D barely allows the department to break even for 2D treatments. CONCLUSIONS Costs based on estimates of resource use can be substantially under- or overestimated. A consistent language (method) is needed to obtain and describe the costs of radiation therapy. The methodology described here can help practitioners and researchers more accurately interpret actual cost information. Future use of such cost-estimation methodologies could provide consistent and comparable costs for negotiations with health care providers and help assess different treatment strategies.