Norman Wong

Audit Fees: A Meta-Analysis of the Effect of Supply and Demand Attributes

Abstract We evaluate and summarize the large body of audit fee research and use meta-analysis to test the combined effect of the most commonly used independent variables. The perspective provided by the meta-analysis allows us to reconsider the anomalies, mixed results, and gaps in audit fee research. We find that, although many independent variables have consistent results, several show no clear pattern to the results and others only show significant results in certain periods or particular countries. These variables include a loss by the client and leverage, which have become significant in comparatively recent studies; internal auditing and governance, both of which have mixed results; auditor specialization, regarding which there is still some uncertainty; and the audit opinion, which was a significant variable before 1990 but not in more recent studies.

Non-audit fees, long-term auditor - client relationships and earnings management

We examine whether auditor independence is affected by the amount spent on non-audit services. Faster growth in non-audit fees and longer time periods over which non-audit services are purchased might reduce the auditors independence from that client. Our results do not provide any support for a relationship between non-audit fee growth rates or the length of time of the non-audit fee relationship with the client and discretionary accruals, our measure of earnings management. We do find some evidence that the interaction of the non-audit fee time-period measures and client importance is positive and significantly related to discretionary accruals.

Efficient contracting and accounting

This paper examines the role of accounting in an efficient contracting perspective of the firm. The firm is an alternative to the market when the costs of using the market become excessive. When a firm replaces the market, authority substitutes for the price mechanism in determining how decisions are made. This paper examines accountings role in controlling the firm to ensure resources are put to their highest-value use. Accounting, together with employment contracts, compensation arrangements, debt contracts, internal and external auditors, and the board of directors including its audit and compensation committees comprise a package of mechanisms that have evolved to govern the firm. These institutional devices become the firms efficient contracting technology. As accounting is part of that contracting technology, the accounting controls and systems that evolve and get implemented are efficient and the accounting methods that are used in calculating the numbers that form part of the firms contractual arrangements are, likewise, efficient. Copyright (c) AFAANZ, 2003.

Board Composition and the Value of New Zealand Companies

This study examines the relationship between board composition and firm value, and the extent to which this relationship may be affected by a company’s investment opportunity set. There is little research that examines this issue, particularly for the New Zealand market. Of the research that exists, and generally for the research that examines how board composition affects firm performance, the findings have been mixed. Using a randomly chosen sample, which improves the external validity of results from prior studies, we find that board composition of high growth option firms is positively related to firm value, and this relationship is maintained when more refined measures that proxy the characteristics of outside directors (such as tenure of outside directors, the level of outside director equity ownership, the number of other board positions held by outside directors, and the total proportion of non‐executive directors, including grey directors) are recognised.

Voluntary disclosure of operating income

This study investigates whether New Zealand firms’ voluntary disclosure of operating income, which is also known as earnings before interest and tax, in the income statement is related to the investment opportunity set. New Zealand provides an ideal setting to examine this because New Zealand generally accepted accounting principles do not require the disclosure of operating income as an intermediate income number in arriving at net income (earnings) in the income statement. We hypothesize and find evidence that firms with high assets-in-place and high leverage are more likely to voluntarily disclose operating income/earnings before interest and tax. However, the assets-in-place finding is sensitive to alternative measures of the investment opportunity set.

Issues in financial accounting and reporting: a Pacific Rim focus

Purpose – The purpose of this paper is to provide editorial insight into recent developments in financial accounting issues in the Pacific Rim area. The paper aims to focus on the impact of international financial reporting standards (IFRS) and provide a commentary, as well as context, for the papers that appear in this special issue.Design/methodology/approach – The paper reviews and comments on several relevant academic papers and regulatory releases.Findings – This paper outlines several key developments in the Pacific Rim region since the decision by Australia and New Zealand to adopt IFRS. The proposed adoption of IFRS in other countries is examined, and noted are the successes and tensions that one set of global accounting standards creates. The contributions of four papers are outlined in this special issue to this debate, and provide suggestions for future research.Practical implications – This review should be of relevance to academics, the profession, and regulators, by providing academic insigh...

Comprehensive versus partial deferred tax liabilities and equity market values

This study investigates the value relevance of the deferred tax liability recognized using comprehensive versus partial allocation. Our research examines New Zealand firms who, prior to the introduction of International Financial Reporting Standards, were free to choose between comprehensive and partial allocation. We test the joint hypothesis that the partial, as opposed to comprehensive, deferred tax liability is relevant for equity valuation and is sufficiently reliable to be reflected in investors’ valuation assessments. Our results are consistent with this prediction.

The Impact of Not Amortizing Intangible Assets on Valuation Multiples

Intangible assets comprise goodwill and identifiable intangible assets with finite and indefinite lives. Current New Zealand GAAP amortizes intangible assets on a systematic basis over their useful lives, with the proviso that the amortization period for goodwill cannot exceed 20 years. International Financial Reporting Standards (IFRS) do not permit the periodic amortization of goodwill and identifiable intangible assets with indefinite lives. Instead, these intangibles are subject to a periodic impairment test with any impairment recognised in profit or loss. In the absence of an impairment loss, the IFRS rule would increase earnings before interest and tax (EBIT) and earnings (E), but this impact should not affect the value of the enterprise (EV) and the value of the firm’s equity (P). Hence, valuation heuristics for EV/EBIT (enterprise value to EBIT) and PE (price to earnings) multiples, which are commonly used for valuations and which have evolved under the amortization rule, need to be revised downw...

New Zealand State-owned enterprises: is state-ownership detrimental to firm performance?

ABSTRACT This study examines the performance of State-owned enterprises by conducting a contemporary examination in the New Zealand environment. Applying both a cross-sectional and time-series approach, we document significant and consistent evidence that state ownership is negatively associated with firm profitability compared to private ownership. We also find evidence suggesting that state ownership is positively associated with asset turnover and labour intensity, but not associated with labour turnover. This implies that SOEs on average experience a higher asset turnover due to excessive labour employment, compared to private firms.

Sustainability assurance: an emerging market for the accounting profession

Purpose The purpose of this study is to examine firm-specific characteristics that influence firms’ choice of assurance provider in sustainability assurance. The market for sustainability assurance consists of three types: accounting firms (particularly the Big 4 firms), non-accounting specialist consulting firms (that specialise only in sustainability issues) and non-accounting general consulting firms (that provide general advisory/consulting services). Design/methodology/approach Using a sample selected from the top 100 publicly listed companies in the UK and USA that published a sustainability report in 2010 and 2011, respectively, for which assurance was obtained, a multinomial logistic regression model is applied by regressing the three types of assurance providers on firm size, leverage, profit, liquidity, percentage of strategic shareholding and two control variables – country and year. Findings The results indicate that the choice of sustainability assurance provider is related to firm size, profitability, liquidity and country. Research limitations/implications There may be relevant variables omitted from the empirical analysis; results of this study may not be able to be generalized beyond the sample selected; and the sample size is relatively small. Practical implications Sustainability assurance is a viable assurance service that the accounting profession can provide. Originality/value This study helps in identifying the types of firms that are likely to demand assurance services provided by accounting firms.