Parveen P. Gupta

The coupling of the symbolic and the technical in an institutionalized context : The negotiated order of the GAO's audit reporting process

The relationship between the work an organization actually performs backstage and the image it presents to external parties has received continuing research attention but is as yet unresolved. Various organizational scholars have held that these two facets of organizations should remain disconnected from one another as they are fundamentally different and any link between them could contaminate one or the other. Other scholars have held that the two facets are indeed connected in a complex interrelationship. We examine this relationship through a qualitative field study of the U.S. General Accounting Offices (GAO) audit reporting process. We find that the GAOs internal work and the image it presents to such parties as the Congress, the press, and the federal agencies it audits are indeed complexly interconnected. We also find that the strength of these connections is influenced by the relative power of the various types of external parties with which the GAO interacts. We conclude by exploring implications for current theory and future research in various types of organizations

Institutional Pressures and Symbolic Displays in a GAO Context

Two key organizational properties have long been studied: (1) the manner in which instrumental work processes are performed, and (2) the symbolic display of rational practice in response to institutional pressures. However, the relationship between these properties has proven to be contentious. For example, at different times, the sociology of professions, institutional theory and loose coupling perspectives have proposed that they should be decoupled and then loosely coupled with one another. Extending beyond these contending propositions, it has also been reasoned that a duality inheres in many elements of organizational structure such that they may be simultaneously instrumental and symbolic in character. To evaluate the relationship among institutional pressures, instrumental work processes and coordination practices, we administered a questionnaire to audit teams in the US General Accounting Office (GAO). Statistical results, augmented with field interviews, suggest that instrumental work processes are loosely coupled with, rather than decoupled from, institutional pressures and their attendant symbolic displays of rational practice. Extending beyond the loose coupling concept, we also found that institutional pressures incite the symbolic facets of instrumental tasks and coordination practices, while GAO professional activities both embody and incite the instrumental facets of institutional pressures. Implications for future research in alternative organizational contexts are explored.

Market Reaction to Control Deficiency Disclosures Under the Sarbanes-Oxley Act: The Early Evidence

Sections 302 and 404 of the landmark Sarbanes-Oxley Act require firms to periodically assess and report control deficiencies to the audit committee as well as to the SEC. Section 302 specifically directs company management to identify and report control deficiencies while Section 404 provides the discipline that forces companies to take the control assessment and reporting task seriously. Importantly, external auditors are required to opine separately on the effectiveness of their clients system of internal control over financial reporting and issue an adverse opinion on internal control in the presence of even a single material weakness. Prior to being mandated by the Sarbanes-Oxley Act, management was not required to assess and report on the state of internal controls in their company. Statement on Auditing Standards (SAS) #60, which provided guidance to the external auditors on these matters, afforded them a great deal of flexibility and judgment not only in determining what constituted a reportable condition but also limited their disclosure only to the audit committee of the board. In a recent speech, Donald T. Nicolaisen, the SECs Chief Accountant, remarks that these new requirements are not only a major financial but also a significant cultural endeavor for registrants in the U.S. and abroad. Consequently, these new requirements have drawn uproar and concern from companies of all sizes and market capitalization. Given the outcry from companies and regulatory assertions that these disclosures are the best thing that has ever happened to the capital markets, we examine whether such control deficiency disclosures convey valuation-relevant information to the market. This issue is important because increasing disclosure requirements without any attendant effect on valuation would impose unnecessary deadweight costs. The disclosures employed in our study were not mandatory under Section 404 at the time our sample firms made them. While there may be many reasons why our sample firms report these deficiencies early, these disclosures may portend the effect to be faced by other firms when the Section 404 rule becomes binding. Consistent with the regulatory assertions, we find that such disclosures are associated with a negative stock price reaction, on average, indicating that such disclosures do indeed convey valuation-relevant information. This reaction is mitigated to some extent, but not fully, if management also discloses that remediation steps have been taken to correct the weaknesses identified in the disclosures. Additionally, the price reaction is less negative for firms employing a Big Four auditing firm. Conversely, the reaction is more negative for firms with larger current liabilities relative to total assets, which suggests that control weaknesses may have implications for increased default risk.

The Changing Roles of the Internal Auditor

Marks the 50th anniversary in 1991 of the Institute of Internal Auditors (IIA). Established in 1941 by a group of forward‐looking internal auditors, the IIA has given great impetus to the professional upgrading of internal auditors. Provides an overview of the evolving role of the internal auditor: tracing the ancient roots of the internal audit function; examining in detail the role played by the IIA in advancing the interests of the profession, and providing an outlook for the future. Concludes by observing that the role of the internal auditor will continue to expand at a rapid pace in the coming decades and beyond.

Do Auditors Allow Earnings Management When Audit Fees are Low

Much of the extant audit research focuses on the impact of excess audit fees paid to the auditors on earnings management. However, there is limited empirical evidence on whether auditors tolerate earnings management when audit fees are low, i.e., below the level of normal fees. Using a large sample representing post-SOX years 2004-2008, we first estimate abnormal (unexpected) audit fees as a residual from a regression of audit fees on several determinants of audit fees. Next, we run a regression of abnormal accruals and other measures of earnings management on abnormal audit fees and control variables. Our results consistently indicate that earnings management is significantly associated with negative abnormal audit fees. In other words, auditors appear to allow earnings management when audit fees are less than the expected fees. To the best of our knowledge this is the first study to examine the relation between abnormal audit fees and the likelihood of fraudulent financial statements. Our findings have important implications for regulators, members of the audit committee, investors, and others.

The Next Frontier for Boards: Oversight of Risk Culture

Abstract Financial and securities regulators around the world are increasingly concluding that deficient board oversight of risk management processes generally, and risk culture in particular, has been a recurring root cause of major corporate governance failures. This article overviews the evolution of these new board risk oversight expectations, outlines handicaps boards face meeting these expectations, and proposes specific steps boards that want to meet the new expectations can take. Handicaps boards face of particular note include, ironically, traditional point-in-time internal audit processes and ERM programs built around an annual update of the company’s “risk register” that is seen as a compliance exercise not a way to integrate risk management in to core business processes, particularly strategic planning. An absence of tangible and practical guidance how boards should actually assess and oversee their company’s risk culture compounds the problem. Recommendations proposed by the authors focus on the significant changes many companies must make to ensure their boards are equipped with the information necessary to oversee management’s “risk appetite/tolerance” and the organization’s risk culture.

Do Companies With Effective Internal Controls Over Financial Reporting Benefit From Sarbanes–Oxley Sections 302 and 404?:

Post-SOX (Sarbanes–Oxley Act) academic research on internal control focuses on the characteristics of publicly listed companies disclosing material control weaknesses or the consequences experienced by these companies. However, to date, limited research has empirically examined whether these new disclosures truly enhance “public interest” by promoting “equity” in the capital markets through enhanced information distribution. In this article, we empirically investigate the impact these disclosures have on information asymmetry and related market micro-structure. We hypothesize that both the management’s and the auditor’s reporting on internal control provide outside investors additional and higher quality information about a firm’s future prospects, thereby reducing the information asymmetry in capital markets. Such reduction in information asymmetry should be reflected in decreased bid-ask spreads and price volatility, as well as increased trading volume. Our cross-sectional analyses show that, subsequent to the management’s report on internal control per Section 302, the information environment improves for U.S. firms as manifested by decreased bid-ask spread and price volatility, and increased trading volume. However, we find no similar results subsequent to the auditors’ reporting on a company’s internal control over financial reporting. In our time-series intervention analyses, about 70% of sample firms have experienced significant and permanent reductions in their bid-ask spreads subsequent to the implementation of Section 302 of SOX, in contrast to only 30% of firms subsequent to the implementation of Section 404 of SOX. Our findings point to the public policy issue of whether financial reporting quality of public companies can be improved at a lower cost.

Risk Oversight: Evolving Expectations for Boards

Abstract This report discusses evolving expectations for board oversight of management’s risk appetite and tolerance and the challenges boards face in meeting them. It also recommends steps to implement a board-driven, objective-centric approach to risk governance.

Board Risk Oversight: What Knowledge & Skills Do Directors Need?

Abstract This article provides an overview of the risk oversight knowledge and skills required to equip directors to better drive value creation, prevent significant corporate value erosion and, perhaps most importantly, help directors protect their personal reputations as guardians of stakeholder interests.

Board Oversight of Management’s Risk Appetite and Tolerance: Regulators Claim they Expect it but Change will Not Come Easy

Abstract In the aftermath of the 2008 global financial crisis post-mortems were convened in countries around the world to identify what went wrong. A unanimous conclusion was that boards of directors of public companies in general, and financial institutions in particular, need to do more to oversee “management’s risk appetite and tolerance” if future crisis are to be avoided. This finding represents a significant paradigm shift in role expectations while introducing a new concept the Financial Stability Board (FSB) has coined effective “Risk Appetite Frameworks” (RAFs).i Regulators around the world are now moving at varying speeds to implement these conclusions by enacting new laws and regulations. What regulators appear to be seriously underestimating is the amount of change necessary to make this laudable goal a reality.