Randal J. Elder

Corporate Governance and Earnings Management: The Implications of Corporate Governance Best-Practice Principles for Taiwanese Listed Companies

This study investigates whether corporate governance characteristics, mandated by the Corporate Governance Best-Practice Principles (CGBPP) for companies listed in Taiwan, are associated with earnings management. In particular, we examine whether the independence, financial expertise, and voluntary formation of independent directorship (supervisorship) are associated with the absolute value of discretionary accruals. Our findings suggest that the independence of supervisors, financial expertise of independent directors, and voluntary formation of independent directorship (supervisorship) are associated with lower likelihood of earnings management. These findings are stronger after the CGBPP was enacted, suggesting that the implementation of CGBPP has lowered the likelihood of earnings management.

Improving student performance and retention via supplemental instruction

Abstract Supplemental Instruction (SI) is a cooperative learning model designed to improve student performance and retention in courses with a history of high failure and withdrawal rates. This paper describes the SI model and provides descriptive data on student performance, failure, and withdrawal rates for 132 introductory accounting classes from 21 four-year colleges and universities that have adopted SI. Participants in SI programs were observed to have higher average course grades, and lower failure and withdrawal rates. In addition, for a subsample of nine schools, course attrition rates (Ds, Fs, and withdrawals) were lower after implementing SI. Descriptive data presented in the paper indicate that SI is effective in improving student performance and retention in introductory accounting.

Audit Quality and Earnings Management by Seasoned Equity Offering Firms

Abstract We investigate the relationship between audit quality as measured by audit firm size and industry specialisation, and earnings management as measured by discretionary current accruals, for companies making seasoned equity offerings (SEOs). Earnings management in the SEO process is of concern because of the underperformance of seasoned equity offering firms. We find evidence that Big 5 auditors are associated with lower earnings management in the years before, during, and subsequent to the SEO. Industry specialist auditors are associated with lower earnings management only in the year of the SEO. Our study contributes to the literature by demonstrating that audit quality reduces earnings management by SEO companies, and that industry specialisation, as a measure of audit quality, also constrains earnings management.

Audit quality attributes, client size and cost of equity capital

Purpose - The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a client firms cost of equity capital. Design/methodology/approach - The paper uses empirical data to construct a measure of Findings - The paper finds that auditor size (auditor is a member of the BigX), auditor industry specialization and auditor tenure are negatively associated with the client firms cost of equity capital. However, the paper finds that this effect is limited only to small client firms, potentially reflecting the poor information environment associated with such firms. Practical implications - The study highlights the importance of audit quality attributes in determining the firms cost of capital. It also highlights ways in which firms (especially small firms) can reduce the cost of equity capital by improving their information environment through the judicious selection of auditors. Originality/value - This is believed to be the first paper to examine whether the effects of three audit quality attributes (auditor size, auditor industry specialization and auditor tenure) on a firms cost of capital are dependent on the clients size. The paper empirically shows that such effects are more pronounced for smaller clients.

IPO Underpricing and Audit Quality Differentiation Within Non-Big 5 Firms

The choice of a non-Big 5 audit firm is optimal for some IPO companies. The choice of audit firm is important because auditor reputation may influence the pricing of the offering. This paper investigates the relationship between IPO underpricing and auditor compensation and proxies for non-Big 5 audit quality. We develop a continuous measure of auditor reputation based on factor analysis. This measure of auditor reputation is associated with lower IPO underpricing and higher auditor compensation, suggesting that auditor quality is an important determinant for firms hiring non-Big 5 auditors. We also examine the underlying constructs for auditor quality to determine their separate effects on IPO underpricing and auditor quality. Non-Big 5 national firms are associated with lower underpricing and higher auditor compensation, suggesting that these firms are perceived to be quality differentiated from non-national firms. SEC experience for non-national firms is associated with higher audit fees, suggesting this experience is perceived to be valuable.

Auditor Independence, Audit Quality and Auditor-Client Negotiation Outcomes: Some Evidence from Taiwan

This study investigates auditor independence in auditor-client negotiation over financial reporting issues using Taiwan data, and whether high quality auditors are more likely than low quality auditors to resist client management pressures over financial reporting issues. Non-audit fees and auditor tenure are used as proxies for auditor independence. We find a significant negative relation between non-audit services and the extent to which the client agreed with the auditor over the financial reporting issues, consistent with non-audit services reducing independence. We did not find a significant relation between auditor tenure and the degree to which the client agreed with the auditor over the financial reporting issues. However, we find a significant positive relation between the interaction of non-audit fees and the auditor tenure variable and the extent of client agreement, suggesting that non-audit fees do not affect the auditors ability to resist client management pressure when auditor tenure is longer. The client is more likely to agree with the auditor when the client perceives the auditor to be an industry specialist. However, we do not find clients are more likely to agree with Big 5 audit firms. Our study provides initial empirical evidence that non-audit fees, auditor tenure, and auditor industry expertise are important factors that affect auditor-client negotiation over financial reporting issues.

Audit Quality Attributes, Client Size and Cost of Capital

We investigate the effects of audit quality attributes related to the auditor and the auditor-client relationship on the firms cost of capital. We further examine whether these effects differ according to client size. We focus on two auditor characteristics; auditor size and auditor industry specialization and two auditor-client relationship characteristics; auditor tenure and the auditors opinion. We use the client firms cost of capital as a proxy for the degree to which the market values these quality attributes. Auditor size, industry specialization, tenure and type of auditor opinion are important determinants of perceived audit quality. The first three characteristics are negatively related to the cost of capital. We also find that that the client firms cost of capital increases if the auditor issues any opinion other than a clean opinion. These results are driven by small clients, suggesting audit quality attributes are highly appreciated for smaller clients.

Corporate Governance, Growth Opportunities, and Earnings Restatements: Effects of a Corporate Governance Code

The study first examines whether firms that adopted the corporate governance mechanisms mandated by the newly enacted Corporate Governance Code in Taiwan are associated with lower incidence of earnings restatements. We find that firms with independent directors (supervisors) are associated with lower incidence of earnings restatements. We further examine this research question in a growth opportunity setting, a prevailing environmental feature in this emerging market, and find that high-growth firms having independent directors (supervisors) with financial expertise are associated with lower incidence of earnings restatements, suggesting that financial expertise of independent directors (supervisors) is important in the financial reporting function in high-growth firms.

Unexpected Fees and the Prediction of Material Weaknesses in Internal Control Over Financial Reporting

We investigate whether prior year unexpected audit fees help predict new material weaknesses in internal control over financial reporting reported under Section 404 of the Sarbanes–Oxley Act (SOX). Predicting material weaknesses may be useful to investors and other financial statement users because these disclosures have adverse economic impacts on disclosing firms. Unexpected fees are significantly associated with material weaknesses reported under Section 404, even after controlling for Section 302 disclosures and other factors associated with internal control weaknesses. Unexpected fees are associated with company-level weaknesses but are not significantly associated with account-specific weaknesses, consistent with differences in the nature and severity of the two types of material weaknesses. Our results are consistent with unexpected audit fees containing information on unobserved audit costs and client control risks, which help predict future internal control weaknesses.

The Effect of the Type and Number of Internal Control Weaknesses and Their Remediation on Audit Fees

Purpose - The implementation of compliance procedures associated with the Sarbanes-Oxley Act of 2002 came at a great cost to most publicly-traded firms, largely due to the internal control disclosures required by Section 404 of the Act. The purpose of this paper is to contribute to the inquiry on internal control effectiveness by examining the impact of the type (same or different) and number of internal control weaknesses on audit fees. The paper also examines whether firms that remediate continue to incur higher audit fees compared to firms that never disclosed a weakness. Design/methodology/approach - The authors evaluate the impact of internal control weaknesses and their remediation on audit fees using ordinary least squares regression for 9,122 firm year observations (3,096 unique firms) over the time period 2004-2007. Findings - The authors find: an incremental impact on audit fees of additional material weakness disclosures; firms that report the same material weakness pay higher fees than firms reporting a different material weakness in consecutive years; and audit fees remain high one, two, and three years following remediation compared to a firm that never disclosed an internal control weakness. Originality/value - In contrast with prior studies, the sample includes firms that remediated weaknesses, firms that failed to remediate weaknesses, and firms that did not have prior weaknesses. The results suggest that the failure to remediate has greater risk implications than new weaknesses and that material weaknesses are associated with higher audit fees several years after remediation.