Stella Fearnley

A methodology for analysing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes

Abstract There is a consensus that the business reporting model needs to expand to serve the changing information needs of the market and provide the information required for enhanced corporate transparency and accountability. Worldwide, regulators view narrative disclosures as the key to achieving the desired step-change in the quality of corporate reporting. In recent years, accounting researchers have increasingly focused their efforts on investigating disclosure and it is now recognised that there is an urgent need to develop disclosure metrics to facilitate research into voluntary disclosure and quality [Core, J. E. (2001). A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(3), 441–456]. This paper responds to this call and contributes in two principal ways. First, the paper introduces to the academic literature a comprehensive four-dimensional framework for the holistic content analysis of accounting narratives and presents a computer-assisted methodology for implementing this framework. This procedure provides a rich descriptive profile of a companys narrative disclosures based on the coding of topic and three type attributes. Second, the paper explores the complex concept of quality, and the problematic nature of quality measurement. It makes a preliminary attempt to identify some of the attributes of quality (such as relative amount of disclosure and topic spread), suggests observable proxies for these and offers a tentative summary measure of disclosure quality.

The Importance of Audit Firm Characteristics and the Drivers of Auditor Change in UK Listed Companies

Abstract This paper explores the importance of audit firm characteristics and the factors motivating auditor change based on questionnaire responses from 210 listed UK companies (a response rate of 70%). Twenty-nine potentially desirable auditor characteristics are identified from the extant literature and their importance elicited. Exploratory factor analysis reduces these variables to eight uncorrelated underlying dimensions: reputation/quality; acceptability to third parties: value for money: ability to provide non-audit services: small audit firm: specialist industry knowledge; non-Big Six large audit firm: and geographical proximity. Insights into the nature of ‘the Big Six factor’ emerge. Two thirds of companies had recently considered changing auditors; the main reasons cited being audit Ice level, dissatisfaction with audit quality and changes in top management. Of those companies that considered change. 73% did not actually do so. the main reasons cited being fee reduction by the incumbent and av...

Perceptions of auditor independence: U.K. evidence

The reality and perception of auditor independence is fundamental to public confidence in financial reporting. A new Independence Standards Board was set up in the U.S. in 1997 and the European Union (EU) is currently seeking to establish a common core of independence principles. The general setting within which audit decisions are made and independence perceptions are formed is evolving rapidly due to competitive and regulatory changes. Policy-makers must work continuously to evaluate the critical threat factors and develop appropriate independence principles. This paper explores the potential of recent regulatory reforms in the United Kingdom (U.K.), many of which are unique to that country, to strengthen the independence framework. Using a questionnaire instrument, U.K. interested parties’ perceptions of the influence on auditor independence of a large set of 45 economic and regulatory factors are elicited. Most factors have a significant impact on independence perceptions for all groups (finance directors, audit partners, and financial journalists). The principal threat factors relate to economic dependence and non-audit service provision, while the principal enhancement factors relate to regulatory changes introduced in the early 1990s (the existence of an audit committee, the risk of referral to the Financial Reporting Review Panel and the risk to the audit firm of loss of Registered Auditor status). Exploratory factor analysis reduces the factor set to a smaller number of uncorrelated underlying dimensions.

Behind the Audit Report: A Descriptive Study of Discussions and Negotiations Between Auditors and Directors

This paper presents direct evidence concerning the extent, nature, and outcome of interactions between the two primary parties in the auditor-client relationship — finance directors (FDs) and audit engagement partners (AEPs). A questionnaire instrument is used to elicit the frequency with which, over a three year period, an extensive set of 46 audit and audit-related issues is discussed, is negotiated, and results in a change to either the accounting numbers or disclosures. Three hundred FDs and 307 AEPs of listed UK companies are surveyed, with response rates of 51% and 80%, respectively. Principal findings are that: (i) compliance issues dominate discussions, while accounting and fee issues dominate negotiations; (ii) audit committees generally reduce the level of negotiation and increase the level of discussion, suggesting that the overall degree of confrontation declines; and (iii) in the majority of cases (57%), negotiation results in a change to the financial statements, providing evidence of the auditors influence on the financial statements.

Auditor changes and tendering: UK interview evidence

Competitive pressures in the audit market have led to aggressive fee renegotiation and tendering by companies. This paper reviews microeconomic tender theory and finds it to be of limited value in the audit context. Content analysis of semi‐structured interviews conducted with the finance directors of 12 UK listed companies which had recently tendered and/or changed auditor are used to investigate the tender/change process. Contrary to popular belief, fee levels do not necessarily dominate the decision to change auditors, rather changes within the client company, audit staffing, and auditor’s professionalism and competency issues dominate. Nor is the selection of a tender “winner” generally based solely on price, as predicted by tender theory and as would be expected when the consequences of audit failure do not fall on the directors. However, consistent with economic theory, the winning bid appears frequently to be too low, resulting in attempts by auditors to subsequently increase fees and resentment by the finance director. Directors generally appear to view the audit tender as relating to not only the attest function per se, but to a larger package of services concerning the financial reporting function. The relative importance of price versus non‐price competition in auditor choice is found to vary across companies. Auditor choice is influenced strongly by both economic and behavioural factors, in particular, by directors’ assessment of the quality of non‐attest services and the expected quality of working relationships, in addition to price and audit quality.

Perceptions of factors affecting audit quality in the post-SOX UK regulatory environment

Global repercussions of the Enron scandal and particularly the enactment of the Sarbanes–Oxley Act (SOX) in the USA, resulted in significant changes in the UK regulatory regime for audit and corporate governance, including an increased role for audit committees and independent inspection of audit firms. UK-listed company chief financial officers, audit committee chairs (ACCs) and audit partners were surveyed in 2007 to obtain views on the impact of 36 economic and regulatory factors on audit quality post-SOX. Four hundred and ninety-eight usable responses were received, representing a response rate of 36%. All groups rated various audit committee interactions with auditors among the factors most enhancing audit quality. However, International Standards on Auditing (ISAs) and the audit inspection regime, aspects of the ‘standards-surveillance-compliance’ regulatory system, are viewed as less effective. Exploratory factor analysis reduces the 36 factors to nine independent dimensions: economic risk; audit committee activities; risk of regulatory action; audit firm ethics; economic independence of auditor; audit partner rotation; risk of client loss; audit firm size and, lastly, ISAs and audit inspection. Post-SOX regulations have introduced additional dimensions to the factors influencing audit quality. Respondents commented that aspects of the changed regime are largely process and compliance driven, with high costs for limited benefits, a finding consistent with regulatory over-reaction.

How IFRS has destabilised financial reporting for UK non-listed entities

Purpose - The paper aims to trace the development of attitudes towards financial reporting solutions for entities not subject to the European Union (EU) Regulation. This Regulation mandated application of IFRS for the group accounts of listed companies for financial years beginning 1 January 2005. It seeks to evaluate the alternatives in the light of changing attitudes to IFRS, and the accounting model being adopted, particularly focusing on the problems facing smaller companies. Design/methodology/approach - The paper employs qualitative analysis of data from two main sources: first, a series of interviews with financially literate individuals before IFRS was implemented in the UK; and second, from responses to ASBs consultations on the future of financial reporting for non-listed entities. Findings - The increasing perception is that IFRS is overly complex and is complicating the search for appropriate form of financial reporting for entities not covered by the EU Regulation. In particular, there is a difficulty in knowing the correct dividing point between large and small company accounting, and views on this have evolved over time. The needs of small and medium enterprises appear to have been ignored in the debates dominated by the requirements of global players. Research limitations/implications - The implications are that further, possibly more radical policy options need to be considered for smaller companies to ensure that the costs of financial reporting remain in proportion to the benefits. Originality/value - The paper identifies the changing views in the UK of the suitability of IFRS for non-listed entities.

The regulatory framework for financial reporting and auditing in the United Kingdom: the present position and impending changes

Abstract This paper provides an overview of the current regulatory framework for financial reporting and auditing in the United Kingdom. The framework remained stable for 10 years following significant reforms in 1990–1991. A further process of change is now taking place. These changes arise from three sources: refinements in the UKs regulatory framework, the European Commissions drive for a single capital market, and political interest in accounting regulation following the Enron collapse. The present position is explained and the future implications of recent and impending changes are considered.

A Real-life Case Study of Audit Interactions—Resolving Messy, Complex Problems

Real-life accounting and auditing problems are often complex and messy, requiring the synthesis of technical knowledge in addition to the application of generic skills. To help students acquire the necessary skills to deal with these problems effectively, educators have called for the use of case-based methods. Cases based on real situations (such as the one presented in this paper) are viewed as being of most educational value. This case is based on interviews with each of the three key parties involved with the final stage of the audit—the finance director, the audit engagement partner and the audit committee chair. The valuation of intangibles in business combinations (IFRS 3) is the issue which causes the audit interactions described. Although some suggestions are included, the case may be used very flexibly, depending on time constraints, the nature of the course and programme in which the case is embedded, and instructor preferences.

Do UK audit committees really engage with auditors on audit planning and performance

In the wake of the financial crisis, regulators intend to increase the responsibilities of audit committees (ACs), yet little is known about how ACs discharge their existing responsibilities and interact with auditors and management. This study investigates the involvement of the AC, the AC chair (ACC), the audit partner (AP) and the chief financial officer (CFO) in relation to a range of audit-related matters in UK-listed companies in the 2007 regulatory environment, which remains fundamentally unchanged. The level of AC and ACC engagement in seven AC responsibilities set by the Combined Code is high (over 80%). However, only 50% of 16 audit planning, performance and finalisation matters are routinely discussed. The ACC acts without the full AC in 11% of discussions, while 25% involve only the CFO and AP without either the ACC or the AC. The extent of discussion and/or ACC involvement is influenced by background characteristics (company size, auditor size and ACC experience and qualifications). This evidence of less than full AC engagement with audit-related issues suggests that regulators may risk creating an AC expectations gap if AC duties under the extant model are significantly increased without structural change.