This study investigates the increase in forecasting accuracy of hazard rate bankruptcy prediction models with creditor coordination effects over the forecasting period 1990-2009. A firm's probability of bankruptcy is likely to be marginally affected by creditors' coordination behavior, since failure to coordinate may result in premature foreclosure, denial of refinancing, or disagreement over private restructuring. Applying findings from prior literature, I present creditor coordination effects as interactions between the ex ante likelihood of creditor coordination failure and a firm's information characteristics. The most striking finding of this study is an increase, on average, of 10% in the out-of-sample forecasting accuracy of private firm prediction models with creditor coordination effects. The contributions of this study are twofold, (1) the hazard rate model results provide evidence that creditor coordination can exert marginal effects on firms' probability of bankruptcy, and (2) the forecast accuracy results suggest that incorporating creditor coordination effects can significantly improve the forecasting accuracy of bankruptcy prediction models for private firms.

Employee knowledge is a critical contributor to the quality of output in knowledge-intensive industries. A debated but unresolved question is whether the resources provided by firms in knowledge-intensive industries contribute to the observed variation in employees' performance across firms. The answer to this question is unclear because the benefits from the resources that firms provide may be competed away or transferred to the employees when they leave the firm. I provide evidence on this question by analyzing the equity research industry. Specifically, I examine the change in forecast accuracy of sell-side analysts who move from one brokerage house to another while maintaining coverage of the same firms. This setting allows me to isolate the brokerage house effect on forecast accuracy since the analyst and task are held constant. I find that when an analyst moves to a brokerage house with more (less) resources, analyst forecast accuracy improves (deteriorates). These findings suggest that firms in at least one industry are able to acquire a competitive advantage and generate value by providing their employees with useful and unique resources that cannot be easily transferred when those employees move across firms. I further explore whether my results are driven by the endogeneity of analyst turnover by examining a subsample of turnovers that result from brokerage house closures. My results hold in this subsample as well.

This paper examines the benefits and costs of disclosing regulatory oversight actions. Specifically, I analyze the capital-market consequences of the SEC’s decision to make firm reviews publicly available. Typically, following a review of a public company, the SEC creates a “comment letter” describing its concerns about the company’s financials. Comment letters were previously available only to the company itself, but the SEC started publishing them in 2005. Using a unique database of comment letters issued before 2005, my research design exploits the staggered disclosure of comment letters to show that the letters affect information asymmetry differently in the pre- and post-periods. While the comment letters exacerbate information asymmetry around earnings releases when they are private, they decrease it when public. This effect is stronger when the reviews are more timely. I also show that comment letters increase the information content of the associated earnings releases only when they are public. The effect is stronger for companies with higher levels of investor monitoring. However, I provide evidence that the SEC’s disclosure decision has enhanced managers’ ability to anticipate the content of the reviews, partially mitigating oversight efficacy. Despite this cost, my results suggest that the disclosure of SEC’s reviews helps to level the playing field among investors and improves the complementary oversight role played by the market.

This study examines whether bellwether firms’ management earnings forecasts predict future macroeconomic trends and their propensity to issue these forecasts. I find that forecasts issued by firms producing/sourcing commodities in a large cyclical sector of the economy (defined as bellwether firms) predict real and nominal GDP growth and aggregate earnings for the subsequent four quarters. Forecasts issued towards the end of a quarter and forecasts by small bellwether firms present greater predictive power. When examining the propensity to issue forecasts, I find that bellwether firms provide less frequent disclosures than non-bellwether firms, but bellwether firms owned by many institutional investors issue more frequent disclosures than other bellwether firms. These results suggest that bellwether firms may be reluctant to issue timely disclosures because their investors can learn about them from government announcements. However, institutional investors may pressure bellwether firms to issue these timely disclosures.

<p> Fictitious revenue recognition is the most prevalent upward fraudulent revenue recognition technique top executives utilize especially in the computer software industry. Examined in this quantitative research is the moderating effect of managerial overprecision (one of three forms of overconfidence) when top executives engage in fictitious revenue recognition to obtain a cash bonus and or to ensure the same level of salary. Participants are 29 graduate students in Business and Economics Department from a reputable university in New York. All participants are highly overconfident at a hit rate of 90%. Ten participants (approximately 35%) display a lower level of overconfidence at the lower 25&ndash;40% hit rates. At the 25&ndash;40% hit rates there was a statistically significant difference between means for overconfident executives who choose to manage earnings to influence their compensation and executives who do not exhibit overconfidence. Results from binary logistic regression showed opportunity is the better predictor variable of future earnings management, followed by rationalization (displacing responsibility), and then incentive. Incentive is the fictitious revenue technique of recording as sales items shipped to other locations. These three factors of the fraud triangle accounted for approximately 74% of the variability of the outcome variable rationalization behavior. Rationalization behavior is the tendency for perpetrators to change their beliefs about the ethicality of engaging in an unacceptable behavior and an attempt to negate the negative affect (emotion resulting from a decision or behavior). Recommendation for future research should include executives in companies in the computer hardware industry and computer software industry, diffusion of responsibility (another form of rationalization), and other fictitious revenue techniques. Companies should include those that the Securities and Exchange Commission (SEC) issued an Accounting and Auditing Enforcement Release (AAER) and those that did not receive an AAER.</p><p>

This study will concentrate on the latest factor causing changes in the domain of accountancy: technological advances. With a great deal of creativity and ingenuity, accountants around the world were able to find solutions to one of the problems that arose: increased fraudulent behavior. These, at times, involved a level of technology that was still not fully understood by all its users. This paper is going to focus on one of the ways that technology was applied to react to these changes: continuous auditing and monitoring. The idea of continuously auditing/monitoring the events and transactions of companies is not a new one, but innovations in technology have redefined it. Through explanation and demonstration of three continuous auditing models, this paper will attempt to bring some light on the topic and give an insight on the technology required for such a practice to be carried out effectively. Possible drawbacks and obstacles of incorporating the system in a company’s day-to-day activities will be also looked at, and recommendations will be made.

The Financial Accounting Standards Board (FASB) has recently introduced a new Accounting Standards Update (ASU) that will require financial institutions to measure their loan losses using a new Expected Loss Model (ELM) that emphasizes forward looking financial decisions. Numerous financial journals hypothesize that large financial institutions will face difficulties when implementing the new ASU. This research explores the potential implementation issues that small, local financial institutions, specifically Eastman Credit Union (ECU), will encounter as they begin the implementation process.

abstract: A Chief Audit Executive (CAE) is the leader of a company’s internal audit function. Because there is no mandated disclosure requirement for the internal audit structure, little is understood about the influence of a CAE on a company. Following the logic that a CAE disclosed in SEC filings is more influential in a company’s oversight function, I identify an influential CAE using the disclosure of the role. I then examine the association between an influential CAE and monitoring outcomes. Using data hand collected from SEC filings for S&P 1500 companies from 2004 to 2015, I find companies that have an influential CAE are generally larger, older, and have a larger corporate board. More importantly, I find that an influential CAE in NYSE-listed companies is associated with higher internal control quality. This association is stronger for companies that reference a CAE’s direct interaction with the audit committee. This study provides an initial investigation into a common, but little understood position in corporate oversight. / Dissertation/Thesis / Doctoral Dissertation Accountancy 2019

Debt as opposed to equity as the major source of financing and the influence of banks on the corporate governance of listed companies are unique features of the Japanese business environment. This thesis investigates how these features affect the choice of auditor by Japanese listed companies and auditor reporting by Japanese CPA firms on those companies. Pong and Kita (2006) provided some univariate analyses and indicated that Japanese companies tended to select the same external auditors as their main banks to reduce the agency costs. In this thesis, I further examine the influence of main banks on auditor selection by logistic regression and also investigate the influence of main banks on auditor reporting quality after controlling self-selection bias. Using data from Japanese listed companies in the Tokyo Stock Exchange over the 2002-2008 period, I provide empirical evidence that companies with more reliance on main bank loans are more likely to choose their main banks’ external auditors. Using the Propensity Score Matching method and the Heckman two-step binary probit model to control for self-selection bias, the empirical results support the hypothesis that main bank auditors are more likely to issue modified opinions to the borrowing companies than non-main bank auditors, providing evidence of higher audit quality from main bank auditors. As a sensitivity test, I also use discretionary accruals as a measure of audit quality. the results indicate that companies who choose the same auditors as their main banks have higher audit quality than companies who choose different auditors from their main banks. My thesis contributes to the existing auditing literature in several ways. First, by studying the influence of debt financing on auditor choice and auditor reporting, this thesis extends the auditor market research that focuses mainly on the role of auditors in equity markets to the bank-based market. Furthermore, this thesis also complements auditing research on the influence of institutions on audit quality.

Motivated by the renewed interest in, but insufficient empirical evidence of, collusion between auditors and corporate management, I examine this issue in the unique environment of China, which is characterized by a high level of government control over listed companies and auditors, strong competition for audit clients, and uneven economic and legal development across the country. In contrast to prior studies, I employ a two-stage regression approach to study the determinants of audit collusion in China. In the first stage, I develop an audit opinion prediction model of Big 4 auditors (viewed as “typical” auditors) that corrects for self-selection bias. I then apply this opinion prediction model to clients of non-Big 4 (local) auditors. I define audit collusion as the discrepancy between the actual opinions that clients of local auditors received and the opinions these clients would have received under similar circumstances had they hired typical auditors (i.e., Big 4 auditors): that is, the predicted opinions. In the second stage, I regress an audit collusion proxy on client and auditor characteristics and institutional variables to detect the determinants of audit collusion in China. Audit collusion depends on the closeness of the relation among three parties – the company owner, the company manager, and the auditor. Prior studies suggest that state-owned enterprises (SOEs) and local auditors have the closest relationship and that their interests are mostly aligned. As audit qualification and client loss are costly for SOE managers and local auditors, respectively, both parties have strong incentives to abide by a self-enforcing collusive agreement. Therefore, I expect audit collusion to occur in SOEs that demonstrate poor firm performance (which could lead to qualified opinions), in listed companies that are characterized by a strong government presence and the audit reports of which are subject to government interference, and when market forces are not strong enough to deter collusive behavior. Using a sample of 4,874 firm-year observations over the 2001-2006 period, I find statistically robust evidence to confirm my hypotheses. Specifically, I find that SOEs in poor financial condition and for which the government is the largest shareholder tend to collude with their auditors. In addition, I find that the relation between non-SOEs (regardless of their financial condition) and audit collusion to be significantly negative, which suggests that the interests of non-SOEs are mostly aligned with the interests of individual investors. Consistent with prior studies, I also find that audit collusion usually occurs in regions in which the underlying institutional features of the market environment are not in place to punish auditors. Prior research generally uses auditor switching to test for the existence of collusive auditor behavior by comparing observed pre- and post-switch audit opinions. As a result, relatively little attention has been paid to the possibility of audit collusion in the absence of auditor switching. Moreover, comparison of observed opinions before and after companies switch auditors is subject to potential self-selection bias, as post-switchers are not randomly assigned to audit firms. The present study overcomes these problems by considering all listed companies (regardless of auditor switching) and using the two-stage Heckman approach to control for self-selection bias. Further, in contrast to most prior research, which uses an analytical model to distinguish honest and dishonest auditor reporting, I empirically test collusion by comparing the difference between the actual opinions that client firms receive and the opinions they would have received had they used independent, higher quality auditors. My results suggest that as long as the interests of the company and the auditor coincide and neither party has an incentive to break the collusive agreement, audit collusion can occur even when auditor switching does not take place. The finding that audit collusion exists in China suggests that government rules and regulations alone are not sufficient to create a healthy audit market. Rather, the government should improve the overall institutional environment through measures such as the reduction of government ownership of firms, withdrawal of the government from involvement in both the stock and audit markets, and development of a credit market and legal environment that deter collusive auditor behavior.