<p> Financial statement fraud is so prevalent that the American Institute of Certified Public Accountants (AICPA) and the Securities and Exchange Commission (SEC) both issued guidelines dealing with revenue recognition specifically because the majority of financial statement fraud involves overstating revenue. The specific problem addressed by this study was that although there are analytical procedures used throughout the audit process, only 10% - 12% of detected frauds are found using this method. Research has shown that companies with large differences between reported net income and taxable income showed among other things, fraudulently overstated earnings compared to companies with average differences. The study examined how income tax expense related to operating income, which included all revenue less expenses but before income taxes payable; and, whether the ratio of income tax expense to operating income differs for public companies with and without detected financial statement fraud. The full census sample included examination of fraud firms and non-fraud firms for all cases occurring between the years 1993 and 2005. The data was analyzed using descriptive statistics including measurements of central tendency and variability and inferential statistics including z-scores and Pearson&rsquo;s correlation coefficient. The results indicated that there is a relationship between non-fraud income tax expense and income before income taxes r = .996, N = 332, (p &lt; .01), two tails, and for fraud firms, there is a correlation between income tax expense and income before income taxes r = .963, N = 386, (p &lt; .01), two tails. This research also indicates that a correlation exists for non-fraud firms between income tax expense and operating income, r = .702, N = 196, (p &lt; .01), two tails and for fraud firms r = .842, N = 386, (p &lt; .01), two tails. Finally, the results also indicate there may be a significant correlation between the ratio of income tax to operating income for fraud firms compared to the ratio of income tax expense to operating income for nonfraud firms where r = .169, N = 196, (p &lt; .05), two tails. Converting the fraud ratio to a z-score demonstrates that any ratio greater than .46 gives a greater than 50% chance of indicating fraud (Field, 2009).</p>

This research provides theoretical, regulatory, and empirical underpinnings that financial reports are the joint representation of the certifying triangle (i.e., CEO-CFO-Auditor). This research also finds that replacement of the CEO tends to reduce the survival rate of the CFO with the firm, and vice versa; replacement of the CFO reduces the survival rate of the auditor, and vice versa. However, an association does not exist between the survival rate of the CEO and the auditor. Moreover, while a single realignment of the certifying triangle does not reduce the year-end ERC, a double (CEO-CFO) realignment significantly decreases the ERC. This negative effect is mitigated if the double (CEO-CFO and CEO-Auditor) realignment coincides with prior adverse accounting conditions. Nevertheless, the effects of a triple realignment on the ERC are not conclusive. Collectively, these results suggest that the board and the market perceive the certifying triangle as a team when it comes to financial reporting; however, the interrelations among the three vary. Further, investors uncertainty of earnings credibility increases significantly when two contracts are replaced contemporaneously. However, investors confidence is largely restored when the board acts to make the two related parties accountable for the adverse conditions that the firm runs into. Overall, triangle realignment represents a holistic effort by the board to build a well-incentivized and well-matched financial reporting team. This paper contributes to the financial reporting research by challenging the presumed homogeneity of the top executive team.

Erickson, Heitzman, and Zhangs (2013) results indicate that firms engage in tax-motivated loss recognition to offset previously recorded income. Since tax and financial income by design is linked (Guenther, Maydew, and Nutter 1997), net operating loss reporting can impose significant costs on CEOs who have to recognize similar losses for financial reporting purposes. As a result, firms must motivate the CEO to accelerate loss recognition if the firm expects to benefit from the cash inflows generated by the tax refund. In the current study, I examine whether CEO cash-based compensation increases to offset the potential negative costs that can arise due to NOL reporting. Counter to ex-ante predictions, the results do not indicate that CEO cash-based compensation increases surrounding NOL reporting. The lack of cash-based compensation increase is consistent with NOL reporting arising from poor financial performance, rather than tax-motivated loss recognition.

This study investigates whether the receipt of a modified audit report is associated with a reduction in the perceived (by investors) quality of the firm's earnings as reflected in its earnings response coefficient (ERC). The accounting numbers of a firm receiving a modification to its audit report are likely to contain relatively higher measurement error and, hence, be more noisy. Furthermore, there is likely to be greater uncertainty regarding the production, investment, and financing (PIF) activities of these firms. Both of these factors--noise in accounting earnings and uncertainty in PIF activities--are expected to be negatively related to the market's responsiveness to earnings. Therefore, firms receiving modified audit reports are expected to exhibit reduced ERCs. Furthermore, firms receiving a going concern modified audit report are expected to have more noisy accounting numbers and higher uncertainty regarding future PIF activities than firms receiving a material uncertainty modified audit report without a going concern uncertainty. Accordingly, firms in the former category are expected to exhibit a greater decline in their ERCs than firms in the latter group. For similar reasons, the firms facing a material uncertainty modified audit report will exhibit a sharper decline in their ERCs than firms receiving a consistency modified audit report. A sample of 677 firms receiving first-time modifications is examined over a six year period, the three years prior to a first-time modification through the two years following this modification. Descriptive evidence is provided that examines market performance, accounting performance, leverage position, and accrual management. This evidence suggests that firms receiving modifications are performing more poorly, are more leveraged than similar firms. Moreover, these firms appear to be engaging in earnings management at the time of the modification. The regression results indicate that following a modification, a firm's ERC is lower, implying increased noise in accounting information. Modifications for going concern uncertainties are associated with the largest decline in ERC, followed by material uncertainty modifications. No significant decline in ERC was observed for consistency modifications.

Positive accounting theory proposes that it is costly to violate debt covenants and, hence, that managers will be motivated to try to prevent violations from occurring (Watts and Zimmerman 1986). While early research in the debt covenant literature simply assumed that default was costly, a recent trend has been to examine firm-specific conditions in an effort to more accurately describe the nature of the costs (Beneish and Press 1993). This study is comparable in that firm-specific conditions are used to shed new light on the effects of debt covenant violation. This paper, however, focuses on the long-term consequences, as opposed to the short-term costs, of debt covenant violation and on the degree to which the market's perception of violation is a function of these consequences. Thus, the findings presented herein reveal (1) what happens to firms when they violate their debt covenants, and (2) how accurately and efficiently the financial markets impound this information. The current study utilizes a sample of 162 firms having initial debt covenant defaults between 1978 and 1988. Relative frequency analyses reveal that only 40% of these firms violate their covenants once. The remaining 60% have subsequent incidents of either technical default, monetary default, bankruptcy or liquidation. Firms forced into bankruptcy or liquidation comprise approximately 20% of the sample, suggesting that covenant violations, indeed, are not inconsequential events. In support of this, the capital markets tests reveal that equity holders do not take covenant violations lightly. Sample firms are found to experience significant increases in systematic risk and significant decreases in share prices. Furthermore, share price reactions to initial covenant violation announcements are found to be associated with the specific subsequent events (i.e., subsequent technical default, monetary default, bankruptcy and liquidation) that are faced by the violating firms. Thus, this paper reveals that the market is capable of distinguishing, at the date of initial default, between firms that will have no future default problems and firms that will face more severe consequences, such as monetary default, bankruptcy and liquidation.

When faced with various contract options, better workers self-select to those that pay according to performance (Salop and Salop 1976; Demski and Feltham 1978; Guasch and Weiss 1980; Chow 1983; Waller 1985; Waller and Chow 1985; Dillard and Fisher 1990). Similarly, this study suggests that public accounting firms, characterized by up-or-out contracts where workers are promoted or terminated based on the relative rank of their performance, design contracts that will attract better workers. This study hypothesizes that a low-skill worker's expected value of an up-or-out contract: (Hypothesis H1) is positively related to the error associated with employee performance measurement and (Hypothesis H2) is lower when the performance of terminated workers is disclosed versus when it is not. As a consequence of reducing the expected value, low-skill workers will tend to select other contracts. Hypothesis H1 is related to the analytical implications of tournament research by Nalebuff and Stiglitz 1980; Lazear and Rosen 1981; O'Keeffe, Viscusi, and Zeckhauser 1984; McLaughlin 1988). Two experiments were used to test the hypotheses. Both asked subjects to compare and state their preferences regarding two contracts; however, the first emphasized control while the second emphasized mundane realism. The data of both experiments strongly supported hypothesis H1. In the second experiment, this support was stronger yet for the responses of the subject's with the more extreme skill ratings. Results related to hypothesis 2 of the first experiment were weakly significant and of the second experiment were significant but opposite from the prediction.

<p> This dissertation studies a firm&rsquo;s decision to voluntarily disclose that it is seeking &ldquo;strategic alternatives,&rdquo; effectively setting out to explore the potential sale or merger of the company. Firms appear to use these voluntary disclosures to maximize shareholder value and credibly convey private information. Voluntary disclosures of strategic alternatives are associated with a three-day return of +5.8 percent on average. Compared to an entropy-balanced control group with similar characteristics in expectation, disclosing firms that are subsequently acquired experience positive abnormal takeover returns (reflecting benefits from a more favorable sale process and improved information), whereas disclosing firms that are not subsequently acquired experience negative abnormal returns (reflecting costs from more dysfunction). The existence of economically significant costs and benefits is consistent with a general voluntary disclosure framework resulting in a threshold equilibrium. The decision to seek strategic alternatives appears to be prompted by poor performance, poor information environment, and the presence of corporate governance catalysts, namely, blockholders, activists, and golden parachutes.</p>

This study investigates how CEO managerial ability affects investment quality, investment efficiency, and the value of cash. Specifically, I examine whether higher managerial ability is associated with higher M&A quality, more efficient capital investments, and higher value of cash. Investment decision-making and implementation can signal a CEO’s managerial ability (Stein 2003), and shareholders assign more value to the cash of those firms with high ability CEOs. Thus, I predict that more able CEOs conduct higher quality M&A and make more efficient capital investment decisions. I also propose that the value of cash is higher for firms with more able CEOs. Using the methodology developed in Demerjian et al. (2012) to estimate CEO managerial ability, I find that the M&As conducted by more able CEOs are less likely to experience goodwill impairment and divestitures in the post-acquisition period. I also find that managerial ability, to a certain extent, can improve capital investment efficiency when firms have a higher likelihood of over- or under-investment. Furthermore, I provide evidence that cash has higher value if it is managed by more able CEOs. Overall, my findings suggest that while managerial ability plays a limited role in improving M&A quality, it significantly increases capital investment efficiency and the value of cash.

The reasons why managers make certain accounting method choices have been explored by accounting researchers for some time. For over ten years, much of this research has been driven by positive accounting theory, which is based on the underlying assumption that managers act rationally to maximize their own personal wealth when making accounting method choices. This study is an initial attempt to extend positive accounting theory research to a not-for-profit setting; specifically, the choice of accounting method for endowment investments by colleges and universities is examined. The three objectives of this study are: 1) to determine if the findings of previous research in positive accounting theory hold in the college and university industry, 2) to determine if other institutional characteristics are associated with the accounting method used for endowment investments, and 3) to provide information to policymakers regarding the accounting for long-term investment by not-for-profit organizations. Data were obtained from 162 four-year colleges and universities. Two regression models were developed to explain the variation in the accounting method used for investments. The first model contained five variables related to positive accounting theory and the second model contained five variables related to other institutional characteristics. The results of the first model indicate that the choice of accounting method for endowment investments is related to the factors suggested by positive accounting theory. Government regulations and bonus plan provisions factors were significant and of the expected sign. The political costs factor was also significant but not of the expected sign. The debt covenants factor was not significant. The results of the second model indicate that the choice of accounting method for endowment investments is related to other institutional characteristics. Specifically, the model found that location, asset allocation in equity investments, and the institution's auditor had a statistically significant influence on the choice of accounting method. The research indicates that there are systematic differences in the choice of accounting method for not-for-profit organizations similar to those explained by positive accounting theory for for-profit organizations. Additional institutional characteristics were also found to influence accounting choice, which warrant further research.

The accounting profession is through a natural progression constantly changing its shape. What was once known as traditional accounting is nowadays entailing moving towards a more service-minded occupation where the former bookkeepers are steadily transforming into accounting consultants. Nevertheless, since accountancy is commonly known as a craft which is supposed to be taught through supervision; this professional shift is crucially linked with the choice of teaching method within the apprenticeship process which takes place between an apprentice and an experienced supervisor. Prior research has revealed that a tolerant approach of teaching has beneficial impacts regarding corporative efficiency since it leads to a greater chance to adapt to environmental changes compared to a conservative approach of teaching.1Correspondingly, a conservative approach tends to result into limitations concerning creativity and innovation associated with an individual level. Accordingly, this paper has flourished a deeper understanding of the apprenticeship process by addressing insights and identifying reasons for why accounting firms which are examined in this study might possibly prefer a conservative approach instead of a tolerant approach given the comparative advantages related to a tolerant approach of teaching during the apprenticeship process. Aligned with this presented purpose, twelve semi-structured interviews were conducted within four different accounting firms located in Sweden; where one half of the respondents were newly graduated accountants while the other half supervisors. Through the identification of linguistic patterns stated during the interviews; we finally reached the conclusion that practical consistency and corporate values were arguments demonstrated in favor of applying a conservative approach during the apprenticeship process, while educational and technical reasoning was determinant factors for preferring a tolerant approach of teaching.