Effective corporate governance : experimental evidence on international auditors'judgments and the contribution of financial accounting education

1 Summary This dissertation deals with two major aspects of corporate governance that grew in importance during the last years: the internal audit function and financial accounting education. In three essays, I contribute to research on these topics which are embedded in the broader corporate governance literature. The first two essays consist of experimental investigations of internal auditors' judgments. They deal with two research issues for which accounting research lacks evidence: The effectiveness of internal controls and the potentially conflicting role of the internal audit function between management and the audit committee. The findings of the first two essays contribute to the literature on internal auditors' judgment and the role of the internal audit function as a major cornerstone of corporate governance. The third essay theoretically examines a broader issue but also relates to the overall research question of this dissertation: What contributes to effective corporate governance? This last essay takes the perspective that the root for quality corporate governance is appropriate financial accounting education. r develop a public interest approach to accounting education that contributes to the literature on adequate accounting education with respect to corporate governance and accounting harmonization. The increasing importance of both the internal audit function and accounting education for corporate governance can be explained by the same recent fundamental changes that still affect accounting research and practice. First, the Sarbanes-Oxley Act of 2002 (SOX, 2002) and the 8th EU Directive (EU, 2006) have led to a bigger role for the internal audit function in corporate governance. Their implications regarding the implementation of audit committees and their oversight over internal controls are extensive. As a consequence, the internal audit function has become increasingly important for corporate governance and serves a new master (i.e. the audit committee) within the company in addition to management. Second, the SOX (2002) and the 8th EU Directive introduced additional internal control mechanisms that are expected to contribute to the reliability of financial information. As a consequence, the internal audit function is expected to contribute to a greater extent to the reliability of financial statements. Therefore, effective internal control mechanisms that strengthen objective judgments and independence become important. This is especially true when external- auditors rely on the work of internal auditors in the context of the International Standard on Auditing (ISA) 610 and the equivalent US Statement on Auditing Standards (SAS) 65 (see IFAC, 2009 and AICPA, 1990). Third, the harmonization of international reporting standards is increasingly promoted by means of a principles-based approach. It is the leading approach since a study of the SEC (2003) that was required by the SOX (2002) in section 108(d) was in favor of this approach. As a result, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) commit themselves to the development of compatible accounting standards based on a principles-based approach. Moreover, since the Norwalk Agreement of 2002, the two standard setters have developed exposure drafts for a common conceptual framework that will be the basis for accounting harmonization. The new .framework will be in favor of fair value measurement and accounting for real-world economic phenomena. These changes in terms of standard setting lead to a trend towards more professional judgment in the accounting process. They affect internal and external auditors, accountants, and managers in general. As a consequence, a new competency set for preparers and users of financial statements is required. The basil for this new competency set is adequate accounting education (Schipper, 2003). These three issues which affect corporate governance are the initial point of this dissertation and constitute its motivation. Two broad questions motivated a scientific examination in three essays: 1) What are major aspects to be examined regarding the new role of the internal audit function? 2) How should major changes in standard setting affect financial accounting education? The first question became apparent due to two published literature reviews by Gramling et al. (2004) and Cohen, Krishnamoorthy & Wright (2004). These studies raise various questions for future research that are still relevant and which motivate the first two essays of my dissertation. In the first essay, I focus on the role of the internal audit function as one cornerstone of corporate governance and its potentially conflicting role of serving both management and the audit committee (IIA, 2003). In an experimental study, I provide evidence on the challenges for internal auditors in their role as servant for two masters -the audit committee and management -and how this influences internal auditors' judgment (Gramling et al. 2004; Cohen, Krishnamoorthy & Wright, 2004). I ask if there is an expectation gap between what internal auditors should provide for corporate governance in theory compared to what internal auditors are able to provide in practice. In particular, I focus on the effect of serving two masters on the internal auditor's independence. I argue that independence is hardly achievable if the internal audit function serves two masters with conflicting priorities. The second essay provides evidence on the effectiveness of accountability as an internal control mechanism. In general, internal control mechanisms based on accountability were enforced by the SOX (2002) and the 8th EU Directive. Subsequently, many companies introduced sub-certification processes that should contribute to an objective judgment process. Thus, these mechanisms are important to strengthen the reliability of financial statements. Based on a need for evidence on the effectiveness of internal control mechanisms (Brennan & Solomon, 2008; Gramling et al. 2004; Cohen, Krishnamoorthy & Wright, 2004; Solomon & Trotman, 2003), I designed an experiment to examine the joint effect of accountability and obedience pressure in an internal audit setting. I argue that obedience pressure potentially can lead to a negative influence on accountants' objectivity (e.g. DeZoort & Lord, 1997) whereas accountability can mitigate this negative effect. My second main research question - How should major changes in standard setting affect financial accounting education? - is investigated in the third essay. It is motivated by the observation during my PhD that many conferences deal with the topic of accounting education but very little is published about what needs to be done. Moreover, the Endings in the first two essays of this thesis and their literature review suggest that financial accounting education can contribute significantly to quality corporate governance as argued elsewhere (Schipper, 2003; Boyce, 2004; Ghoshal, 2005). In the third essay of this thesis, I therefore focus on approaches to financial accounting education that account for the changes in standard setting and also contribute to corporate governance and accounting harmonization. I argue that the competency set that is required in practice changes due to major changes in standard setting. As the major contribution of the third article, I develop a public interest approach for financial accounting education. The major findings of this dissertation can be summarized as follows. The first essay provides evidence to an important research question raised by Gramling et al. (2004, p. 240): "If the audit committee and management have different visions for the corporate governance role of the IAF, which vision will dominate?" According to the results of the first essay, internal auditors do follow the priorities of either management or the audit committee based on the guidance provided by the Chief Audit executive. The study's results question whether the independence of the internal audit function is actually achievable. My findings contribute to research on internal auditors' judgment and the internal audit function's independence in the broader frame of corporate governance. The results are also important for practice because independence is a major justification for a positive contribution of the internal audit function to corporate governance. The major findings of the second essay indicate that the duty to sign work results - a means of holding people accountable -mitigates the negative effect of obedience pressure on reliability. Hence, I found evidence that control .mechanisms relying on certifications may enhance the reliability of financial information. These findings contribute to the literature on the effectiveness of internal control mechanisms. They are also important in the light of sub-certification processes that resulted from the Sarbanes-Oxley Act and the 8th EU Directive. The third essay contributes to the literature by developing a measurement framework that accounts for the consequences of major trends in standard setting. Moreovér, it shows how these trends affect the required .competency set of people dealing with accounting issues. Based on this work, my main contribution is the development of a public interest approach for the design of adequate financial accounting curricula. 2 Serving two masters: Experimental evidence on the independence of internal auditors Abstract Twenty nine internal auditors participated in a study that examines the independence of internal auditors in their potentially competing roles of serving two masters: the audit committee and management. Our main hypothesis suggests that internal auditors' independence is not achievable in an institutional setting in which internal auditors are accountable to two different parties with potentially differing priorities. We test our hypothesis in an experiment in which the treatment consisted of two different instructions of the Chief audit executive; one stressing the priority of management (cost reduction) and one stressing the priority of the audit committee (effectiveness). Internal auditors had to evaluate internal controls and their inherent costs of different processes which varied in their degree of task complexity. Our main results indicate that internal auditors' evaluation of the processes is significantly different when task complexity is high. Our findings suggest that internal auditors do follow the priorities of either management or the audit committee depending on the instructions of a superior internal auditor. The study's results question whether the independence of the internal audit function is actually achievable. With our findings, we contribute to research on internal auditors' judgment and the internal audit function's independence in the frame of corporate governance.

Ore genesis of Pb-Zn deposits in the Nappe zone of Northern Tunisia: Constraints from Pb-S-C-O isotopic systems

The Jalta and Jebel Ghozlane ore deposits are located in the extreme North of Tunisia, within the Nappe zone. The mineralization of Jalta, hosted in Triassic dolostones and the overlying Mio-Pliocene conglomerates, consists of abundant galena, barite, and cerussite with accessory sphalerite, pyrite, and jordanite. At Jebel Ghozlane, large Pb-Zn concentrations occur in the Triassic dolostones and Eocene limestones. The mineral association consists of galena, sphalerite, barite, and celestite and their oxidation products (cerussite, smithsonite, and anglesite). Lead isotope ratios in galena from both districts are relatively homogeneous ((206)Pb/(204)Pb = 18.702-18.823, (207)Pb/(204)Pb = 15.665-15.677, (208)Pb/(204)Pb = 38.725-38.875). The delta(34)S values for sulfates from both areas (+12.2 to +16.2 parts per thousand at Jalta and + 14.3 to + 19.4 parts per thousand at Jebel Ghozlane) are compatible with a derivation of sulfur from marine sulfates, possibly sourced from the Triassic evaporites. The delta(34)S values of the sulfides have a range between -10 and +12.5 parts per thousand at Jalta, and between -9.1 and +22.1 parts per thousand at Jebel Ghozlane. The large range of values suggests reduction of the sulfate by bacterial and/or thermochemical reduction of sulfate to sulfur. The high delta(34)S values of sulfides require closed-system reduction processes. The isotopically light carbon in late calcites (-6.3 to -2.5 parts per thousand) and authigenic dolomite (-17.6 parts per thousand) suggests an organic source of at least some of the carbon in these samples, whereas the similarity of the delta(18)O values between calcite (+24.8 parts per thousand) and the authigenic dolomite (+24.7 parts per thousand) of Jalta and their respective host rocks reflects oxygen isotope buffering of the mineralizing fluids by the host rock carbonates. The secondary calcite isotope compositions of Jalta are compatible with a hydrothermal fluid circulation at approximately 100 to 200 degrees C, but temperatures as low as 50 degrees C may be indicated by the late calcite of Jebel Ghozlane (delta(18)O of +35.9 parts per thousand). Given the geological events related to the Alpine orogeny in the Nappe zone (nappe emplacement, bimodal volcanism, and reactivation of major faults, such as Ghardimaou-Cap Serrat) and the Neogene age of the host rocks in several localities, a Late-Miocene age is proposed for the Pb-Zn ore deposits considered in this study. Remobilization of deep-seated primary deposits in the Paleozoic sequence is the most probable source for metals in both localities considered in this study and probably in the Nappe zone as a whole. (C) 2011 Elsevier B.V. All rights reserved.

Development of a hepatocyte hollow fiber bioreactor for the study of contrast agents by magnetic resonance imaging

Thanks to the continuous progress made in recent years, medical imaging has become an important tool in the diagnosis of various pathologies. In particular, magnetic resonance imaging (MRI) permits to obtain images with a remarkably high resolution without the use of ionizing radiation and is consequently widely applied for a broad range of conditions in all parts of the body. Contrast agents are used in MRI to improve tissue discrimination. Different categories of contrast agents are clinically available, the most widely used being gadolinium chelates. One can distinguish between extracellular gadolinium chelates such as Gd-DTPA, and hepatobiliary gadolinium chelates such as Gd-BOPTA. The latter are able to enter hepatocytes from where they are partially excreted into the bile to an extent dependent on the contrast agent and animal species. Due to this property, hepatobiliary contrast agents are particularly interesting for the MRI of the liver. Actually, a change in signal intensity can result from a change in transport functions signaling the presence of impaired hepatocytes, e.g. in the case of focal (like cancer) or diffuse (like cirrhosis) liver diseases. Although the excretion mechanism into the bile is well known, the uptake mechanisms of hepatobiliary contrast agents into hepatocytes are still not completely understood and several hypotheses have been proposed. As a good knowledge of these transport mechanisms is required to allow an efficient diagnosis by MRI of the functional state of the liver, more fundamental research is needed and an efficient MRI compatible in vitro model would be an asset. So far, most data concerning these transport mechanisms have been obtained by MRI with in vivo models or by a method of detection other than MRI with cellular or sub-cellular models. Actually, no in vitro model is currently available for the study and quantification of contrast agents by MRI notably because high cellular densities are needed to allow detection, and no metallic devices can be used inside the magnet room, which is incompatible with most tissue or cell cultures that require controlled temperature and oxygenation. The aim of this thesis is thus to develop an MRI compatible in vitro cellular model to study the transport of hepatobiliary contrast agents, in particular Gd-BOPTA, into hepatocytes directly by MRI. A better understanding of this transport and especially of its modification in case of hepatic disorder could permit in a second step to extrapolate this knowledge to humans and to use the kinetics of hepatobiliary contrast agents as a tool for the diagnosis of hepatic diseases.

Emergence of oriented circuits driven by synaptic pruning associated with spike-timing-dependent plasticity (STDP)

ABSTRACT: Massive synaptic pruning following over-growth is a general feature of mammalian brain maturation. Pruning starts near time of birth and is completed by time of sexual maturation. Trigger signals able to induce synaptic pruning could be related to dynamic functions that depend on the timing of action potentials. Spike-timing-dependent synaptic plasticity (STDP) is a change in the synaptic strength based on the ordering of pre- and postsynaptic spikes. The relation between synaptic efficacy and synaptic pruning suggests that the weak synapses may be modified and removed through competitive "learning" rules. This plasticity rule might produce the strengthening of the connections among neurons that belong to cell assemblies characterized by recurrent patterns of firing. Conversely, the connections that are not recurrently activated might decrease in efficiency and eventually be eliminated. The main goal of our study is to determine whether or not, and under which conditions, such cell assemblies may emerge out of a locally connected random network of integrate-and-fire units distributed on a 2D lattice receiving background noise and content-related input organized in both temporal and spatial dimensions. The originality of our study stands on the relatively large size of the network, 10,000 units, the duration of the experiment, 10E6 time units (one time unit corresponding to the duration of a spike), and the application of an original bio-inspired STDP modification rule compatible with hardware implementation. A first batch of experiments was performed to test that the randomly generated connectivity and the STDP-driven pruning did not show any spurious bias in absence of stimulation. Among other things, a scale factor was approximated to compensate for the network size on the ac¬tivity. Networks were then stimulated with the spatiotemporal patterns. The analysis of the connections remaining at the end of the simulations, as well as the analysis of the time series resulting from the interconnected units activity, suggest that feed-forward circuits emerge from the initially randomly connected networks by pruning. RESUME: L'élagage massif des synapses après une croissance excessive est une phase normale de la ma¬turation du cerveau des mammifères. L'élagage commence peu avant la naissance et est complété avant l'âge de la maturité sexuelle. Les facteurs déclenchants capables d'induire l'élagage des synapses pourraient être liés à des processus dynamiques qui dépendent de la temporalité rela¬tive des potentiels d'actions. La plasticité synaptique à modulation temporelle relative (STDP) correspond à un changement de la force synaptique basé sur l'ordre des décharges pré- et post- synaptiques. La relation entre l'efficacité synaptique et l'élagage des synapses suggère que les synapses les plus faibles pourraient être modifiées et retirées au moyen d'une règle "d'appren¬tissage" faisant intervenir une compétition. Cette règle de plasticité pourrait produire le ren¬forcement des connexions parmi les neurones qui appartiennent à une assemblée de cellules caractérisée par des motifs de décharge récurrents. A l'inverse, les connexions qui ne sont pas activées de façon récurrente pourraient voir leur efficacité diminuée et être finalement éliminées. Le but principal de notre travail est de déterminer s'il serait possible, et dans quelles conditions, que de telles assemblées de cellules émergent d'un réseau d'unités integrate-and¬-fire connectées aléatoirement et distribuées à la surface d'une grille bidimensionnelle recevant à la fois du bruit et des entrées organisées dans les dimensions temporelle et spatiale. L'originalité de notre étude tient dans la taille relativement grande du réseau, 10'000 unités, dans la durée des simulations, 1 million d'unités de temps (une unité de temps correspondant à une milliseconde), et dans l'utilisation d'une règle STDP originale compatible avec une implémentation matérielle. Une première série d'expériences a été effectuée pour tester que la connectivité produite aléatoirement et que l'élagage dirigé par STDP ne produisaient pas de biais en absence de stimu¬lation extérieure. Entre autres choses, un facteur d'échelle a pu être approximé pour compenser l'effet de la variation de la taille du réseau sur son activité. Les réseaux ont ensuite été stimulés avec des motifs spatiotemporels. L'analyse des connexions se maintenant à la fin des simulations, ainsi que l'analyse des séries temporelles résultantes de l'activité des neurones, suggèrent que des circuits feed-forward émergent par l'élagage des réseaux initialement connectés au hasard.