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.

Bioreporters and biosensors for arsenic detection. Biotechnological solutions for a world-wide pollution problem.

A wide variety of whole cell bioreporter and biosensor assays for arsenic detection has been developed over the past decade. The assays permit flexible detection instrumentation while maintaining excellent method of detection limits in the environmentally relevant range of 10-50 μg arsenite per L and below. New emerging trends focus on genetic rewiring of reporter cells and/or integration into microdevices for more optimal detection. A number of case studies have shown realistic field applicability of bioreporter assays.

Acting, predicting and intervening in a socio-hydrological world

This paper asks a simple question: if humans and their actions co-evolve with hydrological systems (Sivapalan et al., 2012), what is the role of hydrological scientists, who are also humans, within this system? To put it more directly, as traditionally there is a supposed separation of scientists and society, can we maintain this separation as socio-hydrologists studying a socio-hydrological world? This paper argues that we cannot, using four linked sections. The first section draws directly upon the concern of science-technology studies to make a case to the (socio-hydrological) community that we need to be sensitive to constructivist accounts of science in general and socio-hydrology in particular. I review three positions taken by such accounts and apply them to hydrological science, supported with specific examples: (a) the ways in which scientific activities frame socio-hydrological research, such that at least some of the knowledge that we obtain is constructed by precisely what we do; (b) the need to attend to how socio-hydrological knowledge is used in decision-making, as evidence suggests that hydrological knowledge does not flow simply from science into policy; and (c) the observation that those who do not normally label themselves as socio-hydrologists may actually have a profound knowledge of socio-hydrology. The second section provides an empirical basis for considering these three issues by detailing the history of the practice of roughness parameterisation, using parameters like Manning's n, in hydrological and hydraulic models for flood inundation mapping. This history sustains the third section that is a more general consideration of one type of socio-hydrological practice: predictive modelling. I show that as part of a socio-hydrological analysis, hydrological prediction needs to be thought through much more carefully: not only because hydrological prediction exists to help inform decisions that are made about water management; but also because those predictions contain assumptions, the predictions are only correct in so far as those assumptions hold, and for those assumptions to hold, the socio-hydrological system (i.e. the world) has to be shaped so as to include them. Here, I add to the ``normal'' view that ideally our models should represent the world around us, to argue that for our models (and hence our predictions) to be valid, we have to make the world look like our models. Decisions over how the world is modelled may transform the world as much as they represent the world. Thus, socio-hydrological modelling has to become a socially accountable process such that the world is transformed, through the implications of modelling, in a fair and just manner. This leads into the final section of the paper where I consider how socio-hydrological research may be made more socially accountable, in a way that is both sensitive to the constructivist critique (Sect. 1), but which retains the contribution that hydrologists might make to socio-hydrological studies. This includes (1) working with conflict and controversy in hydrological science, rather than trying to eliminate them; (2) using hydrological events to avoid becoming locked into our own frames of explanation and prediction; (3) being empirical and experimental but in a socio-hydrological sense; and (4) co-producing socio-hydrological predictions. I will show how this might be done through a project that specifically developed predictive models for making interventions in river catchments to increase high river flow attenuation. Therein, I found myself becoming detached from my normal disciplinary networks and attached to the co-production of a predictive hydrological model with communities normally excluded from the practice of hydrological science.

A melting pot world of species : reply to Speziale et al.

Native plants and animals are a natural heritage threatened by one of the six greatest extinction events in Earth's history. Humans, through habitat transformation, exploitation, and species introductions, are driving this extinction event. To turn this tide, Speziale et al. (2014) suggest reducing human dependence on non-native species by increasing the use, harvest, planting, and raising of native species, thereby increasing their cultural and economic value. The search for new or under-appreciated uses of native species is laudable, especially if it helps protect them and contributes to local cultural diversity. Such efforts are arguably an inherent trait of human curiosity and entrepreneurship and are a central platform of popular movements such as slow foods and native gardening. However, Speziale et al.'s hypothesis - that using native species can protect them - is less simple than they suggest. We refute the idea of nativism that underpins Speziale et al.'s proposal and makes it poorly defensible and considered the unaddressed consequences of the proposal for people and for conservation.

Food traditions and landscape histories of the Indian Ocean World : theoretical and methodological reflections

Environmental histories of plant exchanges have largely centred on their eco- nomic importance in international trade and on their ecological and social impacts in the places where they were introduced. Yet few studies have at- tempted to examine how plants brought from elsewhere become incorporated over time into the regional cultures of material life and agricultural landscapes. This essay considers the theoretical and methodological problems in inves- tigating the environmental history, diversity and distribution of food plants transferred across the Indian Ocean over several millennia. It brings together concepts of creolisation, syncretism, and hybridity to outline a framework for understanding how biotic exchanges and diffusions have been translated into regional landscape histories through food traditions, ritual practices and articu- lation of cultural identity. We use the banana plant - which underwent early domestication across New Guinea, South-east Asia and peninsular India and reached East Africa roughly two thousand years ago - as an example for il- lustrating the diverse patterns of incorporation into the cultural symbolism, material life and regional landscapes of the Indian Ocean World. We show that this cultural evolutionary approach allows new historical insights to emerge and enriches ongoing debates regarding the antiquity of the plant's diffusion from South-east Asia to Africa.

Citizenship education in Switzerland before, during and after the First World War

Citizenship education was intensively discussed during the 1910s. Patriotic ideals and the love of the fatherland were described with diligence in teachers' journals. After the outbreak of the World War I, Swiss teachers reacted immediately to the new circumstances and published lessons in their weekly teacher journals for every day of school for different grade levels. These lessons comprised current events and civic education as well as didactical instructions for the teacher. In pupils' essays, citizens are often depicted as religious members of society who are industrious and hardworking, whereas in the journals, religious aspects are related to peace but not to citizenship education. As a multilingual and neutral country, Switzerland struggled with major domestic problems due to the cultural conflict between the French- and the German-speaking regions, especially during wartime. However, teachers promoted unity from the beginning. Therefore, changes and continuities during this decade concerning citizenship education are of crucial research interest. The practical sections of teachers' journals, including lessons and didactical instructions, and pupils' essays provide insight into what happened in the classrooms. Which forms of national identity and citizenship were taught in classrooms before, during and shortly after WW1 in public schools in Switzerland? How did pupils describe the current issues of war and citizenship?

The Life-World and Its Multiple Realities: Alfred Schütz's Contribution to the Understanding of the Experience of Illness

Alfred Schütz original contribution to the social sciences refers to his analysis of the structure of the "life-world". This article aims to invigorate interest in the work of this author, little known in the field of health psychology. Key concepts of Schütz' approach will be presented in relation to their potential interest to the understanding of the experience of illness. In particular, we develop the main characteristics of the everyday life and its cognitive style, that is, its finite province of meaning. We propose to adopt this notion to define the experience of chronic or serious illness when the individual is confronted to the medical world. By articulating this analysis with literature in health psychology, we argue that Schütz's perspective brings useful insight to the field, namely because of its ability to study meaning constructions by overcoming the trap of solipsism by embracing intersubjectivity. The article concludes by outlining both, the limitations and research perspectives brought by this phenomenological analysis of the experiences of health and illness.