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.

Men perform comparably to women in a perspective taking task after administration of intranasal oxytocin but not after placebo

Oxytocin (OT) is thought to play an important role in human interpersonal information processing and behavior. By inference, OT should facilitate empathic responding, i.e. the ability to feel for others and to take their perspective. In two independent double-blind, placebo-controlled between-subjects studies, we assessed the effect of intranasally administered OT on affective empathy and perspective taking, whilst also examining potential sex differences (e.g., women being more empathic than men). In study 1, we provided 96 participants (48 men) with an empathy scenario and recorded self reports of empathic reactions to the scenario, while in study 2, a sample of 120 individuals (60 men) performed a computerized implicit perspective taking task. Whilst results from Study 1 showed no influence of OT on affective empathy, we found in Study 2 that OT exerted an effect on perspective taking ability in men. More specifically, men responded faster than women in the placebo group but they responded as slowly as women in the OT group. We conjecture that men in the OT group adopted a social perspective taking strategy, such as did women in both groups, but not men in the placebo group. On the basis of results across both studies, we suggest that self-report measures (such as used in Study 1) might be less sensitive to OT effects than more implicit measures of empathy such as that used in Study 2. If these assumptions are confirmed, one could infer that OT effects on empathic responses are more pronounced in men than women, and that any such effect is best studied using more implicit measures of empathy rather than explicit self-report measures.

Functional sphere profiling reveals the complexity of neuroblastoma tumor-initiating cell model.

Neuroblastoma (NB) is a neural crest-derived childhood tumor characterized by a remarkable phenotypic diversity, ranging from spontaneous regression to fatal metastatic disease. Although the cancer stem cell (CSC) model provides a trail to characterize the cells responsible for tumor onset, the NB tumor-initiating cell (TIC) has not been identified. In this study, the relevance of the CSC model in NB was investigated by taking advantage of typical functional stem cell characteristics. A predictive association was established between self-renewal, as assessed by serial sphere formation, and clinical aggressiveness in primary tumors. Moreover, cell subsets gradually selected during serial sphere culture harbored increased in vivo tumorigenicity, only highlighted in an orthotopic microenvironment. A microarray time course analysis of serial spheres passages from metastatic cells allowed us to specifically "profile" the NB stem cell-like phenotype and to identify CD133, ABC transporter, and WNT and NOTCH genes as spheres markers. On the basis of combined sphere markers expression, at least two distinct tumorigenic cell subpopulations were identified, also shown to preexist in primary NB. However, sphere markers-mediated cell sorting of parental tumor failed to recapitulate the TIC phenotype in the orthotopic model, highlighting the complexity of the CSC model. Our data support the NB stem-like cells as a dynamic and heterogeneous cell population strongly dependent on microenvironmental signals and add novel candidate genes as potential therapeutic targets in the control of high-risk NB.

Endocrine response and perceived stress test during an experimental challenge task in adult survivors of a childhood cancer.

BACKGROUND: Although long-term implications of cancer in childhood or adolescence with regard to medical conditions are well documented, the impact on mental health and on response to stress, which may be an indicator of psychological vulnerability, is not yet well understood. In this study, psychological and physiological responses to stress were examined.¦PROCEDURE: Fifty-three participants aged 18-39 years (n = 25 survivors of childhood or adolescence cancer, n = 28 controls) underwent an experimental stress test, the Trier Social Stress Test (TSST). Participants were asked to provide repeated evaluations of perceived stress on visual-analogical scales and blood samples were collected before and after the TSST to measure plasma cortisol.¦RESULTS: The psychological perception of stress was not different between the two groups. However, the cancer survivors group showed a higher global plasma cortisol level as well as higher amplitude in the response to the TSST. The global cortisol level in cancer survivors was increased when depression symptoms were present. The subjective perception of stress and the plasma cortisol levels were only marginally correlated in both groups.¦CONCLUSIONS: It is suggested that the exposure to a life-threatening experience in childhood/adolescence increases the endocrine response to stress, and that the presence of depressive symptoms is associated with an elevation of plasma cortisol levels. A better knowledge of these mechanisms is important given that the dysregulations of the stress responses may cause psychological vulnerability. Pediatr Blood Cancer 2012; 59: 138-143. © 2011 Wiley Periodicals, Inc.

Identification of case complexity and increased health care utilization in patients with rheumatoid arthritis.

OBJECTIVES: To document biopsychosocial profiles of patients with rheumatoid arthritis (RA) by means of the INTERMED and to correlate the results with conventional methods of disease assessment and health care utilization. METHODS: Patients with RA (n = 75) were evaluated with the INTERMED, an instrument for assessing case complexity and care needs. Based on their INTERMED scores, patients were compared with regard to severity of illness, functional status, and health care utilization. RESULTS: In cluster analysis, a 2-cluster solution emerged, with about half of the patients characterized as complex. Complex patients scoring especially high in the psychosocial domain of the INTERMED were disabled significantly more often and took more psychotropic drugs. Although the 2 patient groups did not differ in severity of illness and functional status, complex patients rated their illness as more severe on subjective measures and on most items of the Medical Outcomes Study Short Form 36. Complex patients showed increased health care utilization despite a similar biologic profile. CONCLUSIONS: The INTERMED identified complex patients with increased health care utilization, provided meaningful and comprehensive patient information, and proved to be easy to implement and advantageous compared with conventional methods of disease assessment. Intervention studies will have to demonstrate whether management strategies based on INTERMED profiles can improve treatment response and outcome of complex patients.

La médecine de famille en Suisse à l'horizon 2030: quelle place pour la délégation des tâches médicales. [Family practitioners in Switzerland by 2030: which roles for medical task delegation?]

Due to population aging, by 2030 Switzerland may face a demand of 24 million family practitioner visits, a growth of 13 percent from the 2005 level. This result is based on the assumption that the per capita demand for doctor visits remains what was observed in 2005 by age groups and sex. During the same period, the total number of practitioners may decrease by 14 percent whereas the female proportion of such practitioners may double. These changes may cause a 33 percent decrease in the supply of physician visits to reach only 14 millions. The comparison of the demand and supply of family doctor visits reveals that by 2030, 10 million visits may be unmet which represents 40 percent of the demand. On the supply side, a full scale implementation of task delegation may partially reduce that gap (minus 2 millions). On the demand side, improved health status may bring in a larger decrease in the needs for visits (minus 4 million).

Le traitement de l'échinococcose alvéolaire humaine: une approche multidisciplinaire [Treatment of alveolar echinococcosis: a multidisciplinary task]

Alveolar echinococcosis is characterized by a long asymptomatic period but, without treatment, up to 80% of patients may die within ten years of diagnosis. Owing to a lack of fast-acting and fully effective chemotherapy, partial radical hepatic resection is the only chance of cure. One-third of patients are now treated in this way, and complex vascular and biliary reconstruction procedures are sometimes necessary. Liver transplantation may also be indicated for highly selected patients (about 5%) with life-threatening complications after failure of other treatments. Interventional radiology and endoscopy can be used to drain liver abscesses and/or infected and obstructed bile ducts, either as palliative procedures or as a bridge to radical resection. Parasitostatic benzimidazole therapy, especially based on continuous albendazole administration, is mandatory for at least two years after radical resection, and for life in inoperable patients.

Transitions in social complexity along elevational gradients reveal a combined impact of season length and development time on social evolution.

Eusociality is taxonomically rare, yet associated with great ecological success. Surprisingly, studies of environmental conditions favouring eusociality are often contradictory. Harsh conditions associated with increasing altitude and latitude seem to favour increased sociality in bumblebees and ants, but the reverse pattern is found in halictid bees and polistine wasps. Here, we compare the life histories and distributions of populations of 176 species of Hymenoptera from the Swiss Alps. We show that differences in altitudinal distributions and development times among social forms can explain these contrasting patterns: highly social taxa develop more quickly than intermediate social taxa, and are thus able to complete the reproductive cycle in shorter seasons at higher elevations. This dual impact of altitude and development time on sociality illustrates that ecological constraints can elicit dynamic shifts in behaviour, and helps explain the complex distribution of sociality across ecological gradients.

Task force IV: Clinical use of ambulatory blood pressure monitoring. Participants of the 1999 Consensus Conference on Ambulatory Blood Pressure Monitoring

OBJECTIVE: To reach a consensus on the clinical use of ambulatory blood pressure monitoring (ABPM). METHODS: A task force on the clinical use of ABPM wrote this overview in preparation for the Seventh International Consensus Conference (23-25 September 1999, Leuven, Belgium). This article was amended to account for opinions aired at the conference and to reflect the common ground reached in the discussions. POINTS OF CONSENSUS: The Riva Rocci/Korotkoff technique, although it is prone to error, is easy and cheap to perform and remains worldwide the standard procedure for measuring blood pressure. ABPM should be performed only with properly validated devices as an accessory to conventional measurement of blood pressure. Ambulatory recording of blood pressure requires considerable investment in equipment and training and its use for screening purposes cannot be recommended. ABPM is most useful for identifying patients with white-coat hypertension (WCH), also known as isolated clinic hypertension, which is arbitrarily defined as a clinic blood pressure of more than 140 mmHg systolic or 90 mmHg diastolic in a patient with daytime ambulatory blood pressure below 135 mmHg systolic and 85 mmHg diastolic. Some experts consider a daytime blood pressure below 130 mmHg systolic and 80 mmHg diastolic optimal. Whether WCH predisposes subjects to sustained hypertension remains debated. However, outcome is better correlated to the ambulatory blood pressure than it is to the conventional blood pressure. Antihypertensive drugs lower the clinic blood pressure in patients with WCH but not the ambulatory blood pressure, and also do not improve prognosis. Nevertheless, WCH should not be left unattended. If no previous cardiovascular complications are present, treatment could be limited to follow-up and hygienic measures, which should also account for risk factors other than hypertension. ABPM is superior to conventional measurement of blood pressure not only for selecting patients for antihypertensive drug treatment but also for assessing the effects both of non-pharmacological and of pharmacological therapy. The ambulatory blood pressure should be reduced by treatment to below the thresholds applied for diagnosing sustained hypertension. ABPM makes the diagnosis and treatment of nocturnal hypertension possible and is especially indicated for patients with borderline hypertension, the elderly, pregnant women, patients with treatment-resistant hypertension and patients with symptoms suggestive of hypotension. In centres with sufficient financial resources, ABPM could become part of the routine assessment of patients with clinic hypertension. For patients with WCH, it should be repeated at annual or 6-monthly intervals. Variation of blood pressure throughout the day can be monitored only by ABPM, but several advantages of the latter technique can also be obtained by self-measurement of blood pressure, a less expensive method that is probably better suited to primary practice and use in developing countries. CONCLUSIONS: ABPM or equivalent methods for tracing the white-coat effect should become part of the routine diagnostic and therapeutic procedures applied to treated and untreated patients with elevated clinic blood pressures. Results of long-term outcome trials should better establish the advantage of further integrating ABPM as an accessory to conventional sphygmomanometry into the routine care of hypertensive patients and should provide more definite information on the long-term cost-effectiveness. Because such trials are not likely to be funded by the pharmaceutical industry, governments and health insurance companies should take responsibility in this regard.