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.

How useful is consolidation of public sector entities' financial statements ?

Whether or not to consolidate financial statements is dealt with in IPSAS#6. This standard is by and large based on IAS#27. It deals with the criterion according to which an entity's financial statements should be considered and which consolidation technique should be used. However, it remains silent when it comes to exposing the reason why a public sector entity should consolidate its financial statements. The literature is almost as silent as IPSAS on this issue. Which means that there is a lack of both theoretical and empirical knowledge on this subject. This paper explores the usefulness of the consolidation of financial statements (CFS) for different categories of users. It aims at investigating for which purposes consolidation is most useful and whether enlarging the scope of the consolidate group serves these purposes. Five purposes are considered: information, decision- making, accountability, risk-assessment, statistics improvement. The paper also aims at investigating if some categories of users consider CFS more useful than others. The issue is essentially empirical. Therefore it is examined in light of the results of an in-person interviews. We surveyed 25members of parliament, officials, creditors, and consultants of the Swiss central government. The results show that consolidating FS is considered especially important and useful for risk- assessment, information and accountability and to a somewhat lesser extent for decision-making and statistics improvement. Extending the scope of CFS may improve the situation when it comes to statistics but it would only marginally make CFS more relevant for decision making. Consultants and, to a lesser extent, members of the finance ministry are those respondents who deem the scope enlargement to be the most useful.

Structure du temps de travail des infirmières de santé publique: effets de l'âge des patients, de la nature des prestations fournies et du lieu du contact. [Structure of work times of public health nurses: effect of the age of patients, nature of care given and location of contact].

In the framework of health services research sponsored by the Swiss National Science Foundation, a research was undertaken of the activity of the large majority of the public health nurses working in the Swiss cantons of Vaud and Fribourg (total population 700,000). During one week, 130 nurses gathered, with a specially devised instrument, data on 4165 patient visits. Studying the duration of the contacts, one has distinguished contact duration per se (DC), duration of the travel time preceding the contact (DD), and total duration in relation with the contact (DTC-addition of the first two). It was noted that the three durations increased significantly with patient age (as regard travel time, this is explained by the higher proportion of home visits in higher age groups, as compared with visits at a health center). Examined according to location of the visit, contact duration per se (without travel) is higher for visits at home and in nursing homes than for those taking place at a health center. Looked at in respect to the care given (technical care, or basic nursing care, or both simultaneously), our data show that the provision of basic nursing care (alone or with technical care) doubles contact duration (from 20 to 42-45'). The analyses according to patient age shows that, at an advanced age (beyond 80 years particularly), there is an important increase of the visits where both types of care are given. However, contact duration per se shows a significant raise with age only for the group "technical care only"; it can be demonstrated that this is due to the fact that older patients require more complex technical acts (e.g., bladder care, as compared with simpler acts such as injection). A model of the relationships between patient age and contact duration is proposed: it is because of the increase in the proportions of home visits, of visits including basic nursing care, and of more complex technical acts that older persons require more of the working time of public health nurses.

"Public on the outside, private on the inside": the organizational hybridization, sense of belonging and identity strategies of the employees of a public unemployment insurance fund in Switzerland

A number of studies show that New Public Management reforms have altered the current identity benchmarks of public officials, particularly by hybridizing values or management practices. However, existing studies have largely glossed over the sense of belonging of officials when their organization straddles the concerns of public service and private enterprise, so that the boundary between public and private sector is blurred. The purpose of this article is precisely to explore this sense of belonging in the context of organizational hybridization. It does so by drawing on the results of research conducted among the employees of a public unemployment insurance fund in Switzerland. On the one hand, the analysis shows how much their markers of belonging are hybrid, multiple and constructed in negative terms (with regard to the State), while indicating that the working practices of the employees point to an identity that is nevertheless closely bound with the public sector. On the other hand, the analysis shows that the organization plays strategically with its State status, by exploiting either its private or public identity in line with the needs related to its external image. The article concludes with a discussion of the results highlighting the strategic functionality of the hybrid identity of the actors.

Paper 2: EUROCAT public health indicators for congenital anomalies in Europe.

OBJECTIVE: The purpose of this article is to present the specific public health indicators recently developed by EUROCAT that aim to summarize important aspects of the public health impact of congenital anomalies in a few quantitative measures. METHODS: The six indicators are: (1) congenital anomaly perinatal mortality, (2) congenital anomaly prenatal diagnosis prevalence, (3) congenital anomaly termination of pregnancy, (4) Down syndrome livebirth prevalence, (5) congenital anomaly pediatric surgery, and (6) neural tube defects (NTD) total prevalence. Data presented for this report pertained to all cases (livebirths, fetal deaths, or stillbirths after 20 weeks of gestation and terminations of pregnancy for fetal anomaly [TOPFA]) of congenital anomaly from 27 full member registries of EUROCAT that could provide data for at least 3 years during the period 2004 to 2008. Prevalence of anomalies, prenatal diagnosis, TOPFA, pediatric surgery, and perinatal mortality were calculated per 1000 births. RESULTS: The overall perinatal mortality was approximately 1.0 per 1000 births for EUROCAT registries with almost half due to fetal and the other half due to first week deaths. There were wide variations in perinatal mortality across the registries with the highest rates observed in Dublin and Malta, registries in countries where TOPFA are illegal, and in Ukraine. The overall perinatal mortality across EUROCAT registries slightly decreased between 2004 and 2008 due to a decrease in first week deaths. The prevalence of TOPFA was fairly stable at about 4 per 1000 births. There were variations in livebirth prevalence of cases typically requiring surgery across the registries; however, for most registries this prevalence was between 3 and 5 per 1000 births. Prevalence of NTD decreased by about 10% from 1.05 in 2004 to 0.94 per 1000 in 2008. CONCLUSION: It is hoped that by publishing the data on EUROCAT indicators, the public health importance of congenital anomalies can be clearly summarized to policy makers, the need for accurate data from registries emphasized, the need for primary prevention and treatment services highlighted, and the impact of current services measured.

Peut-on faire confiance à l'administration ? Une analyse du concept de confiance, appliqué au secteur public

D'une manière générale, la confiance est un « lubrifiant » (Arrow, 1974) facilitant les relations sociales (eg Luhmann, 1968, Giddens, 1984, Zucker, 1986). D'un point de vue économique, un environnement institutionnel bénéficiant d'une confiance élevée serait corrélé avec la performance de l'économie nationale (eg Dyer and Chu, 2003). La confiance, en tant que capital social, permettrait et engendrerait des comportements altruistes et coopératifs impactant et soutenant la prospérité économique d'une communauté (Fukuyama, 1995). Dans un cadre organisationnel, la confiance engendre une communication plus ouverte et facilite l'échange d'information (eg Smith and Barclay, 1997, Currall and Judge, 1995), facilite la gestion des conflits (eg Blomqvist, 2002), l'apprentissage commun (eg Bijlsma-Frankema, 2004) ou diminue les coûts d'intégration (eg Bidault and Jarillo, 1995), par exemple.