Legal liability, government intervention, and auditor behavior : evidence from structural reform of audit firms in China

This paper investigates how legal liability influences audit quality and audit fees, particularly in the presence of government intervention. Since 2010, all Chinese audit firms were required to transform from a structure of limited liability company (LLC) to limited liability partnership (LLP), which removes the cap on the liability exposure of negligent auditors. By adopting this natural experiment, we document the following findings: first, after audit firms reorganize as LLPs, auditors are more likely to (1) issue modified audit opinions and going-concern opinions, (2) constrain clients’ earnings management, and (3) charge a premium in audit fees, which suggest that exerting unlimited legal liability on negligent auditors improves both audit quality and audit fees. Second, the effect of the LLP adoption is more pronounced when auditors are from local audit firms, and clients are controlled by local governments. Further analyses suggest that the stock prices of clients positively react to the reform event, which indicates that LLP adoption improves the overall value of audits. In summary, our empirical findings are consistent with the argument that legal liability is able to effectively shape auditor behavior in emerging markets where the other institutional mechanisms are relatively weaker and government intervention is heavy.

Stakeholders’ perspectives on the role of regulatory reform in integrated reporting

This paper reports on an exploratory study of the preferences of users of non-financial reporting for regulatory or voluntary approaches to integrated reporting (IR). While it is well known that companies prefer voluntary approaches to non-financial reporting, considerably less is known about the preferences of the users of non-financial information. IR is the latest development in attempts over 30 or more years to broaden organisational non-financial reporting and accountability to include the wider social and environmental impacts of business. It promises to provide a more cohesive and efficient approach to corporate reporting by bringing together financial information, operational data and sustainability information to focus only on material issues that impact an organisation’s ability to create value in the short, medium and long term. The study found more support for voluntary approaches to IR as the majority of participants thought that it was too early for regulatory reform. They suggested that IR will become the reporting norm over time if left to market forces as more and more companies adopt the IR practice. Over time IR will be perceived as a legitimate practice, where the actions of integrated reporters are seen as desirable, proper, or appropriate. While there is little appetite for regulatory reform, half of the investors support mandatory IR because, in their experience, voluntary sustainability reporting has not led to more substantive disclosures or increased the quality of reporting. There is also evidence that IR privileges financial value creation over stewardship, inhibiting IR from moving beyond a weak sustainability paradigm.

Do individual auditors affect audit quality? Evidence from archival data

We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze approximately 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level.

City-level auditor industry specialization, economies of scale, and audit pricing

We examine the effects of city-level auditor industry specialization and scale economies on audit pricing in the United States. Using a sample of Big N clients for the 2000-2007 period, and a scale measure based on percentile rankings of the number of audit clients at the city-industry level, we document significant specialization premiums and scale discounts in both the pre- and post-Sarbanes-Oxley Act (SOX) periods. However, the effects of industry specialization and scale economies on audit pricing are highly interactive. The negative effect of city-industry scale on audit fees obtains only for clients of specialist auditors. By contrast, clients of non-specialist auditors obtain scale discounts only when they enjoy strong bargaining power, suggesting that auditors are "forced" to pass on scale economies to clients with greater bargaining power.

Political connection and cost of debt: Some Malaysian evidence

This paper investigates the association between Malaysian politically connected (PCON) firms and the cost of debt. We extend previous research that finds Malaysian PCON firms are perceived as being of higher risk by the market, and by audit firms, by providing evidence that lenders also perceive these firms as being of higher risk. We also find that PCON firms have a significantly (1) higher extent of leverage, (2) higher likelihood of reporting a loss, (3) higher likelihood of having negative equity, and (4) higher likelihood of being audited by a big audit firm. We suggest that PCON firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks. Additionally, we find that CEO duality present in PCON firms is perceived by lenders as being more risky, and that a higher proportion of independent directors on the audit committee mitigate this perceived risk. © 2012.

Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing

This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.

Perks and the informativeness of stock prices in the Chinese market

While the literature shows that perks can affect firm values positively or negatively, we argue that firms with higher perks are more likely to be associated with a lower quality of financial reporting, which, in turn, can affect the informativeness of stock prices. Based on hand-collected data on perks from Chinese listed firms, we find that firms with lower perks are associated with higher informativeness of stock prices (or lower R-square). Moreover, the positive association between perks and R-square is shown to be weaker for firms with higher financial reporting quality through audit and earnings quality measures.

The effect of a staged, emergency department specific rapid response system on reporting of clinical deterioration

BACKGROUND: Despite emerging evidence regarding clinical deterioration in emergency department (ED) patients, the widespread uptake of rapid response systems (RRS) in EDs has been limited. AIMS: To evaluate the effect of an ED RRS on reporting of clinical deterioration and determine if there were differences between patients who did, and did not, deteriorate during ED care. METHODS: A retrospective cross sectional design was used to conduct this single site study in Melbourne, Australia. Stratified random sampling identified 50 patients with shortness of breath, chest pain or abdominal pain per each year studied (2009-2012) giving a total of 600 patients. The intervention was an ED RRS implemented in stages. RESULTS: The frequency of clinical deterioration was 14.8% (318 episodes/89 patients). Unreported deterioration decreased each year (86.7%; 68.8%; 55.3%; 54.0%, p=0.141). Patients who deteriorated during ED care had a longer median ED length of stay (2.8h; p<0.001), were 31.9% more likely to need hospital admission (p<0.001) and 4.9% more likely to die in hospital (p=0.044). CONCLUSIONS: A staged ED specific RRS decreased the frequency of unreported clinical deterioration. Controlled multi-site studies of ED specific RRSs are needed to examine the effect of formal ED RRSs on patient outcomes.

Indelible shame? News reporting of non-convictions in digital space

This paper examines the role of media in publicising the names of people who receive a non-conviction for a minor crime. It positions the news media’s ability to “name and shame” people who appear before the courts as a powerful cultural practice, rather than adopt a widely celebrated Fourth Estate view of the press as a watchdog on the judicial process. The research draws on interviews conducted in two regional centres of Victoria, Australia, with those involved in news coverage of very minor crimes where non-convictions were imposed. Their spoken words reveal a range of tensions linked to reporting non-convictions in the digital age. In the eyes of the law, a non-conviction means that an offender has an opportunity to rehabilitate away from the public gaze. However, the news media ‘s ability to name such offenders online has the potential to impose a lasting “mark of shame” in digital space that can prevent them gaining employment or housing, and damage their social standing and relationships. We live in a media-saturated culture in which the vast majority of people rely on news media for information about judicial proceedings and in turn, the news media constructs public understanding of the law through the way it represents crime and court processes. This paper argues that traditional understanding of the nexus between the judicial system and the Fourth Estate fails to acknowledge the news media’s considerable power outside the officially recognised operation of the open justice relationship, and that this deserves attention in the digital age

Effects of the SEC's XBRL mandate on financial reporting comparability

© 2015 Elsevier Inc. In 2009, the US Securities and Exchange Commission (SEC) made it mandatory for firms to file interactive data using XBRL along with their 10-K and 10-Q reports on EDGAR. There was an initial three-year phase-in period, with the first (last) phase covering the largest (smallest) firms in the US capital markets. We examine the implications of the SEC's XBRL mandate for financial statement comparability. Our results indicate that financial statement comparability declined in the initial years after the mandate. We also find that firms that use more company-specific extension taxonomies (companies are allowed to use their own taxonomies when the standard taxonomy provided by the Financial Accounting Standards Board (FASB) is inadequate) have lower financial statement comparability in the post-mandate years. Finally, we document that the level of discretion involved in measuring particular financial statement line items is related to the post-mandate change in comparability - we find that selling, general and administrative expense (SG&A) comparability declined after the mandate, while depreciation comparability did not change.

Improving the implementation of responsible alcohol management practices by community sporting clubs: A randomised controlled trial

INTRODUCTION AND AIMS: Despite an increased prevalence of risky alcohol consumption and alcohol-related harm among members of sporting groups and at sporting venues, sporting clubs frequently fail to implement alcohol management practices consistent with liquor legislation and best practice guidelines. The aim of this study was to assess the impact of a multi-strategy intervention in improving the implementation of responsible alcohol management practices by sports clubs. DESIGN AND METHODS: A randomised controlled trial was conducted with 87 football clubs, with half randomised to receive a multi-strategy intervention to support clubs to implement responsible alcohol management practices. The 2-year intervention, which was based on implementation and capacity building theory and frameworks, included project officer support, funding, accreditation rewards, printed resources, observational audit feedback, newsletters, training and support from state sporting organisations. Interviews were undertaken with club presidents at baseline and post-intervention to assess alcohol management practice implementation. RESULTS: Post-intervention, 88% of intervention clubs reported implementing '13 or more' of 16 responsible alcohol management practices, which was significantly greater than the proportion of control groups reporting this level of implementation (65%) [odds ratio: 3.7 (95% confidence interval: 1.1-13.2); P = 0.04]. All intervention components were considered highly useful and three-quarters or more of clubs rated the amount of implementation support to be sufficient. DISCUSSION AND CONCLUSIONS: The multi-strategy intervention was successful in improving alcohol management practices in community sports clubs. Further research is required to better understand implementation barriers and to assess the long-term sustainability of the change in club alcohol management practices.

Retrospective clinical audit of outcomes for patients admitted to an inpatient palliative care unit for restorative care

Background Restorative care in palliative care is a subset of rehabilitation that aims to improve quality of life through restoration or maintenance of physical functions. Outcomes for restorative care programmes delivered by palliative care units have not adequately been assessed.

Objectives The objectives are to examine the outcomes of a restorative care programme in an inpatient palliative care unit, including discharge destination, performance status changes and length of stay.

Methods Retrospective clinical audit of consecutive patients admitted to Calvary Health Care Bethlehem in Melbourne, Australia, principally for restorative care from July 2010 to December 2011.

Results 79 admissions met inclusion criteria. Mean age was 76.5 years (SD=11.14) and 43 (54%) were men. 75 (95%) patients had a malignant diagnosis; of these, the majority had lung cancer (24%). 16 patients (20%) were discharged home, 51 (65%) died and 12 (15%) were transferred. Of the patients discharged home, only 6 (38% of those discharged home) improved their performance status. Those discharged home had a significantly shorter length of stay (17 days compared to 39 days; p<0.05). Patients discharged home also had significantly better Australia-modified Karnofsky Performance Status (AKPS) and Resource Utilisation Groups-Activities of Daily Living (RUG-ADL) scores on admission than others (both p<0.05).

Conclusions The majority of patients referred for restorative care died during admission, with only a minority discharged home. Patients discharged most commonly experienced maintenance and not improvement in performance status. A successful discharge home following restorative care was associated with a shorter length of stay. Implications and recommendations for successful restorative care will be discussed.

Discharge communication from inpatient care: an audit of written medical discharge summary procedure against the new National Health Service Standard for clinical handover

OBJECTIVE: To audit written medical discharge summary procedure and practice against Standard Six (clinical handover) of the Australian National Safety and Quality Health Service Standards at a major regional Victorian health service. METHODS: Department heads were invited to complete a questionnaire about departmental discharge summary practices. RESULTS: Twenty-seven (82%) department heads completed the questionnaire. Seven (26%) departments had a documented discharge summary procedure. Fourteen (52%) departments monitored discharge summary completion and 13 (48%) departments monitored the timeliness of completion. Seven (26%) departments informed the patient of the content of the discharge summary and six (22%) departments provided the patient with a copy. Seven (26%) departments provided training for staff members on how to complete discharge summaries. Completing discharge summaries was usually delegated to the medical intern. CONCLUSIONS: The introduction of the National Service Standards prompted an organisation-wide audit of discharge summary practices against the external criterion. There was substantial variation in the organisation's practices. The Standards and the current audit results highlight an opportunity for the organisation to enhance and standardise discharge summary practices and improve communication with general practice.

Who's counting? Legitimating measurement in the audit culture

What gives legitimacy to the numbers that constitute the measurement techniques of the audit culture? We argue that the audit culture’s blind application of numbers to people as if there was no moral or ethical dimension to the calculation rests on a military discourse resi-dent in mathematics. This argument is based on the genealogy presented in this paper, which uncovers a regime of measurement-by-number, sedimented as legitimate through an associa-tion with military power. We claim that this military measurement-by-number is a dubious technique of government on which the audit culture relies for its highly questionable authori-ty.

Executive equity risk-taking incentives and audit pricing

Using a large sample of U.S. firms spanning the period 2000-2010, we document a strong positive association between the sensitivity of CEO compensation portfolio to stock return volatility (vega) and audit fees. We also show that the positive association between vega and audit fees is weaker in the post-Sarbanes-Oxley Act (SOX) period. In supplementary tests, we show that the relation between vega and audit fees is stronger for firms with older CEOs and in firms where the CEO is also chairman of the board. Collectively, our results suggest that audit firms incorporate executive risktaking incentives in the fees they charge for their services.