Scaling the Costs of 404 Testing to Fit the Needs of Small Public Companies

In July of 2002, the Sarbanes-Oxley Act was passed by Congress, including section 404 which requires the auditors to test and opine on the company's internal controls. Since that time there has been much debate about whether the intended benefits of increased investor confidence and financial statement transparency trump the unexpectedly high compliance costs, especially for public companies with market-caps less than $75 million. Before these companies begin complying in the upcoming year, interest groups are calling for the requirements to be 'scaled' to better fit the needs of these companies. While auditors already are expected to scale their audit approach to each individual client, more must be done to significantly decrease the costs in order to reverse the trend of small companies foregoing listing on U.S. capital markets. Increased guidance from the PCAOB, SEC, and other related parties could help the small-cap companies and their auditors be aware of best practices. Also, exempting industries that already follow similar guidelines or are significantly injured by the compliance requirements could help. Lastly, the controversial proposal of rotational audits could be put in place if the affected parties cooperate to remove the undue burden on these small-cap companies. Without some form of significant action, the investors could soon lose the ability to buy small-cap companies in U.S. markets.

Responding to Price Signals in Communal Agriculture: Shaker Hog Production, 1788-1850

Isolated Shaker communal farms stressed self-sufficiency as an ideal but carefully chose which goods to buy and sell in external markets and which to produce and consume themselves. We use records of hog slaughter weights to investigate the extent to which the Shakers incorporated market-based price information in determining production levels of a consumption good which they did not sell in external markets: pork. Granger causality tests indicate that Shaker pork production decisions were influenced as hypothesized, strongly by corn prices and weakly by pork prices. We infer that attention to opportunity costs of goods that they produced and consumed themselves was a likely factor aiding the longevity of Shaker communal societies.

Discrimination in Metropolitan Housing Markets Phase II: Asians and Pacific Islanders

This report documents the results of a an 11-city paired testing study by the Department of Housing and Urban Development of housing discrimination against Asian- Americans and Pacific Islanders. The study shows that one out of every five Asians and Pacific Islanders attempting to buy or rent a home are discriminated against, a rate similar to that of African Americans and Hispanics.

US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk

This paper develops a reduced form three-factor model which includes a liquidity proxy of market conditions which is then used to provide implicit prices. The model prices are then compared with observed market prices of credit default swaps to determine if swap rates adequately reflect market risks. The findings of the analysis illustrate the importance of liquidity in the valuation process. Moreover, market liquidity, a measure of investors. willingness to commit resources in the credit default swap (CDS) market, was also found to improve the valuation of investors. autonomous credit risk. Thus a failure to include a liquidity proxy could underestimate the implied autonomous credit risk. Autonomous credit risk is defined as the fractional credit risk which does not vary with changes in market risk and liquidity conditions.