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.

Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops

Emerging market countries that have improved institutions and attained intermediate levels of institutional quality have experienced severe financial crises following capital flow reversals. However, there is also evidence that countries with strong institutions and deep capital markets are less affected by external shocks. We reconcile these two observations using a calibrated DSGE model that extends the financial accelerator framework developed in Bernanke, Gertler, and Gilchrist (1999). The model captures financial market institutional quality with creditors. ability to recover assets from bankrupt firms. Bankruptcy costs affect vulnerability to sudden stops directly but also indirectly by affecting the degree of liability dollarization. Simulations reveal an inverted U-shaped relationship between bankruptcy recovery rates and the output loss following sudden stops. We provide empirical evidence that this non-linear relationship exists.

Debate over Fair Value Accounting: Should we allow Politics to take an active role in setting accounting standards or should we trust that the SEC knows best?

In light of the recent economic downfall, there has been significant media coverage on the topic of fair value accounting. There are many critics of the accounting rule, who place blame on it for the destruction of billions of dollars in capital between financial institutions. Other commentators, however, see the rule as necessary and applaud its ability to bring the turmoil in the economy into the spotlight promptly so that it could be addressed effectively. This paper will begin by conducting a study of fair-value accounting from its inception in previous standards and then follow it through to Statement No. 157. I will then discuss the SEC’s most recent study of FAS157 and their decision as a result of the study.

Ontogenetic Effects of Hatching Plasticity in the Spotted Salamander (Ambystoma maculatum) due to Egg and Larval Predators

The ability to respond plastically to the environment has allowed amphibians to evolve a response to spatial and temporal variation in predation threat (Benard 2004). Embroys exposed to egg predation are expected to hatch out earlier than their conspecifics. Larval predation can induce a suite of phenotypic changes including growing a larger tail area. When presented with cues from both egg and larval predators, embryos are expected to respond to the egg predator by hatching out earlier because the egg predator presents an immediate threat. However, hatching early may be costly in the larval environment in terms of development, morphology, and/or behavior. We created a laboratory experiment in which we exposed clutches of spotted salamander (Ambystoma maculatum) eggs to both egg (caddisfly larvae) and larval (A. opacum) predators to test this hypothesis. We recorded hatching time and stage and took developmental and morphological data of the animals a week after hatching. Larvae were entered into lethal predation trials with a larval predatory sunfish (Lepomis sp.) in order to study behavior. We found that animals exposed to the egg predator cues hatched out earlier and at earlier developmental stages than conspecifics regardless of whether there was a larval predator present. Animals exposed to larval predator cues grew relatively larger tails and survived longer in the lethal predation trials. However the group exposed to both predators showed a cost of early hatching in terms of lower tail area and shorter survival time in predation trials. The morphological and developmental effects measured of hatching plasticity were transient as there were no developmental or morphological differences between the treatment groups at metamorphosis. Hatching plasticity may be transient but it is important to the development and survival of many amphibians.