Audit committee director turnover

Actions by both private sector organizations and legislators in recent years have highlighted the importance of the audit committee of the board of directors of corporations in the financial reporting process. For example, the Sarbanes Oxley Act of 2002 has multiple sections that deal with the composition and functioning of audit committees. My dissertation examines multiple issues related to the composition of audit committees. In the first two parts of my dissertation, I examine the stock market reactions to disclosures of audit committee appointments and departures in the 8-Ks filed with the SEC during 2008 and 2009. I find that there is a positive stock market reaction to the appointment of audit committee directors who are financial experts. The second essay investigates the cumulative abnormal return to departure of audit committee directors. I find that when an accounting expert leaves the audit committee, the market reaction is significantly negative. These results are consistent with regulators’ concerns related to having directors with audit, accounting and other financial expertise on corporate audit committees. The third essay of my dissertation examines the changes in audit committee composition in the last decade. I find that while the increase in audit committee size is relatively modest, there has been a significant increase in the number of audit committee experts and the frequency of audit committee meetings over the past decade; interestingly, such increase in the number of meetings has persisted even after the media focus on the auditing profession, in the immediate aftermath of the Enron and Andersen failures, have waned. My results show that audit committee composition and its role continues to evolve with regulatory and other corporate governance related changes.

Internal control reporting by non-accelerated filers

I examine three issues related to internal control reporting by non-accelerated filers. Motivation for the three studies comes from the fact that Section 404 of the Sarbanes-Oxley Act (SOX) continues to be controversial, as evidenced by the permanent exemption from Section 404(b) of SOX granted to non-accelerated filers by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act also requires the SEC to study compliance costs associated with smaller accelerated filers. In the first part of my dissertation, I document that the audit fee premium for non-accelerated filers disclosing a material weakness in internal controls (a) is significantly lower than the corresponding premium for accelerated filers, and (b) declines significantly over time. I also find that in the case of accelerated filers remediating clients pay lower fees compared to clients continuing to report internal control problems; however, such differences are not observed in the case of non-accelerated filers. The second essay focuses on audit report lag. The results indicate that presence of material weaknesses are associated with increased audit report lags, for both accelerated and non-accelerated filers. The results also indicate that the decline in report lag following remediation of problems is greater for accelerated filers than for non-accelerated filers. The third essay examines early warnings (pursuant to Section 302 disclosures) for firms that subsequently disclosed internal control problems in their 404 reports. The analyses indicate that non-accelerated firms with shorter CFO tenure, presence of accounting experts on the audit committee, and more frequent audit committee meetings are more likely to provide prior Section 302 warnings. Overall the results suggest that there are differences in internal control reporting between the accelerated and non-accelerated filers. The results provide empirical grounding for the ongoing debate about internal control reporting by non-accelerated filers.

Gender differences in audit committees

Issues related to the composition of audit committees have attracted significant interest from legislators and regulators in recent years. In my dissertation, I examine one overlooked component of audit committee composition – namely, the presence of female directors on the audit committee. I empirically test to see if there are any differences in the functioning of audit committee when there is at least one female director on the audit committee. My dissertation examines three issues: audit committee diligence, audit pricing and earnings management. ^ The absence of females on corporate boards has become the focus of legislators in some countries. Prior research, in a variety of contexts, suggests that women are in general more conservative in their judgments and decisions. The first part of my dissertation empirically shows that the presence of at least one female director on the audit committee makes the audit committee have more meetings. The second essay empirically examines if there is a positive association between audit fees and the presence of female directors in the audit committee. I posit that having a female director on the audit committee will result in higher audit fees. I find no significant evidence to show that audit fees are higher when there is a female director on the audit committee. The third part of my dissertation empirically examines if there an association between the presence of a female director on the audit committee and earnings management. I find no significant evidence to show that the presence of female directors on the audit committee constrains earnings management. Overall, the results suggest that having a female on the audit committee changes the form – if not the substance – of audit committee functioning. ^

Gender Differences in Audit Committees

Issues related to the composition of audit committees have attracted significant interest from legislators and regulators in recent years. In my dissertation, I examine one overlooked component of audit committee composition – namely, the presence of female directors on the audit committee. I empirically test to see if there are any differences in the functioning of audit committee when there is at least one female director on the audit committee. My dissertation examines three issues: audit committee diligence, audit pricing and earnings management. The absence of females on corporate boards has become the focus of legislators in some countries. Prior research, in a variety of contexts, suggests that women are in general more conservative in their judgments and decisions. The first part of my dissertation empirically shows that the presence of at least one female director on the audit committee makes the audit committee have more meetings. The second essay empirically examines if there is a positive association between audit fees and the presence of female directors in the audit committee. I posit that having a female director on the audit committee will result in higher audit fees. I find no significant evidence to show that audit fees are higher when there is a female director on the audit committee. The third part of my dissertation empirically examines if there an association between the presence of a female director on the audit committee and earnings management. I find no significant evidence to show that the presence of female directors on the audit committee constrains earnings management. Overall, the results suggest that having a female on the audit committee changes the form – if not the substance – of audit committee functioning.

A study of the top executive conference centers in the United States and an examination of the corresponding corporate meetings market

Introduction: The United States today has become "meeting-conscious." The complexity of conducting business has led to the need for sophisticated coordination of decision-making processes on all levels of the organization. Company meetings have played an increasingly important role in the success and future of many companies. Strategies and decisions are developed at meetings that can determine future policies of crucial importance. Executive training can mean the difference in whether the company will even survive. Large and growing companies have increased their off-premise meeting budgets annually in spite of the state of the economy. however, the rising costs of travel and lodging have made management monitor these budgets more closely than ever. Thus, the need to use every dollar efficiently has compelled companies to examine newer methods of running meetings and alternatives to the usage of typical off-premise meeting facilities. The importance of off-premise meetings in the United States economy has greatly increased due to the billions of dollars spent annually. These factors make it vital to explore the effectiveness of time and monetary expenditures. Up until the mid-1960's, company meetings were held in facilities of various design and purpose, none of which were specifically designed for the small to medium corporate meeting. Upon gathering information concerning the meetings market and the corporate meeting planner, certain individuals endeavored to change the situation. This study is designed to investigate this new concept, which will hereafter be referred to as "conference center." For the purpose of this study, the following two definitions will be used. 1. Conference center - that meeting facility primarily marketing its facilities for the small to medium-sized corporate meeting. The center is operated by specialists aware of market needs in as much detail as are those people working for the company involved. On-premise sleeping rooms are not mandatory provided such facilities are within easy access. 2. Meeting planner - that person within an organization who has primary responsibility for arranging off-premise meetings and all other related items necessary for meeting effectiveness. This person may spend anywhere from 10 to 100l of his time in this capacity. The conference center has effectively satisfied the need for specialized corporate meeting facilities. This study will show the depth of the corporate meetings market and trace the growth and development of this relatively new conference center concept. Information will also be compiled on the top centers in the country. It is hoped that by presenting this research meeting planners will become more aware of the nature and location of these centers, especially for use by the small to medium-sized company. Such exposure of the centers will hopefully increase existing demand and enable the construction of new, innovative centers.

Associations between SOX 404 opinions and auditors, audit committees, and executives

This dissertation examined three issues associated with Section 404 of the Sarbanes-Oxley Act (SOX) that are of current interest to regulators and the accounting profession. For the first essay, I examined auditor changes from 2003 to 2005 for 2,454 non-financial firms that filed their initial SOX 404 opinions prior to July 1, 2005. My results showed that there is a significant association between the receipt of an adverse SOX 404 opinion and auditor resignations - both before and after the issuance of the SOX 404 opinion. The data related to auditor dismissals show that clients are not successful in opinion shopping, since clients dismissing the auditor before the SOX 404 report also are more likely to receive an adverse SOX 404 opinion than clients not changing auditors. My second essay examined the relation between audit committee characteristics and changes in material weaknesses in internal control over financial reporting under the new SOX regime. My results showed that improvements in internal control in the second year of SOX are associated with: (1) the number of audit committee members and (2) financial expertise of audit committee members. My third essay examined the relation between the appointment of the new executives and the subsequent receipt of initial section 404 of SOX opinions. My results showed that adverse SOX 404 reports will be more likely at firms that recently hired a new chief financial officer (CFO).

Shareholder ratification of the auditor and audit market competition

In my dissertation, I examine factors associated with firms’ submission of auditor selection for shareholder ratification and test if shareholder ratification of auditor selection is associated with the extent of price competition in the audit market (as measured by audit fees) and audit quality (as measured by clients’ earnings management). The dissertation is motivated from the recent recommendation of the U.S. Treasury’s Advisory Committee on Auditing Profession (ACAP) regarding the submission of auditor selection for shareholder ratification votes. The ACAP suggests that this practice may improve the competition in the audit market; yet, there is no empirical evidence supporting the ACAP’s recommendation. My dissertation attempts to fill the gap in the literature on an issue of current interest to the auditing profession. I find that firm size, CEO-Chair duality, insider ownership and institutional ownership are associated with the submission of auditor selection for shareholder ratification vote. However, I do not find an association between audit committee variables and the submission of auditor selection for shareholder ratification vote. The second essay investigates the association between auditor ratification and audit fees. Audit fees are higher in firms that submit auditor selection for shareholder ratification. The finding is not consistent with the increased price competition predicted by the ACAP. The third essay of my dissertation examine whether the submission of auditor selection for shareholder ratification is associated with earnings management. I find that firms that submit auditor selection for shareholder ratification are more likely to have lower level of earnings management. Overall, the results suggest that the same factors that are associated with higher quality monitoring also may be associated with the submission of auditor selection for shareholder ratification vote. The results call into question the one-size-fits-all approach recommended by the ACAP.

Audit pricing, reporting quality, and auditor switches in the post -SOX period

The Sarbanes-Oxley Act represents an important watershed event in the history and regulation of the accounting profession. In this dissertation, I develop arguments as to why we can expect differences in auditor behavior before and after SOX and empirically test if indeed there were differences in auditor behavior before and after SOX. My dissertation consists of three essays. For the three essays, I investigate issues related to auditor independence, audit pricing, the impact of auditor changes in the post-SOX period. The motivation for the first part of my research comes from the SEC's assertions that there are differences between types of non-audit services in terms of their potential to adversely impact auditor independence. The first part of my dissertation empirically validates the SEC's assertions that auditors would be more conservative in those instances where the tax and other non-audit services fee ratios are high but not when the audit-related fee ratio is high. The second part of my study examines if auditors are less likely to "low ball" their audit fees in the period after SOX than in the period preceding SOX. Legislators, regulators, and the media have expressed concerns that auditors "low ball" the fees for initial year audits and that such low-balling can lead to reduced audit quality. I find that there is significant initial year audit fee discount in pre-SOX period and but the fee discount does not hold in post-SOX periods. The third part of my dissertation examines the association between auditor switches and auditor conservatism. I find that a large portion of Big 4 clients switch to non-Big 4 auditors and there is no significant evidence indicating that successor auditors are more conservative in the post-SOX period.

Shareholder Ratification of The Auditor and Audit Market Competition

In my dissertation, I examine factors associated with firms’ submission of auditor selection for shareholder ratification and test if shareholder ratification of auditor selection is associated with the extent of price competition in the audit market (as measured by audit fees) and audit quality (as measured by clients’ earnings management). The dissertation is motivated from the recent recommendation of the U.S. Treasury’s Advisory Committee on Auditing Profession (ACAP) regarding the submission of auditor selection for shareholder ratification votes. The ACAP suggests that this practice may improve the competition in the audit market; yet, there is no empirical evidence supporting the ACAP’s recommendation. My dissertation attempts to fill the gap in the literature on an issue of current interest to the auditing profession. I find that firm size, CEO-Chair duality, insider ownership and institutional ownership are associated with the submission of auditor selection for shareholder ratification vote. However, I do not find an association between audit committee variables and the submission of auditor selection for shareholder ratification vote. The second essay investigates the association between auditor ratification and audit fees. Audit fees are higher in firms that submit auditor selection for shareholder ratification. The finding is not consistent with the increased price competition predicted by the ACAP. The third essay of my dissertation examine whether the submission of auditor selection for shareholder ratification is associated with earnings management. I find that firms that submit auditor selection for shareholder ratification are more likely to have lower level of earnings management. Overall, the results suggest that the same factors that are associated with higher quality monitoring also may be associated with the submission of auditor selection for shareholder ratification vote. The results call into question the one-size-fits-all approach recommended by the ACAP.