Audit committee effectiveness : informal processes and behavioural effects

Purpose This paper seeks to investigate the conditions and processes affecting the operation and potential effectiveness of audit committees (ACs), with particular focus on the interaction between the AC, individuals from financial reporting and internal audit functions and the external auditors. Design/methodology/approach A case study approach is employed, based on direct engagement with participants in AC activities, including the AC chair, external auditors, internal auditors, and senior management. Findings The authors find that informal networks between AC participants condition the impact of the AC and that the most significant effects of the AC on governance outcomes occur outside the formal structures and processes. An AC has pervasive behavioural effects within the organization and may be used as a threat, an ally and an arbiter in bringing solutions to issues and conflicts. ACs are used in organizational politics, communication processes and power plays and also affect interpretations of events and cultural values. Research limitations/implications Further research on AC and governance processes is needed to develop better understanding of effectiveness. Longitudinal studies, focusing on the organizational and institutional context of AC operations, can examine how historical events in an organization and significant changes in the regulatory environment affect current structures and processes. Originality/value The case analysis highlights a number of significant factors which are not fully recognised either in theorizing the governance role of ACs or in the development of policy and regulations concerning ACs but which impinge on their governance contribution. They include the importance of informal processes around the AC; its influence on power relations between organizational participants; the relevance of the historical development of governance in an organization; and the possibility that the AC’s impact on governance may be greatest in non-routine situations.

The Corporate Governance Effects of Audit Committee

This chapter provides a synthesis and evaluation of empirical research on the governance effects associated with audit committees. Given recent policy recommendations in several countries aimed at strengthening these committees, it is important to establish what research evidence demonstrates about their existing governance contribution. A framework for analyzing the impact of audit committees is described, identifying potential perceived effects which may have led to their adoption and documented effects on aspects of the audit function, on financial reporting quality and on corporate performance. It is also shown that most of the existing research has focused on factors associated with audit committee existence, characteristics, and measures of activity and there is very little evidence on the processes associated with the operation of audit committees and the manner in which they influence organizational behavior. It is clear that there is no automatic relationship between the adoption of audit committee structures or characteristics and the achievement of particular governance effects, and caution may be needed over expectations that greater codification around factors such as audit committee members’ independence and expertise as the means of ‘‘correcting’’ past weaknesses in the arrangements for audit committees. The most fundamental question concerning what difference audit committees make in practice continues to be an important area for research development. For future research we suggest: (1) greater consideration of the organizational and institutional contexts in which audit committees operate; (2) explicit theorization of the processes associated with audit committee operation; (3) complementing extant research methods with field studies; and (4) investigation of unintended as well as expected consequences of audit committees.

The performance of diversified emerging market equity funds

We investigate the performance of globally diversified emerging market equity funds during the first decade of the twenty-first century. A vast majority of these funds do not outperform the market benchmark even before transaction costs. The systematic risk of most of the funds is similar to that of the market benchmark portfolio, which may suggest that they aim to offer diversification benefits rather than seeking superior risk-adjusted returns through active management. We do not find any evidence of market timing ability amongst these funds. Finally, whilst we detect persistence in performance, this result is driven mainly by the poorly performing funds.

Hierarchical deterministic Bitcoin wallets that tolerate key leakage (short paper)

A Bitcoin wallet is a set of private keys known to a user and which allow that user to spend any Bitcoin associated with those keys. In a hierarchical deterministic (HD) wallet, child private keys are generated pseudorandomly from a master private key, and the corresponding child public keys can be generated by anyone with knowledge of the master public key. These wallets have several interesting applications including Internet retail, trustless audit, and a treasurer allocating funds among departments. A specification of HD wallets has even been accepted as Bitcoin standard BIP32. Unfortunately, in all existing HD wallets---including BIP32 wallets---an attacker can easily recover the master private key given the master public key and any child private key. This vulnerability precludes use cases such as a combined treasurer-auditor, and some in the Bitcoin community have suspected that this vulnerability cannot be avoided. We propose a new HD wallet that is not subject to this vulnerability. Our HD wallet can tolerate the leakage of up to m private keys with a master public key size of O(m). We prove that breaking our HD wallet is at least as hard as the so-called "one more" discrete logarithm problem.

Bone-anchored prosthesis: Evidence that “gains” overcome the “pain”

Most of socket related discomforts leading to a significant decrease in quality of life of individuals with limb amputation can be overcome by surgical techniques enabling bone-anchored prostheses. To date, the OPRA two-stage procedure (i.e., S1, S2) is the most acknowledged treatment. However, surgical implantations of osseointegrated fixations are developing at an unprecedented pace worldwide.[1-18] Clearly, this option is becoming accessible to a wide range of individuals with limb amputations. The team led by Dr Rickard Branemark has published a number of landmark articles each focusing on a particular aspect (e.g., health related quality of life, functional outcomes, bone remodelling, infection rate). [1-3, 19-32] However, evidences presented in this prospective study are remarkable. Functional outcome, health-related quality of life and complications were considered concurrently for a large population (i.e., 51 participants) over an extended period of time (i.e., up to year follow up). Therefore, the “gain” and “pain” of the whole procedure were truly contrasted for the first time. The results confirmed that OPRA surgical and rehabilitation procedures improved significantly prosthetic use, mobility, global situation and fewer problems. Furthermore, the authors reported 47 episodes of infections for 63% (32) participants between post-op S1 and two years follow up. A total of 87% (41) were superficial infections recorded for 28 participants between post-op S2 and two years follow up, while 13% (6) were deep infections occurring for 4 participants during post-op S1 and S2. As expected, post-op S2 phase was the most prone to both infections. More importantly, the vast majority of infections were effectively treated with oral antibiotics. Clearly, this study provided definitive evidence that the benefits of OPRA fixation overcome complications. This article is also establishing reporting standards and benchmark data for future studies focusing on bone-anchored prostheses.

The equity and efficiency of the Australian share market with respect to director trading

Purpose – The purpose of this paper is to investigate the extent of directors breaching the reporting requirements of the Australian Stock Exchange (ASX) and the Corporations Act in Australia. Further, it seeks to assess whether directors in Australia achieve abnormal returns from trades in their own companies. Design/methodology/approach – Using an event study approach on an Australian sample, abnormal returns for a range of situations were estimated. Findings – A total of 13 (seven) per cent of own‐company directors trades do not meet the ASX (Corporations Act) requirement of reporting within five (14) business days. Directors do achieve abnormal returns through trading in shares of their own companies. Ignoring transaction costs, outsiders can achieve abnormal returns by imitating directors' trades. Analysis of returns to directors after they trade but before they announce the trade to the market shows that directors are making small but statistically significant returns that are not available to the market. Analysis of returns to directors subsequent to the ASX reporting requirement up to the day the trade is reported shows that directors are making small but statistically significant returns that should be available to the market. Research limitations/implications – Future research should investigate the linkages between late reporting by directors and disadvantages to outside shareholders and the implementation of internal policies implemented to mitigate insider trading. Practical implications – Market participants should remain vigilant regarding the potential for late/non‐reporting of directors' trades. Originality/value – Uncovering breaches of reporting regulations are particularly important given that directors tend to purchase (sell) shares when the price is low (high), thereby achieving abnormal returns.

NFPOs and their anti-corruption disclosure practices: Evidence from Australia

By focusing on major Australian overseas aid not-for-profit organisations (NFPOs), this study has found that NFPOs’ public disclosures lack appropriate commentary relating to anti-corruption measures. We found that this could be due to a break down in regulatory oversight caused by a lack of mandatory reporting standards. This finding reinforces the experience of NFPOs in terms of addressing anti-corruption issues. The key lesson is that there is a need for significant improvement in the anti-corruption regulations, hence associated disclosure practices within the NFPOs sector.

The selection, optimization, and compensation model in the work context: A systematic review and meta-analysis of two decades of research

Over the past two decades, the selection, optimization, and compensation (SOC) model has been applied in the work context to investigate antecedents and outcomes of employees' use of action regulation strategies. We systematically review, meta-analyze, and critically discuss the literature on SOC strategy use at work and outline directions for future research and practice. The systematic review illustrates the breadth of constructs that have been studied in relation to SOC strategy use, and that SOC strategy use can mediate and moderate relationships of person and contextual antecedents with work outcomes. Results of the meta-analysis show that SOC strategy use is positively related to age (rc = .04), job autonomy (rc = .17), self-reported job performance (rc = .23), non-self-reported job performance (rc = .21), job satisfaction (rc = .25), and job engagement (rc = .38), whereas SOC strategy use is not significantly related to job tenure, job demands, and job strain. Overall, our findings underline the importance of the SOC model for the work context, and they also suggest that its measurement and reporting standards need to be improved to become a reliable guide for future research and organizational practice.

Detecting Earnings Management Using Neural Networks

Detecting Earnings Management Using Neural Networks. Trying to balance between relevant and reliable accounting data, generally accepted accounting principles (GAAP) allow, to some extent, the company management to use their judgment and to make subjective assessments when preparing financial statements. The opportunistic use of the discretion in financial reporting is called earnings management. There have been a considerable number of suggestions of methods for detecting accrual based earnings management. A majority of these methods are based on linear regression. The problem with using linear regression is that a linear relationship between the dependent variable and the independent variables must be assumed. However, previous research has shown that the relationship between accruals and some of the explanatory variables, such as company performance, is non-linear. An alternative to linear regression, which can handle non-linear relationships, is neural networks. The type of neural network used in this study is the feed-forward back-propagation neural network. Three neural network-based models are compared with four commonly used linear regression-based earnings management detection models. All seven models are based on the earnings management detection model presented by Jones (1991). The performance of the models is assessed in three steps. First, a random data set of companies is used. Second, the discretionary accruals from the random data set are ranked according to six different variables. The discretionary accruals in the highest and lowest quartiles for these six variables are then compared. Third, a data set containing simulated earnings management is used. Both expense and revenue manipulation ranging between -5% and 5% of lagged total assets is simulated. Furthermore, two neural network-based models and two linear regression-based models are used with a data set containing financial statement data from 110 failed companies. Overall, the results show that the linear regression-based models, except for the model using a piecewise linear approach, produce biased estimates of discretionary accruals. The neural network-based model with the original Jones model variables and the neural network-based model augmented with ROA as an independent variable, however, perform well in all three steps. Especially in the second step, where the highest and lowest quartiles of ranked discretionary accruals are examined, the neural network-based model augmented with ROA as an independent variable outperforms the other models.

Cobreaking of Stock Prices and Contagion

Financial crises have shown that dramatic movements in one financial market can have a powerful impact on other markets. The paper proposes to use cobreaking to model comovements between financial markets during crises and to test for conta-gion. It finds evidence of cobreaking between stock returns in developed markets. Finding cobreaking has implications for the diversification of international investments. For emerging mar-ket stock returns the evidence of cobreaking is mainly due to the non-financial event of the 9/11 terrorist attacks in 2001. Fi-nancial crises originating in one emerging market do not spread to other markets, i.e., no contagion.

Owners' Way or the Highway: Short-term Expectations and Owner Impatience

Increased media exposure to layoffs and corporate quarterly financial reporting have created arguable a common perception – especially favored by the media itself – that the companies have been forced to improve their financial performance from quarter to quarter. Academically the relevant question is whether the companies themselves feel that they are exposed to short-term pressure to perform even if it means that they have to compromise company’s long-term future. This paper studies this issue using results from a survey conducted among the 500 largest companies in Finland. The results show that companies in general feel moderate short-term pressure, with reasonable dispersion across firms. There seems to be a link between the degree of pressure felt, and the firm’s ownership structure, i.e. we find support for the existence of short-term versus long-term owners. We also find significant ownership related differences, in line with expectations, in how such short-term pressure is reflected in actual decision variables such as the investment criteria used.

Deforestation and forest degradation in India - implications for REDD+

Reducing emissions from deforestation and forest degradation (REDD+) is considered as an important mechanism under the UNFCCC aimed at mitigating climate change. The Cancun Agreement on REDD mechanism has paved the way for designing and implementation of REDD+ activities, to assist countries experiencing large-scale deforestation and forest degradation. Contrary to the general perception, the present analysis shows that India is currently experiencing deforestation and forest degradation. According to the latest assessment of the Forest Survey of India, the net annual loss of forests is estimated to be 99,850 ha during the period 2007-2009, even though the total area under forests has increased. The REDD+ mechanism aims to provide financial incentives for reducing deforestation and forest degradation. India, despite having robust legislations, policies and remote sensing capabilities, is not ready to benefit from the emerging REDD+ mechanism, with potential flow of large financial benefits to rural and forest-dependent communities from international financial sources.

El resurgimiento actual del debate sobre los modelos comparados de capitalismo

Resumen: A partir de la crisis financiera y económica internacional, ha caido la visión del mundo unipolar (basada en la interpretación extrema del libre mercado) para dar lugar al retorno de la intervención del Estado en la economía, en un mundo multipolar en donde se da la competencia de modelos nacionales o socio-culturales de capitalismo. Este trabajo analiza los límites que presenta este sistema de capitalismo estado, y lo contrasta con La Economía Social de Mercado como sistema de ordenamiento de la economía. Este es un sistema que requiere la presencia de un marco institucional sólido que la regule y está focalizado en la equidad y la autosuperación de las personas. Se busca así analizar el funcionamiento de estos sistemas en el marco que les dio origen y analizar su efectividad y su crecimiento en el mundo en los últimos años. Finalmente, se emplea el análisis de estas teorías para el caso latinoamericano.

Relación entre la globalización y la internacionalización financiera: el caso de las empresas vascas

[ES] Cada vez es mayor el número de empresas que optan por acudir a mercados financieros exteriores, tanto al objeto de obtener financiación en mejores condiciones, como para realizar inversiones más atractivas que las disponibles dentro de las fronteras nacionales. La decisión de internacionalizar el área financiera de la empresa puede ser el resultado de una estrategia específica orientada al aprovechamiento de las oportunidades que ofrece el proceso de globalización financiera, que se está desarrollando de forma vertiginosa los últimos años.

Competitive issue of money & abolition of central banks

The aim of this work is to analyze the main characteristics of the current financial system and to investigate the arising of critical voices with respect this system. In particular, we analyze some historical facts that have been important in the creation of this financial order. We analyze the new digital currency, known as Bitcoin, as the basic ingredient in the formation of a new alternative and decentralized international financial system. In 10 years Bitcoin has expanded its influence to many economic activities. We also analyzed briefly the classic liberal theory that criticizes the intervention of governments in the markets. Finally, we consider relevant the arising of a group of countries (BRICS) that may challenge the current system where the position of USA is privileged.