Knowledge that Transforms

Because of their complexity and principle-based nature, the creation of International Financial Reporting Standards (IFRS) engendered significant uncertainty that modified the order of things within large accounting firms. This motivated them to establish Professional Practice Function (PPF) units to try to ensure a credible degree of consistency in applying IFRS across a wide range of financial reports at the international level. We study backstage dynamics surrounding a PPF national unit in one of the Big Four firms. We focus on the rise of the PPF as an expert-based control device within the firm, and the role PPF members play as knowledge brokers to interpret IFRS. Our investigation is carried out through ethnographic fieldwork supplemented by interviews with PPF members and field auditors. The analysis brings forward some of the organizational dynamics surrounding PPF members' efforts to establish their credibility as intermediaries both hierarchically, between administrative partners and field auditors, and epistemically, between the unifying logic of IFRS and auditees' financial reporting specifics. Ultimately, our analysis points to the role of the PPF as a gatekeeping or internal control device that mediates between different pools of knowledge to monitor the firm's reputation risk against IFRS implementation challenges. From a legal perspective, our ethnography documents how accounting “law” is made at the firm level and how PPF members strive for consistency – in spite of significant epistemological and organizational challenges. Our ethnography also shows that complex IFRS interpretation issues are not resolved through one person's judgment; instead, the firm's structure surrounding the PPF allows for the constitution of inter-individual judgment that transcends national, sectoral, and (sometimes) organizational boundaries. Finally, we see one important contribution of our work as helping reveal the limits of large conceptual categories such as “auditors”, which tend to downplay the dynamics of convoluted practice relationships.

We find that federal bureaucrats award more, larger, and less risky contracts to politically connected firms when they have greater discretion over contracting outcomes. Using a sample of 4.3 million federal government contract actions obligating $2.47 trillion between 2000 and 2015, we show that this result varies predictably across contract and agency characteristics, over time, and in placebo tests, and is robust to a comprehensive fixed effect structure and seven alternate measures of political connectedness. Our evidence illustrates the overlooked role of the bureaucrat in facilitating political bias in federal contracting outcomes.

Audit academics and policymakers express ongoing concerns about limited knowledge transfer between audit research and policymaking. We use theory-based knowledge transfer norms to evaluate eight practices used by audit academics to transfer research knowledge to policymakers. The discontinued PCAOB-AAA Auditing Section “Research Synthesis Project” came closest to enacting these theory-based knowledge transfer norms. Hence, we examine why those involved in that project did not follow these norms. Interviews with project authors reveal that their review creation approach anchored on the traditional academic literature review, and insufficiently adjusted it to meet the goal of communicating audit research evidence to policymakers. However, interviews with PCAOB project liaisons indicate that policymakers were engaged with and found value in the review creation process. Thus, we analyze PCAOB rulemaking documents for evidence that policymakers valued and used the project’s reviews in their policymaking. Over the project’s duration, we find increasing citations of research to the reviews themselves and to a broader set of academic research. Our findings of knowledge transfer occurrence in this project warrant further research on the efficacy of mobilizing audit research via research syntheses. We also show how several current audit domain knowledge transfer practices can be combined with the research syntheses approach leading to systematic effective knowledge transfer to policymakers.

The Organization for Economic Co-operation and Development (OECD) reports that a male favoring pay gap exists in every one of its member countries. To reduce the gender pay gap, governments and investors are demanding that companies disclose gender pay information. While companies seem to resist these demands, there is little evidence about how investors might react to the disclosure of gender pay information. We draw on theories of fairness and the instrumental perspective of corporate social responsibility activities to predict how the disclosure of gender pay information influences investor judgments. Our experimental findings indicate investors are more willing to invest in a company that discloses gender pay equity compared to either a company disclosing a gender pay gap or one disclosing no gender pay information. Further, our mediation analyses results show a sequential mediation process whereby the gender pay disclosure affects perceptions of fairness (economic consequences) directly (indirectly through fairness), with only perceptions of the economic consequences resulting from the gender pay disclosure directly influencing willingness to invest. In addition, despite the presence of the same sequential mediation relationship, we find limited evidence investors are less willing to invest in a company that discloses a typical gender pay gap compared to a company disclosing no gender pay information. Two additional experiments indicate it is the information about gender pay, not its disclosure by the company, that influences investors; and the effect is intentional. Our results are consistent with investors anticipating real economic consequences from the disclosure of gender pay information.

Accounting research on tax has primarily focused on documenting the income shifting strategies of multinational corporations. However, no studies, as far as we are aware, have hitherto explored how large accountancy firms manage their own tax affairs despite being huge economic entities in their own right. Using a unique private firm dataset of Big 4 affiliated firms from 30 European countries we examine whether the Big 4 shift income among their separate legal entities. Despite apparent disincentives to doing so, we find archival evidence consistent with tax-motivated income shifting. Difference-in-difference specifications around the incorporation of Deloitte EMEA in the U.K. and PwC Europe in Germany provide further evidence consistent with income shifting increasing among Deloitte and PwC affiliates subsequent to the incorporation of their respective regional coordinating entities. In cross-sectional analyses we find evidence consistent with incentives to engage in outbound income shifting being weaker for unprofitable affiliates. We also provide evidence consistent with the Big 4 engaging in income shifting only in countries with favourable tax conditions/weak tax enforcement. Finally, we find evidence in line with debt allocation and intangible asset placement being important channels through which the Big 4 achieve their income shifting objectives. Our study contributes to the literature by being the first to open the black box of the Big 4's own tax planning practices.

Using an experiment, I examine whether managers have preferences for corporate social responsibility (CSR) in a capital budgeting setting and the factors that influence the extent to which they act on these preferences. I find that managers have and act on preferences for CSR by reporting to implement higher cost CSR investments that reduce firm profit even when they have financial incentives not to do so. I also find that when managers need to misreport to act on their preferences for CSR, their willingness to act on such preferences is decreased due to a desire to be honest. Conversely, an opportunity to create slack for personal benefit increases managers’ willingness to act on their CSR preferences, offsetting the decrease resulting from honesty concerns. Together these findings demonstrate that managers’ preferences for CSR investments can influence behavior even in the presence of competing economic incentives and social norms. Finally, an analysis of firm profit shows that firms may be better off financially with managers who act on preferences for CSR investments rather than managers who have strong preferences for wealth. This result obtains because managers with strong CSR preferences do not create slack to the same extent as managers with strong preferences for wealth. These results have implications for both theory and practice because they show that managers’ reports used to make investment decisions are influenced by their personal CSR preferences.

In response to general calls for increased transparency in society, pay transparency policies are growing in importance. Given that pay transparency unavoidably gives employees the opportunity to make comparisons between themselves and others, in this study we address the question of how these comparisons impact the incentive effects of performance contingent pay, and consequently their performance outcomes. Specifically, we empirically examine whether horizontal pay dispersion alters the effectiveness of performance-based pay contracts, which firms typically use to incentivize effort. Exploiting our unique access to a large healthcare provider, we document the moderating role of horizontal pay dispersion on the effectiveness of individual monetary incentives at generating increased individual performance. To provide a more nuanced understanding of the moderating effect of pay dispersion, we further examine the boundary conditions of the proposed interaction. In particular, we examine the differential effect of overall pay dispersion on employees that rank high versus low in the pay distribution and disaggregate overall pay dispersion into performance-related versus performance-unrelated pay dispersion. Our findings consistently show a positive moderating effect of pay dispersion when employees are more likely to consider the observed pay dispersion as legitimate, and a negative moderation effect when this is less likely the case. Our study strengthens the understanding of how individual level incentives function in the context of a multi-person firm setting. Our results document that individual incentives are effective, but also suggest that pay dispersion can have a significant influence on the incentive-performance relation. These findings provide some evidence that individuals are concerned not only with their own payout, but also with that of others, and that this concern has a significant impact on individual’s effort provision, and consequently performance.

Existing studies have developed increasingly sophisticated accounts of the performative agency of valuation devices and their effects on markets and organizations. In particular, research has focused on the work of different actors to legitimize valuation devices and ensure their adoption, which then leads to performativity. This paper extends work on the legitimacy and performativity of valuation devices by developing a dynamic, non-linear theorization of the boundary conditions of performativity and the feedbacks that result in changes in performativity over time. We ask: How do evolutions in a valuation device’s legitimacy relate to its performativity? Our analysis is based on a longitudinal study of the profits per equity partner (PEP) metric which between 1995 and 2013 became established as a key valuation device for English law firms. Through this case we draw attention to the dynamic legitimacy-performativity nexus . We show how the waxing and waning of different forms of legitimacy, in line with the dynamics of the broader institutional environment, affect the performativity of a particular valuation device. We also reveal a performativity paradox . The more a device gains legitimacy the more it becomes influential and exercises performative effects. The more this happens, the more the risk that tensions, contradictions and challenges will arise and begin to undermine the valuation device’s legitimacy and consequently its performativity. Consequently, we contribute to better theorizing the dynamic links between legitimacy, performativity and counter-performativity.