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Audit Firm Appointments, Audit Firm Alumni, and Audit Committee Independence*

Clive S. Lennox; Chul W. Park
Contemporary Accounting Research 2007 24(1), 235-258 open access
A company officer is an "alumnus" if he previously worked for an audit firm. Iyer, Bamber, and Barefield (1997) find that alumni have ties with their former audit firms and alumni are more inclined to provide economic benefits to former firms if they have stronger ties. If the alumnus is a senior corporate officer, the alumnus may benefit his former firm by recommending that the company appoint the firm as its auditor. However, the company's audit committee may be concerned that officer-auditor ties threaten audit quality. Therefore, an independent audit committee may not sanction the appointment of the officer's former firm. This study investigates (a) whether companies tend to appoint officers' former audit firms, and (b) whether independent audit committees mitigate this tendency. We document that companies appoint officers' former firms more often than they appoint alternative audit firms. However, companies are less likely to appoint officers' former firms if audit committees are more independent. This suggests that independent audit committees strengthen audit quality by deterring affiliations between audit firms and officers. © CAAA.

Strategic Consequences of Historical Cost and Fair Value Measurements*

Ricardo F. Reis; Phillip C. Stocken
Contemporary Accounting Research 2007 24(2), 557-584 open access
This paper examines the measurement of non-financial assets in imperfectly competitive markets and considers the effect of alternative measurements on firms' investing and operating activities. We analyze a duopoly where each firm manufactures, reports, and thereafter sells its inventory. We initially characterize the informativeness of a firm's accounting report when it is prepared using historical cost and find a firm's report does not always reveal its level of inventory. We then characterize the informativeness of a report when it is prepared using fair value and find it completely reveals a firm's inventory holding. We highlight the difficulty of implementing fair value measurements that arise because fair value is an endogenous consequence of the strategic interaction between firms.