This article cites a study which assesses the effect of the separation of ownership from control on accounting policy decisions. Many theories of management behavior in manager firms consistently argue that a gradually rising performance measure is in management's best interest. This study is an empirical investigation of the accounting policy decisions which were made by 110 firms during the 9-year period between 1954-1962. The firms considered for inclusion in this study were listed on the New York Stock Exchange in December 1954, as reported in the U.S. Senate Staff Report. Fifty-seven managers and fifty-three owner firms were selected randomly from this population for inclusion in this study. In this study, control refers to the power to direct the affairs of the corporation or to determine the broad policies guiding the corporation. Results of this study extend the research previously reported in the accounting literature by empirically drawing the distinction between owner-controlled firms and manager-controlled firms for the first time. Some of the results lend empirical evidence to the importance of distinguishing between owner and manager control.

We examine the strategic effects of auditor tenure on the auditor's testing strategy and the manager's inclination to commit fraud. Most empirical studies conclude that longer tenure improves audit quality. Proponents of restricting tenure argue that longer tenure impairs auditor independence and a “fresh look” from a new auditor results in higher audit quality. Validating this argument requires testing whether the observed difference in audit quality between a continuing auditor and a change in auditors is less than the theoretically expected difference in audit quality without impairment. Our findings provide the guidance necessary for developing such tests. Our results show that audit risk (the probability that fraud exists and goes undetected) is lower in both periods for the continuing auditor than with a change in auditors. More importantly, we show that across both periods, expected undetected fraud is lower for the continuing auditor than with a change in auditors.

Internal auditors perform work that is relevant to their host entities' financial reporting processes; yet, little research attention has focused on the effects of internal auditing on companies' external financial reporting. Using a unique and previously unavailable data set, we investigate the relation between internal audit function (IAF) quality and earnings management. We measure IAF quality using a composite measure comprising six individual components of IAF quality based on SAS No. 65, which guides external auditors in assessing the quality of an IAF with respect to its role in financial reporting. Earnings management is measured using two separate proxies: (1) abnormal accruals and (2) the propensity to meet or barely beat analysts' earnings forecasts. We find evidence that IAF quality is associated with a moderation in the level of earnings management as measured by both proxies.