Knowledge that Transforms

[Considerable evidence exists that governmental accounting numbers are related empirically to bond risk and return measures. However, prior research does not preclude the possibility that accounting numbers merely reflect unobserved factors such as economic and political attributes impounded in bond measures. This study considers whether governmental annual financial reports convey new information directly to the bond market. Changes in bond prices during the period around the release date of governmental annual reports were examined to assess market responses to the reports. No significant evidence was obtained to suggest that municipal bond investors use the information in the annual report at the time of its release to adjust bond prices. In contrast, new bond issues and bond rating announcements were associated with significant market reactions. Thus, these results indicate that, while issuer-specific accounting information may be used by bond investors in conjunction with decisions involving new issues and rating evaluations, investors do not appear to impound the information directly into secondary market prices at the time the information is released.]

[Audit contract type-fixed fee or cost-reimbursement-may affect audit fees and audit hours because of differences in both risk-sharing and incentives for efficiencies between the two types of contracts. It was hypothesized that under fixed fee contracting (1) audit fees would be higher or unaffected, and (2) audit hours would be lower. Instead, results indicate fixed fee contracts are associated with significantly lower audit fees and audit hours are not affected by contract type. The study also found that type of auditor (Big Eight or non-Big Eight), company ownership (public or closely-held), and time frame of audit performance (auditors' busy or non-busy season) was not related to contract choice. Finally, fixed fee contracting tended to be used more in early years of auditor/client relations. However, any pricing unique to initial engagements (e.g., price cutting behavior) did not explain significantly lower audit fees with fixed fee contracting.]