Knowledge that Transforms

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn Email Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation Mark L. DeFond; Annual Report and Editorial Commentary for The Accounting Review. The Accounting Review 1 November 2015; 90 (6): 2603–2638. https://doi.org/10.2308/accr-10477 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search

ABSTRACT This paper empirically examines the interactive effect of competition intensity and competition type on the use of customer satisfaction measures in executives' annual bonus contracts. Specifically, we predict a stronger association between competition intensity in an industry and the use of customer satisfaction measures in executives' annual bonus contracts when the competition is non-price-based than when the competition is price-based. Using hand-collected data from Standard & Poor's (S&P) 1500 firms' disclosures of the use of customer satisfaction measures in executive bonus contracts in 2006 and 2010 proxy statements, we find results consistent with our prediction. Our results are robust to alternative measures of competition type and competition intensity. We also find similar results when we use the weight on customer satisfaction measures in executive bonus contracts as the dependent variable. Our study extends the literature on the effect of competition on the design of managerial incentives by distinguishing between competition intensity and competition type, and providing the first large-sample empirical evidence on the joint effect of these two dimensions of competition on the incentive use of an important nonfinancial performance measure. Data Availability: Data used in this study are obtained from publicly available sources.

ABSTRACT This study examines whether China's weak institutional environment results in lower-quality audits by the Big 4 firms. We find that the Big 4 assign their less experienced partners to companies that are listed only in China compared with clients cross-listed in Hong Kong. The Big 4 are less likely to issue modified audit reports, and they charge lower audit fees for clients that are listed only in China. Finally, companies listed only in China have larger signed abnormal accruals than do companies cross-listed in Hong Kong. Overall, we conclude that the weak institutional environment in China results in the Big 4 firms providing lower-quality audits to companies that are listed only in China.

ABSTRACT We specify measures of accounting consistency both across time and across firms based on the textual similarity of accounting policy footnotes disclosed in 10-K filings. We first examine how these measures relate to earnings quality. Accounting consistency over time is positively associated with a number of earnings quality proxies, including earnings persistence, predictability, accrual quality, and absolute discretionary accruals. We also find that lower consistency relative to other firms in the industry is associated with larger absolute accrual model residuals. Finally, we examine the information processing effects of accounting consistency. We find that greater accounting consistency in the time-series and the cross-section is associated with lower information asymmetry, as proxied by bid-ask spread and illiquidity. Greater cross-sectional consistency is also associated with greater analyst coverage, more accurate analyst forecasts, decreased dispersion in analyst forecasts, and stronger stock return synchronicity. Data Availability: The accounting consistency measures developed in this study are available upon request. All other data are available from the sources cited in the text. JEL Classifications: M41.

ABSTRACT This study investigates whether the market for audit clients penalizes auditors following association with low-quality audits. Specifically, we examine whether audit offices experience a loss in local market share following client restatements. We document that the frequency of restatement announcements within an office-year (“contamination”) is inversely related to subsequent year-over-year change in local market share. Further analysis indicates that restatements impair the office's ability to both attract and retain audit clients. We find that this effect is strongest in high competition markets and diminished in low competition markets. We also examine auditor retention decisions at the client level and find that the likelihood of auditor dismissal increases with contamination, even for non-restating clients. We also find that, on average, clients dismissing their auditor select less contaminated audit offices. Taken together, our results suggest that market forces penalize auditors for association with audit failures, thereby providing an incentive to maintain high-quality audits and protect reputational capital.

ABSTRACT We examine whether the effect of mandatory auditor rotation on audit quality depends on the mental frame auditors adopt in evaluating management representations. In practice, auditors can alternately frame their assessments of management representations in terms of their potential dishonesty (what we term skepticism) or potential honesty. Using psychology theory and a laboratory experiment, we predict and find that mandatory rotation improves audit quality when an auditor takes an honesty frame, but that this effect reverses when an auditor takes a skeptical frame. Thus, the benefit of using a skeptical frame occurs when auditors do not rotate, but requiring rotation can reduce audit effort for auditors using a skeptical frame. An implication of our study is that focusing auditors on a skeptical assessment frame rather than mandating auditor rotation may be a less costly way to reduce low-effort audits and aggressive reporting.