Auditing, Auditor change, Auditor change disclosure, Delayed hiring

The SEC currently requires that firms disclose recent disagreements with their auditors over accounting or auditing matters when a change in auditor is reported. The effectiveness and usefulness of requirements to disclose disagreements have been questioned, and previous empirical research on the issue has been inconclusive. This study investigates the information content of disclosure of the auditor-firm disagreements. The analysis indicates a significant negative market reaction in the week that the Form 8-K is filed with the SEC. This finding is consistent with the position that the disclosure provides information useful to investors.

In 1976, the U. S. Senate Subcommittee on Reports, Accounting, and Management (Metcalf Committee) provided data indicating that the eight largest auditing firms in the country (the Eight) are overwhelmingly the major suppliers of audit services to the largest corporations in the United States. The Subcommittee concluded from these data that monopolistic practices by the Big Eight have led to a two-tier structure in the audit industry-one tier consisting of the eight largest auditors and the second tier consisting of all other auditors, with the Big Eight dominating the industry. In the light of these findings, the committee suggested that more activist regulation of the audit industry was needed by the Securities and Exchange Commission. Dopuch and Simunic [1980] examined a wide variety of evidence that might tend to support or refute allegations of a lack of competition in the auditing profession. They (D-S) concluded that the industry was competitive, and in a subsequent paper [1982] they argued that many of the apparent monopolistic characteristics of the industry could be explained by a product-differentiation hypothesis. More specifically, they hypothesized that different auditing firms provide auditing services which are perceived by investors to be different in quality, and in particular, that the Big Eight auditors are perceived as being more credible than non-Big Eight auditors. If this is the case, the Big Eight firms would be

Researchers often restrict their sample selection to either December or non-December Compustat companies. However, no one has rigorously investigated the implications of this restriction. This paper compares financial characteristics of December and non-December year-end companies. December year-end firms are larger and have smaller betas as compared to companies with non-December year-ends. There are some strong industry concentrations in December year-ends, most notably in the regulated or recently deregulated industries. Retail sales firms have primarily non-December year-ends. A comparison of leverage ratios does not reveal a stable systematic difference between December and non-December year-end companies.

The study investigates the information content of the foreign sensitive payment disclosures made during the Securities and Exchange Commission's ‘voluntary’ disclosure program. The results of the information content tests and the tests of the relationship between payment size and abnormal security returns imply that investors may have been reacting to the expectation of the loss of future business or to the possibility of future government sanctions.

Abstract Reviews the book "Accounting: Concepts and Applications," by Paul R. Berney and Stanley J. Garstka.

ABSTRACT We examine the usefulness of other comprehensive income (OCI) to debt investors in nonfinancial companies. Motivated by Merton's (1974) real options framework, we construct a measure of incremental OCI volatility, designed to capture the effect of OCI on overall firm asset volatility, which is a primary driver of credit risk in Merton's (1974) model. We find that the volatility of incremental OCI influences the likelihood of default, credit ratings, and the cost of debt. Overall, our evidence suggests that creditors use information from OCI in their assessment of firm credit risk and in pricing debt contracts.

Michael L. Ettredge, Daniel T. Simon, David B. Smith, Mary S. Stone, The Effect of the External Accountant's Review on the Timing of Adjustments to Quarterly Earnings, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 195-207

This study investigates the effect of firms' adoption of SFAS No. 131 segment disclosure rules on the stock market's ability to predict the firms' earnings, as captured by the forward earnings response coefficient (FERC). The FERC is the association between current-year returns and next-year earnings. SFAS No. 131, effective for fiscal years beginning after December 15, 1997, arguably increased both the quantity and quality of segment disclosure. Consistent with the standard's intended qualitative effects, pre-131 multi-segment firms experienced a significant increase in FERC after adopting SFAS No. 131. Consistent with the standard's intended quantitative effects, many pre-131 single-segment firms began disclosing multiple segments, and those that did experienced an increase in FERC. However, pre-131 single-segment firms that remained single segment (i.e., were unaffected by SFAS No. 131) had no change in FERC, indicating that the increase in FERC for 131-affected firms is not due to some other event concurrent to the adoption of SFAS No. 131. These results are robust under numerous procedures that control for characteristics of the sample firms and their earnings, providing strong evidence that SFAS No. 131 resulted in an increase in stock price informativeness for affected firms. Thus, we provide the first empirical price-based evidence that SFAS No. 131 provided more information (about future earnings) to the market, as the standard's proponents have suggested.