The purpose of this paper is to evaluate whether the expanded requirements of SAS No. 59 (A/CPA [1988]), which requires auditors to actively evaluate and report on a client's going-concern status for the coming year, have allowed investors to make more accurate ex ante assessments of firms that eventually file for bankruptcy. We extend Chen and Church [1996] (hereafter CC), who conclude that SAS No. 34 (AICPA [1981]) "subject to" going-concern opinions have information value because they reduce the surprise associated with bankruptcy announcements. We hypothesize that if SAS No. 59 has achieved what was intended, going-concern opinions issued under SAS No. 59 should further reduce investor surprise at bankruptcy announcements. While we do not believe SAS No. 59 was issued for the specific purpose of helping users to predict bankruptcy, we do suggest that the increased auditor responsibility and improved communication should provide users with information that is of relatively higher quality. This argument is based on a number of important differences between SAS No. 34 and SAS No. 59.

Guenther and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last‐in, first‐out (LIFO) reserve and the market value of its equity. In this paper, we test a deferred tax explanation of this negative association. Specifically, we argue that investors, conditional on adjusting inventory to as‐if first‐in, first‐out (FIFO), estimate a firm's future LIFO liquidation tax burden as its LIFO reserve multiplied by the appropriate corporate tax rate and include this tax‐adjusted LIFO reserve in the valuation of a LIFO firm's net assets. On the basis of this argument, the tax‐adjusted LIFO reserve is in effect an estimate of an off‐balance‐sheet deferred tax liability and, as a result, we predict a negative association between the tax‐adjusted LIFO reserve and market value of equity. We test our deferred tax explanation by estimating a valuation model in which a firm's market value of equity is expressed as a function of the firm's assets, liabilities, deferred tax liability, and tax‐adjusted LIFO reserve; the model is estimated separately in years preceding and following the reduction of tax rates mandated by the US Tax Reform Act of 1986. Test results provide strong support for the deferred tax explanation of the negative association between a firm's LIFO reserve and the market value of its equity.

We focus on the relations among inside ownership, board composition, unaffiliated block ownership, and compensation structure for a sample of firms following their IPOs. Specifically, we follow firms for up to eleven years after their IPOs and examine the full sample and subsamples of firms that survive, are acquired, or that file for bankruptcy during the sample period. We find that as CEO ownership declines, board independence, board seats held by venture capitalists, and unaffiliated block ownership increase. Our findings suggest that as inside ownership decreases alternative governance mechanisms evolve to help mitigate the resulting increase in agency costs. Interestingly, the associations between CEO ownership, the fraction of venture capital board membership, and unaffiliated block ownership exist only for firms that survive over the eleven-year sample period.

The article discusses the study of determining whether audit risk model is descriptive of what occurs in the auditing practice or if the relationship between fees and internal control deficiencies (ICDs) suggest that audit enterprises exert more effort in auditing firms that impart ICDs. The study examines the internal controls over financial reporting (ICOFR), generally accepted accounting principles (GAAP), audit risk model, audit fees and sections of Sarbanes-Oxley Act. The study found out that audit fees are significantly higher for firms disclosing material weakness.

Recent amendments to Auditing Standard (AS) 3101 require disclosure of the initial year of the auditor‐client relationship in the audit report. As the standard was being discussed, auditors, clients, and some PCAOB members expressed reservations about the necessity of tenure disclosures and were particularly concerned about disclosing tenure in the audit report. Our purpose is to investigate whether the tenure disclosures mandated by AS 3101 are associated with changes in stakeholder behavior. We predict and find that after the implementation date, ratification votes against the auditor and the probability of subsequent auditor dismissal increase for long‐tenured versus short‐tenured auditors. Results from a path analysis further suggest that the relative increase in dismissal for long‐tenured auditors appears to be influenced directly through tenure disclosures and indirectly through ratification voting. We also predict and find that negotiating power decreases for long‐tenured auditors as evidenced by lower audit fees. Our results are comparable for companies that voluntarily disclosed and companies that did not disclose auditor tenure in their proxy statements prior to the AS 3101 amendment. Overall, our study suggests that mandatory disclosure of auditor tenure in the audit report significantly affects stakeholder behavior. The PCAOB should consider our findings carefully as they evaluate whether AS 3101 is achieving its intended purpose.

Using proprietary data from a global accounting firm, we investigate the determinants of auditors' interim effort as well as the impact of interim effort on audit quality, client disclosure timeliness, audit hours, and audit fees. Public statements from accounting firms and regulators suggest various benefits from accelerating auditor effort, but these claims remain largely untested. We find that interim effort is higher for large, complex clients that require integrated audits of both financial statements and internal control over financial reporting. With respect to consequences, we find that allocating relatively more work to the interim period is associated with a reduced likelihood of late 10‐K filings, decreased total audit hours, and higher fees. Although increasing interim period effort is not, on average, associated with a reduced likelihood of misstatement, we do find that current period material weaknesses are less likely with greater interim work. Thus, greater interim effort appears to facilitate the remediation of internal control deficiencies before year‐end. We also show that the benefits of increased interim period effort allocation are much stronger—including improved audit quality—when manager and partner interim involvement is high. Overall, our study provides important new insights on audit production and highlights benefits of reduced hours for auditors, earlier identification of control deficiencies for clients, and more timely financial reports for investors.

We examine competition for Andersen’s public clients during and after its failure in 2002. This setting provides a natural experiment to examine audit market dynamics at the local level. We construct a database documenting Big4 purchases of local Andersen offices. After exploring the factors associated with office purchases, we examine the impact of office purchases on public client market share gains and changes in audit fees. We find that three Big4 firms – Deloitte, Ernst & Young, and KPMG – purchased approximately 60% of Andersen’s offices while PricewaterhouseCoopers did not purchase any. The probability that a firm purchased a specific office is greater in markets where the acquiring firm: 1) already had a presence, 2) had a lower ratio of local Andersen clients to the purchaser’s clients, and 3) had already acquired relatively more local former Andersen public clients than other firms prior to the purchase. Our fee analysis expands the United States Government Accountability Office (GAO) post-Andersen audit market study by documenting that the former Andersen clients’ change in audit fees is associated with the differences in client acquisition method.