Can't get away with bad accounting
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by Michael S. Wilkins |
Most of the papers I’ve worked on during the past few years investigate what determines the fees audit firms earn both in their year-end financial statement audits and in their assurance work related to equity offerings. My three most recent projects, however, are a little more eclectic (and probably a little more interesting), so I’ve chosen to summarize them here.
The first two projects basically indicate that, at least on average, things aren’t as bad as the popular press makes them out to be. In the first paper, which was recently published in The Accounting Review, my co-authors and I investigate whether top managers at firms that have earnings restatements are penalized by the labor market. We find that restating firms experience significantly more management turnover after the restatements are disclosed and that displaced managers of restatement firms have a much harder time finding comparable employment in the future. These findings cast doubt on the popular perception that executives are able to “get away with” aggressive accounting.
Our second paper speaks to the idea that the collapse of Enron and the general demise of Arthur Andersen are symptomatic of an environment where accounting firms are no longer doing their jobs correctly. We examine a sample of firms reporting internal control weaknesses and find that audit fees are much higher for these firms than for a group of similar firms that do not have internal control weaknesses, even in years prior to the time period in which the control weaknesses were documented. These results suggest that accounting firms are extending their substantive testing when control problems exist, rather than simply providing rubber stamp audits.
A final project is motivated by a series of recent Wall Street Journal articles documenting the on-going debates about how much information Hong Kong investment banks should be allowed to produce and distribute before initial public offerings. Our paper shows that IPOs are priced significantly more accurately in Hong Kong (where pre-deal research is allowed) than in the United States and Singapore (where pre-deal research was not allowed during our sample period). We hope that this paper will help Hong Kong regulators as they evaluate the potential costs and benefits associated with allowing or denying the continued dissemination of pre-deal research.
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