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(2011)ThesisWithout consistency in auditors' reporting behaviour, it is very difficult for a user of audit reports to determine where differences come from; economic differences, differences in auditing methods, interpretation of standards or even due to the auditors' independence. This thesis examines the consistency in auditors’ reporting behaviour with two empirical studies. The first study investigates the cross-country consistency in the application of auditing standards over time and across different auditing firms in the United States, United Kingdom and Australia. With a sample of 19,157 financially distressed firms from 2001 to 2006, the study finds that there is a lack of consistency in audit reporting behaviour between these countries when it comes to the going concern modification. The lack of consistency is however moderated by international audit firm networks, and the trend is that the country differences have reduced over time. The second study looks at the auditors' consistency by comparing their substantial doubt threshold when first issuing a going concern modification, with their substantial doubt threshold when they withdraw the going concern modification. With panel data from 386 US firms in the years 2000-2008, auditors are found to be inconsistent in their assessment of the substantial doubt criterion. The ceteris paribus probability of observing a going concern modification is 6.9% lower when the going concern modification was first issued, compared to when it was withdrawn. The study finds that this difference is primarily caused by the firms that change auditors between the issuance and the withdrawal of the going concern modification. This implies that given the same auditing standard, different audit firms arrive at inconsistent audit outcomes. Understanding the role and relationship between the various impediments and facilitators to consistency both at a national and international level is of importance to consumers and providers of audit services, as well as those who regulate the audit market. By providing a systematic investigation into the consistency of the audit outcome, the findings of this thesis provides valuable input to the evaluation of the current auditing standards and may serve as a guide to future developments of these standards. The thesis also examines the audit firms’ network structure and its ability to facilitate consistency across borders.
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(2011)ThesisThis study examines whether the survival of Australian companies subject to voluntary administration is associated with the experience of administrators and their professional firm affiliation. A comprehensive data set of 212 voluntary administrations of listed public companies covering the 16 year period from 1993 to 2008 is compiled for analysis. The study finds that administrator experience is positively associated with the initial survival of companies in the VA phase and the ultimate survival of companies in the DOCA phase. This finding is robust to various definitions of experience and various control variables for the financial and other characteristics of companies. The positive association between administrator experience and ultimate survival also persists when the liquidation category is extended to de facto liquidations where pre-administration shareholders lose 95% or more of the value of their equity. The study’s main findings are consistent with the explanation of experienced administrators being relatively better managers of companies rather than self-serving managers that delay liquidation for higher fees. Additional analyses of liquidations in the VA/DOCA phases and losses made by pre-administration shareholders, however, provide evidence consistent with administrator opportunism in the VA phase. In terms of administrator firm affiliation, the study finds that there is a negative association between administrators from Big 4 audit firms and initial survival in the VA phase reflecting the conservative nature or reputational concerns of these firms. In contrast, no association is found between administrators from Large 4 insolvency firms and company survival. There is a positive association, however, between administrators from Mid-tier firms and initial survival in the VA phase. The indirect evidence of administrator opportunism in the study underscores the research need for better public access to information about administrators’ fees.
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(2011)ThesisAuditing standards require auditors to collect 'sufficient appropriate' audit evidence, but fails to provide auditors with guidance on how to do so. Research in psychology calls the cognitive mechanisms to terminate the information search process "stopping rules". The limited literature in psychology identifies four main stopping rules used by decision-makers: magnitude threshold, difference threshold, mental model and mental list. The literature gives little guidance on which of these stopping rules would be used by auditors of financial statements. The purpose of this thesis is to identify the stopping rules used by auditors and to use behavioural decision theory to investigate the impact of the auditor’s knowledge, environment and motivation on auditor stopping rules and decision-making performance. Study One was a verbal protocol study using detailed case study to examine the identification of significant risks at the pre-planning stage of the audit. Participants conducted the task while thinking-aloud to capture their conscious cognitive processes. A checklist similar to those provided to audit staff was provided and used at their discretion. The results identified that auditors used multiple stopping rules during the large, complex and unstructured task. The mental model stopping rule was used to the greatest extent and supplemented by use of the other rules (most often the mental list). This is a significant extension to the stopping rule literature as previously it was reported that decision-makers use only a single stopping rule when determining to cease searching for information. It was also found that the stopping rule itself did not affect performance, but how the participant used the stopping rule; for example use of the mental model alone does not improve performance, but how an auditor uses the mental model. The second study was a behavioural experiment with the smaller, less complex task of identifying the cause of an unexpected gross margin fluctuation. Participants continued to use multiple stopping rules during the conduct of the task, though the magnitude threshold stopping rule was used to a greater extent. The level of risk impacted auditor performance, due to both increasing the accuracy of the participant’s initial cause selection and also the extent to which the participant used the mental model stopping rule. Time budget pressure was found to impact performance via its effect on selecting the correct initial cause.
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(2011)ThesisThis study examines vertical product differentiation within the Big 4 audit firms in the Australian audit market and potential pricing effects resulting from this differentiation. Assuming a competitive Big 4 audit market, systematically higher prices pertaining to one particular Big 4 audit firm is indicative of utilisation of a product differentiation strategy. A firm-wide premium implies existence of vertical product differentiation or quality differentiation. I single out PricewaterhouseCoopers (PwC) as the firm which is most likely to be using vertical product differentiation as its predecessor firm Price Waterhouse is historically considered to be the most prestigious of the Big N firms. In particular, I investigate if there is evidence of a PwC premium relative to the other Big 4 audit firms. Using a sample 5,686 observations over the period 2000 to 2009, I find evidence of a PwC audit fee premium in Australia on average and in specific years. Over this period, after controlling for client attributes, Ernst and Young (EY), KPMG and Deloitte (DT) have 9.7%, 10.8% and 12% lower audit fees than PwC, respectively. I also explore the alternative explanations of location, office size, and auditor industry specialisation in assessing the robustness of these findings. Using size and industry matched samples and propensity score matched samples, I further find that the PwC premium identified is a result of PwC being differentiated as a firm rather than having differentiated clients. My findings are of interest to audit researchers, regulators, auditors and auditees because pricing differentiation by PwC poses implications for future audit research, audit regulation and auditor selection. The identification of a PwC premium highlights a new dimension of product differentiation (vertical or quality differentiation) within the Big 4 audit market.
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(2010)ThesisThe study examines the impact of the Global Financial Crisis (GFC) on changes in auditor reporting behaviour in Australia, in particular, whether auditors change their likelihood of issuing a going concern opinion and change their audit effort in response to a challenging audit environment. Using non-financial Australian listed companies over the period 20052009, I test whether the propensity of going concern modifications issued by auditors, audit report lag and audit fees vary in the financial crisis period (2007-2009) compared with the pre-financial crisis period (2005-2006). I find an increase in the propensity to issue going concern opinions by auditors during the period 2008•2009 compared with the period 20052006; that Big N auditors respond to the GFC earlier than non-Big N auditors; and that all Big auditors increase their propensity to issue going concern opinions in response to the GFC, though the degree of increase varies between Big N auditors. However, variation between Big N auditors in propensity to issue going concern opinions is sensitive to model specification and definition of the GFC period. I also find evidence of increased audit fees but no evidence of longer audit report lags during the crisis period relative to the pre-crisis period. Overall, I provide evidence on to what ex tent auditors exercise their professional scepticism regarding particular issues and how much resources they invest in conducting audit engagements during the GFC. My findings are of interest to regulators, auditors and financial information users because it assists auditors and regulators to assess the appropriateness of the strategies implemented and it also informs financial information users of the extent to which audit opinions are informative during the financial crisis. Also, the study informs the policy and law makers as to the impact of shareholder actions on auditor opinion issuance.
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(2010)ThesisI investigate market reactions to a star resource analyst Keith Goode’s recommendations over daily and intraday horizons. Goode is a well known analyst with a strong media presence, specialising in gold and precious metals, and unique in that he is an independent commissioned analyst. In daily analysis, I find size and industry matched mean buy-and-hold abnormal returns of 8.7% over a short run window, mostly coming from gold stock performance. I argue he is a valuable information intermediary in a high information asymmetry setting, being the Australian mining industry. I also contribute to the literature in relation to Development Stage Enterprises (DSE) and analyst ‘learning-by-doing’ (LBD) theory by measuring the differences between performance of recommended stocks partitioned on a DSE-like criterion and on time-based measures of experience. I find no significant results that an alternative informational signal is move valued by DSE-like firms; nor do I find evidence for LBD in relation to this star analyst. I pose a general, non-parametric method for measuring abnormal values of a wide range of intraday metrics capturing various microstructure features, while controlling for idiosyncratic stock-metric effects. Using this method, I detect abnormal trade frequency, volume, traded value and amount of limit order book activity during the first hour, and trade imbalance during the first 2 hours, of the market opening following Goode’s recommendations. I am unaware of any prior research which measures intraday reactions to analyst recommendations.
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(2011)ThesisThis dissertation explores companies' continuous disclosure ('CD') practices and examines factors impacting managers' CD judgements. CD judgements involve assessing whether a reasonable person would expect the information to have a material effect on the price or value of a company's securities. The concept of what judgements a reasonable person would make is important in both accounting and auditing standards across a range of countries. Regulators have also expressed concerns that practitioners are making too many materiality judgements without a full consideration of how a reasonable investor would evaluate the information (Pozen 2008). This dissertation reports on two studies examining factors influencing managers CD decision making processes and judgements. Study One interviews managers to explore the specific internal disclosure structures used by managers to make CD judgements, and to identify key variables impacting their CD judgements. Study Two, a behavioural experiment, examines whether asking managers to take the decision making perspective of a reasonable investor increases their tendency to disclose a probable negative change in their company's earnings expectations, and whether managers' decision making perspective is moderated by knowledge of their boards' prior disclosure preferences to not disclose. Study One revealed that managers answer to a variety of implicit and explicit accountability relationships which influence their CD behaviour, and that managers do not fully consider the viewpoint of a reasonable person when making CD judgements. Rather, in more subjective CD contexts, they rely on the board's disclosure preference, their own preferences or the company's CD precedents. Study Two drew on the results of Study One to investigate whether decision making perspective and the board's disclosure preference affects managers' evidence evaluations and disclosure judgements. Two types of decision making perspective were examined; a self perspective, and a reasonable investor perspective. The board's preference was either known or unknown. Hypotheses were developed based on motivated reasoning theory. Results revealed that managers taking the perspective of a reasonable investor are more likely to recommend disclosure and this effect is stronger when the board's preference is unknown than known.
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(2010)ThesisThis dissertation examines how well auditors triangulate audit evidence in an electronic audit workpaper environment. Evidentiary triangulation is an audit evidence evaluation technique argued to help auditors face the challenges of the contemporary audit environment. It is a technique formally proposed by Bell, Peecher and Solomon (2005) and involves the simultaneous consideration of evidence from three sources (Entity Business States, Management Information Intermediaries, Management Business Representations) that differ in their specificity and source. In particular, it is a technique argued to increase the likelihood that financial statement fraud will be prevented and/or detected. It is, however, a cognitively onerous technique, one that auditors will likely struggle to successfully apply. The proliferation of electronic audit workpaper systems, however, presents an environment with the potential to reduce (or increase) the cognitive demands of evidentiary triangulation. In particular, the way in which electronic workpapers are linked (i.e., the hyperlinking structure) may help or hinder auditors in their efforts to identify important relationships between evidence items. Evidentiary triangulation performance was investigated across three types of hyperlinking structures (indexed, embedded, combined) and two levels of experience (manager, senior) in a controlled experiment. Analysing the judgments made by 32 managers and 69 seniors, the results revealed that different hyperlinking structures were associated with superior and inferior triangulation performance across different experience levels. Inexperienced auditors’ (seniors’) triangulation performance was inhibited by the simultaneous provision of both indexed and embedded hyperlinks, but facilitated by the individual presentation of each structure. The opposite was the case for experienced auditors (managers), whose triangulation performance was facilitated by a combined hyperlinking structure but inhibited by the individual presentation of each structure. Possibly reflecting a lack of training and experience in applying the evidentiary triangulation technique, the facilitating characteristics of different hyperlinking structures were not reflected in improved judgments. The results were also not consistent across differences in the directional implications of the Entity Business State evidence. The findings of this dissertation have implications for accounting firms both in terms of the ability of their auditors to triangulate audit evidence and the way in which they should structure their electronic presentation of workpapers.
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(2010)ThesisAuditors have been shown to subconsciously bias the processing of audit evidence towards the views held by their supervisor, a phenomenon referred to as predecisional distortion (Wilks 2002). Given its subconscious nature, predecisional distortion in an audit setting is of particular concern. Unlike conscious distortion which can be responsive to external interventions such as those aimed at increasing the level of effort applied to the task, predecisional distortion might be difficult to mitigate because it occurs without the awareness of auditors. While predecisional distortion may not be responsive to external interventions, certain environmental factors may decrease or increase the extent of the distortion, thereby improving (or detracting from) the quality of audit judgments. This dissertation reports on two studies examining one such environmental factor, namely, the hierarchical distance between the supervisor and the subordinate auditor making the judgment. Study One examines the impact of hierarchical distance on the level of predecisional distortion. Two aspects of hierarchical distance are examined, namely, the position of the auditor’s supervisor (hierarchical status) and the extent to which the auditor’s national culture emphasises hierarchical authority (hierarchical culture). When analysing data collected from auditors employed in a single Big 4 international practice in Australia and South Korea, predecisional distortion was found to be a phenomenon confined to superior-subordinate relationships, suggesting that hierarchical distance is a necessary condition of predecisional distortion. Unexpectedly, the level of distortion exhibited by the South Korean auditors working in a strong hierarchical culture was less than that exhibited by the Australian auditors working in a weak hierarchical culture. Interviews conducted with a number of participants following the conduct of Study One suggested that the South Korean auditors might perceive their supervisors to have lower levels of expertise than is the case for Australian auditors. Study Two investigates whether the unexpectedly low levels of predecisional distortion exhibited by South Korean auditors can be explained by variations in the perceived expertise of the supervisor. The results revealed that predecisional distortion is a phenomenon restricted to situations where there is no information that suggests the supervisor lacks expertise. Predecisional distortion was most pronounced when there was clear evidence that the supervisor was an expert. Further, where there was an absence of information about the supervisor’s expertise, predecisional distortion was most pronounced when the supervisor’s view encouraged a more conservative audit approach. The results from the two studies reported on in this dissertation highlight that while predecisional distortion is a pervasive phenomenon in audit settings, the consequences of predecisional distortion of audit evidence may not be as negative as previously thought, and in fact, may even facilitate audit efficiency.
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(2010)ThesisThis thesis examines the role of backdoor listing transactions (BDL) as an alternative route for private firms to go public in the Australian market. In addition, it examines the motivations and performance of firms engaging in such activities. Based on a hand-collected sample of 200 backdoor listing transactions completed during 1992-2007, it is found that Australian BDL transactions are characterised by a high proportion of concurrent equity raisings, information disclosure by way of a prospectus and re-meeting of the re-admission requirements of the listing rules. Public companies that participate in BDL transactions are mostly defunct, with the mining sector being the largest supplier of shell companies. The backdoor-listed private firms are mostly small, development-stage firms, engaging in high-tech businesses. Using three different constructs of shareholder return (viz., buy-and-hold abnormal return, expert-based return and implied shell premium), public firm shareholders are found to gain substantially, with returns ranging from 32 to 49 percent. Multivariate analysis confirms that the measured shell premium is positively related to the pre-event shareholder base and the invocation of regulatory impediments to the takeovers process. Results from an empirical choice model indicate that BDL firms are less liquid, less profitable and more at a development stage than their initial public offering (IPO) counterparts. BDL transactions generally take longer to complete than IPOs and are associated with more cashing-out activity and lower retained ownership by private firm owners. However, no significant difference in the degree of underpricing (first-day return) between the matched BDL and IPO sample is found. BDL firms are found to underperform, in terms of both accounting and stock price measures, a control sample of IPO firms in the three years subsequent to listing, although this underperformance seems to attenuate over longer horizons. The average buy-and-hold abnormal return (BHAR) of BDL firms by the end of the 36-month holding period is −37.0, −62.6 and −87.7 percent relative to three benchmark portfolios of IPOs and value- and equally-weighted market indices. The underperformance in BHARs is robust to tests based on a calendar-time portfolio approach.