This study examines the impact of control systems on corporate innovation. Innovation is key to firm performance and growth, allowing corporations to stay competitive in their industry. We expect control systems to improve information flows within the firm by allowing managers to better identify and patent their most valuable intellectual property. Despite our prediction that control systems positively impact innovation, a priori, this relation is unclear as these same control systems may create an overly restrictive bureaucratic environment that may mitigate the benefits of effective controls for innovation. Using various measures of control system quality, we find evidence that effective control systems are associated with more innovation. Overall, the results of our study suggest effective control systems are associated with the ability of a firm to leverage its innovative projects. Our results suggest that corporations with effective control systems are more likely to be able to react to market and technology changes by ensuring their best ideas are patented.
This case examines the high-profile scandal around the regulatory monitoring of public accounting firms. Specifically, KPMG partners used confidential information about the audits the regulator planned to inspect. The information was obtained from employees at the regulator – the Public Company Accounting Oversight Board (PCAOB). The primary case objectives are to: (i) expand students’ knowledge of the PCAOB inspection process, (ii) highlight the relationship between the regulator and the regulated audit firms, including the concepts of “regulatory capture” and “revolving door,” and (iii) increase students’ awareness of the professional and ethical issues raised by the scandal, including ethical decision-making under pressure, evaluating the appropriateness of requests made by supervisors, overcoming temptations to engage in unethical or illegal behavior, and incentivizing job performance related to ethical conduct. This case is applicable for implementation in undergraduate or graduate auditing or accounting ethics courses.
Studies find evidence that opportunistic reporting often accompanies fair value measurement. However, research cannot determine whether the source of this opportunism is the estimate of fair value itself. Using detailed information on insurers’ investment holdings, we separate the use of fair value measurement discretion from the application of nonmeasurement-related discretion in accounting for incurred losses of financial instruments. Our evidence contradicts the view that fair value measurement discretion plays a large role in opportunistic avoidance of loss recognition for financial instruments. Instead, managers appear to avoid impairment loss recognition by opportunistically applying subjective criteria related to perceived loss persistence and intent to hold.
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