We examine the presence and magnitude of initial audit engagement fee cutting and its potential effect on audit quality in Germany using a sample of 992 firm‐year observations from 2005 through 2011. Our results show systematic fee cutting for initial audit engagement years in Germany. Despite significant audit fee differences between initial and subsequent audit engagement years, we do not find differences in audit quality. Overall, our findings support prior empirical studies, suggesting that low‐balling is merely a natural response of auditors to competitive audit market conditions and does not necessarily impair auditor independence. In the wake of the on‐going discussion in the European Union regarding the control of appointment, remuneration, and duration of audit engagements to curb threats to auditor independence, our findings do not support the implementation of audit market price controls through governmental regulators.
SYNOPSIS The program expense ratio is widely used as a measure of nonprofit (NP) performance. It can be derived from either GAAP financial statements or IRS Form 990. However, these sources have conflicting disclosure requirements that can significantly affect the ratio. The FASB has consolidation requirements for GAAP financial statements, but allows wide latitude in how program-specific functional expenses are disclosed. The IRS requires disclosure of functional expenses on Form 990, but allows wide latitude in how the reporting entity is defined. Thus, the program ratio can vary significantly based on the accounting choices of management. We examine the association of program ratios and consolidation choices in NP hospitals using Form 990 data. We find that hospitals receiving support from unconsolidated affiliates realize significantly higher program ratios. The IRS and FASB should consider this finding when evaluating the latitude in reporting requirements for NP hospitals. JEL Classifications: G1; G3; G18; G38; L3; L30; L31; L38; M4; M41; M48. Data Availability: All data are from publicly available sources quoted in the text.
This article investigates the impact of hospital profit status on quality of care as measured by risk-adjusted, 30-day, inpatient readmission rates gathered by the Centers for Medicare and Medicaid Services. It also evaluates the association between inpatient readmission rates and market concentration, measured by the Herfindahl–Hirschman Index, and various hospital characteristics. It concludes that nonprofit (NP) hospitals have a statistically significant negative association with readmission rates because they can focus on their mission without intense pressure to make a profit. We find no significant association between quality of care and hospital market competitiveness nor any statistically significant evidence to reject the exogeneity assumption of NP status.
Purpose The purpose of this paper is to investigate donor responses to discretionary accounting information consolidation. Nonprofit (NP) financial statement consolidation discretion significantly impacts program ratio reporting, the primary NP performance measure. Stakeholders are misled to allocate limited resources inefficiently. While some NPs file group Internal Revenue Service (IRS) Form 990 returns with their affiliates, effectively providing consolidated statements, others choose to file independently of their affiliates. Design/methodology/approach The authors use OLS regression analysis and panel data for 5,697 NP-year observations for the period 2009-2011 retrieved from the National Center for Charitable Statistics Form 990 database. Findings The authors find evidence that consolidation discretion substantially impacts donor decisions. NP managers have incentive to utilize consolidation discretion to influence charitable giving. Practical implications The authors urge the IRS and the Financial Accounting Standards Board to reconsider the consolidation guidance for NP organizations, to develop performance measures beyond the widely used program ratio, and to require program ratio segment reporting to allow for better comparability among NPs irrespective of consolidation status. Further, the authors caution stakeholders to consider supporting organization transactions in their resource allocation decisions. Originality/value The authors are the first to use NP supporting organization information to investigate consolidation discretion and its impact on donor responses.
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