While similar arguments can be made about other, nonlabor investments (e.g., Biddle et al. 2009), an examination of labor is of particular interest in this context for two primary reasons. First, labor is an important factor of production, with labor costs typically representing roughly two-thirds of economy-wide value added (Hamermesh 1993;Bernanke 2004). For example, the U.S. Census Bureau's Annual Survey of Manufacturers reports that payroll and employee benefits in the manufacturing sector totaled $784 billion for 2008, compared to $166 billion in capital expenditures. 3 Clearly, labor investments are economically significant. Second, while evidence from prior research suggests that accounting quality improves the efficiency of capital expenditures by reducing financing frictions, it is not obvious that this result extends to labor. The adjustment costs associated with labor tend to be relatively low compared to capital expenditures (Dixit and Pindyck 1994), and traditional economic models have often treated labor as a variable factor of production. To the extent that labor costs are variable, they are paid out of current revenues and do not require financing (and by extension do not face the financing frictions that highquality accounting mitigates). Thus, whether high-quality accounting improves the efficiency of investments in labor is an open question.Despite the economic importance and distinguishing features of labor, prior literature (reviewed in section 2) relates financial reporting quality primarily to capital expenditures, without examining the effects on labor. The lack of attention to labor in this setting is noteworthy, particularly given that human capital is increasingly viewed as one of the most important factors for a firm's competitive success (e.g., Pfeffer 1996). This study addresses that gap in the literature.Our examination requires measures of both labor investment efficiency and accounting quality. We use firms' net hiring (percentage change in the number of employees) to proxy for investment in labor, and we create an inverse measure of investment efficiency using the absolute deviation of actual net hiring from its expected level. For our primary analyses, the expected level of net hiring is based on the model of Pinnuck and Lillis (2007), which includes economic variables that explain normal hiring practices, such as sales growth, liquidity, leverage, and profitability. Thus, our measure of abnormal net hiring captures the amount of net hiring not attributable to underlying economic factors. In sensitivity tests, we use the industry median to estimate expected net hiring and also consider several modifications of the baseline Pinnuck and Lillis model, including adding controls for labor power and for other concurrent investments.Our empirical proxies for financial reporting quality are drawn from prior literature. Our primary measure is based on a cross-sectional version of the Dechow and Dichev (2002) model, as modified by McNichols (2002) andSchipper (2005). In sensitivity tests,...

We study determinants of internal control reporting decisions under Section 404 of the Sarbanes-Oxley Act (SOX 404) using a sample of restating firms whose original misstatements are linked to underlying control weaknesses. We find that only a minority of these firms acknowledge their existing control weaknesses during their misstatement periods, and that this proportion has declined over time. Further, the probability of reporting existing weaknesses is negatively associated with external capital needs, firm size, non-audit fees, and the presence of a large audit firm; it is positively associated with financial distress, auditor effort, previously reported control weaknesses and restatements, and recent auditor and management changes. These results provide evidence that detection and disclosure incentives play a role in whether existing material weaknesses are reported, which has implications for the effectiveness of SOX 404 in providing investors with advance warning of potential accounting problems. * University of Connecticut. We appreciate helpful comments from the editor, two anonymous reviewers,

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We examine various penalties that could serve as enforcement mechanisms for Sarbanes-Oxley (SOX) Section 404. We focus on firms with restatements, some of which had previously reported their control weaknesses as required and some of which acknowledged them only after announcing their restatement. We find no evidence that penalties are more likely for firms, managers, or auditors that fail to report existing control weaknesses. Instead, class action lawsuits, management turnover, and auditor turnover are all more likely in the wake of a restatement when control weaknesses had previously been reported. We find similar, although weaker, evidence for Securities and Exchange Commission (SEC) sanctions. These results are consistent with disclosure of control weaknesses making it difficult for management to plausibly claim later that they were unaware of the underlying conditions that led to restatements. The results also suggest that the public and private enforcement mechanisms surrounding SOX 404 are unlikely to provide strong incentives for compliance and offer a potential explanation for why most restatements are issued by firms that previously claimed to have effective internal controls.

This study compares the earnings forecasts of analysts employed by investment banks with those employed by firms not involved in investment banking. We discuss possible resource and informational advantages for investment bank analysts, and conflicts of interest faced by both groups, suggesting that, despite incentives stemming from corporate financing operations, investment bank analysts may nevertheless provide superior forecasts. We also compare forecast accuracy and relative optimism within investment bank analysts between affiliated and unaffiliated analysts. Our results indicate that, controlling for relevant factors identified in prior research, investment bank analysts' forecasts are on average more accurate than forecasts made by other analysts. Among investment bank analysts, affiliated analysts issue more accurate forecasts than unaffiliated analysts. Further analyses reveal evidence consistent with the employment of higher-quality analysts and additional resources contributing to, but not completely explaining, the relation between forecast accuracy and investment banking and also with investment-banking affiliations conferring informational advantages. Regarding alleged biases caused by conflicts of interest, we find that investment bank analysts' forecasts are less optimistic than those of their non-investment bank counterparts. We discuss implications of our results for the Global Settlement brokered by New York State Attorney General Elliott Spitzer, the Securities and Exchange Commission, and ten large investment banks.

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We compile and analyze the reference lists from papers published in nine accounting journals over the period 1996–2011 to identify the individual antecedent works that have been cited the most often by accounting research. We conduct our analyses separately for different topical areas (audit, financial, managerial, tax, other) and research methodologies (archival, experimental, theoretical, other). We then present and discuss lists of the individual works that are most heavily cited by each category. Our results should be useful to Ph.D. students and those who train them in identifying important prior work that continues to motivate and provide a foundation for contemporary accounting research.