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AbstractPurpose -The purpose of this study is to examine the effects of higher-quality auditors on corporate risk-taking. Design/methodology/approach -Agency theory suggests that managers have incentives to avoid risk in the interests of perquisite consumption and self-preservation, while investors prefer that managers invest in all projects with a positive net present value, i.e. projects that generally increase corporate risk. Empirical literature finds that managerial risk-aversion is mitigated (and firm value enhanced) when investor protection is higher. The authors examine whether higher-quality auditing is one such mechanism to encourage shareholder-focused corporate risk-taking. They model measures of corporate risk as a function of whether a firm is audited by an industry specialist or not, controlling specifically for accounting quality. They then examine the incremental effect of higher-quality audits on other forms of external monitoring (analyst coverage and institutional holdings) for corporate risk. Findings -Using a sample from 2003 to 2007, the authors document a positive relationship between local-level audit industry specialization and both the standard deviation of annual stock returns and research and development expenditures (their measures of corporate risk-taking). They then find the effect is mitigated when firms have alternative external monitoring, in the form of either higher analyst coverage or greater institutional holdings. Research limitations/implications -Given the nature of the question the authors ask, particularly in the context of the auditor-client relationship, a potential limitation is the difficulty in assigning causation. Nonetheless, this study underscores the importance of auditors as an effective mechanism for monitoring corporate managers. Originality/value -This study provides novel evidence that auditors affect managerial decision making beyond a simple effect on financial statements, and should be of interest to boards of directors, regulators and investors. Audit quality, alternative monitoring mechanisms, and cost of capital: an empirical analysis", Working paper, Mays Business School, TX A&M University, College Station, TX. Amihud, Y....
Sales returns are often considered a simple financial accounting topic, but in this case accounting for sales returns led to a significant lawsuit and settlement by Medicis Corporation and the largest fine ever imposed against a CPA firm by the PCAOB at the time. This case is designed to aid instructors in teaching accounting for sales with right of return under ASC 606 and is suited for an intermediate financial accounting course or a graduate course in accounting research. {Truncated for Space}
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