nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒04‒29
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The effects of two auditors and non-audit services on audit fees: evidence from a small capital market By Thinggaard, Frank; Kiertzner, Lars
  2. Outline of the transition from national to international audit regulation in Denmark By Holm, Claus; Warming-Rasmussen, Bent
  3. Ex-dividend pricing, taxes and arbitrage opportunities: the case of the Portuguese stock exchange By Jorge Farinha; Miguel Sôro
  4. Profitability Measures and Competition Law By Paul A.Grout; Anna Zalewska
  5. Regulation and Taxation of Casinos under State-Monopoly, Private Monopoly and Casino Association Regimes By Hasret Benar; Glenn P. Jenkins
  6. Corporate governance ratings as a means to reduce asymmetric information By Balling, Morten; Holm, Claus; Poulsen, Thomas
  7. Do as you say – Say as you do: Measuring the actual use of environmental information in investment decisions By Rikhardsson, Pall; Holm, Claus

  1. By: Thinggaard, Frank (Aalborg University); Kiertzner, Lars (Department of Business Studies)
    Abstract: This paper adds to the scarce evidence on the determinants of audit fees in European countries outside the UK. The paper examines audit fees paid by companies listed on the Copenhagen Stock Exchange in 2002, which is the first year in which the disclosure of both audit fees and other fees paid to the auditor at the consolidated group level has been required by the Danish Financial Statements Act. Until 1/1-2005, listed companies are required to be audited by two independent auditors. Here, we have especially focused on the effect of this requirement on the pricing of audit fees. Our results indicate that having two independent auditors reduces total audit fees (most likely due to competitive pressure), but only for larger companies. We have used the core audit fee determinants model, which is a result of international research, with generic proxy variables for client size, complexity, risk profile and auditor size. Our findings indicate similarities with respect to the determining factors, but again a distinction has to be made between large and small companies. In small Danish companies, client size and complexity in a formal technical sense are decisive, which might indicate that audits of such companies involve a relatively large proportion of accessory accounting services in the audit service. In the generic large company, other decisive factors than client size include complexity of substance and general client risk, indicating that the typical audit of such companies is to a greater extent planned as regards risk and materiality. In contrast to most previous international research, analyses of the Danish data showed no general Big Four effect. However, our results indicate that PWC is lowballing in large companies and highballing in small companies. Finally, our results confirm international findings of a positive association between other fees and audit fees
    Keywords: No; keywords
    Date: 2006–04–25
  2. By: Holm, Claus (Department of Business Studies); Warming-Rasmussen, Bent (University of Southern Denmark)
    Abstract: No abstract
    Keywords: No; keywords
    Date: 2006–04–25
  3. By: Jorge Farinha (CETE, Faculdade de Economia, Universidade do Porto); Miguel Sôro (Banco Espírito Santo, Porto)
    Abstract: This paper examines the ex-dividend stock price behaviour in the Portuguese Stock Exchange between 1993 and 2002, a unique period characterized by a richness of different investor tax statuses and several tax changes. After classifying investors according to their tax profile and corresponding dividend tax discrimination factorss, we find that the pursuit of a short-term trading strategy around the ex-dividend day does not yield significant abnormal returns after tax and bid-ask costs. These results are in accordance with the inexistence of arbitrage opportunities even when extreme tax situations are considered under different dividend yield scenarios. It is also shown that the observed ex-dividend price reduction is consistent with a tax explanation and in disagreement with market microstructure arguments. Further tests indicate that the price change is not significantly different from the expected theoretical price reduction for a marginal investor which we identified most likely as a long-term shareholder in high-tax brackets. Finally, our results only provide a weak support for the clientele hypothesis.
    Keywords: ex-dividend pricing, arbitrage, taxes, international financial markets, market efficiency
    JEL: G12 G14 G15
    Date: 2005–12
  4. By: Paul A.Grout; Anna Zalewska
    Abstract: The paper outlines various measures of profitability and considers what role they can play in competition law. We argue that profitability measures can provide a good answer to the wrong question and a much less good answer to the question we really want to answer. Using appropriate definitions of asset value it is possible to identify whether a firm earns more than the absolute minimum needed to cover cost and compensate for risk, i.e., whether profitability measures such as the internal rate of return and the accounting rate of return are above the cost of capital. However, both the empirical evidence we present and theory indicates that this does not really help in most cases. Knowing that a firm is earning say, half a percent more than the cost of capital is not really much help in almost all competition law cases. But we show that once the rate of return deviates from the cost of capital it becomes hard to measure. Using simple examples we show that shifts in cash flows that preserve the net present value of a project can have dramatic effects on profitability measures. Hence, it is hard to assess the quantity of the “excessive” return. Furthermore, this problem is likely to be far more prevalent today than in the past given the growth in outsourcing (since outsourcing has exactly this type of effect on cash flows). Despite such problems, we argue that the measurement of profit has a role to play in competition law but that the analysis is far more of an art form and far less of a simple statistical procedure.
    Keywords: profitability measures, excess return, competition
    JEL: K21 L43 G38
    Date: 2006–01
  5. By: Hasret Benar (Department of Economics, Eastern Mediterranean University); Glenn P. Jenkins (Department of Economics, Queen's University)
    Abstract: This paper considers alternative forms of regulation and taxation of the casino sector. The model considers the situation of a typical tourist destination country that is using casinos to attract and entertain foreign tourists. The objective is to invest in the sector efficiently while maximizing the amount of government revenue or profits accruing to the country. The regulator must determine how the price of gambling will be set, how many casinos will be allowed to enter the industry and the form and rates of taxation. Four alternative forms of regulation are considered: price regulation, state-owned monopoly, private monopoly and casino association regulation. Turnover taxes on the amount of funds gambled and also annual taxation of the fixed costs of the casinos are evaluated. Applications of the models are carried out for North Cyprus. The conclusion is that the economic efficiency costs and the revenue losses from the absence of effective regulation in these tourist destinations can be very substantial with welfare costs equal to the approximately 75 percent of the tax revenue generated by this sector. Furthermore it shows that while a tax on turnover can be efficient in the case of a competitive industry or a cartel association form of regulation, it will be distortunary if a private monopoly is controlling the sector. In contrast a tax on fixed costs will lead to an efficient result in the case of a competitive or private monopoly cases, but it will lead to allocate inefficiencies if the sector is regulated by a casino association that can only control the number of casino entering the sector.
    Keywords: Casino regulation, taxation, state-monopoly, welfare cost
    JEL: H21 H32
    Date: 2006–04
  6. By: Balling, Morten (Department of Business Studies); Holm, Claus (Department of Business Studies); Poulsen, Thomas (Department of Business Studies)
    Abstract: Can corporate governance ratings reduce problems of asymmetric information between companies and investors? To answer this question, we set out to examine the information basis for providing such ratings by reviewing corporate governance attributes that are required or recommended in laws, accounting standards and codes, respectively. After that, we scrutinize and organize the publicly available information on the methodologies actually used by rating providers. However, important details of these methodologies are treated as confidential property, thus we approach the evaluation of corporate governance ratings as a means to reduce asymmetric information in a more general manner. We propose that the rating process may be seen as consisting of two general activities, namely a data reduction phase, and a data weighting, aggregation and classification phase. Findings based on a Danish data set suggest that rating providers by selecting relevant attributes in an intelligent way can improve the screening of companies according to governance quality. In contrast, it seems questionable that weighting, aggregation and classification of corporate governance attributes considerably improve discrimination according to governance quality
    Keywords: No; keywords
    Date: 2006–04–25
  7. By: Rikhardsson, Pall (Department of Business Studies); Holm, Claus (Department of Business Studies)
    Abstract: This paper focuses on the use of environmental information in investment decision making. The research approach employed was based on an experiment where three groups were asked to allocate investment funds between two companies based on financial accounts and information material from these companies. The overall con-clusion of the paper is that even though environmental information is not enough in itself to shift decision preferences, it seems to have some impact on decision mak-ing. However, there seems to be a discrepancy between what decision makers say they do and what they actually do. First, environmental information apparently has greater impact on decision making in the short run than the long run despite deci-sion makers saying that they value environmental information more regarding long-run investments. Second, decision makers downplay the value of environmental information in corporate information material but this information seems to affect their decision making just the same. Third, qualitative information seems to affect decision making regarding short-run investments more than the combination of qualitative and quantitative information
    Keywords: No keywords;
    Date: 2005–04–26

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