nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒12‒04
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Depreciation, Deterioration and Obsolescence when there is Embodied or Disembodied Technical Change By Diewert, W. Erwin; Wykoff, Frank C.
  2. Contagion effect in banking system - measures based on randomised loss scenarios By Hałaj, Grzegorz
  3. Audit Independence : Its Importance to the External Auditor's Role in Banking Regulation and Supervision By Ojo, Marianne
  4. The Role of External Auditors and International Accounting Bodies in Financial Regulation and Supervision. By Ojo, Marianne
  5. Eliminating the Audit Expectations Gap : Myth or Reality? By Ojo, Marianne
  6. The External Auditor's Role in Bank Regulation and Supervision : Helping the Regulator Avoid Regulatory Capture. By Ojo, Marianne
  7. Financial Accelerator Effects in the Balance Sheets of Czech Firms By Horvath, Roman
  8. Els Factors Competitius de les Pimes a Catalunya By Antonio Somoza Lopez; Josep Vallverdu Calafell

  1. By: Diewert, W. Erwin; Wykoff, Frank C.
    Abstract: The paper considers how to measure capital in a model where technical progress is either embodied in new units of capital or it is "disembodied" and simply causes the price of capital services to fall. The disembodied case is considered in sections 2-4. Sections 2 and 3 set out standard vintage capital aggregation models when there is no embodied technical progress. Section 4 discusses disembodied obsolescence in more detail. Section 5 introduces new (more efficient) models of the capital good so that technical progress is embodied in the new models. Section 6 shows how the parameters in the Jorgenson model of capital services could be estimated by statistical agencies if their investment surveys covered sales and retirements of used assets as well as purchases of new assets. Section 7 concludes.
    JEL: C43 C81 D24 D92 E22 M4
    Date: 2006–11–23
  2. By: Hałaj, Grzegorz
    Abstract: Measures of risk of domino effect (contagion) transmitted through interbank market are discussed and results on implementation of measurement procedure in banking sector are presented. It is shown how a very limited set of available data – interbank exposures and information from balance sheets and profit a loss accounts – can help in generating randomised scenarios of possible losses related to market and credit risk.
    Keywords: Contagion; banking system; interbank
    JEL: C62 G21
    Date: 2006–10
  3. By: Ojo, Marianne
    Abstract: The role of the external auditor in the supervisory process requires standards such as independence,objectivity and integrity to be achieved. Even though the regulator and external auditor perform similar functions, namely the verification of financial statements, they serve particular interests. The regulator works towards safeguarding financial stability and investor interests. On the other hand, the external auditor serves the private interests of the shareholders of a company. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. The external auditor may however, have a commercial interest too. The debate surrounding the role of external auditors focusses in particular on auditor independence. A survey by the magazine “Financial Director” shows that the fees derived from audit clients in terms of non-audit services are significant in comparison with fees generated through auditing. Accounting firms sometimes engage in a practice called “low balling” whereby they set audit fees at less than the market rate and make up for the deficit by providing non audit services. As a result, some audit firms have commercial interests to protect too. There is concern that the auditor's interests to protect shareholders of a company and his commercial interests do not conflict with each other. Sufficient measures need to be in place to ensure that the external auditor's independence is not affected. Brussels proposed a new directive for auditors to try to prevent further scandals such as those of Enron and Parmalat. The new directive states that all firms listed on the stock market must have independent audit committees which will recommend an auditor for shareholder approval. It also states that auditors or audit partners must be rotated but does not mention the separation of auditors from consultancy work despite protests that there is a link to compromising the independence of auditors. However this may be because Brussels also shares the view that there is no evidence confirming correlation between levels of non-audit fees and audit failures and that as a result, sufficient safeguards are in place.
    Keywords: audit; independence; banking; supervision
    JEL: M4
    Date: 2006–01
  4. By: Ojo, Marianne
    Abstract: The emergence of powerful financial conglomerates operating at a global level has led to unified supervision of financial services in the UK and Germany. These changes in regulatory structures have a higher potential of better utilisation through the involvement of external auditors. The crucial role played by external auditors in banking regulation and supervision has been highlighted in bank collapses like BCCI and Barings. According to the Basel Core Principles for effective Banking Supervision 1997, an effective banking supervisory system should consist of both “on-site” and “off-site” supervision. Off-site supervision involves the regulator making use of external auditors. On-site work is usually done by the examination staff of the bank supervisory agency or commissioned by supervisors but may be undertaken by external auditors. Following Enron's collapse, debates focussed around why the UK had avoided its Enron. Many argued that it was because the US approach to accounting regulation was rules-based in comparison to the principles-based system of the UK . In addition to adopting an independent standard setting, the International Accounting Standards Board's second principle is aimed at principles as opposed to rules based standards. All public trading companies in the European Union would have to apply new international standards from 2005 in consolidated financial statements ( EC Regulation 1606/2002) and huge efforts are now being made towards global convergence.
    Keywords: international; accounting; organisations; external; auditor; financial; supervision
    JEL: M4
    Date: 2006–03
  5. By: Ojo, Marianne
    Abstract: The audit expectations gap is of serious concern to the UK accounting profession with the Department of Trade and Industry proposing a new framework for independent regulation of the accounting profession. However the new Accounting Foundation has had its role placed under review following the Enron collapse and introduction of the Sarbanes-Oxley Act 2002. This resulted in responsibility for independent regulation of the accounting profession being transferred to the reconstituted Financial Reporting Council. High profile failure of financial services firms, commencing with the secondary banking crisis in the 1970s, followed by collapses of banks such as Johnson Matthey Bankers ( JMB), Bank of Credit and Commerce International (BCCI) and Barings, building societies such as Grays and insurers such as the recent problems at Equitable Life and Independent Insurance have given rise to further debate on the audit expectations gap. The debate surrounding the “expectations gap” often revolves around whether such a gap can be eliminated. Sikka, Puxty, Cooper and Wilmott argue that within a social context, the expectations gap will be difficult to eliminate due to social conflict and the fact that the meaning of social practices is always subject to challenges. It will however, be argued that even though the whole component definition of an audit may be subject to changes and challenges and therefore cannot be objective, elements within the definition of an audit and in particular, the fraud and error detection role of an audit can be relatively objective.
    Keywords: Expectations; gap; audit
    JEL: M4
    Date: 2006–02
  6. By: Ojo, Marianne
    Abstract: The incoming Labour administration in 1997 caused a stir when it gave the Bank of England additional monetary policy powers but removed the Bank’s powers to regulate banking. Up till 1997, banking regulation had been the function of the Bank of England while other areas of financial services had been regulated by bodies such as: The Securities and Investment Board (for investment business) and the Department of Trade and Industry (for insurance). Section 21 of the Bank of England Act 1998 effectively transferred banking supervision to the Financial Services Authority (then known as the Securities and Investments Board). This paper amongst other objectives, aims to explore how the Financial Services Authority ( the FSA) as a regulator, could benefit from the expertise of the external auditor as a middleman, to avoid regulatory capture. As an efficient system of accountability would also help prevent regulatory capture, the issue of accountability will also be discussed. A consideration of developments leading to the adoption of a single regulator in the UK, will illustrate how the type of regulator can contribute to knowledge of how the external auditor can assist the regulator.  Furthermore, not only does this paper consider how the introduction of the FSA has improved transparency and accountability within the banking regulatory and supervisory system, but also the claim that the external auditor could further employ his expertise to help the regulator avoid regulatory capture.
    Keywords: single; regulator; regulatory; capture; external; auditor; banking; supervision
    JEL: K2
    Date: 2005–05
  7. By: Horvath, Roman
    Abstract: The paper examines a financial accelerator mechanism in analyzing determinants of corporate interest rates. Using a panel of the financial statements of 448 Czech firms from 1996–2002, we find that balance sheet indicators matter interest rates paid by firms. Market access is particularly important in this regard. The strength of corporate balance sheets seem to vary with firm size. There is also evidence that monetary policy has a stronger effect on smaller than on larger firms. On the other hand, we find no asymmetry in the monetary policy effects over the business cycle.
    Keywords: balance sheet channel; financial accelerator; interest rates; monetary policy transmission
    JEL: G32 E52
    Date: 2006–11–14
  8. By: Antonio Somoza Lopez; Josep Vallverdu Calafell (Universitat de Barcelona)
    Abstract: The aim of this study is to reflect which the main competitive factors for small and medium businesses are today in Catalonia. For this reason, it has been chosen a sample of 1000 small businesses approximately (according the EU criteria) and analysed the financial information. From this source, it is possible to argue that all aspects related to personnel show the ratios with more statistical significance in order to explain profitability. Also, it has been sent a questionnaire to the firms of the sample and asked the managerial point of view about their opinion about different issues related with competitiveness. Only 50 firms responded our requirement and human resources revealed to be the most important one. We expected that other factors such as innovation or investment in technology were among the most relevant. Nevertheless the results were definitive in the sense that no other aspect was as relevant as the mentioned.
    Keywords: small businesses, financial analysis, competitive factors
    JEL: M10 M40 M20
    Date: 2006

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