nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2007‒02‒10
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Internal audit: the expert in providing comfort to the audit committee. The case of risk management and internal control By G. SARENS; I. DE BEELDE
  2. The Balance Sheet Channel of Monetary Policy Transmission: Evidence from the UK By Eleni Angelopoulou; Heather D. Gibson
  3. A Unifying Model of How the Tax System and Generally Accepted Accounting Principles Affect Corporate Behavior By Douglas A. Shackelford; Joel Slemrod; James M. Sallee
  4. Transparency and Corporate Governance By Benjamin E. Hermalin; Michael S. Weisbach

    Abstract: This study investigates to what extent audit committees feel uncomfortable about risk management and internal control, and focuses on how internal audit can be the expert in providing comfort in these areas, building upon the sociology of professions literature. Four case studies reveal that audit committees need comfort with respect to the control environment. Thanks to their internal position, their familiarity with the company, and their position close to people across the company, internal audit seems to be the most suitable one to provide comfort and be the ‘guard of the corporate culture’. Furthermore, audit committees need comfort regarding the internal controls in high-risk areas. Besides internal audit’s assurance role, active involvement in the improvement of these internal controls provides a significant level of comfort to the audit committee. Their unique conceptual and companyspecific knowledge about risk management and internal control, combined with the right inter-personal skills, enables internal audit to provide this comfort. Formal audit reports and presentations, together with informal contacts, seem to be important ways of providing this comfort. Finally, it becomes clear that the overall level of comfort in the audit committee can be enhanced through a ‘joint audit approach’ between internal and external audit.
    Keywords: internal audit, audit committee, risk management, internal control, comfort, expert, sociology of professions, case studies
    Date: 2006–12
  2. By: Eleni Angelopoulou (Bank of Greece and Athens University of Economics and Business); Heather D. Gibson (Bank of Greece)
    Abstract: This paper examines the sensitivity of investment to cash flow using a panel of UK firms in manufacturing with a view to shedding some light on the existence of a balance sheet channel or financial accelerator. In addition to examining the impact of cash flow in different subsamples based on company size or financial policy (dividend payouts, share issues and debt accumulation), we also investigate the extent to which investment becomes more sensitive to cash flow in periods of monetary tightness. To this end, we employ a monetary tightness indicator constructed for the UK using the narrative approach pioneered by Romer and Romer. The results provide some support for the view that UK firms show greater investment sensitivity to cash flow during periods of tight monetary policy.
    Keywords: Financial Constraints; Balance Sheet Channel, Investment.
    JEL: E22 E52 E44
    Date: 2007–01
  3. By: Douglas A. Shackelford; Joel Slemrod; James M. Sallee
    Abstract: This paper models the impact of the tax system and GAAP on the real and financial reporting decisions of corporations. It provides a first step toward joint evaluation of taxation and financial reporting in the standard economic analyses of corporate behavior. The key finding is that value arises from real decisions that provide firms with discretion in their tax and financial reporting. This desire for flexibility modifies the optimal decisions of firms, in theory, and we provide examples that illustrate this behavior in the real world.
    JEL: H21 H25 M41
    Date: 2007–01
  4. By: Benjamin E. Hermalin; Michael S. Weisbach
    Abstract: An objective of many proposed corporate governance reforms is increased transparency. This goal has been relatively uncontroversial, as most observers believe increased transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to increased transparency, leading to an optimum level beyond which increasing transparency lowers profits. This result holds even when there is no direct cost of increasing transparency and no issue of revealing information to regulators or product-market rivals. We show that reforms that seek to increase transparency can reduce firm profits, raise executive compensation, and inefficiently increase the rate of CEO turnover. We further consider the possibility that executives will take actions to distort information. We show that executives could have incentives, due to career concerns, to increase transparency and that increases in penalties for distorting information can be profit reducing.
    JEL: G32 G38 M41
    Date: 2007–01

This nep-acc issue is ©2007 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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