nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2008‒01‒26
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Role of the External Auditor in UK Bank Regulation and Supervision By Ojo, Marianne
  2. Comparative Analysis Between the External Auditor's Role in Bank Regulation and Supervision By Ojo, Marianne
  3. Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach By H.M. Anderson; H. Chan; R. Faff; Y.K. Ho
  4. Tax Rate Cuts and Tax Compliance--The Laffer Curve Revisited By Elöd Takáts; Tamas K. Papp
  5. Capitalizing R&D Expenditures By Diewert, Erwin; Huang, Ning
  6. Bank capital: a myth resolved By Van Laere, Elisabeth; Baesens, Bart; Thibeault, André

  1. By: Ojo, Marianne
    Abstract: 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 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. As well as considering threats to auditor independence and safeguards to protect against such threats, this paper focuses on how the external auditor can assist the FSA through two of its principal regulatory tools in the FSA's response to risk, namely supervision and enforcement. A lot of work and improvements on audit independence have been carried out over the years and there should be an ongoing process of review and further efforts aimed at improvement. Key words: Supervision, Enforcement, Independence
    JEL: K29
    Date: 2006–09
  2. By: Ojo, Marianne
    Abstract: This comparative analysis discusses the differences between the structure and systems of bank regulation operating in the UK, Germany, Italy and the US. The importance of harmonisation in achieving stated supervisory objectives is also emphasised. The main objective of this chapter is to illustrate how the external auditor's role could be harnessed more efficiently in the UK banking regulatory and supervisory process. This is of particular importance given the reduced supervisory role which the Bank of England has assumed since banking regulatory and supervisory powers and functions were transferred to the Financial Services Authority. External audits and in particular external auditors, have a greater role to play in bank regulation and supervision than was the case over 20 years ago. This is so mainly as a result of globalisation. The need for a single regulator which regulates not just the banking sector, but also the insurance and securities sectors, has arisen principally because of the rise of conglomerate firms. Single regulators are able to manage more effectively cross sector services' risks. Correspondingly, the functional overlaps between banking, insurance and securities business and their universal scope make it more difficult for a regulator to observe and comprehend such businesses. The difficulty of measuring and assessing risk within such institutions along with the speed with which assets can be adjusted in derivatives markets has led to more emphasis being placed on internal managerial control. Consideration is also being given to the structures that can be put in place to re inforce the incentives of all parties involved – not just to management but all parties including auditors and regulators. Because banking has evolved to a stage where conglomerates now have a significant presence and provide a range of services (and not just banking services), and because of the growing presence of international firms, the role of the external auditor has become so important.
    JEL: K29
    Date: 2007–08
  3. By: H.M. Anderson; H. Chan; R. Faff; Y.K. Ho
    Abstract: Abstract: We study information flows between earnings and forecasts, using suitably adapted Granger causality tests. This approach complements existing cross-sectional studies by abstracting from stock market reactions to information, and focussing on dynamic interactions between information flows instead. We find bi-directional causality in timeseries of analyst earnings forecasts and reported earnings, supporting our expectation that forecasts contribute to information that is reflected in future reports. Further, our evidence of feedback suggests that past reports and forecasts are both reflected in future forecasts, implying that the information in reports has inherent value, and that forecasts do not fully substitute for reports.
    JEL: G14 M41 C32
    Date: 2007–10
  4. By: Elöd Takáts; Tamas K. Papp
    Abstract: The paper shows how tax rate cuts can increase revenues by improving tax compliance. The intuition is that tax evasion has externalities: tax evaders protect each other, because they tie down limited enforcement capacity. Thus, relatively small tax rate cuts, which decrease incentives to evade taxes, can lead to increased revenues through spillovers - creating Laffer effects. Interestingly, tax rate cuts here imply increasing effective taxes. The model is consistent with what happened in Russia, and may provide basis for further thinking about tax rate cuts in other countries.
    Keywords: Tax evasion , Russian Federation , Tax revenues , Taxes ,
    Date: 2008–01–11
  5. By: Diewert, Erwin; Huang, Ning
    Abstract: The next international version of the System of National Accounts will recommend that R&D (Research and Development) expenditures be capitalized instead of being immediately expensed as in the present System of National Accounts 1993. An R&D project creates a new technology, which in principle does not depreciate like a reproducible asset. A new technology is however subject to obsolescence, which acts in a manner that is somewhat similar to depreciation. The paper looks at the net benefits of an R&D project in the context of a very simple intertemporal general equilibrium model and suggests that R&D expenditures be amortized using the matching principle that has been developed in the accounting literature to match the fixed costs of a project to a stream of future benefits. Of particular interest is the evaluation of the net benefits of a publicly funded project where the results are made freely available to the public.
    JEL: C43 C61 C67 C68 C82 D24 D42 D45 D57 D58
    Date: 2008–01–18
  6. By: Van Laere, Elisabeth; Baesens, Bart; Thibeault, André (Vlerick Leuven Gent Management School)
    Abstract: In order to promote financial stability, regulatory authorities pay a lot of attention in setting minimum capital levels. In addition to these requirements, financial institutions calculate their own economic capital reflecting the unexpected losses and true risk according to the specific characteristics of their portfolio. The current Basel I framework pays little or no attention to the creditworthiness of a borrower in deciding on the regulatory capital requirements. As a result, a lot of banks remove low-risk assets from their balance sheets and only retain relatively high risk assets on balance. The recently introduced Basel II framework should result in a further convergence between regulatory and economic capital. However, recent papers (Elizalde et al., 2006; Jackson et al., 2002 and Jacobson et al. 2006) argue that also under Basel II, regulatory and economic capital will have different determinants. This paper first gives an overview of capital adequacy and then further describes the differences and similarities between economic and regulatory capital based on a literature review.
    Date: 2008–01–08

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