Dasaratha V. Rama

SUMMARY: This article summarizes the published study “Related Party Transactions and Audit Fees: Indian Evidence” (Kushwaha, Anand, Jayadev, and Raghunandan 2024). Related party transactions (RPTs) in public companies are of concern to regulators in many countries, such as India, because RPTs can be used for wealth extraction by controlling shareholders. Many public companies in India have concentrated ownership and significant presence of RPTs. After the systemically important Satyam failure in 2009, Indian legislators enacted The Companies Act of 2013 to increase transparency for RPTs and improve corporate governance standards. Kushwaha et al. (2024) show that related party sales are associated with higher audit fees and auditor resignations after the enactment of the 2013 Act. The paper discusses implications for auditors and regulators when companies have material RPTs in non-Western markets. JEL Classifications: G34; M41; M42.

SUMMARY: Prior research shows that many of the companies that disclose material weaknesses in internal control (MWs) do not disclose such weaknesses in earlier quarterly 10-Q filings for the same year—i.e., the year-end MW disclosures are “surprise” disclosures. We find that shareholders at accelerated filers with surprise MW disclosures are more likely to vote against auditor ratification (by a factor of about 1.4 times) than at companies with “no-surprise” MW disclosures. These findings suggest that shareholders may at least partly blame auditors and hold them responsible for the surprise MW disclosures. Internal control disclosures necessarily involve professional judgment, but the results indicate that for shareholders, earlier disclosure of such problems is preferable to waiting until the year-end (and perhaps hoping that the problems will be resolved).

SUMMARY: The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have justified audit-related disclosure rules by asserting that such information would be relevant for shareholders in auditor ratification voting decisions. The underlying assumption, stated more explicitly by activists and others, is that such voting can influence auditors’ subsequent actions. A recent study by Tanyi, Rama, Raghunandan, and Martin (2020) tests this assumption. Using data from 10,326 auditor ratification votes, Tanyi et al. (2020) find that higher than expected shareholder dissatisfaction of their external auditors is associated with higher audit quality and higher audit fees in the subsequent period. The results suggest that auditors should pro actively engage with audit committees if there is higher than expected shareholder dissatisfaction. Auditors can also expect regulators to use such evidence in future rule proposals by the SEC and PCAOB, given past actions by regulators.

SUMMARY: SOX Section 404(b) continues to be of interest to legislators and regulators. Prior studies show that in the initial implementation years of SOX 404, the majority of material weakness (MW) disclosures were “surprise” MWs—i.e., disclosed at year-end, but not in prior quarterly filings (Hermanson and Ye 2009; Munsif, Raghunandan, and Rama 2013). We show that during the years 2010–2019, 74 (72) percent of MW disclosures by accelerated (non-accelerated) filers were surprise disclosures. Additionally, surprise MWs are more likely to be associated with internal control issues that involve year-end adjustments and/or documentation, procedure, or policy issues. “Early-warning” MWs are more likely due to systemic internal control problems, like segregation of duties. Our findings suggest a role for auditors and substantive audit tests in the disclosure of certain types of MWs. Increased auditor emphasis on interim substantive tests may reduce the likelihood of surprise MWs.

We argue that different types of leverage have different implications for audit risk and audit fees, and hence need to be separately examined. Using data from the years 2004 to 2016, we find that operating liability leverage is positively associated with audit fees and that financing leverage is negatively related to audit fees. The results suggest that the benefits from monitoring effects of financial leverage outweigh the costs associated with the risk of financial distress and financial misreporting. We also find that estimated operating liability leverage has a bigger effect on audit fees than contractual operating liability leverage, consistent with suggestions that auditors are more conservative in the presence of higher estimation risk. Thus, our findings highlight the importance of recognizing sources of leverage in audit risk in general and audit fee models in particular.

Gender diversity in corporate boards and the functioning of compensation committees are two issues that have caught the attention of legislators and regulators in many countries. Using data from 5,630 observations from public companies in the United States, we find that firm and board characteristics are associated with the presence of females on the compensation committee. However, female presence on the compensation committee is not significantly associated with CEO pay (as a proportion of shareholder wealth increase). We then discuss issues related to research on gender diversity in corporate boards, and offer some suggestions for future research on diversity in corporate boards.

Purpose – To examine if there are systematic gender-based differences in the perceptions of accounting firm alumni about their experiences with accounting firms. Design/methodology/approach – Alumni of Big 4 firms' offices in two large cities in the USA are surveyed. The analysis is based on responses from 110 alumni who had left the firm within the previous ten years. Findings – Results indicate that women are less likely than men to believe that their former accounting firms developed their abilities to think and express themselves; helped them learn to manage others; and trained them for their present job. Further, women rated the training, personnel evaluation, and counseling programs at their former accounting firms lower than did men. Women were less likely to recommend their former firm to friends and acquaintances, and less likely to inform the former accounting firm about opportunities or pitfalls. Research limitations/implications – Limitations associated with survey research such as non-response bias must be taken into account. Practical implications – The results suggest that more efforts are needed to bridge the gender gap in the public accounting profession. Originality/value – This study is one of the few that have examined alumni's perceptions about their former firm.