Questions exist regarding the extent to which internal auditors should participate in the external audit, and wide variations are observed in practice. Many professional bodies increasingly advocate the view that increased coordination between the internal and external auditors, including increased use of the internal auditor for the external audit, provides more efficient and effective audit coverage. However, others maintain that internal auditors should not focus on areas that are the subject of external audit interest. This article attempts to shed light on this debate by using insights from transaction cost economics (TCE) to identify conditions under which organizations encourage internal audit participation in the external audit. An analysis of survey data collected from directors of Canadian internal audit departments indicate that some (TCE) variables, particularly transaction‐specific investment, are significantly associated with internal audit participation in the external audit.

Depending on the country and circumstances, reporting rules for intercorporate investments may require the cost method, the equity method, proportionate consolidation, or full consolidation, and may yield dramatically different accounting numbers. In the post-Enron environment there is a particular focus on investments for which liabilities remain off balance sheet. We compare the information content of alternative accounting treatments for a sample of Canadian firms reporting joint ventures under proportionate consolidation. We restate their financial statements using the equity method, and we compare the information content of the two accounting methods in predicting accounting return on common shareholders' equity. We find evidence consistent with the view that financial statements prepared under proportionate consolidation provide better predictions of future return on shareholders' equity than do financial statements prepared under the equity method. We conclude that, for these firms, proportionate consolidation provides information with greater predictive ability and greater relevance than does the equity method.

Bhattacharyya (2007) develops a model in which compensation contracts motivate high-quality managers to retain and invest firm earnings, while low-quality managers are motivated to distribute income to shareholders. In equilibrium, the model shows that there is a positive (negative) relationship between the earnings retention ratio (dividend payout ratio) and managerial compensation. Results of tests of US data show that executive compensation is positively (negatively) associated with earnings retention (dividend payout). Our results indicate that corporate dividend policy is perhaps best understood by considering the payout ratio (dividends divided by earnings), rather than the level of cash dividends alone. Copyright (c) 2008 The Authors. Journal compilation (c) 2008 AFAANZ.

PurposeThis paper aims to examine whether the corporate governance rankings published by a market information intermediary are reflected in the values that investors accord to firms.Design/methodology/approachPanel data from 289 Canadian firms in the four‐year period 2002‐2005 were analyzed using a price model.FindingsThe results suggest that the corporate governance rankings published by the market information intermediary are related to not only firm market value, but also to accounting results.Practical implicationsThis study provides empirical observations that would be useful for various organizations involved in the regulation of corporate governance practices and the standardization of relevant data elements.Originality/valueThis study contributes to the literature by demonstrating that information published by an information intermediary is reflected in firm market values. Moreover, this information appears to be related to the accounting results. Thus, good governance rankings are reflected in the accounting results.

PurposeThis paper seeks to present and test a model of the association between dividend payout and executive compensation.Design/methodology/approachThe authors develop a model based on Bhattacharyya whereby managerial quality is unobservable to shareholders, and therefore first‐best contracts are not possible. In the second‐best world, compensation contracts motivate high quality managers to retain and invest firm earnings, while low quality managers are motivated to distribute income to shareholders. These hypotheses arising from the model are tested on data for Canadian firms' dividend payouts over the period 1993‐1995 using tobit regression analyses.FindingsConsistent with the predictions of the Bhattacharyya model, the results show that, ceteris paribus, earnings retention (dividend payout) is positively (negatively) associated with executive compensation. These results hold when payout is defined as common dividends plus common share repurchases.Research limitations/implicationsThe Canadian data provide only limited information on the components of executive compensation. A more useful test would be possible with more detailed information on, for example, salary, bonus, and benefits.Originality/valueSeveral recent papers have documented an association between dividends and executive compensation. This paper presents and tests a model that provides a potential explanation for this link.