PurposeThe purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen clients (S&P 1500 companies) who switched to the remaining Big 4 international accounting firms in 2002 due to the demise of Arthur Andersen LLP (Andersen). Did the audit clients pay a premium or discount in audit fees to their new auditor who specialized in their industry?Design/methodology/approachOrdinary least squares regression is used to test hypothesis of a positive association between industry specialization and audit fees charged to former Andersen's audit clients in 2002 following Andersen's demise. This study provides more control over size effects by design. Test variables are constructed based on national market share of audit fees within an industry. Logistic regression is used to examine the likelihood of choosing new auditor that is an industry specialist.FindingsResults support hypothesis, consistent with auditor differentiation explanation. Proportion of clients that had engaged an industry specialist in 2001 increased from 38 percent (84 clients) to 48 percent (105 clients) in 2002. No evidence of price‐gouging in 2002 although clients who aligned with industry specialist paid a 23.2 percent premium in audit fees. Large clients lost bargaining power to negotiate lower fees. Findings are robust to the inclusion of additional alternative measures of company size.Research limitations/implicationsResults of logistic regression analysis imply that large audit clients with former auditor of tarnished reputation, long auditor tenure and high leverage are more likely to switch to an industry specialist to possibly signal audit/financial reporting quality. Large sample companies may limit the ability to generalize findings to smaller companies.Practical implicationsMandatory audit firm rotation (currently being debated in the profession) will have costly effect on the pricing of Big 4 audits for companies wanting to signal audit and financial reporting quality to affect market perception, and large companies would likely lose their ability to bargain for lower audit fees.Originality/valueThe paper focus on the alignment of Andersen clients and impact on audit fees with Big 4 industry specialists resulting from the sudden increase in audit market concentration. Prior to Andersen's collapse, evidence on the association of audit fees premium and industry specialists was mixed, and little attention has been given to the influence of auditor industry specialization on both audit fees and alignment of former Andersen clients with a Big 4 specialist. This paper fills that void.

Transparency is a fundamental principle of good corporate governance. A disclosure is an important mechanism that enhances corporate governance through increased transparency and better informed stakeholders. When a government operation contractually assigns prison services to a nongovernment for-profit entity, then that entity is fulfilling a public interest role of incarceration and should be accountable to the citizen taxpayers (i.e., the stakeholders). Accountability is important. But what happens to accountability when the mission statements and business strategies of the nongovernment for-profit entities diverge from the original government operation? The private prison industry, annually, spends thousands and sometimes millions of dollars toward political campaigns and lobbyists to influence and educate legislatures as a part of their corporate political strategy to ensure a steady stream of growing revenues. Consequently, various laws have been implemented resulting from successful lobbying efforts that affect the public interest. These nontrivial amounts are not disclosed in their annual reports or proxy statements. However, this information is reported in a disaggregated way in various non-SEC filings. This study shows that tracking federal and state lobbying expenditures and political campaign contributions is a complicated task for a trained staff of researchers, and would be quite difficult for most stakeholders; thus, current reporting obscures transparency. I thus argue for greater transparency by requiring mandatory disclosures of political contributions and lobbying expenditures in the financial statements of publicly held private prison corporations. Benefits of audited annual reports filed with the Securities and Exchange Commission would enhance the reliability of management assertions about expenditures related to political contributions and lobbying costs reported by private prison corporations and the detailed information would be presented in a single, complete disclosure. This new disclosure requirement would improve corporate governance, increase accountability, decrease information asymmetry that exists between the private prison corporations and stakeholders, and allow external stakeholders to make informed judgments about whether those in the business of incarceration are fulfilling their public interest role.

Professional analysts' estimates of earnings per share (EPS) provide a rare source of forward-looking information regarding the financial performance of publicly traded firms. Although numerous studies in the economics, finance, and accounting literatures have examined the properties of these forecasts and provided general insight into their performance, no known research explicitly examines the performance of analysts' EPS estimates for publicly traded food companies. This issue is particularly relevant given the influence that publicly traded agribusiness companies maintain in the agro-food supply chain (Vickner, 2002). Focusing on quarterly consensus estimates of EPS for 11 of the largest publicly traded food companies based on capitalization, the authors examine the point accuracy of these estimates through the introduction of the mean absolute scaled error measure, their performance over time, as well as their optimal forecast properties of bias, efficiency, and forecast encompassing. Results suggest that professional analysts, on average, produce EPS estimates that are more accurate than time series alternatives, yet the differences are often not statistically significant. For many of the firms examined, analysts' EPS estimates are found to be biased, inefficient, and do not encompass information in simple time series alternatives. For many firms in the sample, forecast accuracy has decreased over time. However, it is difficult to determine if this decline in forecast accuracy is due to turnover of analysts in the wake of increased financial market regulation (e.g., Sarbanes-Oxley), decline in forecasting skill, or structural changes in the food industry, which make it more difficult to forecast earnings over time. [EconLit citations: Q140; G170; M490]. r

No abstract

No abstract