Pamela Kent

Voluntary employee disclosures in Australian annual reports applying Ullmann’s stakeholder theory

Pamela Kent et al. — Thu, 04 Oct 2012 22:15:30 PDT

Extract:
Many companies state in their reports that their employees are the company’s most valuable resource (Flamholtz, 1999; Gröjer and Johanson, 1999; Guthrie, Petty and Johanson, 2001; Mouritsen, 1998; Petty and Guthrie, 2000). The purpose of this paper is to examine voluntarily employee 1 disclosures in Australian corporate annual reports by applying Ullmann’s (1985) three dimensional stakeholder framework comprising stakeholder power, strategic posture and economic performance. This study first investigates the propensity of companies to disclose voluntary employee information in relation to stakeholder employee power which is represented by employee share ownership and union membership. Second, strategic posture denoted by corporate governance best practice systems and corporate mission statements are examined. Return on assets (ROA) and market oriented Tobin’s Q are proxies used for economic performance. Finally, the quality of employee disclosures using content analysis are examined also using Ullmann’s (1985) three dimensional model.

The decision to internally generate or outsource risk management activities

Jacqueline Christensen et al. — Thu, 04 Oct 2012 22:15:29 PDT

This study uses transaction cost economics (TCE) to identify factors influencing Australian Securities Exchange (ASX) companies’ decision to internally generate or outsource activities required to manage risk. Limited research has been conducted in TCE and risk management with most in the accounting discipline concentrating on internal audit. Increasing our understanding of risk management practices benefits organisations, accounting professionals and regulators concerned with governance practice and enables policy development to be based on informed research. Applying TCE expands the scope of the theory’s application and contributes to the body of knowledge. Using a unique data set obtained from a survey sample of 281 listed ASX companies in 2009 combined with archival data hypotheses are operationalized and analysed using multivariate and logistic regression. Broadly in line with the TCE propositions, results indicate outsourcing risk management activities are positively associated with uncertainty measured by volatile sales, environmental diversity measured by industry competition, number of subsidiaries, recent organisational changes, new management and leverage. A negative association exists between outsourcing and expenditure on research and development, environmental uncertainty measured in terms of technological change and transaction frequency.

Are corporate governance recommendations relevant for small companies?

Jacqueline Christensen et al. — Thu, 04 Oct 2012 22:15:27 PDT

This study examines the extent to which small listed companies in Australia comply with the Australian Securities Exchange corporate governance recommendations, and whether applying these recommendations is associated with benefits in terms of performance and accountability. The results indicate that many small listed companies comply with the recommendations, although the benefits to these companies from doing so appear to be low. We do not find evidence of a positive association between small company compliance with recommendations regarding board independence, diligence and formation of an audit committee and performance. However, we find that compliance with the recommendation against having a dual CEO/Chair structure is beneficial. The voluntary regulatory approach is likely to be disproportionately costly for small companies if as our findings suggest compliance has few benefits for small companies. This is an important issue because small companies represent a substantial proportion of all listed companies. The current study has international relevance because the problem of designing effective governance regulation for a broad range of companies is not unique to the Australian jurisdiction. The findings have worldwide implications for regulators because the implementation of governance recommendations is costly for small companies and many regulatory frameworks require companies to implement formal corporate governance mechanisms regardless of their size.

Corporate governance and the quality of green house gas emission disclosures

Janice Hollindale et al. — Thu, 04 Oct 2012 22:15:26 PDT

The introduction of the National Greenhouse and Energy Reporting Act 2007 (Cth) legislation is evidence of the importance the Australian Government places on the issue of greenhouse gas emissions (GHG) reporting. Australian corporations’ GHG disclosure information in annual reports is currently unknown as most research has focused on environmental voluntary disclosures in general. We used content analysis to produce an index wherein we assessed the quality of GHG disclosures made in the annual reports of Australian public-listed companies in 2007. Our interest was focused on whether good quality corporate governance influences the quality of GHG emission disclosures. We examined the relation between the quality of corporate governance and the quality of GHG disclosures made by 216 companies. We find that the presence of an environment committee is associated with a lower proportion of unverifiable or ‘soft’ disclosures, and that larger firms are likely to provide better quality GHG disclosures.

The decision to outsource risk management activities

Jacqueline Christensen et al. — Thu, 04 Oct 2012 22:15:25 PDT

This study uses transaction cost economics (TCE) to identify factors influencing Australian Securities Exchange (ASX) companies’ decision to internally generate or outsource activities required to manage risk. Limited research has been conducted applying TCE in a risk management context with most in the accounting discipline concentrating on internal audit. Increasing our understanding of risk management practices benefits organisations, accounting professionals and regulators concerned with governance practice. Using a unique data set obtained from a survey sample of 271 listed ASX companies in 2009 combined with archival data hypotheses are operationalised and analysed using multivariate and logistic regression. Broadly in line with the TCE propositions expenditure on research and development, staff turnover in risk management relative to other service functions, environmental uncertainty measured in terms of technological change and transaction frequency are associated with less outsourcing of risk management activities. Uncertainty due to environmental diversity measured by the number of subsidiaries and recent restructures, acquisitions or mergers is associated with more outsourcing of risk management activities. Behavioural uncertainty related to new staff is also associated with more outsourcing. Contrary to the theoretical predictions of TCE, volatile sales are associated with more outsourcing and competition and overseas sales are associated with less outsourcing of risk management activities. Training and contract duration, hypothesised as indicators of asset specificity, are associated with more outsourcing.

The decision to outsource management advisory services

Pamela Kent — Thu, 04 Oct 2012 22:10:22 PDT

Purpose – The purpose of this paper, using transaction cost economics as a theoretical framework, is to seek an understanding of a company's decision to purchase Management Advisory Services (MAS) from their external auditors and other consultants as opposed to assembling MAS internally within the company.

Design/methodology/approach – Data from annual reports for a pooled sample of 3,154 company years were collected for listed Australian companies to determine MAS from auditors. Data for a second sample were collected by undertaking a survey of listed companies to provide a figure for total management advisory services paid to auditors and other consultants. Ordinary least squares regression was used to analyse the data and predict companies' decision to outsource or internally generate MAS.

Findings – It is found that purchases of MAS from external auditors and other consultants are associated with, restructuring, number of controlled entities (subsidiaries), number of geographical segments, management change and frequency of contracting. Other company characteristics, including company's industry membership, short-term growth, leverage, return on assets, use of a “big 5” auditor, type of audit report, and audit fees also explain the quantity of MAS purchased by a company from their external auditors and other consultants.

Originality/value – Transaction cost economics has not previously been applied to explain the decision to generate MAS internally by assembling knowledge within the company versus outsourcing from auditors and other consultants. The study makes use of unique data sets because it covers the period when regulations were not foreshowed restricting accounting firms supplying their audit clients with MAS.

Auditor tactics in negotiations: A research note

Janice Hollindale et al. — Wed, 03 Oct 2012 23:00:25 PDT

This study provides a broad set of tactics identified and used by mediation experts widely cited in the psychology literature. Seven auditing partners are provided with this broad list of tactics and asked to apply these tactics to two examples of an audit judgment setting. Another group of auditors consisting of 11 partners and 11 managers identify the degree of importance they plan to place on these 38 adapted tactics in the same audit judgment setting. Factor analysis is used to group the tactics into dimensions and it is found that there are four underlying factors. These are contending (forcing/asserting), compromising, problem solving and accommodating. The 22 auditors also manually sort the tactics into groups of homogeneous tactics, and cluster analysis indicates four factors of appealing to authority, forcing/asserting, context setting and facilitating. These groupings from the factor analysis and auditors’ sorting are broadly consistent with previous research. Little difference is observed between partners and managers’ assessment of the importance of the tactics, while auditors with formal negotiation training place less emphasis on compromising tactics than those without training.

Choice of non-audit services' supplier: Other consultants versus the external auditor

Jacqueline Christensen et al. — Mon, 15 Nov 2010 17:32:44 PST

Extract: The research problem for this study is to identify factors that influence a company’s decision to purchase non-audit services (NAS) from their external auditor rather than from an alternative external NAS provider (hereafter described as an external consultant). The study examines whether a company’s competitive position and its corporate governance characteristics influence its choice of NAS provider. It also explores whether receiving a qualified audit opinion is associated with its decision to source NAS from an external consultant.

Innate and discretionary accruals quality and corporate governance

Pamela Kent et al. — Sun, 25 Jul 2010 17:38:44 PDT

This paper extends previous research on the association between corporate governance mechanisms and accruals quality. We derive measures of the discretionary and innate components of accruals quality and regress them against corporate governance characteristics. For discretionary accruals, we find use of a Big 4 audit firm and a larger audit committee as the primary governance mechanisms associated with higher accruals quality. For innate accruals quality, we find that higher quality is associated with an independent board of directors, a larger, more independent and more active audit committee, and use of a Big 4 audit firm. Our findings suggest a stronger relation between sound governance mechanisms and innate accruals quality than discretionary accruals quality.

Application of stakeholder theory to corporate environmental disclosures

Pamela Kent et al. — Sun, 25 Jul 2010 17:38:43 PDT

Ullmann's (1985) three-dimensional model of social responsibility disclosure is tested to determine whether it can be operationalized to help explain the quantity and quality of environmental disclosures in Australian annual reports. The stakeholder power dimension of Ullmann's framework is significant in explaining environmental disclosures while content of the mission statement and existence or otherwise of environmental or social responsibility committees also find strong statistically significant support in the results. Ullmann's stakeholder theory has previously been applied to explain social disclosures in general (Roberts, 1992) and is an important theory because it introduces a measure of strategy. The current paper demonstrates how this theory can be applied to a specific social disclosure using variables that are idiosyncratically applicable to the types of disclosures.

Corporate governance and company performance in Australia

Jacqueline Christensen et al. — Sun, 25 Jul 2010 17:38:42 PDT

This study tests whether the adoption of Australian best practice corporate governance recommendations have a positive or negative relation with financial performance measured by return on assets (ROA) and Tobin's Q. The governance mechanisms associated with increased ROA and Tobin's Q are the existence of an audit, nomination and remuneration committee in Australia suggesting they are particularly beneficial to companies. We found evidence that a significant negative relation exits between the number of directors and proportion of independent directors on the board and the presence of a dual CEO/Chairperson and ROA. There is a significant positive relation between the number of directors on the board and the presence of a dual CEO/Chairperson and Tobin's Q and a negative relation between the number of board meetings and Tobin's Q. Agency theory is applied and results indicate that the existence of audit, nomination and remuneration committees is significantly associated with improved financial performance of Australian listed companies. Stewardship theory explains the significant positive association between the presence of a dual CEO/Chairperson and company market performance.

What drives TBL reporting: Good governance or threat to legitimacy?

Pamela Kent et al. — Tue, 11 Aug 2009 18:28:56 PDT

This paper provides two complementary explanations for the adoption of triple bottom line (TBL) reporting by Australian companies. The first explanation is that companies adopt TBL reporting to legitimise their relationship with society because of adverse publicity from the media. The second explanation is that TBL reporting is adopted because of the company’s desire to achieve high-quality reporting and transparency inferred by strong corporate governance. Companies with TBL reporting had significantly more adverse media coverage before implementing TBL reporting than non-TBL companies. TBL reporting is also significantly and positively related to the existence of an environmental or sustainable development committee and the frequency of meetings of the audit committee.

Innate and discretionary accrual quality and corporate governance

Pamela Kent et al. — Tue, 11 Aug 2009 18:28:56 PDT

The empirical analysis presented in this paper provides further insight into the important issue of the association between corporate governance structures and the quality of reported company earnings. The analysis uses the measure of accrual quality developed by Dechow and Dichev (2002) which provides a direct measure of the quality of current accruals. We derive measures of the innate and discretionary components of accrual quality following Francis et al. (2005), and subsequently include these measures in regressions against corporate governance characteristics. The results show that sound governance structures have a positive association between the innate and discretionary components of accrual quality. Interestingly, we find the relation between sound governance structures and accrual quality is stronger for innate than discretionary accruals. This suggests that sound governance is more important in reducing environmental uncertainty and associated unintentional accrual estimation errors than in constraining discretionary earnings management.

Auditor orientation, strategies, and tactics in audit negotiations

Janice Hollindale et al. — Tue, 11 Aug 2009 18:28:55 PDT

This paper establishes the tactics that auditors use in negotiations with their client-management. It analyses those tactics to determine whether they are related by some underlying dimensions and their relevant strategies. Auditors performed a sorting task on 38 audit-specific tactics and assembled the tactics into groups of similar tactics. We used the auditors’ own cognisant representations of those tactics to determine their underlying structure. Multidimensional scaling found that there are four dimensions to the tactics that auditors use. During negotiations with their clients, auditors employ tactics representing core dimensions which can be interpreted as “Concern for Self”, “Concern for Client”, “Concern for Others”, and “Concern for Accounting Principles”. Results of cluster analysis established four primary classifications to the 38 auditor tactics. These are “Facilitating”, “Contextual”, “Forcing/asserting”, and “Appeal to authority”. Within these four classifications, twelve sub-categories were observed. This research expands current knowledge fundamental to the audit discipline by establishing the negotiation tactics used by auditors and their underlying multidimensionality, and thus has extended the knowledge of audit conflict management beyond that of strategy-level. Accordingly, this research is beneficial to practicing auditors and for the education of auditors. This research contributes to theory within the fields of auditing and general negotiation because it has established that the two-dimensional model of concern that has formed the basis of much behavioural research is insufficient to describe an auditor’s responsibilities.

Corporate governance and disclosures on the transition to international financial reporting standards

Pamela Kent et al. — Tue, 11 Aug 2009 18:28:54 PDT

For reporting periods ending on or after 30 June 2004, Australian companies were required to disclose the expected impact of applying Australian equivalents of International Financial Reporting Standards effective from 1 January 2005. The objective of this paper is to examine the association between the level of disclosure and corporate governance quality. Using a sample of listed companies with 30 June balance dates, we find that the quantity of disclosure was positively related to some aspects of superior corporate governance, such as the frequency of board and audit committee meetings and the choice of auditor.

Droughts and big baths of Australian agricultural firms

Pamela Kent et al. — Tue, 11 Aug 2009 18:28:53 PDT

Purpose – The purpose of this paper is to examine whether Australian agricultural firms display big bath behaviour during droughts by recognising extraordinary and abnormal losses. It is hypothesised that Australian agricultural firms are more likely to report big bath losses in drought years than in non-drought years and, in a given drought year, agricultural firms are more likely to report big bath losses than firms in other industries.

Design/methodology/approach – The authors analyse 405 firm-years data for agricultural firms over 1980-1995. For comparison, they also analyse matched-pair samples of 17 and 30 non-agricultural firms for the drought years of 1983 and 1995, and matched-pair samples of 19 non-agricultural firms for the non-drought years of 1986 and 1990, respectively. Both univariate and multivariate analyses are used to test the hypotheses.

Findings – It is found that agricultural firms are more likely to take big baths in drought years than in non-drought years. Further, in a given drought year, agricultural firms are more likely to take big baths than non-agricultural firms. Further analyses of sales, profitability, and extraordinary and abnormal items support the idea that big baths reflect managerial opportunism rather than the economic consequences of droughts.

Originality/value – Previous studies have not investigated the impact of natural calamities like flood and drought on accounting choices. This paper makes an original contribution to the accounting literature by documenting evidence on the extent to which an act of nature, over which management has little or no control, can influence accounting choices.

Governance Structures, Ethnicity, and Audit Fees of Malaysian Listed Firms

Puan Yatim et al. — Wed, 18 Feb 2009 16:07:40 PST

This study examines the association between external audit fees, and board and audit committee characteristics of 736 Malaysian listed firms. It is hypothesised that good corporate governance practices reduce auditors' risk assessments, resulting in lower audit fees. Drawing on the existence of a clearly identifiable ethnic domination of board membership and ownership of Malaysian listed firms, the study also posits that Bumiputera-controlled firms pay higher audit fees because of their weaker governance practices.

Design/methodology/approach – This study employs a cross-sectional analysis of 736 firms listed on the Bursa Malaysia for the financial year ending in 2003. Multiple regression analysis is used to estimate the relationships proposed in the hypotheses.

Findings – Overall, the results of this study reveal that external audit fees are positively and significantly related to board independence, audit committee expertise, and the frequency of audit committee meetings. The study also finds a strong negative association between external audit fees and Bumiputera-owned firms. An additional analysis into the internal governance structures of firms in the sample show that Bumiputera firms practice more favourable corporate governance practices compared to their Non-Bumiputera counterparts.

Originality/value – This study is a unique contribution in that it provides data on corporate governance practices in Malaysia for a large sample in the period after the corporate governance reforms taken by Malaysian capital market regulators and participants. Previous studies have shown that Bumiputera-controlled firms pay higher audit fees than Non-Bumiputera-controlled firms. These studies have not tested theoretical explanations for this fee differential. A theoretical explanation provided in the current study is that Bumiputera-controlled firms pay higher audit fees than Non-Bumiputera-controlled firms partially because of differences in corporate governance practices. The study finds conflicting results with previous research suggesting that corporate governance practices have changed in Malaysia since the amendments of Bursa Malaysia Listing Requirements 2001.

The relation between external audit fees, audit committee characteristics and internal audit

Jenny Goodwin-Stewart et al. — Wed, 18 Feb 2009 16:07:39 PST

This study examines the association between audit fees, an effective audit committee and internal audit in an Australian setting. We find significant positive associations between the level of audit fees and the existence of an audit committee, the use of internal audit, and audit committee meeting frequency. We also find a significant 3-way interaction between audit committee independence, expertise and meeting frequency. Additional analysis indicates that expertise is positively associated with audit fees only when meeting frequency and independence are low. This is consistent with audit committee members with accounting expertise demanding a higher level of assurance in these circumstances.

Incidence and Incentives for the Voluntary Disclosure of Employee Entitlement Information Encouraged under AASB 1028

Pamela Kent et al. — Wed, 18 Feb 2009 16:07:39 PST

This paper examines the determinants of voluntary disclosure by firms of employee entitlement actuarial assumptions under AASB 1028. It draws on proprietary costs of information and stakeholder theory to make predictions about factors, which influences the disclosure of the actuarial assumptions. This framework is chosen after a review of alternative theories used to investigate voluntary disclosure. It is found that disclosure is negatively related to the power of firms' employees, and firm economic performance. Disclosures are weakly, positively related to firm size in the multivariate model.

The use of internal audit by Australian companies

Jenny Goodwin-Stewart et al. — Wed, 18 Feb 2009 16:07:39 PST

Purpose – The purpose of this study is to explore the voluntary use of internal audit by Australian publicly listed companies and to identify factors that lead listed companies to have an internal audit function.

Design/methodology/approach – Drawing on the Institute of Internal Auditors' definition of internal auditing, the paper predicts that internal audit use is associated with factors related to risk management, strong internal controls and strong corporate governance. To test the predictions, the study combines data from a survey of listed companies with information from corporate annual reports. The paper also provides descriptive information on the use of internal audit.

Findings – The results indicate that only one-third of the sample companies use internal audit. While size appears to be the dominant driver, there is also a strong association between internal audit and the level of commitment to risk management. However, the study finds only weak support for an association between the use of internal audit and strong corporate governance.

Research limitations/implications – A limitation of our study is that some of the variables in the model may not be good proxies for the factors being measured. Refinement of the model and the variables used provides an opportunity for future research. Practical implications – The limited use of internal audit by Australian companies has important implications for sound corporate governance.