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Our paper examines whether audit quality is higher for industry audit specialists at the national and cityoffice levels using the framework developed in Ferguson et al. [2003] and Francis et al. [2005]. We find that auditors who are both national and city-specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city-specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city-industry specialists alone (without also being national specific industry specialists) are lower than those audited by nonindustry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city-specific industry specialist, its clients are less likely to meet or beat analysts' earnings forecasts by one penny per share and more likely to be issued a going-concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city-specific industry specialist, suggesting that auditors' national positive network synergies and the individual auditors' deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.

PurposeThis paper empirically examines whether the order of liability and preferred stock accounts presented on the balance sheet is consistent with how the stock market values their riskiness.Design/methodology/approachThis paper measures a firm’s riskiness with idiosyncratic risk and employs the first-difference design to test the relation between idiosyncratic risk and the order of current liabilities, noncurrent liabilities and preferred stock, respectively. Further, the paper tests whether operating liabilities are viewed as riskier than financial liabilities. Finally, the authors partition their sample based on the degree of financial distress and investigate whether the results differ between the two subsamples.FindingsThe paper finds that current liabilities are viewed as riskier than noncurrent liabilities and preferred stock is viewed as less risky than current and noncurrent liabilities, consistent with the ordering on the balance sheet. Further, the paper finds that operating liabilities are viewed as riskier than financial liabilities. Finally, the authors find that total liabilities and preferred stock (redeemable and convertible classes) are viewed as riskier for distressed firms than for nondistressed firms.Originality/valueThe authors thoroughly investigate the riskiness of several classes of claims and document that the classification of liabilities and preferred stock classes is relevant to common stockholders for assessing their associated risk.

We investigate the effect of the PCAOB’s Part II report on annually inspected firms’ audit fees and audit quality. The PCAOB replaced the peer review auditor program with an independent inspection of audit firms. Upon completion of each inspection, the PCAOB issued inspection reports that include a public portion (Part I) of identified audit deficiencies, and (in most cases) a nonpublic portion (Part II) of identified quality control weaknesses. The Part II report is only made public when the PCAOB deems that remediation was insufficient after at least 12 months have passed. Starting around the time of the 2007 Deloitte censure (Boone et al., 2015), the PCAOB shifted from a soft synergistic approach to an antagonistic approach, such that Part II reports were imminent, despite delays that ultimately led to their release one to four years later than expected. Our study spans the period from 2007 to 2015, and examines the effect on audit fees and audit quality at the earliest date that the Part II report could have been released – 12 months after the Part I report was issued. We find that following the 12 month period, that annually inspected audit firms eventually lost reputation by lower audit fees, while they concurrently made remedial efforts to increase the quality of their client’s financial reporting quality (abnormal accruals magnitude and restatements). However, three years after the Part II report was actually released, audit fees increased.

After the demise of Arthur Andersen, the public accounting industry has witnessed a significant migration of public clients to second-tier (Grant Thornton and BDO Seidman) and smaller third-tier accounting firms. While prior literature documents that smaller auditors are perceived by the stock market as an inferior substitute for a Big 4 auditor, this perception appears to have changed in recent years. In this paper, we analyze market responses to auditor switching from Big 4 to smaller accounting firms during 2002 to 2006. We break our sample period into two separate periods (Periods 1 and 2) based on when regulatory changes occurred. These changes included Sarbanes-Oxley (SOX) 404 implementation, Public Company Accounting Oversight Board (PCAOB) inspections, and a tightened Form 8-K filing deadline. We find a relatively more positive stock market reaction to clients switching from a Big 4 to a smaller third-tier auditor in Period 2. This relatively more positive reaction in Period 2 reflects companies seeking better services rather than a lower audit fee, when an audit quality drop is less likely. Overall, our results suggest that companies and investors have become more receptive to smaller accounting firms.

Recent research questions the validity of student evaluation of teaching (SET) data to measure teaching and learning. Yet, there is extensive use of this instrument around the world, which arguably contributes to a decline in the rigor of college classes. This performance measurement has lead to both unethical grade inflation and coursework deflation as faculty try to entertain students rather than educating them. These unethical teaching techniques used by many faculties are on the same plane as the unethical practices of executives “cooking their books.” Ethical and unethical SET management techniques of professors are discussed herein, along with incentive and structural pander pollution of administrators and universities.

Purpose: Student evaluation of teaching (SET) questionnaires are used in many countries, although much current research questions the validity of these surveys. US research indicates that more than 90 percent of academic accounting departments use this performance measurement. This paper aims to focus on the validity of SET data. Design/methodology/approach: A mail survey was sent to a random sample of 1,000 accounting professors employed at four-year universities and colleges in the USA. A total of 447 responses were returned for a response rate of 44.7 percent. Statistical results of the survey for data are reported. Findings: Instructors engage in impression management when SET data are used for control purposes. Dysfunctional behavior of accounting instructors includes easy grading, inflating grades, course work deflation, and other defensive strategies which result in negative social implications. A significant 53 percent of the accounting instructors knew of other professors who have reduced grading standards and course content in order to improve SET scores. Practical implications: Universities worldwide risk legal action when they defame faculty members by releasing unreliable and invalid SET results. Originality/value: The paper illustrates some of the present problems with SET questionnaires. (Contains 5 tables and 1 figure.)

Purpose - Student evaluation of teaching (SET) questionnaires are used in many countries, although much current research questions the validity of these surveys. US research indicates that more than 90 percent of academic accounting departments use this performance measurement. This paper aims to focus on the validity of SET data.Design methodology approach - A mail survey was sent to a random sample of 1,000 accounting professors employed at four-year universities and colleges in the USA. A total of 447 responses were returned for a response rate of 44.7 percent. Statistical results of the survey for data are reported.Findings - Instructors engage in impression management when SET data are used for control purposes. Dysfunctional behavior of accounting instructors includes easy grading, inflating grades, course work deflation, and other defensive strategies which result in negative social implications. A significant 53 percent of the accounting instructors knew of other professors who have reduced grading standards and course content in order to improve SET scores.Practical implications - Universities worldwide risk legal action when they defame faculty members by releasing unreliable and invalid SET results.Originality value - The paper illustrates some of the present problems with SET questionnaires.

Auditors have access to information that is less accessible to lenders, giving auditors an information advantage. For clients that approach a bank for a loan after switching auditors, the lender should be able to discern the client risks from the information revealed by the auditor switch that would otherwise not be apparent. This article explains the types of switches, discusses the risk characteristics of clients typically associated with a particular type of audit switch and shows how auditor switching signals a change in client risk. Switches from national auditors are likely for risk-related reasons and alignment reasons. With the exception of a few high-profile scandals, national audit firms appear to have less risky clients than regional auditors, which reduces potential litigation that can damage the firms' reputation. Lenders can demand information from their current and potential clients' information about client risk. This may include detailed projections of cash flows, sales and costs.

Understanding the information environment of existing or potential clients allows lenders to better use their resources in assessing the future profitability of a corporation. The richness of a client's information environment has become more relevant in recent years. In this article, the authors provide insights on how the reliability and quality of other information that a client provides about the company differs across rich and poor information environments by examining how management earnings forecasts differ across these environments. The differences they identify strongly indicate the need for lenders to incur more verification costs in poor information environments than in rich information environments. While the authors are able to document differences across the fundamental characteristics of management earnings forecasts between poor and rich information environments, the implications of these differences depend on whether the users of these forecasts incorporate the information as if they are credible or as if they are skeptical of management's claims.

Pancreatic ductal adenocarcinoma (PDA) is among the most lethal human cancers in part because it is insensitive to many chemotherapeutic drugs. Studying a mouse model of PDA that is refractory to the clinically used drug gemcitabine, we found that the tumors in this model were poorly perfused and poorly vascularized, properties that are shared with human PDA. We tested whether the delivery and efficacy of gemcitabine in the mice could be improved by coadministration of IPI-926, a drug that depletes tumor-associated stromal tissue by inhibition of the Hedgehog cellular signaling pathway. The combination therapy produced a transient increase in intratumoral vascular density and intratumoral concentration of gemcitabine, leading to transient stabilization of disease. Thus, inefficient drug delivery may be an important contributor to chemoresistance in pancreatic cancer.