Jere Francis holds the position of Distinguished Professor at UTS. In addition to his UTS appointment, Jere is a Curators’ Professor and the Trulaske Chair in accounting at University of Missouri-Columbia in the USA. He did undergraduate and post-graduate work at Drake University and University of Minnesota, and his PhD at University of New England in Australia. In 1994, he was awarded a Doctoral of Economics (by external examination) by the University of New England for his post-doctoral research on auditing and corporate financial reporting.
His research examines the role of auditing and institutions on the incentives of companies and auditors to produce high-quality accounting reports. Jere has made seminal contributions in many areas including audit pricing, audit opinions, the importance of legal and regulatory regimes in facilitating high-quality reporting, philosophical foundations of auditing, and the effects of auditor characteristics on the quality of reported earnings including audit firm size, audit office size, and auditor industry expertise.
Jere is a prolific scholar and ranks among the top ten professors in the world for publications in leading accounting research journals. He has twice been recognized by the American Accounting Association (AAA) for Notable Contributions to audit research, and in 2013 the AAA recognized him as an Outstanding Audit Educator. Jere has served on the editorial boards of leading scholarly journals including Abacus, Accounting Organizations & Society, Accounting & Finance, Auditing: A Journal of Practice & Theory, Contemporary Accounting Research, Journal of Accounting & Economics, Review of Accounting Studies, and The Accounting Review. Jere’s research is influential and widely cited with over 13,000 citations reported by Google Scholar. His research also has practical implications for accounting firms and regulators, and he has presented his research findings to the executive offices of leading international accounting firms, the American Institute of Certified Public Accountants, the World Bank, and the Public Company Accounting Oversight Board in the United States.
On a personal note, Jere first came to Australia in 1973 on a two-year contract with the precursor to what is now Deakin University in Geelong, Victoria. It was the beginning of what has been a life-long love affair with Australia and Australians, including a love of wine, competitive sailing in Geelong, and club cricket in Armidale in the late 1970s when completing his PhD.
Defond, ML, Francis, JR & Hallman, NJ 2018, 'Awareness of SEC Enforcement and Auditor Reporting Decisions', Contemporary Accounting Research, vol. 35, no. 1, pp. 277-313.View/Download from: UTS OPUS or Publisher's site
© CAAA We find that non-Big 4 audit offices with greater awareness of SEC enforcement are more likely to issue first-time going-concern reports to distressed clients; where SEC 'awareness' is measured using (i) audit office proximity to SEC regional offices, and (ii) proximity to specific SEC enforcement actions against auditors. We also show that these non-Big 4 audit offices issue more going-concern opinions to clients who do not subsequently fail, indicating a conservative bias that reduces the informativeness of audit reports. This conservative reporting bias is also associated with higher audit fees and higher auditor switching rates. These findings are important because non-Big 4 firms now audit 39 percent of SEC registrants and issue 88 percent of going-concern audit reports. For Big 4 offices, we find some evidence that awareness of SEC enforcement may improve reporting accuracy by reducing Type II errors (failing to issue a going-concern report to a company that fails), although the number of cases is small.
Beck, MJ, Francis, JR & Gunn, JL 2018, 'Public Company Audits and City-Specific Labor Characteristics', Contemporary Accounting Research, vol. 35, no. 1, pp. 394-433.View/Download from: UTS OPUS or Publisher's site
© CAAA Prior research emphasizes the centrality of audit offices in understanding auditing practices, and documents significant interoffice variation in audit outcomes based on industry expertise and office size. Our study examines how two city-specific labor characteristics also affect audit offices and local audit markets: the city's average educational attainment, and the number of accountants in a city, which proxy for a city's human capital. Our argument draws on the urban economics literature and predicts that the level of human capital in a city is positively associated with an audit office's ability to conduct high-quality audits. As expected, there is a positive association between audit quality (quality of audited earnings and accuracy of going-concern reports) and average education level in the city in which the lead engagement office is located. This association is generally significant for both Big 4 and non-Big 4 offices, but is relatively stronger for non-Big 4 firms that are more tied to local labor markets. A company is also more likely to choose a non-Big 4 auditor in cities with higher educational levels and relatively more accountants, and there is evidence of higher non-Big 4 audit fees as a city's education level increases. Collectively, these results suggest that local labor characteristics affect audit offices, audit quality, and the ability of non-Big 4 auditors to compete with Big 4 auditors in the audits of public companies.
Francis, JR, Mehta, MN & Zhao, W 2017, 'Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients', Contemporary Accounting Research, vol. 34, no. 4, pp. 1922-1974.View/Download from: UTS OPUS or Publisher's site
© CAAA Our study reports evidence on the dynamic effects of client switches on auditor reputations and fee premia. Offices of large accounting firms that lose (gain) major industry clients experience a reputation shock leading to more same-industry client losses (gains) over the next two years. There is also a shift in audit fees charged to other same-industry clients when a major client loss (gain) results in an audit office losing (gaining) city-level industry leadership. A major client loss or gain also creates a short-term capacity shock to an audit office's ability to supply high-quality audits. However, there is no evidence of reputation spillovers to other-industry clients in the audit office, or to clients in other offices of the accounting firm.
Francis, JR, Huang, SX & Khurana, IK 2016, 'The Role of Similar Accounting Standards In Cross-Border Mergers and Acquisitions', Contemporary Accounting Research, vol. 33, no. 3, pp. 1298-1330.View/Download from: UTS OPUS or Publisher's site
This study investigates whether differences in accounting standards across countries create information costs that inhibit firms from investing in foreign markets. Using the frequency and dollar magnitude of cross-border mergers and acquisitions (M&As) from 32 countries over the period 1998-2004, we find that the aggregate volume of M&A activity across country pairs is larger for pairs of countries with similar Generally Accepted Accounting Principles (GAAP), and that this increased volume of M&A activity is driven by target countries that also have strong enforcement. We also find that the 2005 mandatory adoption of International Financial Reporting Standard (IFRS) attracted more cross-border M&As among IFRS-adopting countries, and that this increase in M&A activity within the IFRS countries is more pronounced for country pairs with low similarity in GAAP in the pre-IFRS adoption period. Overall, our results highlight the role of accounting standards and enforcement in shaping cross-border M&A activity.
Dutillieux, W, Francis, JR & Willekens, M 2016, 'The spillover of SOX on earnings quality in non-U.S. jurisdictions', Accounting Horizons, vol. 30, no. 1, pp. 23-39.View/Download from: UTS OPUS or Publisher's site
© 2015, American Accounting Association. All rights reserved. In most European countries, U.S.-owned subsidiaries are required by law to file separate entity financial statements in local GAAP. We use this unique institutional setting to examine whether the Sarbanes-Oxley Act of 2002 (SOX) had a flow-through effect on the earnings quality of local GAAP financial reports for a sample of Belgian subsidiaries owned by U.S.-listed firms. Belgium has weaker institutions relative to the U.S. and this is a setting where the spillover effects of SOX might be expected to improve local GAAP earnings quality. Using a difference-indifferences research design, we compare changes in earnings quality before and after SOX for a treatment sample of Belgian subsidiaries owned by U.S.-listed companies (which are subject to SOX), with a control sample of Belgianowned subsidiaries whose owners are not subject to SOX regulations. We find that the earnings quality of the U.S.-owned subsidiaries improved after SOX (smaller abnormal accruals and more timely loss recognition). In contrast, the earnings quality of the control sample was either unchanged or declined in the pre-versus post-SOX periods. These results suggest that SOX did have a flow-through effect on earnings quality in a non-U.S. jurisdiction, and that SOX has had a broader international effect beyond the original legislative intent.
© 2015 AIBE. Prior studies document a Delaware incorporation effect on firm valuation, generally using Tobin's Q, but the directional effects are mixed and inconclusive. Our study uses implied cost of equity to assess valuation, and we find consistent evidence that firms incorporated outside of their home state, either in Delaware or in other states, have a cost of equity that is 40 to 100 basis points higher than firms incorporated in their home state (depending on the model). Importantly, there is no statistical difference between Delaware incorporation and other non-home states of incorporation, which suggest the more important distinction is home state versus non-home state, rather than a Delaware effect. These findings are robust to controls for risk factors that affect the cost of equity including market beta, market value of equity, book to market ratio, analyst forecast dispersion, long-term growth in earnings, and industry membership. Results are consistent in yearly estimations for the sample period 1990-2006, and robust across the spectrum of firm size, different measures of cost of equity, and to control for endogeneity of the firms' incorporation choice.
Cameran, M, Francis, JR, Marra, A & Pettinicchio, A 2015, 'Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience', AUDITING-A JOURNAL OF PRACTICE & THEORY, vol. 34, no. 1, pp. 1-24.View/Download from: UTS OPUS or Publisher's site
Francis, JR, Michas, PN & Yu, MD 2013, 'Office Size of Big 4 Auditors and Client Restatements', Contemporary Accounting Research, vol. 30, no. 4, pp. 1626-1661.View/Download from: UTS OPUS or Publisher's site
We investigate if the existence of low-quality audits in an auditor office indicates the presence of a ``contagion effect on the quality of other (concurrent) audits conducted by the office.A low-quality audit is defined as the presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement. We document that the quality of audited earnings (abnormal accruals) is lower for clients in these office-years (when the misreporting occurred) compared to a control sample of officeyears with no restatements. This effect lasts for up to five subsequent years, indicating that audit firms do not immediately rectify the problems that caused contagion.We also find that an office-year with client misreporting is likely to have subsequent (new) client restatements over the next five fiscal years. Overall, the evidence suggests that certain auditor offices have systematic audit-quality problems and that these problems persist over time.
Francis, JR, Michas, PN & Seavey, SE 2013, 'Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries', Contemporary Accounting Research, vol. 30, no. 1, pp. 325-355.View/Download from: UTS OPUS or Publisher's site
This study explains the challenges associated with the Heckman (1979) procedure to control for selection bias, assesses the quality of its application in accounting research, and offers guidance for better implementation of selection models. A survey of 75 recent accounting articles in leading journals reveals that many researchers implement the technique in a mechanical way with relatively little appreciation of important econometric issues and problems surrounding its use. Using empirical examples motivated by prior research, we illustrate that selection models are fragile and can yield quite literally any possible outcome in response to fairly minor changes in model specification. We conclude with guidance on how researchers can better implement selection models that will provide more convincing evidence on potential selection bias, including the need to justify model specifications and careful sensitivity analyses with respect to robustness and multicollinearity.
Francis, JR, Khurana, IK, Martin, X & Pereira, R 2011, 'The Relative Importance of Firm Incentives versus Country Factors in the Demand for Assurance Services by Private Entities', Contemporary Accounting Research, vol. 28, no. 2, pp. 487-516.View/Download from: UTS OPUS or Publisher's site
The studies by Jamal and Sunder, 2011 and Jeacle and Carter, 2011, and Downer (2011) raise two interesting questions for accounting scholars: what is an audit, and what is auditing research? As illustrated by these papers, there are widespread certification activities in modern societies and the first theme of this essay is that accounting scholars can both learn from and contribute to a much broader research literature on certification and verification activities. While there are some exceptions, for the most part the accounting literature on auditing is quite narrow in scope, focusing almost exclusively on professional accountants, financial statement audits by licensed auditors and the related regulatory regimes (e.g., Cooper and Robson, 2006, Francis, 2011 and Nelson and Tan, 2005).1 Thus the essays title Auditing without Borders is an appeal to expand our thinking about auditing as a more generalizable activity, and a way of enriching our understanding of financial statement audits while at the same time contributing to a broader scholarship on certification and verification processes.2 Even though auditing can be conceptualized as part of a more generalizable activity, the second theme I take up at the end of the essay is that context also matters and is very important in understanding specific certification practices
Larger offices of Big 4 auditors are predicted to have higher quality audits for SEC registrants due to greater in-house experience in administering such audits. We test this prediction by examining a sample of 6,568 U.S. firm-year observations for the period 20032005 and audited by 285 unique Big 4 offices. Results are consistent with larger offices providing higher quality audits. Specifically, larger offices are more likely to issue going-concern audit reports, and clients in larger offices evidence less aggressive earnings management behavior. These findings are robust to extensive controls for client risk factors and to controls for other auditor characteristics. While the evidence suggests audit quality is higher on average in larger Big 4 offices, we make no claims that audit quality is unacceptably low in smaller offices.
Francis, JR, Richard, C & Vanstraeln, A 2009, 'Assessing France's Joint Audit Requirement: Are Two Heads Better than One?', Auditing-a Journal Of Practice & Theory, vol. 28, no. 2, pp. 35-63.View/Download from: UTS OPUS or Publisher's site
We examine auditor choice for listed companies in France where two (joint) auditors are required by law. This unique setting creates more complex auditor choice than the typical Big 4/non-Big 4 dichotomy in other countries, and we study if a firms ownership structure affects its auditor-pair choice as well the consequences on earning quality. The findings are consistent with agency theory and indicate that a Big 4 auditor (paired with a non-Big 4 auditor) is more likely to be used when there is greater information asymmetry (less family control and more diversified ownership structures), and that these associations are even stronger for firms with two Big 4 auditors conducting the joint audit. We also test if a firms auditor-pair choice affects earnings quality and find that firms using one Big 4 auditor (paired with a non-Big 4 auditor) have smaller income-increasing abnormal accruals compared to firms that use no Big 4 auditors and, once again, find that this effect is even stronger for firms that use two Big 4 auditors.
Francis, JR, Huang, S, Khurana, IK & Pereira, R 2009, 'Does Corporate Transparency Contribute to Efficient Resource Allocation?', Journal of Accounting Research, vol. 47, no. 4, pp. 943-989.View/Download from: UTS OPUS or Publisher's site
This paper examines whether a country's corporate transparency environment, which includes the quality of accounting information, contributes to efficient resource allocation. Based on a cross-country study of 37 manufacturing industries in 37 countries, we provide three pieces of related evidence. First, we find the contemporaneous correlations in industry growth rates across country pairs are higher when there is a greater level of corporate transparency in the country pairs, after controlling for country-level economic and financial development. Second, we find the influence of transparency on these correlations is stronger when country pairs are at similar levels of economic development (GDP). Finally, when we control for the level of transparency explained by a countrys institutions in place, we find that residual transparency (unexplained by country-level factors) is associated with industry-specific growth rates. Taken together, the results are consistent with corporate transparency facilitating the allocation of resources across industry sectors.
Francis, JR & Wang, D 2008, 'The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality around the World', Contemporary Accounting Research, vol. 25, no. 1, pp. 157-191.View/Download from: UTS OPUS or Publisher's site
Francis, JR, Khurana, IK, Martin, X & Pereira, R 2008, 'The Role of Firm-Specific Incentives and Country Factors in Explaining Voluntary IAS Adoptions: Evidence from Private Firms', European Accounting Review, vol. 17, no. 2, pp. 331-360.View/Download from: UTS OPUS or Publisher's site
This paper investigates voluntary adoptions of International Accounting Standards (IAS) by private enterprises, and builds on prior research which posits that higher quality financial reports through IAS adoption can reduce information asymmetry and facilitate contracting with external parties. Specifically, we pursue the following questions. First, do firm-specific incentives matter in the IAS adoption decision after controlling for country-level institutional factors? Second, does the relative importance of firm vs. country factors vary across institutional settings? Using a sample of 3,722 small and medium-sized private enterprises from 56 countries, we report two primary findings. First, both firm and country factors matter in the voluntary IAS adoption decision. Second, when we focus on sub-samples of countries partitioned by the level of economic development, we find that firm factors dominate country factors in more developed countries, while in less developed countries, country factors dominate firm factors in explaining IAS adoptions. This result is consistent with the argument in Doidge et al. (Journal of Financial Economics, 86(1), pp. 139, 2007) that firm incentives are more important in explaining governance choices (including accounting) in more developed countries where the benefits from better governance are more likely to exceed the attendant costs. Collectively, our results suggest that less developed countries can enhance the benefits from IAS adoptions by developing institutions which facilitate private contracting
Basioudis, IG & Francis, JR 2007, 'Big 4 audit fee premiums for national and office-level industry leadership in the United Kingdom', Auditing, vol. 26, no. 2, pp. 143-166.View/Download from: Publisher's site
The pricing of Big 4 industry leadership Is examined for a sample of U.K. publicly-listed companies, and adds to the evidence from the Australian and U.S. audit markets that city-specific industry leadership commands a fee premium. There is a significant fee premium for city-specific industry leaders relative to other Big 4 auditors, but no evidence that either the top-ranked or second-ranked firm nationally commands a fee premium relative to other Big 4 auditors, after controlling for city-level industry leadership. We also test for Big 4 fee premiums relative to non-Big 4 auditors and the U.K. data suggest a three-level hierarchy based on audit fee differentials: (1) Big 4 city-specific industry leaders have the largest fees; (2) other Big 4 auditors (noncity leaders) and second-tier national firms have comparable fees that are lower than Big 4 city leaders but larger than third-tier firms; and (3) third-tier accounting firms have the lowest fees.
Ruddock, Taylor, and Taylor (2006) use an earnings conservatism framework to investigate the effects of nonaudit services (NAS) on earnings conservatism, and to test whether audit quality was impaired by NAS in Australia during the 1990s. They find no evidence of differential conservatism conditional on the level of NAS fees paid to auditors, and thus conclude that NAS have no adverse effect on audit quality. While this result may not extrapolate to the U.S. setting due to institutional difference between the two countries, the study does add to a growing body of empirical evidence that questions whether there is any logical rationale for restricting the scope of the services that auditors provide to their audit clients. In reviewing the NAS research literature over the past 40 years, one has to conclude that there is no "smoking gun" evidence linking the provision of nonaudit services with audit failures. However, the literature also finds that NAS can adversely affect the appearance of auditor independence, and this may be more than a "mere perception" problem, because there is also evidence that stock prices are significantly lower for companies that pay their auditors large fees for nonaudit services. © CAAA.
Francis, JR & Ke, B 2006, 'Disclosure of fees paid to auditors and the market valuation of earnings surprises', Review of Accounting Studies, vol. 11, no. 4, pp. 495-523.View/Download from: Publisher's site
We investigate if the SEC's recently mandated disclosure of fees for audit and nonaudit services paid by firms to their incumbent auditors affected the market's perception of auditor independence and earnings quality. Following the initial fee disclosures in 2001, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) was significantly lower for firms with high levels of nonaudit fees than for firms with low levels of such fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information that was viewed by the market as relevant to appraising auditor independence and earnings quality. © Springer Science+Business Media, Inc. 2006.
Ferguson, AC, Francis, JR & Stokes, D 2006, 'What matters in audit pricing: industry specialization or overall market leadership?', Accounting and Finance, vol. 46, no. 1, pp. 97-106.View/Download from: UTS OPUS or Publisher's site
Ferguson et al. (2003) report that audit industry fee premia primarily reside with joint national and city-specific industry leadership as opposed to merely firm-wide (national) industry expertise, suggesting auditor choice among the Big 5 is best conceptualized on joint industry specialization in city-specific markets and nationally. The present study examines whether the prior results could be confounded by the presence of city-specific overall market leadership effects. Our findings reaffirm that joint local and national auditor industry expertise is valued by audit clients. Furthermore, overall city-specific leadership, by itself, also matters in fee determination and results in higher fees, although at a slightly weaker level of statistical significance
Francis, JR, Reichelt, K & Wang, D 2005, 'The pricing of national and city-specific reputations for industry expertise in the U.S. audit market', Accounting Review, vol. 80, no. 1, pp. 113-126.
The pricing of Big 5 industry leadership in the U.S. audit market is investigated using audit fee disclosures for the 2000-2001 fiscal years and the joint national-city framework in Ferguson et al. (2003). There is a significant fee premium of 19 percent on those engagements where Big 5 auditors are both the nationally top-ranked auditor and the city-level industry leader in the city where the client is headquartered, indicating that national and city-specific industry leadership jointly affect auditor reputation and pricing. However, there is never a premium in any tests for auditors that are national industry leaders alone without also being city-specific industry leaders, indicating that national leadership by itself does not result in a premium. The evidence is mixed with respect to city-specific industry leaders alone that are not also national industry leaders. While there is a premium of 8 percent in the primary tests, this result is inconclusive as it does not hold in all sensitivity analyses.
Francis, JR, Khurana, IK & Pereira, R 2005, 'Disclosure incentives and effects on cost of capital around the world', Accounting Review, vol. 80, no. 4, pp. 1125-1162.View/Download from: Publisher's site
Prior research predicts that firms reliant on external financing are more likely to undertake a higher level of disclosure, and a higher disclosure level should, in turn, lead to a lower cost of external financing. This paper tests these predictions outside the United States where alternative legal and financial systems could mitigate the effectiveness of such disclosures and, comprehensively, examines both disclosure incentives and disclosure consequences on cost of capital for a common set of firms. Using a sample from 34 countries, we find that firms in industries with greater external financing needs have higher voluntary disclosure levels, and that an expanded disclosure policy for these firms leads to a lower cost of both debt and equity capital. Crosscountry differences in legal and financial systems affect observed disclosure levels in predicted ways. However, a surprising result in the study is that voluntary disclosure incentives appear to operate independently of country-level factors, which suggests the effectiveness of voluntary disclosure in gaining access to lower cost external financing around the world.
This paper reviews empirical research over the past 25 years, mainly from the United States, in order to assess what we currently know about audit quality with respect to publicly listed companies. The evidence indicates that outright audit failure rates are infrequent, far less than 1% annually, and audit fees are quite small, less than 0.1% of aggregate client sales. This suggests there may be an acceptable level of audit quality at a relatively low cost. There is also evidence of voluntary differential audit quality (above the legal minimum) along a number of dimensions such as firm size, industry specialization, office characteristics, and cross-country differences in legal systems and auditor liability exposure. The evidence is very positive although there is some indication that audit quality may have declined in the 1990s, in which case there could be merit in recent reforms such as the Sarbanes-Oxley Act of 2002 in the US. However, we do not know from research the optimal level of audit quality and therefore whether we currently have 'too little' or 'too much' auditing? Despite this lacuna we are entering an era of more mandated auditing in response to high-profile corporate governance failures including the Enron-Andersen affair. Finally, while recent reforms have scaled back the scope of non-audit services due to independence concerns, a case can be made that audit quality will always be somewhat suspect if other services are provided that are perceived to potentially compromise the auditor's objectivity and skepticism. For this reason public confidence in audit quality may be increased by proscribing all non-audit services for audit clients. Recommendations are also proposed with respect to legal liability reform and changes in partner compensation arrangements. © 2004 Elsevier Ltd. All rights reserved.
Casterella, JR, Francis, JR, Lewis, BL & Walker, PL 2004, 'Auditor industry specialization, client bargaining power, and audit pricing', Auditing, vol. 23, no. 1, pp. 123-140.View/Download from: Publisher's site
Porter's (1985) analysis of competitive strategy is used to explain industry specialization by Big 6 accounting firms. In Porter's framework, industry specialization can be viewed as a differentiation strategy whose purpose is to create a sustainable competitive advantage relative to nonspecialist auditors. A differentiation strategy will lead to higher audit fees if valued by clients. We find evidence of higher fees for Big 6 industry specialists relative to nonspecialists in the U.S. audit market, but only for companies in the lower half of the sample based on size (assets < $123 million). By contrast, companies in the upper half of the sample do not pay a specialist premium, and audit fees actually decrease as a company becomes increasingly large relative to its auditor's industry clientele. Together these results suggest that audit fees are higher when clients are small and have little bargaining power, but audit fees are lower when clients have greater bargaining power and this is more likely when companies are large in absolute size and large relative to their auditor's industry clientele.
This study investigates whether an auditor's objectivity is impaired by nonaudit services or by the level of economic dependence on a client. Like several contemporaneous studies, we use recent mandated proxy statement audit and nonaudit fee disclosures to measure economic dependence and we use discretionary accruals as a surrogate for auditor objectivity. The results in the extant literature are mixed. We provide some explanations for those inconsistent results. First, we replicate the results of Frankel et al. (2002), finding, as they did, a significantly positive association between the relative level of nonaudit fees and discretionary accruals. Second, we document that this initial result is primarily due to small-to-medium-sized high-growth firms, especially firms having initial public offerings and in the e-commerce, biomedical, telecommunication, and pharmaceutical industries. After factoring these characteristics into the analysis, we find no evidence that the relative level of nonaudit service fees impairs an auditor's objectivity.
Ferguson, AC, Francis, JR & Stokes, D 2003, 'The effects of firm-wide and office-level industry expertise on audit pricing', The Accounting Review, vol. 78, no. 2, pp. 429-448.View/Download from: UTS OPUS or Publisher's site
This study examines the role of auditor industry expertise in the pricing of Big 5 audits in Australia. We test if the audit market prices an auditor's firm-wide industry expertise, or alternatively if the audit market only prices office-level expertise in those specific cities where the auditor is the industry leader. We document that there is an average premium of 24 percent associated with industry expertise when the auditor is both the city-specific industry leader and one of the top two firms nationally in the industry. However, the top two firms nationally do not earn a premium in cities where they are not city leaders. We further document that national leadership rankings are, in fact, driven by the specific offices where accounting firms are city leaders. Thus, the overall evidence supports that the market perception and pricing of industry expertise in Australia is primarily based on office-level industry leadership in city-specific audit markets
Reynolds, JK & Francis, JR 2000, 'Does size matter? The influence of large clients on office-level auditor reporting decisions', Journal of Accounting and Economics, vol. 30, no. 3, pp. 375-400.View/Download from: Publisher's site
Large clients create an economic dependence that may cause auditors to compromise their independence and report favorably to retain valuable clients. Economic dependence is measured as a client's size relative to the size of the office that contracts for the audit and issues the audit report. We find no evidence economic dependence causes Big Five auditors to report more favorably for larger clients in their offices. However, larger clients also pose greater litigation risk, and we do find that Big 5 auditors report more conservatively for larger clients, suggesting that reputation protection dominates auditor behavior. © 2001 Published by Elsevier Science B.V.
Audit fees of Big 6 and non-Big 6 accounting firms are examined for 348 publicly listed Hong Kong companies. Using more recent data than prior studies, we find evidence of Big 6 premiums for both general brand name and for industry specialization. In addition, we find that the large local firm Kwan Wong Tan & Fong, which is the market leader in the property sector, has significantly lower fees than both Big 6 and other non-Big 6 auditors in that industry. Specialization thus leads to different results for Big 6 and non-Big 6 firms and suggests a market segment not previously identified: non-Big 6 specialization, which leads to production economies and the capture of market share through lower fees for a clientele seeking low-priced audits. These results also suggest that prior studies do not recognize sufficiently that Big 6 brand-name reputation is a necessary foundation on which to achieve higher priced quality-differentiated audits based on industry specialization.
Francis, JR, Stokes, DJ & Anderson, D 1999, 'City markets as a unit of analysis in audit research and the re-examination of big 6 market shares', Abacus, vol. 35, no. 2, pp. 185-206.View/Download from: Publisher's site
Big 6 market shares based on aggregate national data have been used in prior research to infer market leadership and industry expertise, and to differentiate Big 6 accounting firms from one another. In this study it is demonstrated that further differences exist with respect to city-specific audit markets, both between firms and within the same firm across different city markets. The specific finding is that the national market leader is not the city-specific market leader the vast majority of time. Usefulness of the city-level unit of analysis is further demonstrated by re-examining the 1989 mergers creating Ernst & Young and Deloitte Touche. The primary effect of the Ernst & Young merger was to increase market shares in cities in which the pre-merger firms already had significant market shares, resulting in an increase in the number of cities in which the merged firm achieved top ranking. In contrast, the primary effect of the Deloitte Touche merger was an expansionof the number of city-level markets in which the merged firm had significant (though not leading) market shares. The findings of this study suggest that, in order to move beyond our current understanding, important audit research questions such as the reason for particular auditor–client alignments, the competitive nature of markets, audit pricing of reputations, and auditor reporting and independence issues should be investigated in city-level markets where audit contracting occurs and where Big 6 market shares (and presumably reputations) vary widely from city to city. Blackwell Publishers Ltd 1999.
Accounting accruals are managers' subjective estimates of future outcomes and cannot, by definition, be objectively verified by auditors prior to occurrence. This causes audits of high-accrual firms to pose more uncertainty than audits of low-accrual firms because of potential estimation error and a greater chance that high-accrual firms have undetected asset realization and/or going concern problems that are related to the high level of accruals. One way that auditors can compensate for this risk exposure is to lower their threshold for issuing modified audit reports, an action that will increase modified reports and, therefore, lessen the likelihood of failing to issue a modified report when appropriate. We call this auditor reporting conservatism and test if high-accrual firms in the United States are more likely to receive modified audit reports for asset realization uncertainties and going concern problems. Empirical results for a large sample of U.S. publicly listed companies support the hypothesis that auditors are more conservative, that is, more likely to issue both types of modified audit reports for high-accrual firms. Further analyses show that income-increasing accruals are somewhat more likely to result in reporting conservatism than income-decreasing accruals, and that only the Big Six group of auditors show evidence of reporting conservatism. These findings add to our understanding of the audit report formation process and the potentially important role played by accounting accruals in that process.
This study investigates if the use of a Big 6 auditor is increasing in the firm's endogenous propensity to generate accruals. High-accrual firms have greater scope for aggressive and/or opportunistic earnings management and therefore have an incentive to hire a Big 6 auditor to provide assurance that reported earnings are credible. For a large sample of NASDAQ firms over the period 1975-1994 we find that the likelihood of using a Big 6 auditor is increasing in firms' endogenous propensity for accruals. Even though Big-6-audited firms have higher levels of total accruals, we also find they have lower amounts of estimated discretionary accruals. This finding is consistent with Big 6 auditors constraining aggressive and potentially opportunistic reporting of accruals.
Two competing theories of initial engagement audit pricing are examined empirically. DeAngelo's (1981a) model predicts initial engagement discounts in all settings, while Dye's (1991) model specifically predicts discounting will not occur in settings where audit fees are publicly disclosed. Unlike the United States and most countries, audit fees are publicly disclosed in Australia. Our study examines initial engagement pricing in Australia during a time period when comparable U.S. studies report discounts of 25 percent (Ettredge and Greenberg 1990; Simon and Francis 1988). The Australian evidence finds initial engagement discounting only for upgrades from non-Big 8 to Big 8 auditors. Discounting for upgrades to Big 8 auditors is consistent with economic theories of discount pricing by sellers of higher-priced, higher-quality experience goods as an inducement to purchase when uncertainty about product quality is resolved through buying (experiencing) the goods. The evidence in our study is generally consistent with Dye's (1991) conclusion that public disclosure of audit fees precludes initial engagement discounting and the potential independence problems arising from such discounting.
Craswell, A, Francis, JR & Taylor, SL 1995, 'Auditor brand name reputation and industry specialisations', Journal of Accounting & Economics, vol. 20, no. 3, pp. 297-322.View/Download from: UTS OPUS or Publisher's site
The development of both brand name reputation and industry specialization by Big 8 auditors is argued to be costly and therefore to increase audit fees. For a sample of 1484 Australian publicly listed companies we estimate audit fee premia for Big 8 auditors. On average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big 8 auditors, and the Big 8 brand name premium over non-Big 8 auditors averages around 30%. These results support that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation.
I argue that our understanding of auditing as a normatively hermeneutical (interpretative) practice is deformed by the emergence of scientism and technocratic rationality in auditing, and, relatedly, that the auditor's understanding of auditing's judgmental character is displaced by the recent development of and reliance on highly structured audit methodologies. The result is that auditing no longer knows "itself" as a hermeneutical practice, with the further consequence that auditors may lose their capacity for moral and critical reasoning and hence for moral agency with respect to their actions qua auditor. For this claim I draw on Aristotelian arguments about phronesis or practical ethical reasoning about good action. The point is not that there is an earlier Golden Age of auditing to recover, but rather that the auditor's potentiality for realizing "the good" in auditing through phronesis is eroded by the technocratic deformity of practice. © 1994.
Edward Arrington, C & Francis, JR 1993, 'Giving economic accounts: Accounting as cultural practice', Accounting, Organizations and Society, vol. 18, no. 2-3, pp. 107-124.View/Download from: Publisher's site
This essay describes accounting as a practice that has no necessary relation to the institutions and practices of a professionalized élite known as "Accountants". We assume that the giving and receiving of economic accounts is a ubiquitous aspect of human experience, and we seek to explain its practice as one of donating intelligibility and understanding to what Etzioni (The Moral Dimension: Toward a New Economics, Free Press, 1988) describes as the "moral dimension" of economic experience. Appropriating arguments from the moral philosopher H. Richard Niebuhr, we outline that moral dimension in a way that culminates in the act of giving economic accounts. Then, through the arguments of Paul Ricoeur, we show how the hermeneutical horizon of the economic account can be explained as an analogue to the hermeneutics of speech and the hermeneutics of writing. These two opposed structures of discourse - speech and writing - form a theoretical typology adequate to the task of expanding our sense of what accounting is and what it is not in a way that accomodates the cultural ubiquity of the economic account. © 1993.
Edward Arrington, C & Francis, JR 1993, 'Accounting as a human practice: The appeal of other voices', Accounting, Organizations and Society, vol. 18, no. 2-3, pp. 105-106.View/Download from: Publisher's site
Anderson, D, Francis, JR & Stokes, DJ 1993, 'Auditing, directorships and the demand for monitoring', Journal of Accounting and Public Policy, vol. 12, no. 4, pp. 353-375.View/Download from: Publisher's site
Three monitoring mechanisms used for corporate governance are external auditing, internal auditing, and directorships. We consider the three mechanisms as endogenous to the firm and that each firm has an optimal set of monitoring mechanisms the specific mix of which is conditioned by the firm's production-investment attributes. Production-investment attributes are proxied by the degree to which firm value is determined by growth options versus assets-in-place. Empirical predictions are then made and tested concerning the total demand for monitoring from all three mechanisms, and substitutions or tradeoffs between 1) auditing and directorships and 2) external and internal auditing. The results support the hypotheses that overall monitoring expenditures decrease as the firm has relatively more assets-in-place, that relatively more auditing (compared to directorships) occurs for firms with greater assets-in-place, and that relatively more internal auditing (compared to external auditing) also occurs for firms with greater assets-in-place. Predictions are also made and tested concerning the general effect of firm size on the demand for auditing and directorships. The study helps to better understand the economic rationale for each monitoring mechanism and the role it plays in the efficient corporate governance of the firm. © 1993.
Arrington, CE & Francis, JR 1989, 'Letting the chat out of the bag: Deconstruction, privilege and accounting research', Accounting, Organizations and Society, vol. 14, no. 1-2, pp. 1-28.View/Download from: Publisher's site
There are signs on the intellectual scene that we are moving out of an era in the social sciences termed modernism - a belief that separating fact from value, truth from falsity, is just a matter of applying the right version of method. The purpose of this paper is to introduce accounting researchers to a movement termed "deconstruction" which reflects the postmodern view that modernism is an untenable philosophical position. Postmodern thought in general and deconstruction in particular demand self-reflection and abandon any desire to somehow "ground" knowledge in an external and transcendental metaphysic like the positivist's faith in observation or the Marxist's faith in historical determinism. Deconstruction differs from the academic tradition in which competing metaphysics attack each other with their different dogmas. Instead, it works from within a research paper (text), taking an author's own criteria for privileging his or her work, and then de-constructs the text by pointing out how the author violates his or her own system of privilege. In this study, we both introduce deconstruction and apply it to Michael Jensen's "Organization Theory and Methodology" [The Accounting Review(April 1983) pp. 319-339], a text which would suggest that positive theory in accounting should be privileged over other ways of knowing and writing accounting discourses. We show through deconstruction that positive theory and the empirical tradition are not entitled to the kind of epistemic privilege and authority that they have enjoyed in silencing other kinds of writings about accounting. Deconstruction, then, is a moment of resistance to the reductionism of modernism and its desire for knowledge closure. It resists metaphysical author[ity] and restores life to its original difficulty before our obeissance to metaphysics. © 1989.
The presence of scientific misconduct challenges the authority of science to regulate itself. This paper examines the basis for scientific self-regulation, a basis which forms an ideology of science that has served to publicly legitimate the authority and autonomy of science. It is argued that the conventional scientific narrative overstates quality control and, as a consequence, that there is a potential crisis of legitimation in science. In particular, the dichotomy that is constructed between (1) the structure of science and (2) the individual scientist, is seen as problematic and cannot be used to shift the responsibility for misconduct onto individuals while at the same time preserving the sanctity of the structure of scientific practices—the two are inseparable. This analysis helps to locate the data audit/quality assurance movement and to clarify its role within the structure of scientific practices. The continued public support and legitimation of science requires that the scientific community critically examine and strengthen the structure of scientific practices. The re-examination should not focus overtly on controlling individual scientists. Rather, given the communal nature of science, the appropriate focus is on the social units that constitute and control the structure of scientific practices: laboratories, institutions, scientific societies and journals, and funding agencies. The First International Conference on Scientific Data Audit Policies and Quality Assurance should be viewed, then, as the beginning of a serious and difficult conversation among scientists on how to improve quality control in science and achieve public accountability while at the same time retaining the vitality of scientific practices. © 1989, Taylor & Francis Group, LLC. All rights reserved.
FRANCIS, JR & WILSON, ER 1988, 'AUDITOR CHANGES - A JOINT TEST OF THEORIES RELATING TO AGENCY COSTS AND AUDITOR DIFFERENTIATION', ACCOUNTING REVIEW, vol. 63, no. 4, pp. 663-682.
SIMON, DT & FRANCIS, JR 1988, 'THE EFFECTS OF AUDITOR CHANGE ON AUDIT FEES - TESTS OF PRICE CUTTING AND PRICE RECOVERY', ACCOUNTING REVIEW, vol. 63, no. 2, pp. 255-269.
Francis, JR 1987, 'Lobbying against proposed accounting standards: The case of employers' pension accounting', Journal of Accounting and Public Policy, vol. 6, no. 1, pp. 35-57.View/Download from: Publisher's site
An analysis is made of lobbying against the FASB's 1982 pension accounting proposals. The proposed changes would have put a liability/asset on the balance sheet for unfunded/ overfunded pension benefits, reduced flexibility in the measurement of pension expense, and created the potential for yearly volatility in expense measurement. Olson's (1971) analysis, The Logic of Collective Action, suggests that firm-specific benefits of individual lobbying or collective action are proportional to firm size. If the benefits of accounting lobbying, avoiding adverse financial statement effects, are also proportional to firm size, then lobbying should be explained solely by firm size. However, for a sample of 218 lobbying firms and 582 nonlobbying firms, the empirical tests show that potentially adverse effects are cross-sectionally independent of firm size and that both firm size and the potential for adverse financial statement consequences explain the decision to lobby. © 1987.
Several hypotheses concerning pension funding strategy are tested in a cross-sectional regression model on a sample of 255 firms. Results are consistent with the following explanations: (1) finance incentives (tax benefits and financial slack) for high-level funding, (2) labor incentives for low-level funding, and (3) financial statement incentives relating to political costs for high-level funding and debt contracting costs for low-level funding. Pension funding strategy appears to be complex, involving tradeoffs between funding incentives. The nature of these interactions and tradeoffs remains to be clarified through future research. © 1987.
FRANCIS, JR & SIMON, DT 1987, 'A TEST OF AUDIT PRICING IN THE SMALL-CLIENT SEGMENT OF THE UNITED-STATES AUDIT MARKET', ACCOUNTING REVIEW, vol. 62, no. 1, pp. 145-157.
Francis, JR 1986, 'DEBT REPORTING BY PARENT COMPANIES: PARENT‐ONLY VERSUS CONSOLIDATED STATEMENTS', Journal of Business Finance & Accounting, vol. 13, no. 3, pp. 393-403.View/Download from: Publisher's site
Francis, JR & Stokes, D 1986, 'Audit Prices, Product Differentiation, And Scale Economies - Further Evidence From The Australian Market', Journal Of Accounting Research, vol. 24, no. 2, pp. 383-393.View/Download from: Publisher's site
Francis, JR 1984, 'The effect of audit firm size on audit prices. A study of the Australian Market', Journal of Accounting and Economics, vol. 6, no. 2, pp. 133-151.View/Download from: Publisher's site
The effect of audit firm size on prizes is a complex function of competition in the market for audit services, product differentiation, and scale economics to large firms. In this study, a competitive market is supported in Australia with product differentiation to Bif Eight accounting firms. Specially, Big Eight accounting firms have significantly higher audit prices than non-Big Eight firms. This results holds for 'large' and 'small' auditees. A test is also made of price cutting in the Australian market. Price cutting is defined as lower initial audit fees than continuing engagement fees for a comparable audit. Test results do not evidence price-cutting behavior by accounting firms. There is in fact weak evidence that initial audit fees are higher than continuing engagement fee levels. Higher initial fees suggest that accounting firms may recover at least some of the audit start-up costs immediately. © 1984.
David J. Williams and Keith D. Turpie criticize the methodology used by the present authors in the original paper (Pound and Francis, 1981). Part of this criticism is specious because it rests on the untested assertion that an alternative approach would be superior. The remainder of their Comment, however, does indicate that the exact purpose of the statistical tests was not explained as clearly as it should have been. Some elaboration is provided here concerning the tests and the manner in which the tests relate to the oligopolistic nature of the Australian accounting services market for publically traded corporations. Copyright © 1983, Wiley Blackwell. All rights reserved
Pound, GD & Francis, JR 1981, 'THE ACCOUNTING SERVICES MARKET: THEORY AND EVIDENCE: THE ACCOUNTING SERVICES MARKET', Journal of Business Finance & Accounting, vol. 8, no. 3, pp. 353-371.View/Download from: Publisher's site
Consolidated financial statements are typically taught by the use of a consolidated worksheet. Adjustments in journal entry form are made on the worksheet to derive a consolidated result. Students often have difficulty with the worksheet adjustment methodology because it focuses more on the adjustment rules than on the underlying consolidation objective. An alternative methodology based on algebra overcomes the deficiencies inherent in the worksheet approach. Algebra is suggested to be a rigorous and concise tool for use in teaching consolidation objectives and in solving consolidation problems. © 1979 Accounting and Finance Association of Australia and New Zealand
FRANCIS, JR & POLLARD, BM 1979, 'An Investigation of Nonaudit Fees in Australia: RECENT DEVELOPMENTS IN THE NONAUDIT SERVICES DEBATE', Abacus, vol. 15, no. 2, pp. 136-144.View/Download from: Publisher's site
DeFond, ML & Francis, JR 2005, 'Audit research after Sarbanes-Oxley', Auditing, pp. 5-30.
The scrutiny auditing received following Enron's failure and the accounting scandals at Worldcom and other companies provides compelling evidence that auditing matters and is important. What is unclear, however, is whether auditing was sufficiently "broken" in the first place to warrant the radical reforms and changes effected by the Sarbanes-Oxley Act of 2002 (SOX). While there have been some high profile corporate failures and accounting scandals, the number of demonstrated audit failures as evidenced by successful litigation or U.S. Securities and Exchange Commission (SEC) sanctions is quite small and approaches an annual failure rate of close to zero. In addition, our interpretation of the academic research suggests that many of the "solutions" embodied in SOX are not only unlikely to solve the profession's alleged problems; they may well have serious unintended negative consequences. So the disconnect is large between the scientific evidence on audit quality and institutional changes premised on the assumption that auditing is broken. This paper attempts to stimulate research into some of the important questions implicitly raised by SOX regarding the audit profession's potential failings. An outline of our primary observations and suggestions are presented in the paper's Introduction.
Francis, JR & Wang, D 2005, 'Impact of the SEC's public fee disclosure requirement on subsequent period fees and implications for market efficiency', Auditing, pp. 145-160.
This study investigates the impact of the U.S. Securities and Exchange Commission's (SEC) mandated public disclosure of audit fees on subsequent period audit pricing. Our theoretical model predicts that the initial public disclosure of fees will lead to greater precision and reduced dispersion (less variance) in subsequent period fees. Using the new fee disclosures in the first two disclosure years (2000 and 2001), we find significantly smaller variances in audit fees as predicted for 2001 relative to 2000. In addition, we document that those clients that were "overcharged" ("undercharged") in 2000 have significantly lower (higher) fees in 2001. However, there is greater downward fee adjustment than upward adjustment that suggests that clients have bargaining power over auditors. We also document that subsequent period fees appear to have completed the adjustment process by the second post-disclosure year (2002) with subsequent fees adjusting on average around 0.31 percent for each one percent of fee surprise in 2000. In sum, the evidence indicates that public disclosure has improved the precision of audit pricing (less variance) and this is a potentially more fundamental and lasting consequence of public disclosure, and transcends the SEC's original rationale, which was more narrowly premised on the conjectured adverse effect of nonaudit services on auditor independence.
Sterman, MB, Kaiser, DA, Mann, CA, Suyenobu, BY, Beyma, DC & Francis, JR 1993, 'Application of quantitative EEG analysis to workload assessment in an advanced aircraft simulator', Proceedings of the Human Factors and Ergonomics Society, pp. 118-121.
A fully portable quantitative EEG assessment system was used to evaluate workload in an advanced technology aircraft simulator. Air refueling and landing approach tasks were each performed at two difficulty levels in 15 Air Force pilots. Averaged and trended EEG spectral data were compared in the 8-12 Hz band to identify functional requirements for increased workload within and between tasks. A progressive suppression of 8-12 Hz activity at medial and right parietal sites accompanied increased workload in the air refueling task, while a sustained suppression at right and left temporal sites was associated with increased workload in the landing task. These findings suggest a potential electrophysiological index for workload. They also identify specific and differential cortical responses to visual integration in air refueling and working memory in ILS approach as primary correlates of the cognitive requirements for these tasks in these subjects.
FRANCIS, JR, TATE, D, KRALL, C & ENGINEERS, SP 1990, 'DEVELOPMENT OF A TRIPLE PARISON DIE HEAD FOR SELAR RB', PLASTICS IN THE ENVIRONMENT : YESTERDAY, TODAY & TOMORROW, pp. 751-753.
Between 1982 and 1987, the Australian audit market experienced an
increase in price competition resulting from changes in professional
rules governing advertising and marketing practices as well as the
introduction of widespread audit tendering. Because these changes
are generally assumed to have reduced any alleged ability of the Big
Eight to earn oligopoly profits, they provide an opportunity to test
alternative explanations for the observed Big Eight audit-fee
premia. If the market was not competitive, the Big Eight premium
may be the result of market imperfections and the changes in
professional rules could be expected to lead to a decline in the
premia. Alternatively, if the market was competitive and the premia
were attributable to product differentiation, it would be
sustainable notwithstanding deregulation of the market. The initial
analysis of panel data of publicly reported audit fees for a six-
year period suggests that reductions in real audit fees are more
marked among Big Eight clients and occur more quickly in response to
a change of auditor. However, using seemingly unrelated regression
it appears that structural adjustments were made to the audit-fee
process and the Big Eight premium did not decline over the six year
period. This result does not support allegations that Big Eight fee
premia result from a relatively uncompetitive audit market.