ABSTRACT The Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) ... more ABSTRACT The Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act 2004 (CLERP 9) added substantial new provisions pertaining to auditor independence, and followed in the wake of financial reporting scandals during 2000 to 2003. Many of the regulatory changes were framed in the earlier Ramsay Report, which drew on independence concerns raised in the academic literature. This review paper reviews Australian academic research investigating auditor independence, framed by our conceptual understanding of auditor independence, to assess what we have learned about the impact of CLERP 9 on auditor independence. Our review of Australian auditor independence research published post-CLERP 9 reveals little evidence of the impact of the regulatory changes on auditor behaviour (independence in fact) and perceptions (independence in appearance). We conclude there are substantial needs for further research on the impact of the CLERP 9 amendments on auditor independence and any enduring independence issues. We identify particular areas for future research that may better inform policy development and argue that the prospect of high-quality relevant research will increase if regulatory agencies, the accounting profession and audit practitioners engage more with academics in the research process. We identify several ways in which this might occur.
We would like to acknowledge the helpful advice and comments from Allen Craswell, ABSTRACT: Signi... more We would like to acknowledge the helpful advice and comments from Allen Craswell, ABSTRACT: Significant changes in public sector have impacted on the operations of government audit offices in several countries, notably, Australia, New Zealand, Canada, United Kingdom and the United States. Government audit offices are required to operate in a more contestable or market-like environment, where they are accountable for an efficient and effective provision of public sector audit. The purpose of this study is to compare the efficiency of in-house and contract-out arrangements to deliver financial audits in the public sector. This study examines the audit cost efficiency within the context of the current public sector arrangement at the state level in Western Australia (WA). The results for 178 public agencies in WA suggest that contract-out audits are more costly than in-house audits but the result is conditional on agency type.
Proceedings of the 35th Annual Hawaii International Conference on System Sciences, 2002
In the context of information retrieval, traditional collec- tion selection algorithms have been ... more In the context of information retrieval, traditional collec- tion selection algorithms have been widely studied. These algorithms utilize language models, a representation of the contents of each text collection over which selection is to be performed, but these language models cannot always be easily acquired. Query-based sampling is a technique by which these language models are discovered by inter- acting
This paper investigates the effects of ethical conflict and emotion on auditors" inventory judgme... more This paper investigates the effects of ethical conflict and emotion on auditors" inventory judgments. We predict that the presence of an ethical conflict in the form of a job offer from the client will lead individuals to value the client"s ending inventory less conservatively in relation to the absence of an ethical conflict (where there is no job offer). We also hypothesize that a more positive emotion will lead to less conservative inventory judgments compared to a more negative emotion. Additionally, we predict an interaction effect between ethical conflict and emotion so that positive-emotion individuals with a job offer will sign-off on inventory values that are less conservative relative to individuals in all other conditions. Conversely, we expect negative-emotion individuals without a job offer to sign-off on inventory values that are more conservative relative to individuals in all other conditions. We conducted a 2 x 3 full factorial experiment manipulating ethical conflict (presence/absence of a job offer from the client) and emotion (positive, neutral, and negative). After reading the case materials, participants were required to sign-off on an ending inventory value. The results confirmed our expectations. Implications for practice and future research are also discussed.
Fund managers can only exhibit selectivity through purchasing (selling) stocks that appreciate (d... more Fund managers can only exhibit selectivity through purchasing (selling) stocks that appreciate (depreciate) more frequently than expected from random occurrence, if stocks are incorrectly priced. We develop a method that can statistically identify fund managers that exhibit net, buy, and sell selectivity in their trades, as well as distinguish manager skill from fortuitous stock selection. Stock investor sentiment betas are calculated from the recently developed investor sentiment index, and used to indicate stock mispricing. We find that superior stock selection is concentrated in funds that hold high sentiment beta stocks; the major constituent of funds with the aggressive growth objective.
Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective v... more Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas.
ABSTRACT We use portfolio holdings to show that mutual funds preferentially trade stocks accordin... more ABSTRACT We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks’ sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.
ABSTRACT The 1997/98 financial crisis forced the Indonesian government to inject capital into sel... more ABSTRACT The 1997/98 financial crisis forced the Indonesian government to inject capital into selected banks, introduce deposit insurance and change capital requirements. This study investigates the relation between highly concentrated ownership and bank risk-taking using a sample of 52 insured private commercial Indonesian banks during the 1995–2003 period. For restructured banks, ownership concentration is positively related to overall risk, and negatively related to credit and liquidity risks, especially during the relaxed capital adequacy requirement period. Liquidity risk is reduced when the government and owners contribute additional capital, and credit risk is lowered as the government removes bad loans from problematic banks.
ABSTRACT We investigate how a fund's choice of which stocks to trade is affected by the s... more ABSTRACT We investigate how a fund's choice of which stocks to trade is affected by the stocks' contribution to the risk, and tracking error variance of the fund's portfolio. By identifying funds where orchestrated trading during a period leads to changes in the portfolio's risk and tracking error variance, we examine how this relates to the fund's return performance. We establish that risk-taking is relatively uncommon, and in contrast to previous studies, find that it is undertaken by funds that experienced above average performances. Further, we find that by increasing tracking error variance, funds achieve superior average returns.
ABSTRACT Effects of loan loss provisioning on lending behaviour of banks remain a major concern i... more ABSTRACT Effects of loan loss provisioning on lending behaviour of banks remain a major concern in policy circles in order to strengthen both bank stability and financial intermediation. From a sample of commercial banks in Asian countries over the 1992-2009 period, this paper attempts to identify factors contributing to the occurrence of a procyclical effect of loan loss provisions on loan growth in banking by differentiating loan loss provisions into discretionary and non-discretionary provisions. Our empirical results highlight that non-discretionary provisions have indeed a procyclical effect, as higher non-discretionary provisions reduce loan growth of banks. This procyclical effect holds in large banks but disappears in small banks. A closer investigation shows that bank market structure, economic development and institutional quality also affect the link between non-discretionary provisions and loan growth of banks. More specifically, higher bank competition, higher per capita income and higher rule of law mitigate the procyclical effect of non-discretionary provisions on loan growth in banking regardless of whether banks are large or small. These findings have therefore policy implications with regard to the adoption of the dynamic provisioning system for Asian banks.
ABSTRACT This study examines the impact the global financial crisis had on the value relevance of... more ABSTRACT This study examines the impact the global financial crisis had on the value relevance of GAAP and non-GAAP earnings. We adopt the Ohlson (1995) valuation and CAR models to test the value relevance and information content of alternative earnings measures. We use six different earnings measures comprising IBES earnings, Standard & Poor’s (S&P) core earnings, cash earnings, cash flows from operations, earnings from operations adjusted to exclude special items under GAAP and income before extraordinary items under GAAP. We draw our sample from US publicly traded firms between 2002 and 2010. Our sample is partitioned into Financial and non-Financial firms, and S&P 500 and non-S&P 500 firms. The results show that investors place greater value relevance on GAAP earnings during the GFC period relative to the pre-GFC period.
Asset securitizations increase audit complexity and audit risks, which are expected to increase a... more Asset securitizations increase audit complexity and audit risks, which are expected to increase audit effort. We predict auditors became more sensitive to banks' asset securitization risks in light of their role in bank failures and the financial downturn that commenced in 2007. Using bank holding company data from 2003 to 2009, we find that asset securitization risks (retained interests) are associated with bank audit fees during, but not before, the global financial crisis. This suggests auditors were previously less attentive to securitization risks before the GFC. The results are consistent with auditors previously treating securitizations as asset sales rather than recourse debt.
Journal of Multinational Financial Management, 2004
... as a signal of monetary policy change. Several alternative announcement effect hypotheses o... more ... as a signal of monetary policy change. Several alternative announcement effect hypotheses of why markets respond appear in the literature (eg see [Thornton, 1986 and Thornton, 1998]). The most popular argument is that ...
ABSTRACT The Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) ... more ABSTRACT The Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act 2004 (CLERP 9) added substantial new provisions pertaining to auditor independence, and followed in the wake of financial reporting scandals during 2000 to 2003. Many of the regulatory changes were framed in the earlier Ramsay Report, which drew on independence concerns raised in the academic literature. This review paper reviews Australian academic research investigating auditor independence, framed by our conceptual understanding of auditor independence, to assess what we have learned about the impact of CLERP 9 on auditor independence. Our review of Australian auditor independence research published post-CLERP 9 reveals little evidence of the impact of the regulatory changes on auditor behaviour (independence in fact) and perceptions (independence in appearance). We conclude there are substantial needs for further research on the impact of the CLERP 9 amendments on auditor independence and any enduring independence issues. We identify particular areas for future research that may better inform policy development and argue that the prospect of high-quality relevant research will increase if regulatory agencies, the accounting profession and audit practitioners engage more with academics in the research process. We identify several ways in which this might occur.
We would like to acknowledge the helpful advice and comments from Allen Craswell, ABSTRACT: Signi... more We would like to acknowledge the helpful advice and comments from Allen Craswell, ABSTRACT: Significant changes in public sector have impacted on the operations of government audit offices in several countries, notably, Australia, New Zealand, Canada, United Kingdom and the United States. Government audit offices are required to operate in a more contestable or market-like environment, where they are accountable for an efficient and effective provision of public sector audit. The purpose of this study is to compare the efficiency of in-house and contract-out arrangements to deliver financial audits in the public sector. This study examines the audit cost efficiency within the context of the current public sector arrangement at the state level in Western Australia (WA). The results for 178 public agencies in WA suggest that contract-out audits are more costly than in-house audits but the result is conditional on agency type.
Proceedings of the 35th Annual Hawaii International Conference on System Sciences, 2002
In the context of information retrieval, traditional collec- tion selection algorithms have been ... more In the context of information retrieval, traditional collec- tion selection algorithms have been widely studied. These algorithms utilize language models, a representation of the contents of each text collection over which selection is to be performed, but these language models cannot always be easily acquired. Query-based sampling is a technique by which these language models are discovered by inter- acting
This paper investigates the effects of ethical conflict and emotion on auditors" inventory judgme... more This paper investigates the effects of ethical conflict and emotion on auditors" inventory judgments. We predict that the presence of an ethical conflict in the form of a job offer from the client will lead individuals to value the client"s ending inventory less conservatively in relation to the absence of an ethical conflict (where there is no job offer). We also hypothesize that a more positive emotion will lead to less conservative inventory judgments compared to a more negative emotion. Additionally, we predict an interaction effect between ethical conflict and emotion so that positive-emotion individuals with a job offer will sign-off on inventory values that are less conservative relative to individuals in all other conditions. Conversely, we expect negative-emotion individuals without a job offer to sign-off on inventory values that are more conservative relative to individuals in all other conditions. We conducted a 2 x 3 full factorial experiment manipulating ethical conflict (presence/absence of a job offer from the client) and emotion (positive, neutral, and negative). After reading the case materials, participants were required to sign-off on an ending inventory value. The results confirmed our expectations. Implications for practice and future research are also discussed.
Fund managers can only exhibit selectivity through purchasing (selling) stocks that appreciate (d... more Fund managers can only exhibit selectivity through purchasing (selling) stocks that appreciate (depreciate) more frequently than expected from random occurrence, if stocks are incorrectly priced. We develop a method that can statistically identify fund managers that exhibit net, buy, and sell selectivity in their trades, as well as distinguish manager skill from fortuitous stock selection. Stock investor sentiment betas are calculated from the recently developed investor sentiment index, and used to indicate stock mispricing. We find that superior stock selection is concentrated in funds that hold high sentiment beta stocks; the major constituent of funds with the aggressive growth objective.
Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective v... more Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas.
ABSTRACT We use portfolio holdings to show that mutual funds preferentially trade stocks accordin... more ABSTRACT We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks’ sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.
ABSTRACT The 1997/98 financial crisis forced the Indonesian government to inject capital into sel... more ABSTRACT The 1997/98 financial crisis forced the Indonesian government to inject capital into selected banks, introduce deposit insurance and change capital requirements. This study investigates the relation between highly concentrated ownership and bank risk-taking using a sample of 52 insured private commercial Indonesian banks during the 1995–2003 period. For restructured banks, ownership concentration is positively related to overall risk, and negatively related to credit and liquidity risks, especially during the relaxed capital adequacy requirement period. Liquidity risk is reduced when the government and owners contribute additional capital, and credit risk is lowered as the government removes bad loans from problematic banks.
ABSTRACT We investigate how a fund's choice of which stocks to trade is affected by the s... more ABSTRACT We investigate how a fund's choice of which stocks to trade is affected by the stocks' contribution to the risk, and tracking error variance of the fund's portfolio. By identifying funds where orchestrated trading during a period leads to changes in the portfolio's risk and tracking error variance, we examine how this relates to the fund's return performance. We establish that risk-taking is relatively uncommon, and in contrast to previous studies, find that it is undertaken by funds that experienced above average performances. Further, we find that by increasing tracking error variance, funds achieve superior average returns.
ABSTRACT Effects of loan loss provisioning on lending behaviour of banks remain a major concern i... more ABSTRACT Effects of loan loss provisioning on lending behaviour of banks remain a major concern in policy circles in order to strengthen both bank stability and financial intermediation. From a sample of commercial banks in Asian countries over the 1992-2009 period, this paper attempts to identify factors contributing to the occurrence of a procyclical effect of loan loss provisions on loan growth in banking by differentiating loan loss provisions into discretionary and non-discretionary provisions. Our empirical results highlight that non-discretionary provisions have indeed a procyclical effect, as higher non-discretionary provisions reduce loan growth of banks. This procyclical effect holds in large banks but disappears in small banks. A closer investigation shows that bank market structure, economic development and institutional quality also affect the link between non-discretionary provisions and loan growth of banks. More specifically, higher bank competition, higher per capita income and higher rule of law mitigate the procyclical effect of non-discretionary provisions on loan growth in banking regardless of whether banks are large or small. These findings have therefore policy implications with regard to the adoption of the dynamic provisioning system for Asian banks.
ABSTRACT This study examines the impact the global financial crisis had on the value relevance of... more ABSTRACT This study examines the impact the global financial crisis had on the value relevance of GAAP and non-GAAP earnings. We adopt the Ohlson (1995) valuation and CAR models to test the value relevance and information content of alternative earnings measures. We use six different earnings measures comprising IBES earnings, Standard & Poor’s (S&P) core earnings, cash earnings, cash flows from operations, earnings from operations adjusted to exclude special items under GAAP and income before extraordinary items under GAAP. We draw our sample from US publicly traded firms between 2002 and 2010. Our sample is partitioned into Financial and non-Financial firms, and S&P 500 and non-S&P 500 firms. The results show that investors place greater value relevance on GAAP earnings during the GFC period relative to the pre-GFC period.
Asset securitizations increase audit complexity and audit risks, which are expected to increase a... more Asset securitizations increase audit complexity and audit risks, which are expected to increase audit effort. We predict auditors became more sensitive to banks' asset securitization risks in light of their role in bank failures and the financial downturn that commenced in 2007. Using bank holding company data from 2003 to 2009, we find that asset securitization risks (retained interests) are associated with bank audit fees during, but not before, the global financial crisis. This suggests auditors were previously less attentive to securitization risks before the GFC. The results are consistent with auditors previously treating securitizations as asset sales rather than recourse debt.
Journal of Multinational Financial Management, 2004
... as a signal of monetary policy change. Several alternative announcement effect hypotheses o... more ... as a signal of monetary policy change. Several alternative announcement effect hypotheses of why markets respond appear in the literature (eg see [Thornton, 1986 and Thornton, 1998]). The most popular argument is that ...
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Papers by Gary Monroe