Anecdotal evidence suggests that corporate boards often use information concerning a CEO’s social capital in the selection decision as it is an important heuristic for her ability. Based on prior evidence it is assumed that CEOs with high social capital will improve firm value. However, a CEO can use her social capital in ways that are detrimental to the firm. We attempt to address this conundrum by firstly examining whether the social capital of a new chief executive officer (CEO) affects firm value and secondly whether the conditions faced by the firm influence the relation between the new CEO’s social capital and firm value. We present evidence that the new CEO’s connections have a significantly positive association with the hiring firm’s market value. We also find that CEO social ties have a stronger impact on firm value when firms face greater strategic uncertainty and have an independent board in place. Our supplemental tests also show that the most valuable connections are ‘advice networks’ and cross-industry connections. Furthermore, we find that well-connected CEOs tend to spend more on R&D projects, make greater SG&A investments and generate higher gross margins. Firms also reward CEOs for their social capital.

Auditor-client negotiations typically arise in the context of the incentives and monitoring of the parties involved (Gibbins et al. 2001; Gibbins et al. 2007), yet we know little about how these contextual factors influence negotiation judgments from the manager's perspective (Brown and Wright 2008; Salterio 2011). We posit that monitoring mechanisms through the negotiations process will affect managerial opportunism. Specifically, we posit that a strong audit committee overseeing financial reporting bolsters the bargaining power of the auditor (Ng and Tan 2003; Brown and Wright 2011) and thereby constrains managerial opportunism. Further, we posit that a contentious past relationship with the auditor results in less opportunistic judgments by managers, who are motivated by a desire to come to a negotiations resolution (Gibbins et al. This is in contrast to auditors, who employ more competitive strategies when faced with a contentious client (Brown-Liburd and Wright 2011), which is consistent with the auditors' professional mandate for conservatism in their pre-negotiation judgments (Antle and Nalebuff 1991). In addition, we examine whether greater opportunities to act on managerial incentives or heightened scrutiny from a variety of monitors impact opportunistic behavior in the IPO-year (Lo 2008) relative to the pre-IPO period. To test our hypotheses we use a 2 x 2 x 2 experimental factorial design with audit committee strength (strong or weak) and past auditor relationship (contentious or cooperative) manipulated between subjects, and management incentives (IPO-year) manipulated within subjects. Participants in the experiment are 137 experienced CFO/Controllers who provide pre-negotiation judgments concerning an inventory write-down issue. The findings indicate that participants propose and expect a larger inventory write-down when the audit committee is strong, when faced with a contentious past auditor relationship, and in the presence of both of these conditions. These effects are even more pronounced in the IPO-year. The results are consistent with strong monitoring mechanisms constraining client opportunities to act on their incentives to manage earnings. 1 INTRODUCTION We examine whether incentives for management and opportunities from monitoring influence managers' judgments in resolving financial reporting issues. Auditor-client negotiations typically arise in the context of both auditor and management incentives (Gibbins et al. 2001; Gibbins et al. 2007), yet prior accounting research has largely focused on the negotiation judgments from the auditor's perspective and less so from the client's perspective 1 Examining the manager's perspective is important since they prepare the financial statements and thus essentially make the first offer in audit negotiation. …

The Sarbanes-Oxley Act significantly expanded the responsibilities of auditors, management, and corporate governance actors such as the audit committee and the board. This interview-based research extends an earlier study conducted in 1999-2000 by examining auditors' experiences in working with corporate governance actors in the post-Sarbanes-Oxley era. Thirty audit managers and partners from three of the Big 4 firms participated in the study. In line with regulatory reforms and a monitoring perspective, auditors indicate that the corporate governance environment has significantly improved in recent years with audit committees that are substantially more active and diligent and possessing greater expertise and power to fulfill their responsibilities. In turn, auditors report relying to a greater extent on corporate governance information in planning and performing the engagement. However, results also suggest that at least some changes in governance may have been more form than substance. For example, of some concern, many auditors indicate that management is still seen as a key driver in determining auditor appointments and terminations. Further, management continues to be seen as a major actor in the corporate governance mosaic. Our results indicate that in many instances audit committees play a passive role in helping to resolve contentious financial reporting issues with management, with respondents indicating that the auditor and management often try to resolve issues before they come to the attention of the audit committee. Further, the requirements for CEO and CFO certification are reported by auditors to have a positive effect on the integrity of financial reporting. Our results are largely congruent, except that auditors indicate management has a major influence over the hiring and termination decisions of the external auditors.

The objectives of this case are: (a) to alert students to the importance of non-financial information in the audit process; (b) to develop students’ ability to search for relevant financial and non-financial information in the audit planning process; and (c) to emphasize the importance of resisting the natural tendency to over-rely on financial information when conducting the financial statement audit. Students are asked to consider both financial and non-financial information when evaluating a client’s account balances. The client is in the waste business where there are a number of market, regulatory, and political factors that may affect the valuation of different accounts. Students are also directed to consider the importance of non-financial information in the integrated audit mandated by PCAOB Standard 5 and in fraud detection. The case can help students learn to explicitly consider non-financial information and understand the significance of integrating such information with financial data. The case is suitable for use in undergraduate or graduate auditing and assurance courses.

Auditors participating in a survey identified oversight of financial reporting and the external audit process, and ensuring quality internal controls, as the most important functions of effective audit committees. Financial literacy or expertise, independence, and a strong commitment to perform the job effectively were noted as important attributes. The results also suggest that although audit committees have enough power to confront management on contentious issues, they are not very effective in helping to resolve financial reporting disputes. Management was identified as a key influence in affecting the nature, extent, and quality of communication between the auditor and the audit committee. Most auditors believe that it is not important for each member of the audit committee to be an expert, but it is important that they are financially literate.

ABSTRACT Our study provides insights into the impact of the Sarbanes Oxley Act (2002) on the financial reporting and auditing process from the experiences of US directors. The study involved interviewing 22 directors and, therefore, provides an important perspective on the impact of the legislation on the management,– external auditor – audit committee,relationship from the experiences,of audit committee,members,and,members,of the board. The research corroborates and extends that of Cohen et al. (2008), who interviewed auditors, another important party in the financial reporting process, on this issue. Further, this study complements,Beasley et al. (2007) who,interviewed audit committee,members,on the audit committee,oversight process. Using a semi-structure d questionnaire adapted from Cohen et al. (2008) we find overall that directors’ experiences indicate the legislation has had a positive impact on the strength of the relationship between,the audit committee,and the external auditor, and, similarly, the monitoring role of the board. The strength of this relationship is integral to maintaining a proper balance of power in the management,–