Faculty from the Department of Accounting and Information Systems at the Wisconsin School of Business share key ideas from their research as featured on the Forward Thinking blog.
Assistant Professor Dereck Barr-Pulliam: Continuous Auditing, Separation of Roles Improve Decision-Making
As a former auditor and now an audit researcher, I’m interested in the influence of technology on auditor decision-making. Continuous auditing, for example, is a technology-driven method of gathering and aggregating audit evidence. Unlike traditional periodic audits of a division or a function within a company performed as infrequently as once every five years, continuous auditing enables near real-time assessments of decisions made at even the transaction level.
My research study focused specifically on internal auditors and how serving in their dual role as provider of assurance and consulting services affects the effectiveness of continuous auditing. Internal auditors work for an organization, and as a result, their knowledge about that organization is deeper than it would be for an external auditor who is hired from outside the company, such as accounting firms like Deloitte or KPMG.
A company’s internal audit function can be tasked with a dual role of assurance (e.g., reviewing financial statements, looking at compliance issues) and consulting (e.g., developing and assisting in the implementation of systems). In certain circumstances, a firm’s internal audit function could find itself in a conflict of interest if the unit in charge of implementing a new system for management (such as technology that enables continuous auditing) is the same one using that same technology in its audits. This is a very common practice when the technology is developed in-house versus purchased externally.
The study results showed internal auditors perceived earnings manipulation to be the least likely when continuous auditing was used and the internal audit function separated its dual roles. This suggests that the assurance role can benefit from the use of continuous auditing and that there are instances when the need for greater objectivity (by separating the dual roles) enhances the effectiveness of higher audit frequency.
Assistant Professor Dan Lynch: An Unexpected Contribution: How Pension Funding Rose After the Tax Cuts & Jobs Act of 2017
Signed in December 2017, the Tax Cuts & Jobs Act of 2017 (TCJA) was the biggest overhaul of U.S. tax code since the Tax Reform Act of 1986. One of the major changes was a drop in corporate tax rate from 35 percent in 2017 to 21 percent in 2018. This drop gives firms a clear incentive to step up their tax deductions in 2017.
One area where firms can receive tax deductions is with traditional defined benefit pension plans. Historically, these pensions have been highly underfunded. In 2016, the aggregate unfunded liabilities for 100 of the largest corporate pensions totaled $320 billion. Not surprisingly, the federal government encourages companies to contribute more to defined benefit plans through minimum funding requirements.
Our study questioned whether the TCJA affected defined benefit pension contributions in 2017. We used 1,570 observations from 414 calendar-year firms with pension obligations for the period of 2014 to 2017. Since Generally Accepted Accounting Principles (GAAP) rules require that firms disclose how much they plan to contribute to the pension fund a year in advance, we were able to define the difference between firms’ predicted amount and the amount they actually contributed as the unexpected pension contribution.
We found that unexpected pension contributions increased by nearly 23.8 percent and, aggregated across our sample, equated to roughly $6.6 billion in unexpected contributions in 2017.
Professor Ella Mae Matsumura: With Apparel Industry Suppliers, It’s Executional Skills That Drive Performance
Drawing on work from John K. Shank (1989) regarding the “scale, scope, and complexity” of structural decisions, Matsumura and Jason Schloetzer of Georgetown University examine how a supplier’s structural decisions and executional skills affect its customer concentration, and in turn, performance.
Executional skills are the “day-to-day operations” of a firm, such as workforce efficiency or building in improvement and feedback processes. Suppliers with a concentrated customer base—with “customer” referring to the retailer in this instance—might receive the bulk of their revenue from a handful of retailers they supply products to, rather than one that is spread across many different customers.
Using suppliers’ required disclosures of major customers and data from the Compustat Fundamental Annual table, a database that lists annual company income and other metrics, Matsumura and Schloetzer looked at 55 U.S. apparel suppliers for the period 1998-2014. They defined six structural decisions apparel suppliers were making based on the 491 firm-year observations they reviewed across the 55 companies.
Matsumura and Schloetzer’s study finds that while strategic decisions influence customer concentration, they were shown to have little effect on supplier performance. Suppliers’ financial and operational executional skills, on the other hand, were the drivers behind supplier performance—an important consideration for a more in-depth understanding of the relationship between performance and concentrated customer base.
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