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Despite reservations voiced by the scientific community, the perception that combining non-audit services (NAS) and auditing for the same client may be largely responsible for recently observed accounting and audit failures seems to have gained momentum, and currently, it appears that any auditor offering NAS to auditees automatically endangers ‘independence in appearance’. This chapter addresses the question of whether such opinions can be justified by existing research on the issue of combining NAS and auditing. While there are already some reviews of former empirical papers, there is essentially no survey of the related theoretical research and the more recent empirical work. Here, the focus is mainly on the theoretical side, which is critically reviewed and somewhat extended in Section 2 of the chapter, while Section 3 reviews and interprets some new empirical work in the light of the theories presented before. The final section presents conclusions and directions for further research; the conclusion is that there is no evidence that a simultaneous offering of auditing and NAS to the same client unequivocally and systematically impairs auditor independence, and that, in fact, there are instances where NAS are likely to enhance the quality of the audit because they increase the auditors’ capital that is at stake.

Accounting firms and auditors play a critical role in delivering transparency to capital allocation decisions involving public corporations. Although the source of financial information is the company itself, a public company in the US is required under federal securities laws to retain an independent accounting firm to audit its accounts and to certify that the company’s financial statements “present fairly, in all material respects, the financial position of the company in accordance with generally accepted accounting principles applied in the United States of America”. This chapter traces the evolution of the accounting industry, how the accounting profession operated in the late 20th century, leading to its virtual collapse in the early 2000s, and the regulatory reforms and measures aimed at assuring its recovery.

Investors, creditors, government officials, and others require information to evaluate companies’ economic position, performance, and prospects. This chapter examines the usefulness of financial accounting statements and their limitations in providing this information, particularly measures of economic values. The essential features of the traditional market-transaction, cost-based accounting system, and the benefits and costs of fair-value accounting and of audits and attestations by independent public accountants (IPAs) are described and evaluated.

Standard setters are attempting to structure a single set of global accounting standards. This chapter examines the costs and benefits of such convergence and finds that it is not a viable solution. It outlines a system of “constrained competition” in standards, within which a small set of high-quality standards would offer the most feasible and flexible setting that would cope with increasingly global capital markets. Three alternatives of such competition — among countries, between exchanges, and competition at the firm level — are outlined and discussed. The chapter also discusses harmonization of audit oversight and enforcement worldwide, and stresses that quality assurance is more important than the convergence of accounting standards.

Following a description of the ways that standards benefit users and producers of financial statements, this chapter considers alternative organizational procedures for setting those standards. The benefits and costs of having standards determined by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) rather than by professional accountancy organizations are analyzed. Principles-based versus rules-based accounting standards are also examined.

This chapter reviews the rules governing financial disclosure by corporations in the United States. It begins with an overview of state regulation (which is still in force) and then turns to federal regulation, which began in 1933. The public securities markets are described and the Securities and Exchange Commission’s (SEC) rules governing financial disclosure of public corporations are outlined. Standard setting by the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and investor protection and corporate governance are considered next. Current issues such as the scope of auditing practices, auditor independence, audit failures, principles- versus rules-based accounting standards, and convergence of U.S. and international standards are discussed.

The EU has for a long time strived to harmonize the financial disclosure of companies headquartered in the EU member states. However, financial reporting in these states continues to differ, reflecting the ongoing role of national accounting traditions and regulatory structures. This chapter surveys both the areas where rules have been harmonized and those where national differences remain. The discussion highlights many of the issues that likely to arise in efforts to achieve harmonized rules on a global scale.

The objective is to discuss the merits of analytical models in financial accounting research. Analytical models are particularly useful for gaining insights into situations that are characterized by strategic interactions of various decision-makers with information asymmetry and conflicting interests. Describes the common model structures used in this kind of research, typical assumptions, and major results of the models. Provides examples including aggregations, conservatism, earnings management, and auditing as a basis for an evaluation of the costs and benefits of analytical research. A major advantage is the ability to derive results that run counter to common wisdom, thus enhancing our understanding of real phenomena as well as identifying the conditions under which certain results hold or do not hold. Finally, it considers robustness issues and empirical testing of analytical results, and policy recommendations based on them.

This chapter introduces the concept of the strategic audit. This begins with the identification of the company's distinctive capabilities and the subsequent selection of markets that can make the best use of them. Finally, it is recognized that for these distinctive capabilities to create true competitive advantage, they need to be both sustainable and their added value appropriable by the company.

This chapter introduces the concept of the strategic audit. It begins with the identification of the customers’ needs and characteristics, while, by understanding the value chain, costs, returns, and the opportunity to add value are explored. The chapter undertakes this exercise for four European industries—Italian knitwear, airlines, retail banking, and champagne.

Following the understanding of the market, the strategic audit focuses on the firm itself. Using the examples of British Airways and Benetton, this chapter illustrates how a deep understanding of the firm's distinctive capabilities and strategic assets defines its corporate strategy and describes the business it should be in.

This chapter discusses how economists define discrimination and how it can be measured in the labour market. The primary method is called the ‘decomposition method’, which focuses on the gap in average wages/earnings between social groups. Through an econometric technique, the researcher decomposes the wage gap between groups in order to determine how much of the gap is explained by differential group characteristics or endowments and how much is due to discrimination. The chapter also discusses the critiques of this method and examines additional new techniques, such as correspondence and audit studies, which are being used to gauge the extent of discriminatory attitudes and their manifestations during economic interactions.

This chapter reviews the findings of published surveys of corporate executives showing the project evaluation methods used in capital budgeting. The chapter compares the findings to the theoretically correct methods described and recommended in the academic literature. The goals are to identify past trends, ascertain current practices, and evaluate the existing gap between theory and practice. A major area of investigation concerns the use of various capital budgeting techniques (e.g. net present value, internal rate of return, and payback period). Other important areas of investigation include measuring and adjusting for project risk, using capital rationing, selecting hurdle rates, and conducting post audits. Additional survey research topics discussed include how firms measure project benefits, how firm goals relate to capital budgeting methods used, how firms consider future inflation in capital budgeting analysis, the use of real options, and methods of estimating residual value. While most studies discussed here focus on large U.S. firms, many focus on non-U.S. firms, multinational firms, multi-division firms, and small firms.

The author traces the common roots of fiscal watchdogs, namely, insufficient transparency in public finances. Traditionally, this problem has been dealt with by public audit institutions around the world. However, more recently, the aspiration of citizens in democratic societies, on the one hand, and the pressures from financial markets—in the light of the current urge in public indebtedness—on the other, have led to the establishment of a new generation of independent fiscal institutions entrusted with real-time monitoring of the soundness and consistency of fiscal policy. The relevance of these institutions is further underscored by initiatives in the European Union toward strengthening economic governance in member countries. The chapter provides a panoramic view of the volume and identifies some broad patterns and implications. Finally, it highlights the evolution of good practices that recently culminated in the OECD principles on independent fiscal institutions.

This chapter addresses tax-system instruments that are generally ignored in standard analyses, such as procedures for ensuring compliance, audit rates, penalties and reporting requirements. These policy instruments include tax withholding, information reporting, and the assignment of remittance responsibility as well as public disclosure of tax liabilities and providing information to taxpayers. Recognizing these instruments highlights the central role in tax systems played by firms, and the importance of market transactions and the problems posed by the cash economy for tax enforcement. The chapter concludes by speculating on whether tax-system variation can explain the striking positive cross-country correlation between tax levels and per capita income.

This chapter considers some examples of how introducing administrative and compliance costs modifies and enriches formal normative analysis of the standard set of tax instruments. Examples covered include commodity taxation with compliance costs, optimal commodity tax enforcement, the optimal size of a tax collection agency, optimal audit rules, and optimal redistribution when avoidance behavior is heterogeneous.

This chapter teases apart the information shortfalls in the philanthropy market for individual donors. Donors that want to use the CART principles to evaluate nonprofit organizations have little information to go on to do so. Few organizations put forward genuine measures of impact. And the rating information that is out there is often misleading. Retail donors are left to sway back and forth in the wake of informal impressions, nonprofit-driven public relations, isolated tales of success, and fortuitous personal connections. The chapter argues that existing nonprofit rating systems do not address the core problem since they typically focus on transparency, overhead, or other factors that may or may not be correlated to actual program impact. ImpactMatters, co-founded by Goldilocks co-author Dean Karlan, uses the CART principles to develop “impact audits” that evaluate nonprofits’ quality of impact evidence, cost to create impact, quality of monitoring systems, and extent of learning and iteration.