Advanced Auditing

In: Business and Management

Submitted By makezah
Words 18293
Pages 74
THE JOURNAL OF FINANCE • VOL. LXIV, NO. 3 • JUNE 2009

Do Stock Mergers Create Value for Acquirers?
PAVEL G. SAVOR and QI LU∗

ABSTRACT
This paper finds support for the hypothesis that overvalued firms create value for long-term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We solve this endogeneity problem by creating a sample of mergers that fail for exogenous reasons. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer-target combination would have earned higher returns. None of these results hold for cash bids.

THE LATE 1990S WITNESSED a large mergers and acquisitions wave. Many transactions involved equity as the mode of payment (Andrade, Mitchell, and Stafford (2001), Holmstrom and Kaplan (2001)), and this equity was usually very richly valued by historical standards. The positive correlation between market valuation and merger activity has also been documented in other periods (Martin (1996), Verter (2002)) and is especially strong for stock deals (Maksimovic and Phillips (2001)). One interpretation of this evidence is that managers try to time the market by paying with stock when they believe it is overvalued. Recently, a number of papers formally recognized this link between possible mispricing and acquisition activity. Shleifer and Vishny (2003) propose that overvalued firms engage in stock-financed acquisitions in order to obtain hard assets at an effective discount. This discount comes at the expense of the target’s long-term shareholders, so their theory relies on different stock price performance horizons for the managers of the two involved firms.1 Rhodes-Kropf
∗…...

Similar Documents

Advanced Auditing

...standards high. References Armstrong, M. Ketz, J.E. & Owsen, D. (2003). ‘Ethics education in accounting: moving toward ethical motivation and ethical behavior’. Journal of Accounting Education, vol. 21. P. 1-16. Campbell, D. (2008). ‘Ethical Decision making’. Retrieved from http://www2.accaglobal.com/pubs/students/publications/student_accountant/archive/sa_mar08_campbell.pdf IFAC (2006). ‘Approaches to the Development and Maintenance of Professional Values, Ethics and Attitudes in Accounting Education Programs’. International Accounting Education Standards Board, Information Paper, August 2006. Retrieved from http://www.accountingweb-cgi.com/whitepapers/approaches_to.pdf Knapp, Rittenberg, Johnstone, Gramling (2011) Custom Edition. Advanced Auditing. South-western/ Cengage Learning: USA...

Words: 1508 - Pages: 7

Ac503 Advanced Auditing Unit 2 Case Study

...Unit 2: Case Study - The North Face, Inc. Julia Harmon AC503 – Advanced Auditing Unit 2: Case Study – The North Face, Inc. Should Auditors insist that their clients accept all proposed audit adjustments, even those that have an “immaterial” effect on the given financial statements? Defend your answers. The auditor would not be able to insist that their client accept all proposed audit adjustments. The auditor must advise management, the Board of Directors and the audit committee of all proposed adjustments and advise them of what the effect of the adjustments will have on the financial statement. The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item. (SAB 99). If after determining if the omission or misstatement is material, then the auditor should insist the adjustment be made. If the client refuses, then the auditor should issue a qualified opinion. Should auditors take explicit measures to prevent their clients from discovering or becoming aware of the materiality thresholds used on individual audit engagements? Would it e feasible for auditors to conceal this information from their audit clients? No the auditor should not take explicit measures to prevent their clients from discovering or becoming......

Words: 458 - Pages: 2

Auditing

...Introduction The purpose of auditing is increasing the confidence of people who want to do investment. In order to check the financial statement of listed companies, auditing become more and more important in the society. The people cannot know more the situation about listed companies, so they use auditors’ report to think their investment. However, with more and more scandals about auditing, many people think whether external auditors’ reports provide information to investor that serves the public interest under the current regulatory environment. The public interest First, it is important to know what the public interest is. In order to know the public interest better, we can understand it separately. The public represents social that is abstract concept. It conflicts the private that is specific and certainly. Social is universality and uncertainty. Its function is adjective interest. The International Federation of Accountants (IFAC) defines the public interest as ” The net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy.” It means that everyone in the society may obtain the interest from all society in relation to any action, decision or policy. The auditing profession is relation to the benefit to the society. The public interest from auditing profession is like the responsibility of this profession. This interest is not direct interest, but the auditors will use their behavior to show......

Words: 2169 - Pages: 9

Advanced External Auditing 2 Comment Sheet

...Sheet Course Name: Advanced External Auditing (AU2) Assignment: 1 Modules: 1 and 2 General Comments If you have any comments or suggestions for improvements of these marker’s comment sheets, please forward them to your marker or CGA-BC. Your feedback is important to us. PLEASE NOTE FOR SUBSEQUENT ASSIGNMENTS AND EXAM PURPOSES When answering assignment (and examination) questions, students should carefully read the requirements of the question. Marks are awarded for each valid point included in your answer. The specific terminology of the question is important. If the question asks for items to be “listed”, it is sufficient to list the items without explanation or elaboration. If, on the other hand, the question requires that items be described, a mere listing will not result in full marks being awarded. In general, marks are awarded for each valid point made and you should be guided by both the wording of the question and the number of marks available in deciding how many points are required and how much detail is needed. To receive full marks, it is necessary to provide enough detail (as required by the question) about sufficient points (as determined from the number of marks available). In answering an assignment question, review the lesson notes and required readings carefully and attempt to include as many valid points as possible in your solution. Advanced External Auditing (AU2) is the second course in external auditing and other......

Words: 2685 - Pages: 11

Advanced Auditing

...reports. This has been proven by the fall of many multinationals and the audit pioneers, Andersens. This is one of the causes of audit fraud and it is also seen that as the auditors face an enormous challenge as they enter the twenty-first century, they should be willing to change their attitudes towards their clients. Professionalism should be in the forefront, and an overhaul in the concept of “true and fair” could probably be the solution to harmonisation of the economy. Research limitations/implications – This paper lacks statistical data on the views of the authors. It is based purely on secondary data. Practical implications – Provides awareness to the auditors, corporations and general public on the necessity to revamp the existing auditing practices. This can help the auditors not only to be professionals, but also to be seen as professionals. Originality/value – This paper provides scope for research in this area to identify whether the overhaul concept is acceptable. If yes, what should the new concept be? If no, what is the solution to the existing public outcry? Keywords True and fair view, Auditors, Fraud, Reports Paper type Research paper The changing role of the auditors 249 Introduction The concept of “true and fair view” (TFV) is well known to accountants as well as auditors. It has been the fundamental basis of audited accounts for many years. The legal requirement to show a TFV first appeared in the UK Companies Act of 1948. Since the issue of Statement......

Words: 12579 - Pages: 51

Auditing

...associated with professionally standard auditing (Olagunju, 2011, pp.85). In other to maintain the utmost standard for the accounting profession, independence is seen as being free from control or pressure and not allowing situations which would tend to weaken objectivity or create personal preconceived notions (Porter and Simon et al., 1996). Audit improves the trustworthiness of the financial statements giving it sensible assertion from an independent source that the financial statements is true and fair in agreement with accounting standards (Olagunju, 2011, pp.85-86). The next section of this essay provides detailed information on how value is added to the financial statement when the auditors’ audit with independence whilst appraising how the accounting profession has or is reacting to auditor independence. While the last section will evaluate the risks or threats to independence and explain ways of mitigating identified risks. Value of Independent Auditing on Financial Statements The significance of audit services will be impaired when independence is absent (Sweeney, 1992); therefore, an uncompromised independence gives a better quality audit to the financial statements (Baber et al., 1995). In addition, if an auditor is independent, the motivation to do a better audit is not undermined as the auditor will report misstatements (Pike, 2003). Stewart (1994) in Porter and Simon et al., (1996), likened independence to the “corner stone of auditing”. This means if the......

Words: 2487 - Pages: 10

Advanced Auditing Final Review Case Note

...Gave himself a corporate loan and treating it as his own business and piggy bank * Lack of owners’ oversight which created a one man show * Rationale * One man show, saving the company a lot of money, working so hard, so should get the money to be compensated * Red flags: * Expensive reports: Client is people online, not targeting big sales but targeting individual consumers so doesn't make sense to take them out for dinner * Consultant fees is high for a small company: potentially having agreement with vendor * Paying himself a luxury vehicle on behalf of the company * Other suspicious behavior: Not hiring an accountant and wanting to do everything himself, just want to be done with auditing and just want to do vouching, etc. * Procedures to validate the auditors’ concerns: * Confirmation from those clients he took out to dinner, have phone call to ensure the dinner actually happened * Ask for invoices and receipts: if he bought the laptops and office supplies, where are they in the company and who is using them * Make sure owners are aware the compensation he is getting Switch? * No * Should stay with audit especially since the owners are not involved in the business much, and that Tristan might have something up in his sleeves * Therefore it would be helpful to have another set of eyes...

Words: 1267 - Pages: 6

Question 9-37 Advanced Auditing

...Solution to question 9-37 i) The risks associated with the current method of accounting at Frankincents are as follows: The owner Gaboria Frank relies solely on Norma a part time bookeeper, that works two days a week with minimal or no supervision. The owner trusts the bookkeeper completely and the firm does not encourage control practices such as separate passwords and supervision Norma has developed the systems all by herself and is the only one who understands the nature of the software used. As the business owner, Gaboria should be aware of the systems put in place and should also consult his accountant before the implementations of the systems Only Norma is responsible for the complete accounting function and its activities, such as accounts receivable, disbursements, payroll, etc. There is no segregation of duties, and even though in small firms segregation of duties is not always possible, there is no override of control by the owner, giving the incentive and the opportunity for fraud. Additionally, Norma being a part-time employee may have the incentive and pressure to manipulate and increases the risk for fraud. ii) Being a small business it is not always possible to have segregation of duties and the owner, Gaboria Frank should personally perform operational and clerical activities such as accounts receivable, cash disbursements and payroll. This will give stronger control on activities that have high inherent risk and lower the opportunity and risk of fraud...

Words: 360 - Pages: 2

Advanced Auditing

...IFAC Part A – * A professional accountant shall comply with the following fundamental principles: Integrity – to be straightforward and honest in all professional and business relationships Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments Professional Competence and Due Care – to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties Professional Behavior – to comply with relevant laws and regulations and avoid any action that discredits the profession Threats and Safeguards Threats Self-interest threat – the threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behavior Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment......

Words: 2125 - Pages: 9

Case #1 - Advanced Auditing

...An anonymous caller seeks help from her former university professor. The caller thinks that the company that he is working for only three and one-half month is committing a fraud. The main reason that the caller is worried is because he is the controller of the company and he has to sign the quarterly statement of his privately-held company. Those quarterly statements are for the bank that his company has the line of credit, those statements have to look good so that the bank approve their credit. There are two big problems in the case. The first one is the as he started on the company he had to sign the closing of the prior fiscal year. If the fraud was being made in the last year, he could be treated like an accessory to the fraud because he signs the statements. The other problem is that the CEO and CFO, the highest in command, are the ones that are committing the fraud. I would recommend that the caller has to report the fraud to the FASB. The Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting that governs the preparation of financial reports by nongovernmental organizations. Those standards are officially recognized as authoritative by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants. If the caller continues to work in the company he could get caught committing the fraud and could go to jail. There are two risks if...

Words: 634 - Pages: 3

Advanced Auditing

...Critical Success Factors * The company’s success also depends on management’s ability to recognize and react to changes in market conditions and consumer preferences. * The company’s success is highly dependent on the personal efforts and abilities of its current executive officers * The company relies on its chairman of the board, president and chief executive officer, chief financial officer and treasurer, and its chief operating officer. * The loss or prolonged absence of the services of one or more of these individuals could have a significant adverse effect on the business and its financial condition operating results, and cash flows. * The company’s continued growth also depends on its ability to attract and retain experienced management personnel Critical Risk Factors (p. 40) * Intense price competition resulting in then, possibly negative, margins on sales of manufactured homes * Hence, TMH’s income is driven by its customer financing activities * Many of TMH’s customers are borrowers with limited or troubled credit histories – “subprime” borrowers * Subprime borrowers default at higher rates during economic downturns * Default risk is a significant business risk for TMH * Changes in general economic conditions * Levels of consumer confidence * Interest rates * Housing supply and demand * Employment trends * Inventory levels * Availability of retail (consumer) financing *......

Words: 297 - Pages: 2

Case Advanced Auditing

... PENYELESAIAN AUDIT Sebagai bagian dari tahap IV proses audit, auditor mengevaluasi bukti yang mereka peroleh selama tiga tahap pertama dalam audit untuk menentukan apakah mereka mesti melaksanakan prosedur prosedur tambahan untuk tujuan-tujuan penyajian dan pengungkapan. Auditor melakukan pendekatan untuk memperoleh bukti untuk tujuan audit yang berkaitan dengan transaksi dan saldo. · Melaksanakan prosedur untuk memahami pengendalian yang berkaitan dengan tujuan penyajian dan pengungkapan sebagai bagian dari prosedur penilaian resiko. · Melakukan uji pengendalian yang berhubungan dengan pengungkapan ketika penilaian awal atas resiko pengendalian berada di bawah maksimum. · Melaksanakan prosedur substantive untuk memperoleh assurance bahwa semua tujuan audit dicapai untuk informasi dan jumlah yang disajikan dan diungapkan dalam laporan keuangan. TABEL 24-1 Tujuan Audit Penyajian dan Pengungkapan| Tujuan Audit|Contoh Prosedur Substantif| Keterjadian serta hak dan kewajiban|Mereview kontrak | Kelengkapan|Menggunakan daftar pengungkapan| Klasifikasi dan kemampuan untuk dipahami|Mereview laporan keuangan| Ketepatan dan penilaian |Merekonsiliasi jumlah yang dimasukkan dalam catatan kaki utang panjang dengan informasi yang diperiksa dan didukung dalam kertas kerja audit utang jangka panjang auditor.| II. REVIEW KEWAJIBAN KONTIJEN DAN KOMITMEN Kewajiban kontijen (contingent liability) adalah potensi kewajiban di masa mendatang kepada pihak luar untuk jumlah yang tidak......

Words: 3034 - Pages: 13

Auditing

...Assignment 2 AU2 Advanced External Auditing Question 2 a) Three specific business strategies that explain eBay’s decision to offer good for sale at fixed prices: 1. Expand into New Markets: With the shrinking market of auction bidders on eBay and a growing market of fixed price buyers, customers may not prefer to go in the direction of purchasing goods in an online auction. Since, in an online auction the customer has to wait till the end of the auction to see which buyer with the highest bid wins that item. Whereas, in a fixed price type of format, there are no bids placed and the price remains constant. Customers may prefer the idea of price stability over waiting to see if they get the item as they may be time-sensitive and want the item right way. Therefore, eBay may want to focus and expand its market to customers who do not prefer online auctions. 2. Fixed price “Buy-It-Now” format is beginning to dominate eBay and is a key to future growth. Fixed price items make up of 42% of the gross merchandise sold on eBay. Over the past six years, this fixed price format has been growing at a faster rate than auctions. (Trouble at eBay) 3. Meet consumer expectations in the marketplace by matching its competitors who also offer products at fixed prices online through their websites. Customers who are not interested in purchasing goods in online auctions will then purchase goods from eBay at fixed prices. Since eBay acts as the ‘middle man’ the......

Words: 4140 - Pages: 17

Advanced Auditing Complete Class

...Advanced Auditing Complete Class To purchase this tutorial visit here: http://mindsblow.us/question_des/AdvancedAuditingCompleteClass/2663 contact us at: help@mindblows.us ACC 562 Advance Auditing Entire Course All Weeks Discussions, Quizzes and Assignments ACC562 Complete Course week 1 to week 11 ACC 562 Week 1 Discussion "Unbiased Reporting" Please respond to the following: • Analyze the need for unbiased financial reporting. Based on your analysis, determine at least two (2) drivers that may cause financial reporting to be biased. Provide a rationale to support your response. • Analyze the audit opinion formulation process and suggest at least one (1) improvement to the process to strengthen audit opinions. Provide a rationale to support your suggestion. ACC 562 Week 2 Discussion "Topic of Discussion” Please respond to the following: • Analyze the changes made to corporate governance rules since the implementation of the Sarbanes–Oxley Act of 2002. Based on your analysis, formulate an opinion on whether or not these changes are sufficient in preventing financial fraud. Provide a rationale for your response. • Debate it! Audit committees are an effective tool for detecting and preventing fraud. Provide a rationale for your response. ACC 562 Week 3 Discussion "Application of Ethical Framework” Please respond to the following: • From the case study, use the ethical framework to propose a course of action that you would take concerning the audit. Provide a......

Words: 27733 - Pages: 111

Auditing

... AUDITING THEORY TESTBANKS / REVIEWERS 1. When an auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increase professional skepticism. b. Decline to accept or perform the audit. c. Assess control risk at the maximum level and perform a primarily substantive audit. d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud. 2. An auditor should design the written audit program so that a. All material transactions will be selected for substantive testing. b. Substantive tests prior to the balance sheet date will be minimized. c. The audit procedures selected will achieve specific audit objectives. d. Each account balance will be tested under either tests of controls or tests of transactions. 3. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables. b. Claim received from customers for goods returned may be intentionally recorded in other customer’s accounts. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may cause an overstatement of inventory balances. 4. Accepting an engagement to examine an entity’s......

Words: 24671 - Pages: 99