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Unformatted text preview: ction of cash as part of the revenue cycle examined.
Variable Measurement and Model Speciﬁcation
To test H1, we employ the following equation:
RMM 0 *MI 1 2 *PUBLIC 5 *REVENUE 3 *TENURE *INDUSTRY 6 e. 4 *PYERR
(1) RMM is deﬁned as the combination of ranked auditor-assessed revenue cycle inherent and
control risks (SAS No. 47). The data-granting ﬁrm measures and documents inherent
and control risk assessments as ‘‘low,’’ ‘‘medium,’’ or ‘‘high.’’ The risks are coded 1 for
low, 2 for medium, or 3 for high. A multiplicative combination would result in risk of
material misstatement values of 1, 2, 3, 4, 6, and 9.9 For purposes of interpretation, we use
a ranking mechanism to create a RMM metric that facilitates using OLS as follows:10 7 8 9 10 Of the 78 client observations included in our sample, 18 did not receive a detailed control risk assessment, and
therefore did not include a management integrity (MI) evaluation. There may have been an informal evaluation,
but it was not documented in the working papers we examined. Descriptive statistics suggest the 18 ﬁrms are
more risky, have shorter audit tenure, and are more likely to be private ﬁrms than the 60 ﬁrms with MI assessments. In additional analysis, if we assume that all 18 ﬁrms are low-MI ﬁrms consistent with auditors treating
the ﬁrms as if they are high-risk ﬁrms and not formally evaluating MI, we ﬁnd even stronger support of our
hypotheses. As such, we feel that removing these ﬁrms from our analysis is conservative and if anything biases
against us ﬁnding results.
We did not perform any tests for inter-coder reliability. Instead we relied on the ﬁrm’s help in coding the
variables to insure they measure accurately the constructs we examine.
The multiplicative RMM metric is not measured on a continuous scale and therefore a multinomial logit may
be a more ﬁtting statistical model than OLS. However, the marginal effects of the regressors on the probabilities
are not equal to the coefﬁcients, rendering coefﬁcient interpret...
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- Spring '10