Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 570 (Revised) Going Concern

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The International Auditing and Assurance Standards Board (IAASB) issued for public comment Proposed International Standard on Auditing 570 (Revised) Going Concern. The Australian Auditing and Assurance Standards Board (AUASB) and New Zealand Auditing and Assurance Standards Board (NZAuASB) also called for comments. The Auditing and Assurance Standards Committee of AFAANZ prepared a submission, based on the findings reported in extant research, informing a number of the questions asked by the IAASB. This technical note presents the formal submission made to the IAASB.

Temperature trend and corporate cash holdings

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We examine the causal impact of climate uncertainty on companies’ cash holdings using local temperature trends. We find a notable increase in cash reserves among companies in response to rising climate-related risks. We also identify two significant channels through which climate uncertainty influences firms’ cash management: heightened environmental enforcement risk and increased physical risk. Furthermore, we observe that the positive effect of temperature trends on cash holdings is more pronounced for financially constrained firms and those with a lower level of environmental protection awareness. External financing through equity and debt issuance, as well as cost reduction strategies involving research and development and selling, general, and administrative activities, represent viable avenues for firms to bolster their cash reserves. However, financially constrained firms are less inclined to build up cash reserves through debt financing. Our findings underscore the precautionary nature of corporate cash policies and shed light on how temperature fluctuations can significantly shape corporate behavior.

Is One Head Better Than Two? Dual Leadership and Firm Performance During the COVID‐19 Crisis

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We provide novel evidence on the value of combined CEO and board chair positions (CEO duality) for firms during the COVID-19 pandemic in 2020. Based on 4,840 firm-quarter observations from 1,210 unique firms in the US, we show that CEO duality firms outperformed non-duality firms by a 0.58% margin in quarterly return on assets in 2020, which is equivalent to an incremental annual net profit of US$164 million. A difference-in-difference estimation confirms that the benefit of CEO duality is observed only in the COVID-19 crisis period. Our main finding is robust to potential endogeneity concerns and alternative performance measures. Additional analyses show that the positive impact of CEO duality stems from the mechanisms of operating cost savings and working capital optimization during the crisis. Our finding underscores the benefit of CEO duality when economic uncertainty is high and a speedy decision is important.

Volatility spillovers of cloud stocks: Evidence from China using the dynamic connectedness approach

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Based on daily data from 2013 to 2022, this study examines the spillover effects of volatility between cloud stocks and other asset classes (global stocks, treasury bonds, gold and crude oil) using the VAR connectedness approach. The results show that there is a significant spillover effect from global stocks and crude oil markets to the cloud stock market. The spillover effects become stronger whenever there are shocks such as economic crisis, turbulence in the international financial markets, COVID-19 and global inflation. However, nearly 91% of the variations of cloud stocks come from within, suggesting that the diversification/hedging value of cloud stocks is potentially high.

Confucian culture and cost stickiness

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Cultural features may exert significant impact on firm behaviour. Through a sample of listed A-share firms on the Shanghai and Shenzhen Stock Exchanges, we find that Confucian culture may significantly lower firms' cost stickiness. Our mechanism tests suggest that ideologies of self-discipline and prudence embedded in Confucian culture may mitigate agency issues as well as overestimation of firm earnings. Furthermore, such impact is more pronounced among firms of lower shareholding by institutional investors or of weak internal control, which suggests that Confucian culture may help rectify the imperfection of corporate governance. Lower cost stickiness may also reduce firm risk.

An evaluation of the animal welfare accountability being demonstrated by global apparel companies

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This study evaluates apparel companies' accountability through assessing the quality of their disclosures pertaining to animal welfare. Content analysis is undertaken of annual reports, social responsibility reports, dedicated social responsibility webpages and apparel hangtags and labels collected from the world's largest public apparel companies. Results show that the quality of apparel companies' animal welfare disclosure generally falls short of what is expected by surrogate representatives/stakeholders of animals.

When it’s not personal but positional: The upside of CEO power

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We examine links between corporate cash holdings and types of CEO power, and how these affect firm performance, using agency and stewardship theories to distinguish two types of CEO power: one attributable to the CEO position, and one attributable to CEO personal characteristics. Measured as indices, we find positive associations with cash holdings for both types of power, individually and in combination, but only positional power with higher cash holdings is positively associated with firm performance. Our findings are shown to be robust and suggest that scrutiny of cash holdings by CEOs with high personal power may be prudent.