The Audit Integrity Accounting and Governance Risk (AGR) rating outperforms academic risk measures in all head-to-head tests for detecting corporate accounting irregularities and most tests for predicting accounting irregularities, according to an independent academic study.
The study, conducted by accounting professors Richard Price, Rice University; Nathan Sharp, Texas A&M University; and David Wood, Brigham Young University, is the first to compare academic risk measures against a commercially developed risk model. This report is especially timely given concerns in the market around the accuracy and transparency of corporate financial disclosures.
The study found that when compared to six academic risk measures, Audit Integrity's AGR rating more effectively predicted and detected events that negatively impact corporate stakeholders – such as SEC enforcement actions, shareholder lawsuits and egregious accounting restatements.
"We found that the commercially available AGR rating is superior to current academic risk measures for detecting and predicting accounting irregularities," said Nate Sharp, Assistant Professor of Accounting, Texas A&M University. "What was somewhat surprising was the extent to which AGR ratings outperformed the academic models. From this, we believe that bridging the gap between academic research and commercial practices can provide better tools for research."
Even in recessionary periods, corporations are under considerable pressure from creditors, shareholders and others to exhibit growth and in many cases management is incentivized based on short-term benchmarks. These factors have historically led to earnings management and other accounting gimmicks.
"The results of this study show that a measure of corporate integrity – the AGR rating – can be an effective way to identify and detect corporate improprieties before they negatively impact stakeholders," said Jack Zwingli, CEO of Audit Integrity. "Based on our own testing and client feedback, we've had clear evidence of how effective AGR is, but having an independent academic study validate it is extremely gratifying."
Previously, a 2008 study by Stanford University law and business professors compared Audit Integrity's AGR score and other commercially available corporate risk ratings developed by RiskMetrics/ISS, GovernanceMetrics International and The Corporate Library. The study found Audit Integrity's AGR outperformed all ratings in its ability to predict accounting restatements, class action litigation, and prospective firm performance.
Combined, both of these academic studies provide strong evidence that the AGR rating outperforms all other established academic and commercial measures of corporate accounting and governance risk.
For more information about this study or to learn more about Audit Integrity please visit www.auditintegrity.com. A full copy of the study can be found here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1546675.
About Audit Integrity
Founded in 2002, serving investors, insurers, auditors and corporate finance professionals, Audit Integrity is a leading independent research firm that rates more than 12,000 public companies in North American and Europe based on their corporate integrity. In addition to its flagship Accounting and Governance Risk (AGR) ratings, Audit Integrity also forecasts bankruptcy risk, class action litigation risk, material financial restatement risk, and equity performance risk. The statistical correlation of these ratings has been confirmed by internal and third-party tests. Audit Integrity has offices in Los Angeles and New York City. For more information, please visit www.auditintegrity.com.
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