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CLASSIFICATION SHIFTING, ABNORMAL EARNINGS DYNAMIC, AND STOCK VALUATION
ABDALLA, AHMED
CLUBB, COLIN
Category: FA = Financial Analysis
ABSTRACT: This paper examines the information content of earnings conditional on the existence of misclassification of accounting earnings components in earnings announcements. It develops a theoretical foundation for classification shifting and provides empirical evidence on the information content of core operating expenses that are shifted to negative special items. Assuming a general framework of a vector autoregression of accounting variables that accommodates, besides other accounting variables, two components of transitory earnings; a component reflecting shifted core earnings and a component of purely transitory earnings, we find evidence of stock prices not fully adjusting for misclassification. While reported special items appear to have limited forecasting ability for future abnormal earnings, the core composition of special items that is made up by classification shifting forecasts future profitability as a core earnings component. Nevertheless, the costs that comprise the core portion of negative special items are not fully impounded in stock prices. The market appears to place too large a weighting on reported special items, in order to mitigate its inability to observe the batch of core losses that are packed into special items.
THE EFFECT OF THE AUDITOR’S PORTFOLIO STRUCTURE ON AUDITING EFFICIENCY
ABDEL-MEGUID, AHMED
Category: AU = Auditing
This paper examines the effect of the auditor’s portfolio structure on auditing efficiency using two inclusive measures which provide an overall characterization of the auditor’s portfolio. The first is a portfolio-level Herfindahl (H) concentration index and the second is an Entropy measure of diversification. Results indicate a negative (positive) relation between the degree of industry concentration (diversification) of the auditor’s portfolio and audit fees, on average. Such results indicate that industry specialization, proxied by concentration, leads to economies of scale suggesting that the overall structure of the auditor’s portfolio has a significant effect on overall auditing efficiency. Therefore, auditors can design their portfolios of clients, in terms of industry-mix, in a manner that makes them more competitive in the market.
THE Q&A: UNDER SURVEILLANCE
ABRAHAM, SANTHOSH
BAMBER, MATT
Category: GV = Accounting and Governance
The Question and Answer session (hereafter ‘Q&A’) between sell-side analysts and senior company management held at the conclusion of the investor presentation meeting (conference call ) is described as a key event in the corporate reporting calendar (Matsumoto, Pronk, & Roelofsen, 2011; Mayew, Sharp, & Venkatachalam, 2012). Yet there are fundamental gaps in our knowledge of the (dis)incentives for analyst participation (Libby, Hunton, Tan, & Seybert, 2007). Furthermore, the perceived importance is substantiated almost exclusively through indirect evidence (Bradshaw, 2011). Our work highlights the motivating force of surveillance on analyst behaviour and goes some way to explaining the vexing paradox observed (in a similar setting) by Barker, Hendry, Roberts and Sanderson (2012): Why should analysts engage in a process during which the release of 'useful' - price-sensitive, inside-information - is prohibited?
THE EFFECTS OF FINANCIAL CRISIS ON THE VALUATION OF BOOK VALUE AND NET INCOME: EVIDENCE FROM FINANCIAL FIRMS
ADWAN, SAMI
Category: FR = Financial Reporting
This paper examines the value relevance of book value of equity and net income for a sample of financial firms surrounding the time of most recent financial crisis. It also examines the effects of institutional environment and firm-level corporate governance on the extent to which the value relevance of accounting numbers changes during the time of financial crisis. The study is conducted based on a sample of 2150 firm-year observations related to 227 listed financial firms from European Economic Area (EEA) over the period 2005-2012. The study period is divided into two phases: pre-crisis period (2005-2007) and crisis period (2008-2012). According to our findings, the value relevance of book value of equity increases while that of net income decreases during the time of financial crisis. Unlike institutional environment, firm-level corporate governance has an impact on the extent of changes in the value relevance of the balance sheet and the income statement. More specifically, the value relevance of book value of equity tends to be higher while that of net income is lower for firms characterized by weak corporate governance over the crisis period. Our results are consistent for the whole sample of financial firms and a sub-sample of banks.
DOES COMPLIANCE WITH IFRS EXPLAINS EARNINGS QUALIY: AN INTERNATIONAL STUDY
AFFES, HOUDA
LABELLE, REAL
Category: FR = Financial Reporting
The objective of this paper is (1) to distinguish the impact of accounting standards from that of other institutional factors on financial reporting quality (FRQ) and (2) to highlight the actual impact of compliance with IFRS on FRQ. The sample includes 4,807 companies listed in 30 countries that were required to adopt IFRS over the period 2005-2008. Our results show that when accounting standards are exogenous to the legal environment, FRQ as measured by the relative absence of earnings management is not related to institutional factors such as the level of investor protection, legal enforcement, political interference in the economy and financial market development. However, informational environment, as measured by the media diversity and analyst following, is significantly associated with lower earnings management. Interestingly, in the new international accounting context, the way IFRS are implemented is the main explanation of FRQ.
CCCTB AND CAPM PARAMETERS – A SIMULATION-BASED ANALYSIS OF CONSOLIDATION EFFECTS
AGER, MARCUS
PUMMERER, ERICH
Category: TX = Taxation
In 2011 the European Commission released a proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB). This paper provides a Monte Carlo simulation to assess the impact of consolidation as proposed in the CCCTB on after-tax CAPM parameters of European multinational corporations (MNCs). We show that the CCCTB allows for higher expected returns than extant corporate tax systems and leads to both, a decrease in volatility of MNCs and a decrease in the respective Beta-factors. The higher the level of intra-group diversification and the higher the level of business risk of the MNC, the stronger is the consolidation effect of the CCCTB on expected returns. The CCCTB is found to unfold its strongest impact on expected returns in the event of moderately positive to moderately negative returns. We analyze the impact of the CCCTB with regard to the extant corporate taxation system being in force and show that its effect with respect to a separate accounting regime is approximately twice as strong as with respect to a domestic group taxation system. We most importantly show, that consolidation in the sense of the CCCTB is an effective instrument to significantly reduce the level of asymmetry of taxation and the inherent discrimination of risky investments. In fact, the CCCTB, from the perspective of an investor who believes in the CAPM, in specific situations can lead to positive discrimination in favor of a risky investment alternative.
THE EFFECT OF PRIOR PERFORMANCE INFORMATION ON LENIENCY IN SUBJECTIVE PERFORMANCE EVALUATION
AHN, TAE-SIK (T.S.)
HYUN, JEONG-HOON
Category: MA = Management Accounting
This paper examines whether supervisors’ leniency in subjective performance evaluation is influenced by the prior performance information of subordinates. While prior studies have used proxies for leniency based on aggregate objective performance level or median of subjective scales, we develop the proxy for leniency at the performance measure level based on prior performance level which is found to be more relevant to the current subjective performance score. We analyze archival performance evaluation data of multiple state-owned enterprises (SOEs) in Korea over multiple time periods which enables us to develop the new definition of leniency. Utilizing this data set, we empirically find that lenient rating persists over time, and that larger amount of leniency is applied to low prior performers and harshly evaluated performers in the previous period and smaller amount of leniency is applied to high prior performers and leniently evaluated performers in the previous period. The results have important implications for understanding the incentives of raters which differ with respect to their previous performance information.
ETHICAL POSITIONS INFLUENCING BOUNDARY SPAN BETWEEN BOARD/CEO AND INTERNAL AUDIT REPORTING
AL FAYI, SALEM MESFER
AL FAYI, SALEM ; RODGERS, WAYMOND
Category: AU = Auditing
The primary purpose of this research paper is to identify the boundary span influenced by three dominant ethical pathways (positions) between the Board/CEO and the chief audit executives (CAEs). Our study enhances the literature by illustrating that CAEs’ different ethical positions may greatly influence the boundary span related to internal audit reports. Further, our study treats boundary spanning interconnecting with social capital since they both discuss acquiring key sources of information and knowledge. This is important since the type of information reporting mechanism may influence how an organization’s profitability and/or assets are conveyed to of investors and creditors. Hence, this study implements a decision making model referred to as the Ethical Process Thinking Model in order to develop three primary ethical pathways (preferences [ethical egoism], rules [deontology], and principle-based [utilitarianism]) influencing boundary spanning.
THROUGHPUT MODELLING IN PARTICIPATIVE BUDGETING
AL HUDITHI, FAISAL
RODGERS, WAYMOND
Category: MA = Management Accounting
This research will investigate the impact of participative budgeting on subordinates’ behaviours, such as performance, motivation and satisfaction. Earlier empirical studies have investigated the impact of participative budgeting on those behaviours, either by having a direct relationship, having the influence of a moderator or an antecedent, or having both moderators and antecedents. Yet, those studies’ findings were inconsistence with each other. Therefore, this study uses the concept of “Social Capital” in order to help explaining differences in the literature. Further, this research paper depicts participative budgeting as a subset of social capital. This study argues that the impact of participative budgeting on those behaviours is guided by certain decision making pathways. That is, this study employs Throughput Modelling to assist in clarifying the inconsistency within the literature of participative budgeting and its impact on subordinates’ behaviours. This model divides the thinking process of individuals into four different factors, in which are linked in six different pathways. The linking pathways, moreover, would reflect the rationalization of the individual upon the availability of those different factors.
THE EFFECT OF TAXES ON CORPORATE FINANCING DECISIONS – EVIDENCE FROM THE GERMAN INTEREST BARRIER
ALBERTERNST, STEPHAN
SURETH, CAREN
Category: TX = Taxation
The theoretical literature suggests that when taking tax effects into account, debt ought to be preferable to equity. However, there are no uniform predictions of the size of this tax benefit in comparison to an opposing increasing cost of debt. The vast body of empirical studies on the impact of taxation on capital structure only provides puzzling effects. We believe the German corporate tax reform in 2008, which introduced an interest barrier as a “quasi-experiment”, is a promising opportunity to investigate the effects that arise from a reform of interest deductibility. We consider a study of German tax reform on the basis of German data of general interest because, first, similar tax reforms have been conducted in several countries. Second, the availability of single entity financial statements for German companies allow us to capture tax and capital structure details that have not been available in most prior studies. Third, the major characteristics of the German tax system can be regarded as representative for most European and the major Asian countries. With significance at the 5% level, we find evidence that the companies that are affected by the interest barrier reduce their leverage by 3 percentage points more than companies that are not affected. We are the first to employ a detailed matching approach to the underlying rich dataset, which enables us to overcome some of the limitations of previous studies.
HARD-WIRED OR SOFT-WIRED? THE INFLUENCE OF MANAGERIAL CHARACTERISTICS AND SOCIAL NORMS ON CORPORATE BEHAVIOR
ALBRECHT, LISA
FAVERE-MARCHESI, MICHAEL; FRANKE, BENEDIKT
Category: FR = Financial Reporting
In this paper, we investigate the role of managerial characteristics and a firm's social environment on corporate investment, growth, and firm risk. The Upper Echelons Theory advocates that personal characteristics of managers are a main driver of their decision-making process that ultimately affects corporate policies. However, the framework also suggests that a manager's environment might affect cognitive processes either directly or indirectly by influencing a manager's values. We examine whether CEOs' age is associated with corporate behavior. We find that corporate behavior is association with the individual manager characteristic. Increased personal risk aversion leads to less risky corporate behavior. We additionally consider the influence of social norms surrounding firms' headquarters locations on corporate behavior. We measure the environment's risk tendency by the level of religious adherence in a county. We find that social norms affect corporate investment policies, growth, and firm risk alongside managerial characteristics. We finally classify firms into groups based on the individual manager characteristic and the social environment. We provide empirical evidence that social norms act as a moderator. That is, managers do not solely follow hard-wired incentives but also act according to the standards shared by their social environment.
AGGREGATE CEO COMPENSATION, AGGREGATE PERFORMANCE AND RELATIVE PERFORMANCE EVALUATION
ALBUQUERQUE, ANA M.
CARTER, MARY ELLEN ; JORGENSEN, BJORN
Category: MA = Management Accounting
We document the effect of two types of aggregation – time-series and cross-sectional – on the relation between executive compensation and two common performance measures: stock market returns and accounting earnings. We find that time-series aggregation for each firm over 2 and 4 years strengthens the pay-performance relation relative to that obtained using firm-year observations. These findings are consistent with reduced measurement error from noise in the performance measures or inter-temporal misalignment. In the cross-sectional aggregation, the pay-performance relation is stronger than that documented at the firm-level in prior research but may be affected by implicit relative performance evaluation. We compare intra-industry to inter-industry cross-sectional aggregation and find evidence consistent with relative performance evaluation peers being chosen across industries in addition to within.
SUSTAINABILITY INFORMATION IN ANGLO SAXON AND SOUTH EUROPEAN LOCAL GOVERNMENTS. INFLUENCING FACTORS.
ALCARAZ QUILES, FRANCISCO JOSÉ
NAVARRO-GALERA, ANDRÉS; ORTIZ-RODRIGUEZ, DAVID
Category: PS = Public Sector Accounting
Although the importance of sustainability reporting in the public sector is widely recognized, there are few studies about this issue. In addition, the cultural context could improve to governments to carry out administrative reforms, and implementing and increase the use of new technologies. This paper analyzed the practices of diffusion of information on sustainability in local governments of Anglo Saxon and South European countries. So, we observed the Websites of the largest local governments of these countries, using a list of items from the guidelines of GRI. Furthermore, we have carried out a cluster analysis and multiple linear regressions in various steps, using possible influencing factors, grouped in three categories: population, socio-economic, financial. Our findings show that Anglo Saxon local governments reported more information than Southern European local governments. Social information is the most widespread and environmental information is the least reported. Additionally, the results of different statistical methods show that: the cluster analysis, the administrative culture could be determinant in the disclosure of information about sustainability. The regression analysis, in a first step, the rate of unemployment and the access to the Internet and the dependent population would be the factors that would have a positive impact on the dissemination of sustainability information. In a second step, the factor that could influence on the disclose of sustainability information are not the same in each administrative culture.
AUDIT QUALITY AND ACCRUALS MANIPULATION IN EX - POST BANKRUPT FIRMS
ALDAHRAY, AYMAN
Category: FR = Financial Reporting
The aim of this paper is to examine the relationship between audit quality and accruals manipulation prior to bankruptcy. The results reveal that larger auditors provide higher audit quality and mitigate accruals manipulation prior to bankruptcy more that smaller auditors do. In addition, the results highlight a negative relationship between going concern opinions and accruals manipulation prior to bankruptcy. However, in relation to the previous going concern opinions and accruals manipulation, the results document a positive relationship. Nonetheless, this result is only valid for non-big auditors, as audit size has a moderating effect on the relationship between the previous going concern opinions and accruals manipulation. The results of this paper have some key implications for policy makers and regulators. The going concern opinions were equal to only 23.4 per cent of all bankrupt firms’ audit reports in the sample period. Thus, action should perhaps be taken by regulators to ensure that market participants receive the appropriate audit opinions as often as possible. In addition, the empirical results of this paper highlight the lower risk of reputational loss for small auditors compared to the bigger auditors. Thus, enforcement of appropriate regulations may be needed for smaller auditors to counter their lack of concern for their loss of reputation and to highlight the possible serious legal liability that might exist after bankruptcy.
COMPETITION AND BANK INCOME SMOOTHING
ALEDO MARTINEZ, JUANA
ALEDO MARTÍNEZ, JUANA; DESENDER, KURT ACHIEL; LÓPEZ-PUERTAS LAMY, MÓNICA
Category: FR = Financial Reporting
Using a country-level panel dataset of 18,500 banks from 51 countries over the period 1997-2011, we analyze the effect of competition on bank income smoothing of loan-loss provisions. Our results show that higher levels of competition lead to higher levels of earnings smoothing. In addition, we explore contingency factors related to the institutional context and demonstrate that competition has a significantly stronger effect in societies with high investor protection and low egalitarianism. Our result demonstrates the negative side effect of competition on the quality of accounting information and has important policy implications.
EXECUTIVE INSIDE DEBT AND CORPORATE TAX AVOIDANCE
ALEXANDER, ANNA
Category: TX = Taxation
This study examines the relation between CEO and CFO inside debt holdings and corporate tax avoidance. As executives’ inside debt holdings are unsecured and unfunded, they should align CEOs and CFOs interests with those of outside debtholders. As theory suggests, inside debt holdings incentivize executives to act more conservatively towards risk. Therefore, we focus on the level of tax risk of the corporate tax planning strategy and use proxies to capture the difference in tax risk. While we expect inside debt holdings to curb executives’ risk taking behaviour towards risky tax avoidance, the effect on the overall tax planning strategies is unclear, as tax avoidance increases current cash flows and can also be beneficial to debtholders. Consistent with the prediction, we document a negative association between CEOs and CFOs inside debt holdings and higher levels of tax risk (proxied by the GAAP and cash effective tax rate volatility).
VOLUNTARY VERSUS MANDATORY REPORTING OF SHARE-BASED PAYMENTS AND THE LEVEL OF INVESTOR PROTECTION: AN ANALYSIS OF THE EU AND US BANKING INDUSTRIES.
ALHAJ ISMAIL, ALAA
STITTLE, JOHN; ZAKARIA, IDLAN
Category: FR = Financial Reporting
IFRS2 and FAS13R (share based payments) aim to provide more relevant and reliable information to market participants, and to improve the comparability of financial information worldwide. This paper explores to what extent IFRS2/FAS123R has achieved these aims across different contexts, using pre and post adoption data of a sample of EU and US banks. It shows how investor valuations of expensing stock options differ depending upon whether the fair value of these compensation instruments is recognised or disclosed, and subject to different levels of investor protection. The findings show that over the pre-adoption period, the valuation coefficients on voluntarily expensing of stock options are insignificantly positive (asset); whereas on disclosed information, they are insignificantly negative (expense), and the level of investor protection significantly influenced investor valuation of disclosed stock option expenses. While the valuation coefficients are redundant and insignificant in the pre-adoption period, the valuation coefficients on recognised stock option expenses over the post adoption period are positive and significant, consistently across all the sample contexts that adopted this standard. The findings support the view that recognition versus disclosure matters to market participants worldwide, suggesting that IFRS2/FAS13R has enhanced the reliability and comparability of the fair value of stock options, as important incentive instruments, on a wider global context. Banks’ size positively affects the magnitude of the perceived reliability of the recognised stock option expenses, and it is significantly more apparent in banks operating within reporting contetxs with high levels of investor protection. Finally, investors assign an increasing value to the incentive derived from stock option expenses issued in more risky banks.
THE MEDIUM IS THE MESSAGE: AN UPDATE TO THE THEORY OF CONTINUOUS ASSURANCE
ALLES, MICHAEL
GRAY, GLEN
Category: AU = Auditing
The objective of this paper is to rethink whether the definition of continuous assurance given in the AICPA/CICA “Red Book” in 1999 still remain relevant today, or whether—in the light of a decade and a half of intensive research and extensive experience with implementations in practice—the time has come to update that definition. We introduce the concepts of “technology driven auditing” (TDA) to contrast with “human based auditing” (HBA) and argue that auditing practice exploit the capabilities that technology has in such aspects as data gathering and storage, analysis, transmission and visualization in addition to enabling the preparation of an audit opinion closer in time to the underlying transactions. Moreover, the full use of technology in auditing may lead to situation where the source of assurance shifts from being based on the presence of a third party human auditor to trust being placed in the audit technology itself. This outcome of “technology based auditing” (TBA), which is contrasted to the earlier stage of “technology driven auditing” builds on the thinking of Marshall McLuhan that “the medium is the message” (McLuhan and Fiore, 1967).
REFLECTIONS ABOUT THE FIRST LEVEL OF ACCOUNTING THEORY
ALMEIDA, BRUNO
MARQUES DE ALMEIDA, JOSÉ JOAQUIM
Category: ED = Accounting Education
We question the connections that are possible to establish between accounting, management, and art, with painting and architecture being subsumed under this word. Indeed, historically, the word art is associated to accounting and management. Accounting is conceived by the classic authors – by story tellers – as the art of writing commercial books. Management, in turn, is seen as the art of planning and deciding how to apply scarce resources that may be used differently. Although the connections between accounting and management at a functional, instrumental, and technical level are readily admitted by many, the connection between these two areas of knowledge to art seems to be, at the very least, debatable. It is therefore important to reflect on the main requisites associated to art, and subsequently to discuss art's applicability to accounting and management. To do this, we have used an appropriate mix of research methodologies, which allows us to conclude that the use of the art metaphor is inappropriate when applied to accounting.
DOES SAVING-INVESTMENT CREATE VALUE FOR THE SAVERS? – A CASE OF THE UK LIFE INSURANCE FIRMS
ALMEZWEQ, MUHAMMAD
Category: FA = Financial Analysis
This paper develops a new valuation methodology to value funds provided by policyholders with the expectation that the value of the funds shall grow above or at least at the same rate of inflation in the real goods market. This expected value (by policyholders) is regarded as the basic economic value of funds since it retains constant purchasing power of money over time. The value perceived by the market in excess of the basic economic value is defined as value creation that consists of two basic elements: investment returns (realised gain) and capital gains (unrealised gain). With the new valuation methodology, it is found that the UK life insurance industry lost £209 billion1of value relative to the basic economic value in 2008. It is evident that the identified value creation is related to the business performance and strategies of life insurers, in particular, their risk-taking attitudes in setting their investment portfolio.
BOARD OF DIRECTORS EFFECTIVENESS, AUDIT COMMITTEE EFFECTIVENESS AND THE CHANGE IN AUDIT QUALITY: EVIDENCE FROM GCC REGION
AL-MOATAZ, EHSAN SALEH
ABIDIN, SHAMHARIR ; ALJAAIDI, KHALED
Category: AU = Auditing
Using the suggestions of agency theory alone for predicting the auditor change behavior in the context of GCC countries is inappropriate because they were developed in countries with mature market-oriented economies. In this study, we examine the association of board of directors effectiveness (board of directors independence, size, financial expertise, meetings, nationality, international experience and CEO duality ) and audit committee effectiveness (audit committee independence, size, financial expertise, meetings, nationality and international experience) with the incidence of auditor change among Gulf Cooperation Council (GCC) public listed companies for the period 2005- 2010. We posit that using an integration framework of agency theory, managerial grid theory, and attraction-selection-attrition has more explanatory power to predict auditor change behavior in GCC setting, taking into account economic and behavioral issues. The results show that only board of directors effectiveness is significantly associated with the incidence of auditor change. This study finds out that the economic and the behavioral activities are related to the audit demand in the GCC. Moreover, the study suggests that regulators, especially GCC stock exchanges, should force companies to disclose all relevant information related to auditor change in a transparent and timely manner, and increase law enforcement to enhance good corporate governance practices. For companies, this study proposes that they should put more emphasis on enhancing the role and the quality of the board of directors and audit committee members, as they are involved in the decision of auditor change.
POLITICISATION OF COST MANAGEMENT PRACTICES: THE CASE OF ELECTRICITY AND ENERGY IN EGYPT
ALSAID, LOAI
ALAWATTAGE, DR CHANDANA
Category: MA = Management Accounting
This paper provides an empirical case study as to how the macro political dynamics lead to the micro organisational changes of cost management practices in the public sector organisations. It draws on Dillard et al.'s (2004) version of institutional theory to explain how the micro organisational changes of cost management within the public organisations aligned with the macro institutional changes. Empirical data for the study come from an extended case study of a state-owned enterprise in the Egyptian Electricity and Energy Sector, where semi-structured interviews, field observations and documentary analysis have been deployed as the data collection methods. The paper highlights the necessity of seeing cost management change, especially in the politically sensitive public utilities in less developed countries, as an institutional political change that brings together the wider political objectives of the state and the narrower economic objectives of the firms. 'Changes' of cost management practices deployed in such utilities then operate as technological tools through which the institutional tensions between the polity and the economy are managed. Accordingly, the paper offers a political definition for cost management change in the public sector.
THE EFFECT OF INJUNCTIVE SOCIAL NORMS AND DISSENT ON BUDGET REPORTING HONESTY
ALTENBURGER, MARTIN
Category: MA = Management Accounting
Research in budgeting suggests that contextual factors may have a considerable influence on budget reporting honesty. Therefore, the present study investigates managers’ honesty in the presence of different social norms created by a peer group. While there are several studies which look at the impact of descriptive norms (what one actually does) on managerial honesty, injunctive norms (what one ought to do) have not received a lot of attention in the literature. As concrete actions of peers are rarely observable in the budgeting process, this study focuses on the effect of injunctive norms for honesty/opportunism on budget reporting honesty. Moreover, the role of dissenters from the norm is investigated. The results from a laboratory experiment suggest that injunctive norms can have a considerable influence on managers’ budget reporting behavior because many people conform to the preferences of their peer group. However, the effect of injunctive norms decreases substantially when there are minorities who show alternative preferences. With the use of the experimental data, the expected firm profit is calculated under different contracts. As the managers show considerable levels of honesty, a trust contract should be preferred compared to a hurdle contract which is derived by conventional economic theory. Companies should therefore consider injunctive norms as a possible device to positively affect their managers’ honesty and the respective firm profit.
SHAREHOLDERS LOANS: A SIMPLE METHOD OF MONEY LAUNDERING
ALVES, JORGE
MOREIRA, JOSÉ
Category: FR = Financial Reporting
This study aims to discuss money laundering from a new perspective. For Mitchell et al. (1998) and Bingham (1992), among others, underlying money laundering there are complex webs of transactions with the purpose of “cleaning” illicit funds, transmitting them “through the banking system in such a way as to disguise the origin or ownership of the funds”. One reads this description and thinks of dark environments, gangsters and drug dealers. However, money can be laundered in simple ways that the literature does not discuss, and are familiar for many people. It is the case of shareholders loans that can be used as a solution for cleaning the proceedings of invoiceless sales firms make. For the Portuguese case, we gather empirical evidence and test the hypothesis that such loans are used as a laundry solution for those proceedings. We use a methodology based on two main steps. First, it classifies firms according to their tax fraud behavior by invoiceless sales; second, it relates shareholders loans to such proceedings. We found a positive relationship between these two variables. This result will be a contribution to the literature bringing into the discussion another money laundry tool.
THE IMPACT OF AUDIT COMMITTEE CHARACTERISTICS ON THE INTERNAL AUDIT CONFORMANCE WITH INTERNATIONAL STANDARDS FOR THE PROFESSIONAL PRACTICE OF INTERNAL AUDITING
ALZEBAN, ABDULAZIZ
Category: AU = Auditing
The need for effective interaction between the audit committee and the internal audit function is emphasised by regulators. This study provides empirical evidence of the association between audit committee characteristics and conformance by internal audit with the International Standards for the Professional Practice of Internal Auditing. The data is acquired from a survey of chief internal auditors from Saudi companies listed on the Saudi Stock Exchange. A total of 74 usable responses were received, and the results indicate that CIA tenure influences the extent of conformance with internal audit Standards. Further, conformance with internal audit standards is positively related to the presence of independent members of the audit committee and to those members’ expertise in respect of accounting and auditing. The results add to the literature on internal audit services by introducing a Middle Eastern perspective, and simultaneously providing insights for companies in their attempts to adhere to the International Standards, and hence, supporting efforts towards good corporate governance.
IDENTIFYING PRACTICES THAT MAY REDUCE THE QUALITY OF GOVERNMENT AUDIT – EVIDENCE FROM INDONESIA
AMYAR, FIRDAUS
LOWE, ALAN; WOODS, MARGARET
Category: AU = Auditing
The purpose of this study is to examine probable prevalent reduced audit quality behaviours amongst government auditors and also the probable drivers of such behaviours. The integration of agency theory and organisational control theory underpins this study. This study applies an observation method along with interviews and focus group discussions in one Indonesian government audit institution. The results suggest that there are three types of reduced audit quality acts, namely premature sign-off, superficial audit supervision, and not testing all items in a sample. Government auditors have been shirking or doing moral hazard i.e. not putting in their best effort to carry out their responsibilites that may lead them to engage in RAQB. The main reasons of such behaviours are due to the lack of control, tolerant punishment mechanisms, and unfair salary and rewards systems. This is in line with organisational control theory claiming that enforcement to detect and deter misbehaviour and also inducement such as incentives and fair salary can reduce employee’s misconduct. The findings of this study might help government audit organisations and government auditing standard-setters implement policy, control systems, or any attempt to mitigate such reduce audit quality behaviour practices.
ACCOUNTING QUALITY, INFORMATION RISK AND THE TERM STRUCTURE OF IMPLIED VOLATILITY AROUND EARNINGS ANNOUNCEMENTS
ANAGNOSTOPOULOU, SERAINA
TSEKREKOS, ANDRIANOS
Category: FR = Financial Reporting
We examine the association between accounting quality, which is used as a proxy for firm information risk, and the behavior of the term structure of implied option volatility around earnings announcements. By employing a large sample of US firms having options traded on their equity during 1996-2010, we find that lower (higher) accounting quality is significantly associated with stronger (weaker) changes in the steepness of the term structure of implied volatility curve around quarterly earnings announcements. This finding (which is robust to controls for business-stemminguncertainty regarding future firm performance) is consistent with a stronger differential of short vs. long-term uncertainty for higher information risk firms, indicating greater uncertainty on the future economic performance of poorer vs. stronger accounting quality firms. We also establish the trading implications of these findings by demonstrating a (profitable in-sample) self-financed option trading strategy that is based on the quality of the accounting information released on earnings announcement days.
INDIVIDUAL INVESTORS AND THE VOLUME OF DISCLOSURE IN FIRMS' ANNUAL REPORTS
ANCHEV, STEFAN
HELLSTRÖM, JÖRGEN; OLSSON, RICKARD
Category: FA = Financial Analysis
We examine whether and how individual investors’ decisions and performance are affected when the volume of disclosure in firms’ annual reports is at or beyond the minimum, mandatory requirements. Using a large and detailed dataset on individual investors’ stock positions during the period 1999-2007, we find, on average, a negative relation between the volume of disclosure and investors’ stock portfolio weights and abnormal returns, respectively. The former relation, however, does not hold for stock positions in firms with relatively poor information environment. Moreover, it is less pronounced among more financially competent investors. These results are obtained while controlling for a large number of individual-, portfolio-, stock-, firm- and time-specific variables. Given their recent concerns regarding a potential corporate disclosure overload, the findings in this study should be of interest to regulators and the accounting standard setting boards.
MANAGEMENT GUIDANCE AT THE SEGMENT LEVEL
ANDRE, PAUL
FILIP, ANDREI; MOLDOVAN, RUCSANDRA
Category: FR = Financial Reporting
Managers add information to their earnings guidance to justify, explain, or contextualize their forecasts. We identify segment-level guidance (SLG) as a type of disaggregated information that multi-segment firms provide with their management guidance and investigate its usefulness for financial analysts’ earnings forecasting accuracy, and the influence it has on managers’ earnings fixation. We further characterize SLG with measures of precision and item-disaggregation. Results suggest that SLG is associated with better forecasting accuracy but while providing more item-disaggregated SLG improves accuracy, precision does not seem to matter for analysts. From managers’ point of view, SLG creates incentives to engage in earnings management, and more so the more precise SLG is, while more item-disaggregated SLG discourages earnings management most likely by improving monitoring. In additional analyses, we find that companies in high tech industries known for increased uncertainty in future performance are less likely to provide SLG. In a context where qualitative, narrative, and disaggregated guidance is regarded as a solution to avoid earnings fixation and short termism, understanding which type of information achieves this role, and how, is relevant for managers, investors, and regulators alike.
TOWARD AN INTEGRATED ACCOUNTABILITY MODEL FOR NON-PROFIT ORGANIZATIONS
ANDREAUS, MICHELE
COSTA, ERICKA
Category: SE = Social and Environmental Accounting
Purpose: By contributing to the burgeoning debate regarding ‘for what’ non-profit organizations (NPOs) should be accountable, this paper aims to develop and present an Integrated Accountability Model (IAM) that considers three dimensions of accountability. Methodology/Approach: After highlighting the limits of conventional accounting for NPOs and re-framing the role of profit within them, the paper presents a complete literature review on ‘to whom’ and ‘for what’ NPOs have to be accountable while further developing the IAM of integrated accountability. Findings: The integrated accountability model developed in this paper proposes three categories of NPO accountability: i) the economic and financial dimension or the capability/ability to be economically sustainable in the long term; ii) the mission-related dimension or the raison d'être of an NPO, i.e. the purpose for which the NPO has been set up, its mission; and iii) the social-related dimension or the relationship with the stakeholders, i.e. the impact of NPO activities on its stakeholders in terms of the social contract between them. Originality/Value of Paper: Broadly speaking, this paper makes a contribution to the literature on accountability for NPOs. In particular it sheds light on two points: the importance of separating the mission-related dimension from the social-related one and the potential to open avenues for expansion of the IAM model to for-profit organizations.
DOES SELF-CERTIFICATION ENCOURAGE OR REDUCE ESCALATION OF COMMITMENT?
ANG, NICOLE
ANG, NICOLE; CHENG, MANDY
Category: MA = Management Accounting
Management accounting systems provide information to assist and encourage managers to make optimal decisions concerning organizational resources (Sprinkle 2003). However, research indicates that managers may not make the best use of this information. One well documented problem is escalation of commitment, where managers continue to invest in poorly performing projects, despite receiving information indicating that they should be terminated. In this study, we conduct an experiment to investigate the effectiveness of self-certification, a trust-based control, in encouraging individuals to terminate under-performing projects. We predict and find that when individuals are required to self-certify that they are taking sole responsibility for an under-performing project, they are less likely to escalate investment, even though they still possess private information about the project. However, this effect only occurs at an early stage of the project’s life. At a later decision stage, we find that self-certification increases escalation of commitment. Additional analysis indicates that the effect of self-certification does not extend to situations where it is combined with a monitoring-based control (random internal audits). Overall, we find that self-certification is a potentially effective and relatively costless way of counteracting managers’ tendency toward opportunistic behaviors at the earlier stage of an investment, but only in the absence of a formal monitoring system.
WHO IS THE AUTHOR? WHO IS THE COAUTHOR? AN EMPIRICAL STUDY BASED ON THE PERCEPTION OF BRAZILIAN RESEARCHERS
ANTUNES, MARIA THEREZA POMPA
OKIMURA, RODRIGO; RIBEIRO DE MENDONÇA NETO, OCTAVIO
Category: ED = Accounting Education
This study addressed the issue of ethics in scientific research in accounting field intending to know the beliefs and the practices of Brazilian accounting researches related to authorship and co-authorship attribution in their scientific productions, in terms of: 1) Who is the author? 2) Who is the coauthor? 3) Who is the first author? For this purpose, a questionnaire was developed based on Foucault (2001) and Fernandes, Fernandes and Goldim (2008). Our sample was composed by 61 researchers from the 20 Brazilian accounting graduate programs. Tree important insights emerged from the results. The first one is that there is no consensus among Brazilian accounting researches regarding to beliefs in terms of the criteria to attribute authorship and co-authorship in scientific papers/researches. The second, which derives from the first one, is that this lack of consensus was founded with more intensity in the daily practice of these researchers and the third one is that the researchers did not practice with the same intensity what they believe in, which is nonetheless worrying since some dysfunctional behaviors were observed. In our view, much of this undesirable behavior arises from managerial philosophy based on calculability that emanates from the Brazilian research controlling board (CAPES).
SUBJECTIVE BONUS AND TARGET DIFFICULTY IN BUDGET BASED INCENTIVE CONTRACTS
ARANDA, CARMEN
ARELLANO, JAVIER; DAVILA, ANTONIO
Category: MA = Management Accounting
Subjective bonuses reflect managers’ use of non-contractible information that becomes available during the contracting period to complement objective performance measures. These bonuses can also capture an implicit contract entered at the beginning of the period where employees commit to more difficult targets and managers use subjective bonuses to reward this commitment. We examine this latter aspect and study their interaction with budget-based incentive contracts. We hypothesize that the presence of these implicit contracts allows managers to personalize targets to the individual characteristics of employees, enhancing their motivational structure. Using data from 390 branches from 2003 to 2006 of a large travel retailer (1,282 branch-year observations), we find that managers use subjectivity to set targets with different levels of difficulty across branches; in particular, branches with more difficult targets receive larger subjective bonuses. We also find that those branches with higher ratcheting of their targets receive larger increases in subjective bonuses. Finally, we report an association between future performance and the magnitude of the subjective bonus. This evidence indicates that managers use subjective bonuses beyond capturing non-contractible information to personalize budget-based incentives and improve the motivational properties of budget-based incentives.
THE RELATIONSHIP BETWEEN TRUST AND CONTRACT WITHIN EXTERNALIZED PUBLIC SERVICE PROVISION: HOW DOES CLOSENESS MATTER?
ARGENTO, DANIELA
PEDA, PEETER
Category: PS = Public Sector Accounting
The aim of this paper is to explore the relationship between trust and contract in the context of externalized public service provision. In such a context, local governments may control the performance of external service providers via written contracts and trust. These control arrangements are analysed through a multi-theoretical framework with reference to three cases of externalized water service provision in Estonia. As a main finding, the comparative analysis reveals that the relationship between trust and contract, which can be either substitutes or complements, is contingent upon the closeness between individuals involved in water services provision.
CAPITAL EXPENDITURE AND ITS IMPACT ON FUTURE PROFITABILITY: AN EMPIRICAL STUDY OF AUSTRALIAN FIRMS
ARTHUR, NEAL
HO, SHAWN ; JI, KAIYING
Category: FR = Financial Reporting
This paper models the economic determinants of firm capital expenditure (CAPEX) decisions and how the information in CAPEX, together with the value of growth options and other firm characteristics is useful in the prediction of future earnings. The CAPEX models we develop and test show that CAPEX is related to the value of a firm’s growth opportunities (conditional upon sufficient financial resources being available) and firm life cycle stage. We then examine whether unexpected levels of CAPEX (based on the models we develop), which we view as signals of the exercise of possibly undervalued growth options, are related to future profitability. We find that higher than expected CAPEX is positively related to future earnings (conditional upon the value of available investment opportunities) and that the use of unexpected CAPEX in prediction models leads to lower prediction error in forecasting earnings. These results are relevant to analysts and investors who wish to assess the expected profitability of firm investments. The findings of this study are of potential importance to regulators decisions regarding the disclosure requirements in relation to both CAPEX and CAPEX commitments.
STRATEGY IMPLEMENTATION BY PERFORMANCE MEASURE DISAGGREGATION: EVIDENCE FROM A QUASI-FIELD EXPERIMENT IN SALES RETAILING
ARTZ, MARTIN
ALAVI, SASCHA; HABEL, JOHANNES; WIESEKE, JAN
Category: MA = Management Accounting
We present evidence from a quasi-field experiment to evaluate how a structural change in the sales incentive plan contributes to the implementation of a new sales strategy. In particular, we analyze the performance effects of a European fashion retailer who switched from rewarding sales performance at the store team level (team performance measure) to rewarding sales performance at the individual frontline employee level (individual performance measure). We are able to exploit the shift using a difference-in-difference design and approach the causal mechanism of sales incentive systems at the individual level. We find a sharp increase in individual sales performance in the post switch period with a plausible economic effect. Our results confirm theory from economics and organizational literature stating that individual incentives are more powerful if cooperation or knowledge sharing is of lower importance as it is the case in our retail setting.
COMPARING FINANCIAL AND TAX AUDIT REGIMES: AUDITORS’ PROFESSIONAL SCEPTICISM, AUDITOR-CLIENT RELATIONSHIPS, AND AUDIT EVIDENCE, EFFICIENCY AND QUALITY
ASCHAUER, EWALD
DYBALL, MARIA CADIZ ; MARTINOV-BENNIE, NONNA
Category: AU = Auditing
This study aims to investigate: 1) how financial and tax auditors differ in regard to their trait of professional scepticism, degree of client trust and client identification, and, 2) how the quality of audit evidence, efficiency in audits and audit quality vary between financial and tax audit regimes. A survey of 695 German financial auditors and 155 Austrian tax auditors was conducted to address the study’s aims. The study shows that financial and tax auditors did not differ in their level of trait professional scepticism. However, they displayed dissimilar levels of client trust and identification. Moreover, the quality of audit evidence, audit efficiency and audit quality was higher for financial audits than tax audits. The study’s findings may have implications for the emphasis put by regulators and standard-setters on the negative impact of trusting audit-client relations on audit outcomes.
CULTURE, COMMUNICATION SKILLS AND INTELLECTUAL CAPITAL: A THEORETICAL FRAMEWORK
ASKARY, SAEED
QAYYUM, NUDRAT ; VAN SANT, RICK
Category: ED = Accounting Education
This paper focuses on analyzing communication skills within socio-cultural values developed by Hofestede (1980) and their effects on intellectual capital. The emerging global business environment of different employees from different cultural background is a rich opportunity for exploiting research in the role of culture on communication skills and intellectual capital. This study considered a positive relationship between strong communication skills and effectiveness intellectual capital for current organizational sustainability. We theorize that the educational environment for all students would be highly effective in developing strong communication skills and intensifying their intellectual capital when the cultural values focus on collectivism, reducing uncertainty avoidance, small power distance, and less effective when the cultural values have tendency towards individualism, greater uncertainty avoidance, and big power distance.
AUDITOR CHOICE, COST OF DEBT, EARNINGS MANAGEMENT IN PRIVATE FIRMS
AZZALI, STEFANO
MAZZA, TATIANA
Category: AU = Auditing
Auditor Choice has been widely explored by literature. This study investigates private companies audited by audit firms in the period 2003 – 2012 in Italy, a country where private firms can choose their audit firm from: Big 4; Second-tier; Third-tier firms registered with CONSOB (Italian Securities and Exchange Commission); Third-tier firms registered with Italian MINISTRY of Justice. We find that Big 4 reduce Cost of Debt and Earning Manamegement in Private Firms. Nethertheless differences in the demand of audit services, in country characteristics and agency conflicts between public and private firms, choosing a Big 4 is important for lenders and creditors in the private firms as it is for investors in public companies. Furthermore it is more beneficial to choose a Second-tier firm than a Third-tier firm. However stakeholders do not perceive different quality within Third-tier; Audit Quality does not depend on whether the firm is on CONSOB or MINISTRY register.
TAX PREFERENCE HETEROGENEITY AND CAPITAL STRUCTURES
BABBEL, MICHAEL
PRONOBIS, PAUL
Category: TX = Taxation
This paper investigates whether and how tax preferences heterogeneity among investors affects the association of taxes and capital structures. Using a large sample of publicly traded European firms from 2002 to 2012, we find that the largest investor is generally able to influence a firm’s capital structure in order to maximize her potential tax rate benefits. However, we find that this effect only holds when the tax preferences of the second-largest investor tend in the same direction (i.e., both investors have a tax incentive for debt over equity or vice versa), or respectively, the ownership is highly concentrated with the largest investor. If the tax preferences of the second-largest investor tend in the opposite direction and the largest investor does not hold the majority of shares, the largest investor is not able to influence a firm’s capital structure. We contribute to prior literature by demonstrating that tax preferences effects on capital structures are differentially relevant under different ownership-specific circumstances.
EARNINGS QUALITY AND FAMILY OWNERSHIP: EVIDENCE FROM TIMES OF ECONOMIC TURMOIL
BABOUKARDOS, DIOGENIS
BABOUKARDOS, DIOGENIS
Category: GV = Accounting and Governance
This study examines the accounting quality provided by family-owned firms in an economic environment which suffers from a severe economic crisis. Drawing from agency theory, prior literature has hypothesized and empirically found that family owned firms provide on average accounting information (especially earnings) of higher quality than non-family owned firms. However there are reasons to believe that this finding does not hold in times of economic crisis. There is evidence that in times of crisis, controlling shareholders tend to engage more in actions of expropriating minority shareholders’ wealth. In order to conceal their actions, and hence maintain the investments of minority shareholders in the firm, controlling families may provide obscure accounting information. Focusing on the current sovereign debt crisis in Greece this study provides empirical evidence that the accounting quality of family owned firms listed in the Athens Stock Exchange has significantly deteriorated during the crisis in comparison to a pre-crisis period. Most importantly, it is found that even though for the pre-crisis period comparing family firms to a matched sample of non-family firms provide mixed results, in the crisis period there is clear evidence that family firms provide accounting information of lower quality than a matched sample of non-family firms.
TEXTUAL ANALYSIS AND SENTIMENT IN THE CREDIT DEFAULT SWAP MARKET
BAFUNDI, ANDREA
HOFMANN, RONNY
Category: FR = Financial Reporting
In this study, we investigate the importance of unstructured textual information embedded in 10-K reports for the credit default swap (CDS) market, and how quickly qualitative information is impounded into CDS spreads. More specifically, we test whether credit default protection buyers and sellers are sensitive to non-quantitative information embedded in companies´ mandatory Item 1a – “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the 10-K report filed with the Securities and Exchange Commission (SEC). We find that information related to optimism/pessimism embedded in the reports as captured by the Loughran and McDonald vocabulary is inversely and significantly related to short-window abnormal spreads and hence, value relevant for CDS traders. Using a more general vocabulary, Diction 5.0, only quantitative information is able to explain the variation in spreads. In addition, we show that information on the readability of the 10-K report sections is not immediately impounded into CDS spreads, but is eventually captured if the spread windows are increased (5-day and 7-day window). Overall, we provide evidence that suggests that players in the CDS market analyze textual features of financial text as this provides them with additional useful and value relevant information about a firm´s (default) risk position.
THE MARKET-VALUE EFFECTS OF GHG EMISSIONS, ASSURANCE AND ASSURANCE PROVIDER: AN INTERNATIONAL STUDY
BALATBAT, MARIA
BOSE, SUDIPTA; GREEN, WENDY
Category: SE = Social and Environmental Accounting
We examine the market value effects of greenhouse gas (GHG) emissions disclosures, the effect of assurance of these disclosures as well as the type of assurance provider. The sample consists of 2,028 firm-year observations across 33 countries drawn from the CDP2007 to CDP2011 reports. After controlling for selection bias, we find a negative effect on market value for GHG emissions disclosures and that this effect is moderated if the emissions are assured, particularly when this assurance is provided by the accounting profession. These findings suggest that not only are GHG emissions disclosures informative to investors, but also that firms have an opportunity to reduce the negative impact on market value that results from disclosing GHG emissions through assurance of this information. Results of this study also suggest investors view assurance by the accounting profession to provide higher quality assurance.
INVESTIGATING THE IMPACT OF ORGANISATIONAL CULTURE AND AUDIT PERSONNEL CHARACTERISTICS ON DYSFUNCTIONAL AUDIT BEHAVIOUR
BALDACCHINO, PETER J.
AGIUS, JUSTINE; BEZZINA, FRANK; TABONE, NORBERT
Category: AU = Auditing
Following the recent economic crisis, there has been an increased focus on audit quality. Audit firms are being pressed to seek ways to enhance the quality of audits. This study looks at audit quality by examining the incidence and impact of dysfunctional audit behaviour within audit firms based in Malta. It investigates the impact of organisational culture and audit personnel characteristics on the acceptance of dysfunctional practices among audit staff. To address these objectives, a questionnaire was distributed among the audit personnel of forty audit firms. This was complemented by eight semi-structured interviews held with various audit partners. The study finds that the perceived reinforcement of under-reporting of chargeable time, inappropriate behaviours by superiors and an individual’s locus of control are significant predictors of the acceptance of dysfunctional practices. Results also indicate that audit experience leads to a reduction of such behaviour and that Big Four audit personnel seem to be less accepting of dysfunctional practices than those in smaller firms. Furthermore, the organisational culture within audit firms and an individual’s perception of control in his/her work exhibit significant influence on the acceptance of dysfunctional practices among audit staff. It also raises awareness on the impact of dysfunctional practices and sheds light on the factors contributing to such behaviour in an attempt to enhance audit quality.
THE ROLE OF COUNTRY- AND FIRM-LEVEL DETERMINANTS IN EXPLAINING ENVIRONMENTAL, SOCIAL AND GOVERNANCE DISCLOSURE
BALDINI, MARIA ASSUNTA
DAL MASO, LORENZO; LIBERATORE, GIOVANNI; MAZZI, FRANCESCO; TERZANI, SIMONE
Category: SE = Social and Environmental Accounting
By combining institutional and legitimacy theory in a unique framework, this paper aims at empirically analysing the determinants of non-financial disclosure by investigating the extent to which country- and firm-specific characteristics affect environmental, social, and governance (ESG) disclosure. While prior literature mainly concentrated on individual pillars, this study examines the determinants of ESG disclosure by employing a comprehensive measure. Individual pillars are also examined to investigate whether country- and firm-specific characteristics have a different impact on these types of disclosures. Results are based on a cross-country sample of 33,444 firm-year observations for the period 2005-2012 and are consistent with previous literature suggesting the political system, the labour and education background and the national culture context are the most important categories of institutional determinants impacting ESG disclosure. In line with legitimacy theory, all firm-specific variables related to firms’ visibility (analysts’ coverage, cross listing, size) positively and significantly impact ESG disclosure. Our results show the overlapping of different theories in explaining social responsible actions of firms and confirm the usefulness of investigating social phenomena from more than one theoretical point of view.
DETERMINANTS AND ECONOMIC CONSEQUENCES OF FIRM PARTICIPATION AT POLICY-RELATED CONGRESSIONAL HEARINGS
BALORIA, VISHAL
Category: TX = Taxation
I document the first systematic evidence on the characteristics and economic consequences of firms invited to testify at policy-related congressional hearings. To maximize the power of empirical tests and enhance the generalizability of inferences, I focus specifically on hearings related to corporate taxation. First, compared to a control group closely matched on size and industry, invited firms have more policy-relevant information to offer to the Committee Chair. Second, investor reaction to firm participation at congressional hearings varies predictably based on firm characteristics, including sensitivity to reputational costs and amount of taxes paid. Third, compared to the control group, invited firms reap significant subsequent economic benefits, as their tax payments decline in the two years following the congressional hearing. Among invited firms, this decrease in tax payments is concentrated in firms that have the most to offer to the Committee Chair. Collectively, this evidence suggests that congressional hearings are economically significant events with meaningful consequences for invited firms.
PRECISION OF PUBLIC INFORMATION AND COORDINATION FAILURE: AN EXPERIMENTAL ANALYSIS
BANERJEE, SANJAY
MAIER, MICHAEL
Category: FR = Financial Reporting
More precise public information reduces uncertainty about economic fundamentals, but it can increase uncertainty about other agents' actions, leading to coordination failure. We conducted a laboratory experiment to study the effects of the precision of public information and strategic complementarity on coordination failure. We found that: (i) granular public disclosure, which is disaggregated and precise, increases the likelihood of coordination failure, especially when the news is pessimistic; (ii) the deleterious effect of granular disclosure on coordination failure is stronger when strategic complementarity is high; and (iii) higher levels of information granularity and strategic complementarity decrease coordination efficiency. Our findings have implications for the Federal Reserve's decision to publicly disclose detailed stress test results for distressed banks, and the debate on whether PCAOB should publicly release reports on firm-specific quality-control deficiencies of audit firms.
PROPOSAL OF AN INTERNATIONAL HUMAN CAPITAL REPORTING GRID TO IMPROVE THE VALORISATION OF HUMAN RESOURCES
BARBU, ELENA M.
BIHR, MARIE-HÉLÈNE; IENCIU, NICOLETA
Category: SE = Social and Environmental Accounting
Knowing that no sustainable competitive advantage can be built without a qualitative human capital management of the company, and no human capital management is possible without having employees with true native and gained values, we propose a human capital reporting grid taking in consideration, on the one hand, a global human resources valorisation and, on the other hand, a valorisation of each person. Native values (as creativity, aptitudes, principles and moral values), as well as gained values (as the knowledge and competences accumulated by the employee due to their education, experience and attitude) are taken in consideration in this grid. After the presentation of the grid, we show how it could be used by researchers to investigate the extent and the best practices of human capital reporting in France and Canada, and to identify factors influencing these practices (firm size, board structure, leverage, auditor type, profitability, industry, foreign activity, etc.). The grid could be also used by companies to improve their human capital reporting, by regulators to propose a unique human capital reporting framework, and by researchers to observe the human capital reporting evolution.
THE INFLUENCE OF PUBLIC INTEREST COMMITMENT, RULE ORIENTATION AND ORGANIZATIONAL ETHICAL CULTURE ON SPANISH AUDITORS’ ETHICAL DECISIONS
BARRAINKUA AROZTEGI, ITSASO
ESPINOSA-PIKE, MARCELA
Category: AU = Auditing
The present study tests the influence of organizational ethical culture, public interest commitment and rules versus principles orientation on auditors’ acceptance and committing of unprofessional behaviour. A variance-based structural equation modelling (Partial Least Squares) was employed based on 122 responses from Spanish high ranking auditors. Results reveal that the ethical culture of the organization has a positive influence on auditors’ public interest commitment, as well as ethical decision making. Moreover, auditors’ public interest commitment is related to a more ethical decision making. Therefore, this study reinforces the need to instil the responsibilities that auditors have with society and the relevance of enhancing the ethical culture in audit firms. This study has practical implications for professional organizations, audit firms and regulators. Understanding the auditors’ beliefs and behavioural patterns is critical to proposing mechanisms that enhance ethical behaviour at all levels of an audit firm. Fostering the ethical behaviour among auditors will help improve the audit quality, as the values, ethics and attitudes that the auditors bring to their work are key elements for audit quality.
ACCOUNTANT QUALITY: EVIDENCE FROM LINKEDIN
BARRIOS, JOHN
Category: AU = Auditing
I use professional accountants' career histories from LinkedIn and the staggered state-level adoption of the 150-hour Rule as a natural experiment to test the Rule's impact on career outcomes. My analysis is premised on the economic theories of barriers to entry and screening. I find that the 150-hour Rule is associated with increases in CPA exam pass rates and a reduction in candidate supply. My analysis of LinkedIn data shows that individuals subject to the Rule are more likely to be employed at a Big 4 public accounting firm and to specialize in tax. These individuals spend a larger percentage of their career in public accounting, have the same likelihood of promotion, but exit public accounting at faster rates than their non-150 hour Rule counterparts. These results are consistent with the 150-hour Rule serving as a barrier to entry rather than as an effective screening mechanism.
BOARD COMPOSITION: OWNERSHIP CONCENTRATION AND EXECUTIVE RESOURCES
BARROSO CASADO, RAUL
DAVILA, ANTONIO; OYON, DANIEL
Category: GV = Accounting and Governance
This paper addresses the influence of different types of ownership and the effect that some executive skills and resources have on the choice of independent directors, an important mechanism of shareholder representation. In particular, we address the impact that ownership concentration, shareholder type, shareholder involvement, and the presence of certain managerial resources and capabilities have on the number of independent board members. Our results show that ownership concentration has a non-linear relation with board of director’s independence. However, we find that this relation depends on the type of shareholder. Finally, we observe that boards are designed after an internal analysis of the resources provided by other non-independent directors. The paper contributes to the growing literature on board of directors’ design and the influence of different types of ownership on the design of the governance of the firms. In particular, it combines agency and resource dependence theories to explore how the incentives of shareholders and executive directors shape the governance of the firm.
THE JOBS ACT AND INFORMATION UNCERTAINTY IN IPO FIRMS
BARTH, MARY
LANDSMAN, WAYNE; TAYLOR, DANIEL
Category: FA = Financial Analysis
This study examines whether the Jumpstart Our Business Startups Act (JOBS Act) increases information uncertainty in IPO firms. The JOBS Act creates a new category of issuer, the Emerging Growth Company (EGC), and eases disclosure requirements for IPO firms with EGC status. Measuring information uncertainty using IPO underpricing and post-IPO equity return volatility, we find that both underpricing and volatility are significantly greater for IPO firms with EGC status than comparable firms without EGC status. Additional findings indicate that variation in the application of specific provisions of the JOBS Act explains the differences in underpricing and volatility. We also find that high quality audits offset the increase in information uncertainty associated with applying the provision permitting reduced financial statement disclosure. Taken together, our findings provide evidence that the JOBS Act’s eased disclosure requirements increase information uncertainty in IPO firms.
THE USE OF CUSTOMER ACCOUNTING PRACTICES TO SUPPORT A CUSTOMER-FOCUSED STRATEGY: A CASE STUDY IN AN AUSTRALASIAN BANK
BATES, KEN
EGGLETON, IAN; FOWLER, CAROLYN
Category: MA = Management Accounting
Firms that follow a customer-focused strategy are likely to benefit from the use of customer accounting (CA) practices, and yet the accounting literature on CA is “little more than fledgling” (McManus and Guilding, 2008, p. 783). If management accounting is to serve the strategic objectives of the firm (Atkinson et al., 2012) some form of CA, preferably including a forward-looking metric like customer lifetime value (CLV), is desirable to assist such firms to maximise shareholder value. However, there is limited knowledge about what CA metrics are used in practice how they may be used to manage and monitor a customer-focused strategy. This paper describes case study research on the use of CA in an Australasian Bank with a clear customer-focused strategy. The paper describes how, independently of the central finance function, two SBUs have employed activity-based costing methodology to develop full cost CA information. Personal banking use a novel CLV measure, which incorporates customer needs met as a key variable, to monitor customer segments and to improve customer profitability. The smaller, business banking unit currently uses only historical customer profitability analysis, but intends to develop forward-looking CA measures in the future. Tensions between the central finance function and operational managers about the nature, accuracy and verifiability of CA metrics are evident and may potentially be hindering more widespread use of CA metrics.
THE EFFECTS OF SEVERE ECONOMIC CRISIS ON BUDGETING PRACTICES IN COMPANIES: A LONGITUDINAL STUDY
BATT, CATHERINE ELISABET
KARLSSON, ÞORLÁKUR ; RÍKHARÐSSON, PÁLL
Category: MA = Management Accounting
The 2008 economic crisis had a significant impact on the business world. In the present study we examine the impact of drastic increase in environmental turbulence due to a large-scale national economic crisis on budgeting practices in private companies. The empirical material is from two surveys of budgeting practices in 184 Icelandic companies in 2008 and 191 companies in 2014. The 2008 survey was carried out months before the Icelandic economy was hit with the worst crisis in the history of the country dramatically increasing the environmental turbulence and uncertainty in the operating environment of companies. The 2014 survey was carried out 6 years later using a similar survey instrument and methodological approach. The results indicate, contrary to expectations, that the economic crisis has not had any significant effects on budgeting practice in Iceland. Budgeting practices remain relatively simple and might be seen more as a routine rather than a valuable management tool.
ONE TEAM OR TWO TEAMS? EXPLORING THE EXISTENCE OF A COLLECTIVE AUDIT TEAM IDENTITY BETWEEN AUDITORS AND IT SPECIALISTS AND ITS IMPLICATIONS ON AUDIT PROCESS AND OUTCOMES
BAUER, TIM
ESTEP, CASSANDRA
Category: AU = Auditing
As companies increase reliance on IT in business and financial statement processes, the use of IT specialists has become increasingly important. Currently, little is known about how auditors and IT specialists team together and the impact of those interactions on audit outcomes despite evidence of, and regulator concerns about, auditor shortcomings in specialist and IT audit areas. Drawing on Social Identity Theory, we conduct interviews with audit and IT practitioners to describe factors that influence a collective audit team identity and how this identity strength impacts the financial statement audit process and outcomes. The results of our interviews provide evidence of a collective audit team identity between auditors and IT specialists. However, its strength varies from audit to audit and opinions on this collective, one-team concept differ between auditors and IT specialists; while auditor views are more positive, IT specialists feel they are not always treated as equals or seen as a “necessary evil”. Moreover, the audit process is vastly different for weaker versus stronger collective audit team identities; the former is associated with less widespread IT specialist involvement and less collaboration when modifying audit procedures in light of critical IT issues, which may diminish the quality of risk assessments and the sufficiency of audit testing. Our findings are of interest to regulators, practicing auditors, and academics and motivate future empirical work.
TAX PLANNING IN R&D OFFSHORING
BAUMANN, MARTIN
BACHMANN, CARMEN; LAHMANN, ALEXANDER
Category: TX = Taxation
This paper analyzes the role of tax planning in offshoring R&D services. We find that tax credits, transfer prices and tax rate differences significantly influence the profitability of clinical trial offshoring. Even though transfer prices should neutralize tax savings from offshoring, the analysis shows that the implementation of the tax system in the transfer price increases the profitability of R&D offshoring. Applying aggregated data from the pharmaceutical industry, we show that from a tax perspective, pharmaceutical R&D offshoring is usually more profitable in later clinical trial phases.
ENHANCING THIRD SECTOR ACCOUNTABILITY THROUGH ACCOUNTING – A REVIEW OF REGULATIONS AND PRACTICES IN GERMAN-SPEAKING COUNTRIES
BAUMÜLLER, JOSEF
HARING, NIKOLAI
Category: PS = Public Sector Accounting
The question whether accounting regulations designed for profit-oriented enterprises can or should be transfer into the context of nonprofit-organizations is a much- and long-disputed issue. Technical aspects addressed are whether methods for recognition, measurement, and presentation can give a true and fair view also in the context of these organizations; and whether economic events occur in their context that are not covered (or cannot be covered) by for-profit-accounting-standards. Furthermore, this matter is now of increasing relevance as accounting regulations play a crucial role in the ongoing accountability-debate both internationally and in the three countries analyzed. Firstly, accounting reports are required to give a view on the economic situation of an entity and the degree of efficiency in using the stewarded resources. Secondly, in the context of nonprofits further reporting is required to cover extra-financial information. In both respects, the scarce empirical literature only shows partly little compliance and underdeveloped accountability practices being employed in that aspect. This is also attributed to a regulatory framework which is deemed inappropriate. The paper aims at analyzing and comparing these frameworks for accounting practices in Germany, Austria and Switzerland. Differences between the three countries are outlined and contrasted with the ongoing accountability-debate in literature and developments in international accounting regulations.
CORPORATE GOVERNANCE, COMPANIES’ DISCLOSURE PRACTICES, AND MARKET TRANSPARENCY: A CROSS COUNTRY STUDY
BEEKES, WENDY
BROWN, PHILIP; ZHANG, QIYU
Category: GV = Accounting and Governance
We examine the link between corporate governance, companies’ disclosure practices and their equity market transparency in a study of more than 5,000 listed companies in 23 countries covering the period 1 January 2003 to 31 December 2008. Our results confirm the belief that better-governed firms make more frequent disclosures to the market. We also find different levels of disclosure between common and code law countries, although firms with better governance in both code and common law countries make more frequent disclosures. We measure market transparency by the timeliness of prices. In contrast to single country studies, results show, for the 23 countries collectively, better corporate governance is associated with less transparent share prices. This would suggest that, when the underlying economic conditions and the firm’s business model are consistent with reduced corporate transparency, corporate governance is strengthened to mitigate agency costs. We are thus led to the conclusion that even if information is disclosed more frequently by better-governed firms, it is not necessarily the case their shares are priced more efficiently.
THE RELATIONSHIP BETWEEN CONTROL AND INNOVATION: AN EXPLANATION BASED ON KNOWLEDGE CREATION
BELDI, ADEL
DE LA VILLAREMOIS, OLIVIER; KARMENI, KERIM; MANSOURI, FAYSAL
Category: MA = Management Accounting
This study investigates the relationship between management control system and innovation. Particularly, we attempt to explain “How management control system is positively related to innovation?” A survey data of 106 outlets of franchise networks located in France, using Partial least squares (PLS) method, indicates that management control systems are positively related to innovation and a part of this positive relationship can be explained by the mediating effect of knowledge creation. The article sensitizes franchisors to think how knowledge creation can facilities innovation under business format franchising. It argues also that management control systems acting through behavioral control, outcome control and social control have a positive impact on innovation in the business format franchising system.
COMBINATIONS OF THE LEVERS OF CONTROL IN PRODUCT DEVELOPMENT
BELLORA-BIENENGRAEBER, LUCIA
Category: MA = Management Accounting
This paper contributes to the recent literature on the relationship between management control systems (MCS) and innovation (Bisbe & Malagueno, 2009; Bisbe & Otley, 2004; Ylinen & Gullkvist, 2014) by considering how the levers of control (LOC), i.e., interactive and diagnostic control systems, beliefs and boundary systems, are combined in product development (PD). Based on a survey of 468 manufacturing firms, I explore by cluster analysis how the LOC are combined, given the process of strategy formation (intended or emergent) and the degree of innovativeness of the firm. I identify three empirically derived firm configurations and label them “Values and Norms Control”, “Performance Measures Control”, and “Limited Control”. The first two configurations are equifinal in terms of performance, while outperforming the third configuration. The results contribute to research in that (1) they respond to the call for analysis of “packages” of control instead of isolated MCS components; (2) they provide first quantitative evidence of the relationship between strategy formation process and LOC and build on previous qualitative results; and (3) they enrich the MCS-innovation literature by addressing the combinations of LOC that are capable of generating the highest PD performance. Practice can profit from my results by identifying the best configuration of LOC, given the manifestation of strategy formation process and environment variables.
THE INFLUENCE OF ORGANIZATIONAL DESIGN AND NON-FINANCIAL PERFORMANCE MEASUREMENT ON GLOBAL PERFORMANCE
BENET, NATHALIE
DEVILLE, AUDE
Category: MA = Management Accounting
The marketing literature indicates that employees in contact with customers in the service sector are prominent. This management accounting study considers this result and investigates relations between control of operational performance and organizational performance in the hotel industry. Specifically, we are interested in the relations between assignment of decision rights, performance measurement system and incentive system dedicated to employees in contact with customers, and we consider the effects of this organizational design on organizational performance. These relations are studied in light of the strategic concept of market orientation, this one being operationalized through a qualitative study of the concept of hotel value proposition. In order to test our agency model, we use a PLS analysis on the basis of an empirical study of hotels in the French Riviera. Our results indicate support to the hypothesized positive relations between assignment of decision rights and use of incentive systems, and between use of incentive systems and non-financial measurement. We find no support to the hypotheses that organizational design is positively related to organizational performance, and that hotel value proposition influences organizational design. Overall, results are consistent with prior literature indicating that assignment of decision rights and management control systems are complementary choices. Furthermore, they provide insights on the service specificities.
PROPERTY BUBBLE, URBAN DEVELOPMENT REVENUE AND POLITICAL CORRUPTION IN LOCAL GOVERNMENTS
BENITO, BERNARDINO
BASTIDA, FRANCISCO; BENITO , BERNARDINO; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA-MARÍA
Category: PS = Public Sector Accounting
In the first years of the 21st century, there was a building boom in Spain, which triggered many corruption cases in municipalities. This paper contributes to the scarce literature on this issue by analysing the impact of socio-economic and financial factors on urban political corruption. Our sample covers the 110 Spanish largest municipalities for 2000-2009. The findings indicate that higher salaries for politicians and more transparency are connected with lower corruption levels. We confirm theoretical assumptions that posit that municipalities where politicians have higher salaries present less corruption cases. Finally, municipal transparency should be enhanced, because it is related to lower corruption.
MANAGERS’ FORECASTING BEHAVIOR AND THE RELIABILITY OF EARNINGS FORECASTS IN IPO PROSPECTUS
BENOUDA SIOUD, OLFA
BENOUDA SIOUD, PR. OLFA
Category: FR = Financial Reporting
This study investigates the reliability of management earnings forecasts with reference to these two ingredients: verifiability and neutrality. Specifically, we examine the biasedness (or accuracy) of management earnings forecasts and company specific characteristics that can be associated with accuracy. Based on sample of 102 IPO prospectuses published for admission on NYSE Euronext Paris from 2002 to 2010, we found that these forecasts are on average optimistic and two of the five test variables, earnings variability and financial leverage are significant in explaining ex post bias. Acknowledging the possibility that the bias is the result of the managers’ forecasting behavior, we then examine whether managers decide to under-predict, over-predict or forecast accurately for self-serving purposes. Explicitly, we examine the role of financial distress, operating performance, ownership by insiders and the economy state in influencing managers’ forecasting preferences. We find that managers of distressed firms seem to over-predict future earnings. We also find that when managers are given more stock options, they tend to under-predict future earnings. Finally, we conclude that the management earnings forecasts are affected by an intentional bias due to managers’ forecasting preferences.
THE INFLUENCE OF AMERICAN ACCOUNTING THOUGHT IN FRANCE DURING 1950S: THE CASE OF CONSOLIDATED FINANCIAL STATEMENTS
BENSADON, DIDIER
Category: FR = Financial Reporting
The purpose of this paper is to show that, long before the French groups begin to publish consolidated accounts, American regulations have influenced the thinking of French accountants on the subject in the early 1960s. In consolidating accounts in France, is the pioneering study by Richard and Veyrenc in 1954 that initiates the discussion of the issue of the consolidated balance sheets. The study, Consolidated Balance sheets, income from business groups was presented at the annual conference of the National Society of Accountants in Dijon in 1954, will be widely quoted and discussed in the professional literature until 1964. This paper seeks to highlight the genesis of this seminal text on the consolidated accounts. Richard and Veyrenc where did they get their inspiration? It's in the minutes of a mission productivity with which they participated in the United States in April-May 1951 we find the answer. So it is interesting to revisit the report of the mission to seek productivity measure the contributions of two French accountants in their communication of 1954. According to a comparative report of the mission productivity and communication of Richard and Veyrenc that there are many similarities reading. Consequently, the influence of the task productivity of Accountants of April-May 1951 was instrumental in the establishment of a reflection on consolidation of accounts in France. Thus, even before the French company at the head of a group begin to publish consolidated accounts (late 1960), the literature on the issue of consolidation already broadcasts during the 1950 Anglo-Saxon methodology.
THE RELATIONSHIP BETWEEN BOARD STRUCTURE, BOARD COMMITTEES AND FIRM PERFORMANCE IN RUSSIA
BEREZINETS, IRINA
CHERKASSKAYA, ANNA; ILINA, YULIA
Category: GV = Accounting and Governance
Board of Directors as an internal mechanism of corporate governance is the subject of various studies substantial part of which provides evidence regarding the link between board characteristics and company’s financial performance. This study is aimed to investigate the link between board structure and performance of Russian publicly owned companies measured by Tobin’s Q. Our sample includes 207 Russian traded companies that were listed on RTS (Russian Trading System) during the four year period (2007 – 2011). The results show positive relationship between Tobin’s Q and board size as well as gender characteristic of the board. The relationship between Tobin’s Q and the percentage of independent directors was not identified. In addition it was found that the presence of such board committees as audit committee, nomination and remuneration committee and strategy committee does not necessarily mean any difference in financial performance of these companies from those that lack mentioned committees.
IS THE RISK OF PRODUCT MARKET PREDATION A COST OF DISCLOSURE?
BERNARD, DARREN
Category: FR = Financial Reporting
A developing literature examines the determinants and consequences of product market predation – opportunistic behavior by product market rivals that targets financially constrained firms to appropriate their market share or, in the extreme, to force them out of business. This paper provides evidence that the risk of product market predation imposes an important cost of disclosure on financially constrained firms. The empirical analysis uses a 2006 regulatory change in Germany that effectively forced private firms to comply with pre-existing financial statement public disclosure requirements. The evidence suggests a strong positive quadratic relation between financial constraint and disclosure avoidance. Consistent with the risk of predation driving this relation, the results are substantially stronger for firms that are smaller or less profitable than industry rivals, firms operating in industries with publicly held rivals, and firms less likely to make relationship-specific investments and rely on long-term supply contracts (i.e., non-manufacturing firms). The findings suggest an important link between disclosure and capital structure decisions and contribute to the broader literature on proprietary disclosure costs.
CONTENT TRENDS IN SUSTAINABILITY REPORTING: A CANADIAN INDUSTRY-BASED ANALYSIS
BERTHELOT, SYLVIE
COULMONT, MICHEL; SERRET, VANESSA
Category: SE = Social and Environmental Accounting
The main objective of this study is to present a picture of the trends in the content of the sustainability reports (SR) published by Canadian companies active in four industries over a thirteen-year period. The results of our analysis show a general increase over time in the amount of discretionary information issued, as well as varying degrees of coverage of sustainability categories. In the early 2000s, the focus was more on environmental performance, whereas social performance items such as employment practices, human rights, and consumer-oriented product and service responsibility have now gained more traction.
BE THE LARGEST MUTUAL FUND MANAGEMENT COMPANY IN ACQUIRING FIRMS EVIDENCE FROM CHINA
BI, XIAOGANG
Category: GV = Accounting and Governance
This article investigates the effect of collective holding by the largest Mutual Fund Management Company in acquiring companies (thereafter, LgFund) on acquirers’ post-event valuation. We find total holding by mutual funds is not a superior proxy to predict the acquiring firms post-event valuation, however, the collective holding by LgFund in acquiring firms is significantly positive related to the valuation of acquiring firms. Moreover, the larger increase of holding by LgFund, the higher post-event acquirer valuation, and it takes less time for acquirer to complete the deal.
DETERMINANTS OF THE LEVEL OF INFORMATION DISCLOSURE IN FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS
BIAŁEK-JAWORSKA, ANNA
MATUSIEWICZ, ANNA
Category: FR = Financial Reporting
This paper is an attempt to identify the factors determining the extent of information disclosure in financial reports of selected Polish listed companies. Understanding the determinants that influence the extent of disclosure in financial statements is particularly important in the context of reporting standards harmonisation and the related process of IFRS coming into common use in consolidated accounts since 2005. Based on a panel study of factors determining the scope of information disclosed by 36 Polish public companies in the years 2005-2007, with the Polish Corporate Disclosure Index being used as a disclosure measure, a negative correlation between the extent of disclosure and the companies’ financial performance was demonstrated. The outcomes are consistent with Huang et al. (2011), which showed an adverse effect of ROE on the transparency of companies from Taiwan. Both Taiwanese investors and their Polish counterparts, when analysing financial statements, focus mainly on a companies’ bottom line, paying less attention to any other information. Hence, managers are less motivated to present the company standing in a more detailed manner if a satisfactory profit is generated. The study proved that the analysed companies decided to disclose more when their profitability was lower, especially if the earnings were insufficient for any dividend payment. It may result from their disposition to justify the lack of dividend by explaining the financial standing in more detail.
PUBLIC LOCAL GROUP: THE FINANCIAL STATEMENT EFFECTS OF ADOPTING THE INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS. THE CASE OF ITALY.
BIANCONE, PAOLO PIETRO
SECINARO, SILVANA
Category: PS = Public Sector Accounting
Using a sample of Italian local group, we investigate the financial statement effects of adopting International Accounting Standards. The consolidated financial statements for the local public group, recently introduced in the experimental stage by the Italian legislature, has the potential to provide the information needed to verify the degree of achievement of the objectives inherent in the entire aggregate, especially with reference to the composition the sources of the resources that the composition of the loans of the same. In this context allows to know the group's financial structure, the degree of financial independence and the level of debt, the structure of ownership of the group, the overall cost of the same, the structural composition of costs, especially those that are the most significant items of part of the output. The consolidated information permits, also, the knowledge of the different composition of income as well as the analysis of the relationship between revenue from taxing ability of the parent and the income from exchange relationships activated by the subsidiaries with consequential possibility of forecast consolidated business units as well as to formulate programs for greater optimization is finding that the use of resources. Of course, here and take over the limits, in his overview (overall) the consolidated financial statements can conceal the meaning of particular events and makes it difficult to compare spatial/temporal data consolidated as the Group is, by its nature, ductile (not is a stable) and flexible is the scope of consolidation (directly dependent on the composition of the Group) (Grossi, Reichard, 2006). It will strictly depends by the criteria adopted in the consolidated process: this paper aims to discuss the purpose of the consolidated financial statements of the Public groups to steer the preparation of the interests of stakeholders.
IS AUDITOR INDEPENDENCE REALLY COMPROMISED BY THE MAGNITUDE OF AUDIT FEES? EVIDENCE FROM THE SPANISH CONTEXT
BIEDMA LOPEZ, ESTIBALIZ
GUIRAL, ANDRES; NOH, MINYOUNG; RUIZ BARBADILLO, EMILIANO
Category: AU = Auditing
This study examines whether the magnitude of audit fees adversely affect auditor independence, measured as the auditors’ propensity to issue going-concern modified audit opinions. Using a sample of 561 financially distressed Spanish firms between 2002 and 2010, we find no evidence that the magnitude of audit fees – as measured by the level of audit fees, the amount of audit fees in absolute terms, the relative amount of audit fees received from one client, the amount of unexpected audit fees, and the amount of future fees expected – negatively impairs auditor independence. These results are robust to a variety of sensitivity checks, including the role played by non-audit fees on this association. Our findings are contrary to regulators’ belief that auditor independence is compromised by the magnitude of audit fees.
LONG-TERM EFFECTS OF CORPORATE MISREPORTING: HOW LONG DO CREDIT RATINGS REFLECT THE RISKS ARISING FROM INTENTIONAL MISSTATEMENTS?
BIEREY, MARTIN
SCHMIDT, MARTIN
Category: FA = Financial Analysis
This paper examines the types of risks that arise after an intentional misstatement becomes publicly known and how long these risks adversely affect firms’ credit rating. A content analysis of rating reports reveals five types of misstatement-induced risks that rating analysts are concerned about. The foremost concern is an increased liquidity risk that results from misstatement-related violations of debt covenants. We document that misstatement-induced risks adversely affect a firm’s credit rating for up to six years subsequent to the misstatement becoming publicly known. The effect is more pronounced for firms with a low liquidity and firms with a CEO and CFO turnover following the misstatement. These findings enhance our understanding of the consequences of misreporting by shedding light on the types of misstatement-induced risks and the persistent effect of these risks on firms’ creditworthiness.
TEMPORALITY AND EVIDENCE OF EARNINGS MANAGEMENT IN FRAUD COMPANIES
BISCONTRI, ROBERT
Category: FA = Financial Analysis
Companies manage earnings for a variety of reasons. One method managers use to manipulate earnings in order to meet expectations is discretionary accruals. Fraud and discretionary accruals has been studied in the past but confined in very specific contexts. The purpose of this study is to broaden the generalizability of these studies by addressing two significant issues. First, literature provides ample evidence that companies who managed earnings illegally resulting in fraud, did so using discretionary accruals. However, do all companies that commit fraud resulting in financial restatements, also display behavior consistent with earnings management? The second issue addressed is that of temporality. Is there a pattern to the use of discretionary accruals in the years leading to fraud? In other words is earnings management present for just the fraud period or for further periods leading up to the fraud? Using a sample of AAERs issued by the SEC is used as a proxy for fraud, the results show that earnings management is commonly used in firms who commit accounting fraud broadly not just those using earnings management as the primary vehicle. The results further show that the earnings management extends to more than one year prior to the fraud.
TRANSFER PRICING SYSTEM (TPS) INTEGRATION, DESIGN CHARACTERISTICS AND PERCEIVED TPS SUCCESS
BISIG, BENEDIKT
HUMMEL, KATRIN; PFAFF, DIETER
Category: MA = Management Accounting
This paper shifts the focus of transfer pricing research from a traditional transaction-based approach to transfer pricing to the overall transfer pricing system (TPS). In particular, we investigate the relationship between the integration of the TPS into the management control system, an enabling use of the TPS and the perceived success of the TPS. Results from structural equation modeling using the partial least squares technique indicate that the level of TPS integration is positively and significantly related to the perceived success of the TPS. This relationship is mediated through an enabling use of the TPS as indicated by the design variables repair and internal transparency. Thus, the level of TPS integration is positively associated with internal transparency and the ability to adapt (repair), which in turn have positive links to the perceived success of the TPS.
BEYOND WHAT? ON THE DIFFUSION OF BEYOND BUDGETING
BJORNENAK, TROND
Category: MA = Management Accounting
‘Beyond budgeting’ (BB) is a practice-defined concept that has received increased attention in recent years. Evidence of why it is diffused and how it is adopted in practice seems to be more anecdotal. The purpose of this paper is to describe and compare different adoptions of BB. Drawing on diffusion theory, these differences are related to the various actors driving such adoption. The findings show that there are major differences in how BB is adopted. The systems with and without budgets had common features, and the main differences lay in balance between the central and local, and the temporary and continuous elements of the system, not in whether budgets were used or not. This paper contributes to our understanding of the concept of BB, introduces a framework for describing changes in management accounting systems, the role of controllers in BB and calls for the prompt rethinking of traditional management accounting diffusion studies.
ONLINE FINANCIAL DISCLOSURE AS AN ACCOUNTABILITY MECHANISM FOR NGOS ACROSS THE GLOBE
BORBA, JOSÉ ALONSO
GOOD, KEVIN; MARAGNO, LUCAS; MINATTI FERREIRA, DENIZE; VICENTE, ERNESTO
Category: PS = Public Sector Accounting
The expansion of the Third Sector in terms of size, scope, and importance has brought on a greater need for accountability and legitimacy. The disclosure of reports on financial and operating performance is a powerful tool for NGOs, allowing for a dialogue with their stakeholders, as well as a resource in and of itself, given the vital part it plays in the acquisition of financial support. Parallel to this, the evolution and ever-expanding use of information technology facilitates the disclosure and diffusion of information to stakeholders around the world. The objective of the present work is to evaluate the level of financial disclosure shown by world´s top 100 NGOs as per the Global Journal´s 2013 Ranking, employing a checklist based on related literature and collecting data from the reports concerning the 2013 year that they make available online. Correspondence analysis showed that the level of financial disclosure is associated with the size of the organization, which suggests that along with a larger size, NGOs show a higher level of finance-based disclosure. Finally, the lack of information made available online by the Top 100 NGOs, along with the absence of financial-accounting standards in this realm hinder analysis of these organizations. Towards these ends, the checklist created in this study stands to assist NGOs that need increased disclosure levels but are limited by financial and human resource considerations.
ACCOUNTING MEASURES ABILITY TO CAPTURE INTELLECTUAL CAPITAL
BORDIANU, ANDREEA
Category: MA = Management Accounting
Despite the general belief that the intellectual capital is the key driver of corporate value and economic performance, the emerging picture from an accounting perspective is somewhat confusing. The literature reveals mixed results about the performance enhancing properties of intellectual capital and says little about how this may be brought about. This paper “takes a step back” from the common literature found in the field and questions whether the choice of measurement and its ability to adequately capture intellectual capital could be one of the reasons for the mixed results. It analyses the most commonly used accounting measures of overall intellectual capital value to determine their differences and similarities and whether they are equally effective at capturing different features of this resource. The analysis is based on an 11 years panel of UK listed companies in the low and high knowledge intensive manufacturing and services sectors. Accounting measures are found to have a significantly different ability to reflect the different features of intellectual capital from one measure to another and across different industries. Market-based accounting measures are found to better capture intellectual capital compared to financial statement-based measures. The paper provides a better understanding of the accounting measures of intellectual capital. Also, it provides useful information for the modelling of the link between intellectual capital and performance.
AUDITORS’ AND SPECIALISTS’ VIEWS ABOUT THE USE OF SPECIALISTS DURING AN AUDIT
BORITZ, J. EFRIM
KOCHETOVA-KOZLOSKI, NATALIA; ROBINSON, LINDA; WONG, CHRISTOPHER
Category: AU = Auditing
With the greater spotlight on the quality of auditing in the context of increasing complexity of accounting, auditors are more frequently seeking the assistance of specialists from such fields as tax, information technology, valuations, and forensic accounting. This interview-based study of 40 practitioners from Big 4+2 firms - 18 auditors (partners, managers, seniors) and 22 specialists (tax, IT, valuations and forensics) - examines auditors’ and specialists’ views about the current state of specialist use, sources of conflict, auditors’ overconfidence in their ability to perform specialist work, firm policies, and future expectations about utilization of specialist services.
DO TRANSFER PRICING RULES DISTORT R&D INVESTMENT DECISIONS?
BORNEMANN, TOBIAS
Category: TX = Taxation
This paper analytically examines the decision to either deploy intangible assets via a Licensing or a Cost Sharing Agreement among affiliates of a multina- tional enterprise in the presence of tax rate differentials. Transfer pricing regulations usually offer two alternatives to deploy intangibles across affiliates. Commonly af- filiates are licensed to use an intangible that, in turn, ought pay a royalty at arm’s length. Alternatively, group affiliates can enter into a Cost Sharing Agreement according to which costs are split in proportion to the share in expected benefits de- rived from using the intangible asset. After the intangible is successfully developed each participant is granted economic ownership in the intangible and, therefore, no royalties are payable. In the absence of tax rate differentials, the MNE is indifferent between using Licensing or Cost Sharing Agreements. If the parent affiliate that also develops the intangible faces a higher tax rate than its foreign subsidiary, it is advantageous to use a Cost Sharing Agreement. Vice versa, it is advantageous to license the foreign affiliate to use the intangible asset. As a result, common transfer pricing regulations provide possibilities to strategically respond to varying tax rates and to optimize the group effective tax rate even without deviating from the arm’s length principle.
INDICES OF TAX COMPLEXITY AND ITS RELATION WITH TAX NONCOMPLIANCE: EMPIRICAL EVIDENCE FROM THE PORTUGUESE TAX PROFESSIONALS
BORREGO, ANA CLARA
FERREIRA, CARLOS; LOPES, CIDÁLIA
Category: TX = Taxation
The important role played by Portuguese tax professionals in the tax system justifies the analyses of tax complexity in their perspective and its relation with their tax noncompliance. Data collected in 2013 by questionnaire allowed to perform it and this paper presents the results. Firstly, it analyses the main areas of tax complexity pointed out by TOCs and secondly summarizes the main areas of tax complexity, into three dimensions, by using the Principal Component Analyses. Thus, an index of legislative tax complexity and two indices of compliance complexity (in professionals and tax authority context) were constructed. We verify that there is a relation between TOCs’ perceptions of tax complexity, measured through the indices, and some of their tax noncompliant behaviour, in particular the non-aggressive ones.
CHOICE OF MEASUREMENT BASIS AND DISCRETIONARY DETERMINATION OF CURRENT VALUE OF REAL ESTATE: EVIDENCE FROM DUTCH SOCIAL HOUSING ASSOCIATIONS
BOTERENBROOD, ROB
Category: FR = Financial Reporting
Although there is lack of evidence on the choice between historical cost and fair value as a measurement basis, we do know that certain firm characteristics drive the accounting policy chosen. For example when do firms revalue their assets? Because fair value as a concept is market based there should be no relationship between firm characteristics and fair value. However the literature also indicates that managers might use the discretion if fair value is based on not readily verifiable estimates. In this paper I examine whether firm characteristics are associated with the measurement basis chosen, as well as the reported fair value, which is an unexplored area of the accounting choice literature. Dutch Social Housing Associations (SHAs) have the option to value their possessions at historical cost or current value which is compatible with fair value. Moreover, the Dutch Social Housing supervisor also constitutes the value of the possessions. This gives the unique possibility to research the influence of firm characteristics on the measurement basis as well as on the value of possession of the SHA. The results indicate that the measurement basis is related to firm characteristics and that some of these characteristics also influence the current value. Because the value concept used in this setting is related to fair value the results reported in this paper are indicative for fair value in cases where the fair value is based on not direct observable inputs.
STOCK PRICES AND EARNINGS MANAGEMENT AROUND M&A TRANSACTIONS
BOTSARI, ANTONIA
Category: FA = Financial Analysis
The paper explores the inter-relationship between stock prices and earnings management by bidders in the context of the UK market for corporate control. On the one hand, the results show that inflating earnings prior to a bid does indeed seem to affect prices and to have implications for the pattern of abnormal returns documented at different stages of the M&A transaction – at earnings announcement, at bid announcement, and in the long-run. During the period leading up to the bid, the evidence suggests that earnings management can shape takeover activity, because it allows bidders to induce overvaluation and use their misvalued stock as acquisition currency. During the post-merger period, the results show that accrual mispricing induced by earnings management can at least partly explain the acquirers’ negative returns. This in turn implies that investors’ inability to see through the poor earnings quality of overvalued acquirers, rather than mean reversion alone, can at least partly predict these acquirers’ underperformance. On the other hand, there is evidence that a reverse relation between stock prices and earnings management also holds, i.e. that prices can affect the acquirers’ earnings management behaviour, and that both pricing and earnings management can vary between ‘hot’ and ‘cold’ markets.
SPEED AND EXPERTISE IN STOCK PICKING: OLDER, SLOWER, AND WISER?
BOULLAND, ROMAIN
ORNTHANALAI, CHAY ; WOMACK, KENT
Category: FA = Financial Analysis
We document significant differences among sell–side security analysts in how frequently they change their minds in making recommendation opinions. The average brokerage recommendation remains in place for 13 months, but, importantly, there is significant variation. We introduce a method of identifying analysts who revise their recommendations distinctly more frequently (versus less) than their peers. We find that an individual analyst’s decision–speed style is moderately persistent year to year. However, on average, analysts tend to revise their recommendations less frequently as their tenure increases, suggesting that experience and reputation concerns influence decision–making processes. We find that recommendations issued by faster–revising analysts are heavily discounted by investors, i.e. they command significantly smaller immediate market reactions and, as well, generate lower portfolio alpha. Less frequent revisers are more likely to attain All–star status and are less likely to be terminated. Our results highlight the importance of reputation and experience in individual decision making, and support the notion that a deliberate, slower decision style dominates a “beat the crowd” mentality.
OPERATING FLEXIBILITY AND ACCOUNTING MANIPULATION
BOURVEAU, THOMAS
Category: FR = Financial Reporting
I examine the relationship between operating flexibility and firms’ accounting quality. I use the staggered adoption of wrongful discharge laws across U.S. states as a plausibly exogenous increase in firms’ dismissal costs. These laws protect employees against unfair dismissals, increasing the rigidity of firms’ cost structure. I hypothesize that when regulation makes it more costly to cut labor costs, managers manipulate accruals in lieu of terminating employees in order to increase reported income. I find that regulated firms engage in more income-increasing accrual manipulation than their unregulated peers in response to decreases in demand following the adoption of these laws. This result is strongest for sub-samples of firms that experience larger increases in expected firing costs. My findings shed light on the unintended consequences of pro-labor regulations and contribute to the emerging literature on how firms’ cost structures shape reporting incentives.
THE NEW AUDIT REPORT SEEN THROUGH THE PRISM OF THE CERTIFIED AUDITORS – RESEARCH IN THE REPUBLIC OF MACEDONIA
BOZINOVSKA LAZAREVSKA, ZORICA
SERAFIMOSKA TRPESKA, MARINA
Category: AU = Auditing
With recomposing of the audit report, IAASB announce the commencement of the new era in the audit profession. The proposed amendments in ISA 700, 705 and 706, as well as the new ISA 701 are expected to decrease the information gap and in the same time to increase the communication power of the audit report. The new look of the audit report should meet the users’ requirements for obtaining more information tailored to the specific audit of financial statements engagement. The revision of the standards related to the audit report and their publication in June 2014 encouraged us to carry out a research that will include the certified auditors in the Republic of Macedonia. The main objective of the research is to realize the perception certified auditors have regarding the new amendments and whether they really expect an increase of the credibility of the audit report in the users’ eyes which will decrease the “expectation gap”. The paper is consisted of three parts. The first one is focused on the historical background of the statutory audit in the Republic of Macedonia. The second part defines the objective of the research and related questionnaire development and sample selection. In the third part are summarized the results of the conducted research and based on it are suggested alternative directions for future researches.
THE TRADE-OFF BETWEEN MANDATORY AND VOLUNTARY DISCLOSURE: EVIDENCE FROM THE RISK REPORTING BY OIL COMPANIES
BOZZOLAN, SAVERIO
ARENA, CLAUDIA; IMPERATORE, CLAUDIA
Category: FR = Financial Reporting
Accounting literature investigated the optimal level of disclosure and to what extent corporate disclosure should be mandated by law. Analytical propositions show that mandatory and voluntary disclosure decisions are likely to be related. Some empirical studies found that voluntary disclosure complements mandatory disclosure while others found the opposite. Relying on a proprietary hand-collected database that permits us to obtain reliable measures of mandatory and voluntary disclosure, we investigate the risk disclosures of oil companies. We find that the relationship between mandatory and voluntary disclosure is non-monotonic (the likelihood of voluntary risk disclosure increases with the quality of mandatory risk disclosure leading to a complementary relationship up to a threshold, above which companies start to reduce voluntary disclosure) and varies with the characteristics of the institutional environment (when the capital market is more developed, the need for voluntary disclosure to complement and explain mandatory information is more pronounced).
THE INTERACTIVE ROLE OF DIFFICULTY AND INCENTIVES IN EXPLAINING THE ANNUAL EARNINGS FORECAST WALKDOWN
BRADSHAW, MARK
LEE, LIAN FEN; PETERSON, KYLE
Category: FA = Financial Analysis
Within-year patterns of analysts’ earnings forecasts have been attributed to analysts’ incentives to curry favor with managers by releasing optimistic forecasts at longer horizons, followed by a walkdown to levels at which actual earnings meet or beat the forecast at year end. We propose that forecasting difficulty interacts with such incentives and manifests in the observed walkdown. Although difficulty should affect forecast error but not necessarily optimism, the cognitive psychology literature on motivated reasoning supports a predicted interaction between incentives to be optimistic and the difficulty of the task. Applying that theory to the analyst forecast setting, greater forecast difficulty generates more degrees of freedom for analysts to support a biased outcome, even if the bias is not deliberate. We find cross-sectional variation in earnings forecast difficulty is associated with the slope of the walkdown. More importantly, we find that the interaction between analysts’ incentives to be optimistic and difficulty is the most significant factor in explaining the earnings forecast walkdown. In addition, we examine revenue forecasts as a benchmark of lower forecast difficulty and find no substantive evidence of a revenue forecast walkdown. The overall results suggest the well-known earnings forecast walkdown is not a simple manifestation of analysts’ strategic incentives, but is significantly influenced by the difficulty of forecasting earnings.
ACTUAL AND PERCEIVED LEVEL OF ERM IMPLEMENTATION IN NON-FINANCIAL COMPANIES – EMPIRICAL EVIDENCE ON THE IMPACT OF COMPANY CULTURE
BRAUMANN, EVELYN
D'ARCY, ANNE
Category: MA = Management Accounting
Enterprise Risk Management (ERM) has gained great importance in corporate governance over recent years, particularly in non-financial companies respective its role in company performance. Therefore, this study examines the extent of ERM implementation in non-financial companies and the different risk management design choices and practices that are deployed. It further contributes to insights regarding the role of company risk culture in the implementation of ERM across an enterprise. Based on questionnaire data gathered from 121 non-financial companies in Austria, the stage of ERM implementation, its adopted designs and practices as well as the relation to company risk culture are investigated. This empirical study is distinctive because it takes a more complex approach to measure the level of ERM implementation. Considering the eight components of the COSO ERM Framework (COSO, 2004) we develop factors that form a second higher order construct for the implemented stage of ERM. Using this ERM construct for further analyses, first, we answer what distinguishes companies with high ERM implementation from companies with low ERM implementation. Second, we show that the perceptional degree of ERM implementation indeed differs from actual degree of ERM implementation. Third, we support the hypothesis of a positive relationship between company risk culture and the degree of ERM implementation.
FORWARD-LOOKING DISCLOSURES AND THE INDEPENDENCE AND FINANCIAL EXPERTISE OF U.S. DIRECTORS
BRAVO URQUIZA, FRANCISCO
ABAD, CRISTINA
Category: GV = Accounting and Governance
This paper studies the role that board independence and the accounting financial expertise of outside directors that serve in the audit committee plays in the disclosure of forward-looking information. The results show that, contrary to theoretical predictions and prior evidence, board independence is not associated with the disclosure of forward-looking information. However, the presence of at least one accounting financial expert among the directors who serve in the audit committee is associated with a higher coverage of forward-looking information in the annual reports, particularly information of a financial and strategic nature. The results have implications regarding both the measurement of independence and the effectiveness of board independence. Moreover, in line with the resource dependence theory, our evidence suggests that accounting experts play an important role in forward-looking disclosure strategies. In addition, the paper contributes to the debate on the benefits obtained from having an accounting financial expert serving on the audit committee, as defined by the Sarbanes-Oxley Act. Our evidence on the role of accounting expertise could also help the SEC to narrow the definition of financial expertise. This evidence has direct implications for both companies and regulators in the selection of board members. It also suggests that stakeholders may also demand the presence of accounting experts in audit committees.
RISKY BUSINESS IN AUDITING. AN EMPIRICAL ANALYSIS OF THE CONCEPT OF MATERIALITY.
BREESCH, DIANE
Category: AU = Auditing
While the concept of materiality permeates the audit process, regulatory authorities and professional bodies have always been quite cautious in publishing guidelines or rules of thumb regarding materiality as this might prevent that auditors would simply apply given rules automatically, without taking into account the individual situation of the audited entity. The assessment of the level of materiality is therefore largely left to the professional judgment of the auditor. The question then arises to what extent the applied materiality levels remain uniform or differ across auditors as the diversity in materiality levels might increase the risk that the auditor issues an inappropriate opinion about the fairness of the financial statements and thus ultimately affects audit quality. On the basis of a semi-laboratory experiment in which we analyze the final written exams of 138 Belgian future auditors, our results show that a considerable variance exists in materiality assessment across auditors, whereby the largest materiality threshold was on average 28 times larger than the smallest threshold. Furthermore, by comparing these materiality thresholds against a ‘model’ solution, results suggest that audit risk tend to reach a very high level of 56%. In respectively 25% and 31% of the individual cases, the materiality levels were(substantially) under- and overestimated. This study is relevant to policy makers and professional bodies in terms of guidelines towards materiality levels.
IMPRESSION MANAGEMENT IN EXPLANATIONS FOR CORPORATE GOVERNANCE NON-COMPLIANCE: LIP SERVICE OR LIP GLOSS?
BRENNAN, NIAMH M.
SHRIVES, PHILIP
Category: FR = Financial Reporting
Under the ‘comply-or-explain’ system, companies not complying with corporate governance codes are required to provide explanations for each item of non-compliance. Explanations are unregulated and hence shareholders and other stakeholders are left to determine their adequacy. This paper examines impression management in those explanations, developing and applying a typology for the purpose. Using meaning-oriented content analysis, the study assesses the use of 12 impression management strategies in explanations for non-compliance using a typology derived from the prior literature. The sample comprises non-compliance explanations of UK FTSE 100 companies over two periods (2004/05 and 2011/12). These periods were chosen as they follow substantial changes made in the UK’s 2003 Code and 2010 Code. There were 63 (43) (2004/05 with 2011/12 in brackets) companies not complying with one or more provisions of the Code and 146 (71) explanations for non-compliance. Key impression management strategies identified include ‘minimisation of negative feeling’ (the damage is not too serious), the use of ‘weasel words’ which hide non-compliance and ‘transcendence’ (ends justify means). The research shows there is increased impression management in non-compliance explanations in 2011/12 compared with 2004/05. This is surprising given the Financial Reporting Council’s (FRC) more recent attempts for companies to improve their explanations.
THE EFFECTS OF ORGANIZATIONAL RISK APPETITE, SOCIAL PRESSURE AND HONESTY-HUMILITY ON FINANCIAL REPORTING DECISIONS
BRINK, ALISA
GOULDMAN, ANDREA; VICTORAVICH, LISA
Category: MA = Management Accounting
This study investigates the impact of an organization’s risk appetite, social pressure and the behavioral trait of Honestly-Humility on management accountants’ financial reporting decisions regarding a missing fixed asset. The results of an experiment with 72 management accountants suggest that risk appetite sets the stage for how social pressures impact misreporting intentions. We find that an organization’s risk appetite (aggressive vs. conservative) and social pressure (obedience vs. conformity pressure) interact to effect reporting intentions. More specifically, misreporting intentions significantly increase when either obedience or conformity pressure is introduced in the aggressive risk appetite condition. However, in the conservative risk appetite condition, misreporting intentions only increase significantly upon the introduction of obedience pressure. We also find that Honesty-Humility is a behavioral trait that significantly impacts misreporting intentions, such that management accountants with higher Honesty- Humility scores are less likely to engage in fraudulent financial reporting despite the presence of social pressures to engage in misreporting.
THE NEW GENERATION OF AUDITORS MEETING PRAXIS
BROBERG, PERNILLA
AGEVALL, LENA; UMANS, TIMURS
Category: ED = Accounting Education
This paper describes an exploratory study of whether and in what way ‘double-edged learning’ can develop from understanding the relationship between structure and judgment and thus capture students’ experience of the audit profession. The study is based on a focus group/individual interviews conducted with students performing their work-integrated learning assignments where they interact with auditors. Identifying two themes defined as Perceiving the profession and auditing and Entering into and forming in the audit profession derived from the data, it appears that when positioned within a work-integrated learning context, students develop awareness of the use of standards and checklists on one hand as well as the importance of discretional judgment on the other. Based on these results, we theorise as to how double-edged learning manifests itself in students’ experiences and understanding of the relationship between structure and judgment.
DO M&A LAWSUITS DISCIPLINE MANAGERS' INVESTMENT BEHAVIOR?
BROCHET, FRANCOIS
BOURVEAU, THOMAS; SPIRA, MICHAEL
Category: GV = Accounting and Governance
Using securities lawsuits related to M&A as an industry shock, we examine whether litigation risk acts as an external governance mechanism by disciplining managers' investment decisions. In the two years following an M&A lawsuit (a lawsuit where plaintiffs allege that the firm hid poor performance related to a prior acquisition), we find that industry peers experience higher bidder announcement returns, choose more adequate methods of payment, and engage in fewer diversifying and smaller takeovers. Collectively, this evidence is consistent with post lawsuit deals being of higher quality. Furthermore, we find that peer firms respond to the increased litigation risk by reducing abnormally high investment expenditures. Finally, the reactions are stronger among firms with fewer anti-takeover provisions. Overall, our results show that M&A lawsuits can have an industry-wide deterrence effect on firms' suboptimal investment behavior.
DETERMINANTS OF AUDITOR-CLIENT RETENTION DECISIONS: AN EMPIRICAL ANALYSIS
BROOKS, LI
GILL, SUSAN; WONG-ON-WING, BERNARD
Category: AU = Auditing
Recently, the costs and benefits of mandatory audit firm rotation has been hotly debated. To better evaluate the trade-offs between the switching costs against the agency benefits from continued audit engagements, it is essential to first understand the drivers for an extended auditor-client retention decision. Considering the client and the auditor as rational value-maximizing agents, we propose that the auditor’s client-retention decision is a decreasing function of engagement risk and an increasing function of future quasi-rents. In contrast, the client’s auditor-continuance decision is an increasing function of economic benefits, switching costs, and audit market constraints, but a decreasing function of agency costs associated with the monitoring demands from various stakeholders in the market. Consistent with our predictions, we find that audit firm tenure increases with corporate social responsibility (auditor engagement risk (an inverse proxy for engagement risk), client importance, discretionary accruals, firm size, and audit market concentration, but decreases with agency costs (proxied by free cash flow, auditor-provided tax services, debt monitoring, institutional investors, and corporate governance). Our investigation furthers our understanding on the determinants of auditor-client retention decisions from the perspectives of the auditor and the client within the boundaries of the audit and capital markets.
DETERMINANTS OF THE ADOPTION AND PERFORMANCE EFFECTS OF VALUE-BASED MANAGEMENT SYSTEMS IN GERMANY
BRÜCK, CHRISTIAN
FALTYNEK, BARBARA; KNAUER, THORSTEN; SCHWERING, ANJA
Category: MA = Management Accounting
This paper examines the economic determinants that lead firms to the adoption of value-based management and control systems (VBMSs). Further, we investigate whether firms’ operating performance improves after VBMS adoption. Using a hand-collected data set of German listed firms covering 1,575 firm-years from 2004 to 2011, we predict and find that firms are more likely to implement a VBMS when they are large and have high levels of free float, low market-to-book ratios, and high foreign sales ratios. This supports our argument that the adoption of VBMSs is more likely when agency costs are high. However, we do not find that VBMS adoption improves operating performance. Therefore, our results indicate that German firms adopt VBMSs to appear more attractive and transparent to investors (sig-naling function), but not necessarily to improve performance.
FLEXIBILITY IN COST-BASED TRANSFER PRICING
BRUNNER, MARKUS
SCHÄFER, PETER
Category: MA = Management Accounting
Cost-based transfer prices are frequently used to guide intra-firm trade and also provide incentives for specific investments. We investigate whether transfer prices should be fixed ex ante for the long run or adjusted each period when future costs and revenues are uncertain and uncertainty resolves over time. We find that more flexible standard cost-based transfer prices improve trading decisions: the stronger costs are correlated between consecutive periods, the more information on actual cost enters the future transfer price inducing a more efficient trade decision. However, the supplier anticipates the impact of the investment in sustained cost reduction on future transfer prices leading to ex ante underinvestment. Consequently, if the productivity of the cost reducing investment is not too high, transfer prices should be based on fixed standard costs if uncertainty about future costs is low, and they should remain flexible if uncertainty is intermediate. With high uncertainty, they should be based on actual costs. For high productivity levels of the supplier’s investment in cost reduction, flexible standard-cost pricing will never be optimal.
MANAGING LEGITIMACY TO ATTRACT MILLENNIAL EMPLOYEES
BUJAKI, MERRIDEE
BROUARD, FRANÇOIS; DUROCHER, SYLVAIN
Category: AU = Auditing
The competition to attract trainee accountants is fierce among accounting firms. Millennials have expectations in terms of work experiences and work environment that accounting firms can’t ignore. This paper draws on a egitimacy framework to examine the legitimacy management strategies put forward by large Canadian accounting firms in website communications directed at future employees. Our results demonstrate accounting firms devote considerable effort to manage their legitimacy in the eyes of prospective employees. They stress the meaningful work experience and career development opportunities they can offer their recruits, the possibility for recruits to have a real impact, and the firm’s commitment to diversity. The firms also emphasize the training and support they offer in a friendly work environment where teamwork prevails. They also highlight the good benefits offered, including several work-life balance programs. Accounting firms thus use website communications in a self-laudatory manner to depict a work environment in total accordance with Millennials’ system of values and beliefs. This reveals legitimacy management is crucial when competing for talented workers in the field of accountancy. This analysis suggests that both the accounting firms and the new generation of accountants act as initiators and targets in a two-way socialization process of accounting recruits.
AN UNDERSTANDING OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL AUDITORS IN OBTAINING INFORMATION ABOUT INTERNAL CONTROL WEAKNESSES
BURT, IAN
Category: AU = Auditing
External auditors have expressed concern that an internal auditor’s strong identity with their employing organization may bias any internal control assessments they make of that organization (Schneider 1984). The Institute of Internal Auditors argues that this strong “employee” identity is a benefit by providing internal auditors an advantage over external auditors in gaining information from employees. Through an experiment, relying on the social identity and silence literatures, I predict that the internal auditor’s “employee” identity will encourage other employees to share more information about internal control weaknesses with the internal auditor than with the external auditor. Results support this prediction and indicate the effect is stronger as the severity of the internal control weakness increases. Overall, this research informs external auditors, managers and regulators about conditions under which the internal auditor has an advantage over external auditor in obtaining information which could help improve audit quality and potentially lower audit fees.
COST ACCOUNTING IMPLEMENTATION WITHIN THE STATE ADMINISTRATION, BETWEEEN USEFULNESS AND LEGAL OBLIGATION. THE FRENCH MINISTRY OF DEFENSE CASE
CABANES, LAURENT
Category: PS = Public Sector Accounting
On the basis of the New Public Management, the French State adopted in 2001 the LOLF (French organic law relating to finance laws) in order to rule the Budget setting. The LOLF introduce result logic and above all an accounting frame for the Budget, upgraded in 2012 by the GBCP decree: general accounting and cost accounting are complementing the traditional Budget accounting. Our study is focused on the impact of this new accounting frame on different actors of the French Ministry of Defense, especially these involved with the cost accounting implementation. We identify two groups of actors concerned by cost accounting: the producers and the users. Indeed, we underline that, beyond the legal obligations, cost accounting generate some interests for the top-managers, with several kinds of use in a context of State budgetary restrictions. However, this legal frame application is jeopardized by some conflicts of values and a cultural clash between the new result logic and the tradition of the Common Interest. This accounting frame implies new behaviors for its own production.
INSTITUTIONAL PRESSURES AND STRATEGIES IN PERIPHERY BUSINESS SCHOOLS
CADEZ, SIMON
Category: ED = Accounting Education
Business schools operate under pressures sometimes only marginally academic in nature. A common strategy in the increasingly globalized and competitive market of business education is securing (high) placement on MBA rankings. Despite unlevel playfield, aspirations to join the elite are increasing worldwide, even in periphery. The study herein examines organizational strategies and performance in a periphery context that has recently undergone major social change. The method deployed is a case study of 4 Eastern European business schools. Two main contemporary trends in business education, pursuit of mainstream research and internationalization, are observed also in the context examined. Nevertheless, notable differences in strategies are observed at school level. Public business schools pursue global excellence by imitating the elite or seek international legitimacy by complying with prevailing norms. Private business schools conceal profit motivation under the façade of acquiescence.
AUDIT TEAM CHARACTERISTICS MATTER: HOW GROUPS OF INDIVIDUALS DETERMINE AUDIT QUALITY
CAMERAN, MARA
DITILLO, ANGELO ; PETTINICCHIO, ANGELA K
Category: AU = Auditing
It has been widely recognized that the way audit teams are structured and function plays a crucial role in determining the level of quality of the audit service delivered (PCAOB, 2013). Using private data provided by two of the Big 4 audit firms, we document that group structures within audit teams (in terms of different mix of work assigned to juniors, managers and partners) influence audit quality. We also show that cognitive structures determine audit quality: common educational backgrounds and gender mix inside a team may respectively diminish/improve audit quality. Our evidence provides useful insights that are potentially interesting for audit firms because it suggests some strategies for enhancing the quality of the work done by their teams. Moreover, regulators around the world may consider implementing specific rules aimed at ensuring the best interactions among groups of individuals in audit teams.
FIRM-LEVEL DRIVERS OF THE IMPLEMENTATION OF FRAUD TRAINING AND EFFECTS ON EMPLOYEES’ ETHICS. A EUROPEAN INVESTIGATION
CAMPA, DOMENICO
Category: GV = Accounting and Governance
Using a sample of companies listed on the five biggest European countries, this paper investigates the firm-level drivers of the implementation of fraud training and the effect of the latter on the ethical dimension of employees, measured by the level of financial reporting manipulation. Results indicate that, on average, larger companies and firms with stronger governance are those that are more likely to offer fraud training to their employees. Evidence also reveals that firms with fraud training exhibit lower financial statement manipulation only in the UK since additional analyses indicate that the effectiveness of such training on the ethical dimension of the employees is significantly stronger when it is supported by a context with a credible certainty of punishment. Finally, in none of the countries investigated, the market perceives that their earnings are more value relevant than those of other entities. Findings highlight that regulators should pay particular attention to the enforcement of laws that constrain and punish unethical behaviours within companies since such rules condition the effectiveness of firm-level actions aimed at increasing the ethical dimension of employees. On the other hand, companies need to monitor the implementation of fraud training closely and better communication towards the market is necessary, especially from those entities that, instead, are already achieving some positive effects from it.
COST STICKINESS AND ACCRUALS ESTIMATION MODELS
CANO RODRIGUEZ, MANUEL
NÚÑEZ-NICKEL, MANUEL
Category: FA = Financial Analysis
Previous research on earnings management has documented that the traditional accrual models are misspecified in both samples of high and low sales growth. We provide a theoretical explanation for this misspecification, which is the costs sticky behavior: costs increases when sales rise are higher than cost decreases when sales drop. This costs behavior can bias the traditional accrual models, because they rely on the assumption of costs responding equally to sales increases and to sales decreases. In this paper, we analyze how cost stickiness would affect to two of the most popular accrual modes –the Jones model (Jones 1991) and the Dechow and Dichev model (Dechow and Dichev 2002)– and provide modifications of those models to control for the cost stickiness behavior. Our results show that the control for sales reductions reduces the misspecification of both models, and increase their power for detecting both positive manipulations in sales-decreasing companies and negative manipulations in sales-increasing companies.
EARNINGS MANAGEMENT INCENTIVES: DOES CEO INCENTIVE-BASED COMPENSATION MATTER?
CAO, WENJIAO
JIA, YUPING; ZENG, YACHANG
Category: GV = Accounting and Governance
The association between Chief Executive Officer (CEO) incentive-based compensation and financial misreporting is theoretically and empirically inconclusive. We use a refined misreporting sample where earnings management is driven by CEO’s desire to increase personal gains to investigate whether the desire is triggered by high-powered incentive-based compensation, which leads to misreporting ultimately. We read through the SEC documents of Accounting and Auditing Enforcement Releases (AAERs) issued between 2004 and 2013 to identify misreporting firms where the CEO is overpaid due to earnings management (hereinafter referred to as compensation-related AAER or compensation-related misreporting). We find that the compensation-related misreporting cases account for 36.32% of the AAER firms during our sample period. We document within the AAER sample that firms subject to compensation-related AAER pay their CEOs higher portfolio deltas and vegas than non-compensation-related AAER firms. In comparison with a matched non-AAER sample, we find a positive association between CEO incentive-based compensation (measured by delta, vega, and bonus to salary ratio) and compensation-related misreporting. Results do not hold when we compare the non-compensation-related AAER firms with the non-AAER firms.
DOWNSIDE RISK, CAPITAL FLEXIBILITY AND OPERATING LEASES
CARABIAS, JOSE
Category: FA = Financial Analysis
In this paper, I investigate whether firms’ risk-hedging incentives affect their choices between owned and rented capital (operating leases). In recessions, firms facing negative demand shocks are loaded with unproductive capital. Absent of any trading frictions, firms can trade their assets to adjust their capacity in response to these shocks. However, due to costly reversibility of capital, firms might lack the flexibility to cut capital and deviate from their optimal investment. I find that the proportion of operating leased assets is positively correlated with downside risk. Furthermore, the relationship between operating leases and downside risk strengthens with firms’ inflexibility and the overall leverage in the industry. Finally, I show that contrary to conventional wisdom, by using operating leases, firms are able to reduce their risk exposure and expected return. My findings suggest that firms might be unwilling to retain the economic ownership of assets when, after an aggregate demand shock, the likelihood of being loaded with unproductive capital is high. As such, operating lease contracts might serve as risk-hedging mechanisms through which lessees transfer some of their operating risk to the lessor. These results suggest that, to some extent, companies use (and equity investors value) operating leases consistently with the economic interpretation underlying the “ownership approach” towards lease classification.
LEGAL ASSURANCE OR PERFORMANCE TOOL? USING INSTITUTIONAL THEORY TO EXPLAIN PERCEPTION OF THE LOCAL GOVERNMENT CONSOLIDATED REPORT
CARINI, CRISTIAN
GIACOMINI, DAVIDE; TEODORI, CLAUDIO
Category: PS = Public Sector Accounting
The debate on the consolidated report has increased considerably over the years. While attention remains high at central government level, the academic debate has become gradually oriented also to local government. In this regard, Italy offers an important experience since it was one of the first countries in the European Union to expressly provide for compulsory adoption of the consolidated report for local government. Using institutional theory to explain the role of shared values, culture and the influence of existing practice during the accounting reform, the paper aims to explore the perception of LG financial officer on the users, the uses, and the utility of the new report. We sent a questionnaire to a statistical stratified sample of 800 LG, collecting a response rate of 17%. The results, tested through the structural equation model (SEM), find out that social legitimization pressures than by accountability patterns or performance analysis drive the adoption process more. Even if the empirical evidence confirms that the stakeholders most interested in the consolidated financial report are perceived on the members of the “internal community of the institutions”, the results indicate that the report is perceived as a potential tool for pursuing performance assessment strategies in a group context. However, this potentiality depend on the coordination effort made by the LG. This raises many questions on how the council views the local government group.
EXPLORING COMPLIANCE AND CONVERGENCE OF AUDITOR COMMITMENTS TO PROFESSIONAL VALUES: A CONTEXTUAL ANALYSIS
CARRINGTON, THOMAS
JOHANSSON, TOBIAS; JOHED, GUSTAV; ÖHMAN, PETER
Category: AU = Auditing
By emphasising the work context of auditing in terms of clients served, and by disentangling conformity into compliance and convergence this article extends the institutional analysis of conformity and variation in value commitments in the auditing profession. We find that type of client is a factor that results in differences in compliance and convergence to professional value commitments in the complete sample of 1,646 Swedish Big 4 and non-Big 4 auditors. By analysing not only compliance to value commitments, but also how closely sub-groups within the profession resemble each other (i.e., convergence), we contribute by showing that the type of client served is both a source of conformity and destabilizing factor within the auditing profession, and that Big 4 firms are less homogenous than typically portrayed in previous research.
REPORTING ON INTANGIBLE ASSETS: A CRITICAL REVIEW
CASTILLA POLO, FRANCISCA
GALLARDO-VÁZQUEZ, DOLORES
Category: MA = Management Accounting
We must acknowledge the importance of intangibles in today’s economies and the controversy over the accounting and reporting of these assets. For this reason, a comprehensive literature review to synthesize the lessons learned from research to date and identify gaps in that research would be useful to academics and practitioners. The literature review was conducted after an analysis of the most important academic databases in the period of 1990–2013: ABI Inform Complete, CSIS, EconLit, ISOC, Journal Citation Reports, Scopus, Emerald, Springer, and Google Scholar. We offer a summary of the main gaps in the literature on intellectual capital disclosures, among which we perceive a need for increased qualitative or explanatory research, which would allow further analysis of such decisions. Specifically, the main problem encountered in the research on voluntary disclosure of intangibles appears to relate to the type of methodology used, which is usually quantitative or descriptive. Given that the principal limitations in the field of the disclosure of intangibles have been discussed, we conclude by indicating the principal directions for future research. Qualitative analysis is absent in the literature we reviewed, and we consider it fundamental to understanding this type of disclosure. In fact, the development of future lines of research could provide better-quality intangible asset reporting. Although there are previous studies on this topic, we believe that the main contribution of this study is to offer an integrated framework of existing findings concerning decisions by companies to disclose information on intangibles, a topic on which previous literature is sparse.
ACCRUALS QUALITY AND MANAGERS MOTIVATIONS
CERQUEIRA, ANTONIO
PEREIRA, CLAUDIA
Category: FA = Financial Analysis
We investigate if accruals quality is a valuable indicator of earnings quality for market investors. Our particular focus is on the incremental informative value of taking into account managers’ motivations for using accruals. We propose a market based approach for assessing the usefulness of this indicator for improving investors’ decisions, specifically we examine the association between accruals quality and information asymmetry among stock market participants. Our empirical study uses data on European firms and our results are consistent with a positive association between poor earnings quality and information asymmetry. Further we find that the dispersion of analyst estimates allows us to distinguish managers’ motivations for using accruals, thus increasing the informational content of accruals quality.
VOLUNTARY DISCLOSURE OF SALES AND THE EXTENT OF TRADE CREDIT IN SMALL YOUNG PRIVATE COMPANIES
CEUSTERMANS, STEFANIE
BREESCH, DIANE
Category: FR = Financial Reporting
We examine the association between voluntary financial disclosure and the amount of obtained trade credit in a sample of small and private Belgian companies. We argue that voluntary disclosure can help small private companies in mitigating information asymmetries that arise between the company and their suppliers. We exploit a large and detailed database with information of more than 65,600 small private companies over the period 2010 till 2012. Our results indicate that voluntary financial disclosure by small and private companies is positively related to the level of trade credit, which is in line with the traditional view that asymmetric or incomplete information restricts access to external funds. In addition, we find that trade credit is negatively related to age, profitability, solvency, the level of total bank loans and tangible fixed assets and positively related to growth, the level of inventories and accounts receivable.
AN EVALUATION OF COMPETENCY DEVELOPMENT IN ACCOUNTING TRAINEES
CHAFFER, CAROLINE
WEBB, JILL
Category: FR = Financial Reporting
It is widely acknowledged that the development of generic skills is extremely important to a career as a professional accountant. This study considers the perspective of accounting trainees and examines their perceived level of competency in those generic skills that are considered important. In addition, the study draws on the constructivist learning theory to evaluate the process of competency development, an area which has not been covered in the literature to date. The results of the questionnaire based survey indicate that there are perceived shortcomings in competency across the majority of generic skills. An area of significant difference in competency development are the experiences graduate and non-graduate trainees however whilst there are shortcomings in competency across both groups there are few significant differences in competency between the groups. Despite this, the process of competency development differs between the two groups; in the case of graduate trainees the existence of opportunities offered within the degree have a significant impact on self-reported competency whilst in the case of non-graduates work experience rather than formal or informal training is important to the development of competency.
DATA-MINING FOR IMPROVING LEARNING OUTCOMES IN TEACHING ACCOUNTING WITHIN HIGHER EDUCATION
CHAMIZO-GONZALEZ, JULIAN
CANO-MONTERO, ELISA ISABEL; MUÑOZ-COLOMINA, CLARA ISABEL; URQUIA-GRANDE, ELENA
Category: ED = Accounting Education
Accountancy teaching-learning should enable student´s professional development in terms of cognitive skills, and long life learning within the educational system. The acquisition of skills and abilities go through a process of self-learning guided by the teacher and student active participation. In this context a quantitative research has been designed based on data-mining techniques taking into account the student’s usage of the provided Virtual Learning Environment (Moodle) in different accounting subjects in two Spanish universities. The objectives of this paper are, first, to analyse whether the students who demonstrate greater virtual participation in the e-learning platform activities proposed by the lecturer are causally related to better learning outcomes. Secondly, to identify the activities which have a greater contribution to higher academic performance in Accounting. The results show that the performance of certain activities such as "assignment upload" and "forum add post" is significantly related to student's final grades. However, it is detected that other variables may also affect these results. The latter being the subject of future research.
CORPORATE DIVERSIFICATION AND REAL ACTIVITIES MANIPULATION
CHANG, CHE-CHIA
LIN, CHAN-JANE
Category: FR = Financial Reporting
This paper investigates the association between corporate diversification and real activities manipulation. The key finding is that firms with higher inherent volatility of investment opportunities have lower ability to afford costly real activities manipulation. However, firms may engage in real activities manipulation if they can diversify this inherent volatility by the coinsurance between imperfectly correlated segments. This paper further shows that diversification discount arises partly because of real activities manipulation. Moreover, the effect of real activities manipulation on diversification discount is likely greater than the effect of accrual-based earnings management.
THE EFFECT OF MOOD AND INCENTIVES ON NEGOTIATORS’ JUDGEMENTS ABOUT NEGOTIATED TRANSFER PRICES
CHANG, LINDA
CHENG, MANDY; LY, SAMUAL
Category: MA = Management Accounting
This paper examines the effect of mood (positive vs negative) and incentive schemes (fixed vs tournament) on negotiators’ judgements and transfer price negotiation outcomes. Our experiment shows that compared to sellers in a negative mood, sellers in a positive mood are more likely to display egocentric bias in their transfer price estimates. Sellers with tournament incentive schemes also displayed higher egocentric bias in transfer price estimates than sellers in fixed incentive schemes. Our results show that incentive schemes interacted with mood, such that sellers in a negative mood also displayed egocentric transfer price expectations when they were give tournament incentive schemes (instead of fixed incentive schemes). We also find that negotiating dyads with tournament incentive schemes take a longer time to reach an agreement than negotiators with fixed incentive schemes. However, our results show that mood and incentive schemes did not affect buyers’ transfer price estimates.
EARNINGS QUALITY OF THE AFFILIATED BUSINESS GROUPS: EVIDENCE FROM TAIWAN
CHANG, RUEY-DANG
CHANG, JESSICA (I-JU); TSENG, YEE-CHY
Category: GV = Accounting and Governance
Prior studies on earnings quality mostly focused on regular companies. However, since affiliated business groups (ABG) have played a major role in Taiwan’s economic development, this study explores earnings quality of the ABG. This study was conducted in three phases. First, earnings quality of the ABG and non-ABG were compared to see whether the ABG have lower earnings quality. Three subtests were then performed to see how the variables of main auditing CPA, brand name, and industry specialization affect earnings quality of the ABG. Secondly, measures of auditor’s risk preference were constructed and how they affect the earnings quality of ABG was examined. Finally, this study examined how corporate governance mechanism affects the earnings quality of ABG. Empirical data were collected from Taiwan Economical Journal database, and the sample includes complete information of 12,372 firms in 24 industries from 2000 to 2011. Two proxies of earnings quality were constructed: discretionary accruals and financial restatement. Major empirical results include (1) companies of the ABG have lower earnings quality, (2) partial support was found when the variables of main auditing CPA, brand name, and industry specialization were analyzed, (3) earnings quality is lower when the components of a ABG were audited by risk-seeking auditors, and (4) partial support was found when the corporate governance mechanism was examined. Results of this study can be used as the basis for future research on the earnings quality of accounting information and provide some implications for authorities on how to develop standards to satisfy the needs of economic development.
UNDER COVER OF A DEADLINE: HOW INFORMATIVE IS CORPORATE DISCLOSURE IN RESPONSE TO REGULATORY INTERVENTION?
CHAPPLE, ELLIE (LARELLE)
LUBBERINK, MARTIEN; TRUONG, THUPHUONG
Category: GV = Accounting and Governance
Price and volume queries issued by a capital market operator after an unexpected change in a listed firm’s price or trading volume inform investors about the firm’s value. Investors respond favorably to firms that explain an unexpected price run-up. Cumulative returns after a price and volume query are positive and significant. Likewise, investors penalize firms that deny investors an explanation for an unexpected price decline: Cumulative returns in these cases are negative and significant. However, explanations from firms that experienced an unexpected price decline appear to fall on deaf ears: in these cases Cumulative returns are insignificant. Neither do investors respond to firms that admit to having withheld material information after a price run up. Our research relies on hand-collected information from price and volume queries over the years 1998–201 and suggest that regulatory intervention prompting disclosure provides new information to the market.
GOLDEN PARACHUTES: A CRITICAL REVIEW OF EMPIRICAL EVIDENCE
CHARITOU, ANDREAS
CHARALAMBOUS, CHAROULLA; KARAMANOU, IRENE
Category: GV = Accounting and Governance
The recent global financial crisis, the collapse of giant organizations and the increasing takeover activity brought to the forefront of the capital markets research the issue of executive compensation and more specifically the role of golden parachutes. During the past three decades, a considerable body of literature examined golden parachutes which focused mainly on four major fields; a) the incentive alignment vs wealth transfer, b) the influence of corporate governance on golden parachutes, c) the relation of the probability of a firm to be a takeover target and golden parachutes and d) the market reaction to the announcement of golden parachutes. We use meta-analysis to review and summarize the findings of the major empirical studies. This study critically evaluates the empirical literature on golden parachutes and provides avenues for future research.
AUDIT COMMITTEE DIRECTORS’ ACCOUNTING EXPERTISE AND COST OF EQUITY CAPITAL: ENTRENCHMENT VIEW VERSUS OPTIMIZATION VIEW OF BOARD REGULATION
CHEN, KEN Y.
HUNG, SHENGMIN; ZHANG, X. FRANK
Category: GV = Accounting and Governance
This study examines the effect of audit committee members with accounting expertise on cost of equity capital by considering the entrenchment view and optimization view of board regulations. We find significantly negative relation between the interaction of firm’s entrenchment condition with audit committee directors’ accounting expertise and cost of equity capital. Our results indicate that as firms close to the optimization condition, the cost of equity capital will be lower if the number (ratio) of accounting experts in an audit committee increases. Our results therefore highlight the importance of the extent of entrenchment condition for enhancing the oversight function of audit committee members with accounting expertise to firms’ material financing and investment decisions.
THE EFFECT OF AUDIT QUALITY ON THE ASSOCIATION BETWEEN THE CREDIT RATING AND THE CHOICE OF SIGNALING
CHEN, NI-YUN
PATEL, CHRIS
Category: FA = Financial Analysis
Taking advantage of the special disclosure and credit rating environment of Taiwan, this study relates signaling as accomplished via multiple practices to the firms’ credit rating, and explores how leverage and audit quality affect the aforementioned relation. This study uses the credit rating to proxy for the firm’s credibility and Big 4 auditors to proxy for the firm’s audit quality. The results show that a firm’s choice to signal via information disclosure, dividends and share repurchases is positively related to its credit rating. In addition, the results show that leverage intensifies the positive association of the information disclosure dividends and share repurchases with a firm’s credit rating, and that audit quality intensifies the extent to which leverage increases the aforementioned association. This study brings insight into the benefit multiple signaling has in enhancing the firm’s credit rating and the influence of financial leverage and audit quality on such a benefit.
CEO RETIREMENT, CORPORATE GOVERNANCE, AND CONDITIONAL ACCOUNTING CONSERVATISM
CHEN, SHIMIN
NI, SERENE XU; ZHANG, FEIDA
Category: FR = Financial Reporting
Using 16,604 observations from 1994 to 2006, this paper re-visits the “horizon problem” by examining how CEO retirements affect conditional accounting conservatism. We hypothesize and find that firms become less conservative in financial reporting prior to the retirement of their CEOs, and that strong corporate governance mitigates the effect of CEO retirement. Although the horizon problem literature has long theorized that CEOs manipulate earnings to boost up short-term performance before they leave their companies (Dechow and Sloan, 1991, Smith and Watts, 1982), the evidence is mixed. By examining conditional conservatism, we circumvent some of the methodological difficulties confronting researchers when either real or accrual earnings management is examined. Ours is the first study that provides evidence on how the horizon problem shapes conditional accounting conservatism.
MANDATORY EARNINGS GUIDANCE AND ACCRUALS MANAGEMENT IN CHINA
CHENG, PENG
AERTS, WALTER ; JORISSEN, ANN
Category: FR = Financial Reporting
A longstanding literature debates whether disclosure should be mandated by regulations, or whether firms have adequate incentives to voluntarily disclose at socially optimal levels (Bushman and Landsman, 2010). An equally important question is the effectiveness of disclosure regulation in solving the information and agency problems in capital markets (Healy and Palepu, 2001). In this research, we examine the effectiveness of a disclosure regulation in China’s unique institutional regime, where earnings guidance disclosure is required for firms with prior loss and material net income increase/decrease by 50% or more, so as to alleviate the concern that firms may withhold material information. The distributional histogram of earnings changes shows a discontinuity in the vicinity of the 50% earnings decrease from 2001 onwards, and discretionary accruals of firms with earnings decrease by 40-50% are significantly high. The results suggest that firms are likely to use earnings management to avoid earnings decrease by more than 50% and mandatory negative guidance disclosure. In addition, we find that firms successfully avoiding the 50% earnings decrease threshold often exhibit high discretionary accruals at the year after, otherwise they are likely to move back to compulsory negative guidance disclosure next year. In this vein, earnings management does not really ‘avoid’ negative disclosure, but ‘delay’ negative disclosure. This research adds a piece of empirical evidence to the literature whether firms engage in avoidance strategies to impair the effectiveness of the regulation (Leuz and Wysocki, 2008).
CAN SHORT SELLERS SERVE A MONITORING ROLE? THE EVIDENCE FROM INSIDER TRADING PROFITABILITY
CHENG, QIANG
CHEN, XIA; LUO, TING; YUE, HENG
Category: GV = Accounting and Governance
In this paper, we examine the impact of short sellers on insider trading profitability using a natural experiment. From May 2005 to July 2007, the SEC implemented a pilot program by randomly selecting one third of Russell 3000 stocks and removing the short sale price tests for these stocks (referred to as pilot firms). This regulatory change leads to lower short-selling constraints for pilot firms, without affecting the requirement for other firms (referred to as control firms). We find that compared to control firms, insider trading profitability of pilot firms experienced a significant decrease during the pilot program. The results are more pronounced for pilot firms with poor accounting information quality, for pilot firms without corporate restriction policy on insider trading, and for opportunistic insider trades of pilot firms. Overall, our evidence suggests that short sellers serve an (indirect) monitoring role in disciplining managers.
GROSS PROFIT SURPRISES, FUTURE EARRINGS AND CROSS-SECTION OF STOCK RETURNS
CHIU, PENG-CHIA
HAIGHT, TIM
Category: FR = Financial Reporting
We show that seasonally differenced gross profit surprises predict future stock returns incremental to returns predicted by standardized unexpected earnings (i.e., SUE) and other accounting-based variables with predictive power. Hedge portfolio strategies that exploit the predictive capacity of gross profit surprises generate significant positive returns in most calendar quarters spanning 1977-2010 with magnitudes comparable to SUE-based strategies. We also show that the incremental predictive capacity of revenue surprises documented in Livnat and Jegadeesh (2006) is subsumed by gross profit (i.e., revenues less cost of sales) surprises when returns are measured over three months beginning in the fiscal quarter subsequent to the surprise quarter.
THE EFFECT OF MANDATORY RISK FACTOR DISCLOSURES ON THE PRICING OF CREDIT DEFAULT SWAPS
CHIU, TZU-TING
GUAN, YUYAN; KIM, JEONG-BON
Category: FR = Financial Reporting
This study examines how risk factor disclosures (RFDs) mandated by the Securities and Exchange Commission (SEC) affect the pricing of credit default swaps (CDS). We find that CDS spreads decrease after RFDs are made available in corporate filings, implying that RFDs improve transparency of firms’ financial reporting and reduce information risk premium contained in CDS spreads. Additional analyses suggest that RFDs are especially helpful for investors to evaluate the underlying risks and future prospects of firms with greater information uncertainty and higher likelihood of default. Consistent with Duffie and Lando’s (2001) model, we also document that the slope and concavity of the CDS spread-maturity relation become steeper after firms provide RFDs. Overall, our findings imply that the SEC’s mandate for a “risk factor” section in periodic reports enhances the content of corporate filings and has a positive information effect on the credit market.
PROFESSORS ON THE BOARD: DO THEY CONTRIBUTE TO SOCIETY OUTSIDE THE CLASSROOM?
CHO, CHARLES
JUNG, JAY HEON; KWAK, BYUNGJIN; LEE, JAYWON; YOO, CHOONG-YUEL
Category: SE = Social and Environmental Accounting
According to our data, 38.5% of S&P 1500 firms have at least one professor on their boards. Given the lack of research examining the roles and effects of academic faculty as members of boards of directors (professor-directors) on corporate outcomes, this study investigates whether firms with professor-directors are more likely to exhibit higher corporate social responsibility (CSR) performance ratings. Results indicate that firms with professor-directors do exhibit higher CSR performance ratings than those without. However, the influence of professor-directors on firm CSR performance ratings depends on their academic background—the positive association between the presence of professor-directors and firm CSR performance ratings is significant only when their academic background is specialized (e.g., science, engineering and medicine). Finally, this positive association weakens when professor-directors hold an administrative position at their universities.
FINANCIAL REPORTING CHANGES AND INTERNAL INFORMATION ENVIRONMENT: EVIDENCE FROM SFAS 142
CHO, YOUNG JUN
CHENG, QIANG ; YANG, HOLLY
Category: FR = Financial Reporting
Using the adoption of SFAS 142 as an exogenous shock to the external reporting system, we examine the effect of a change in financial reporting on a firm’s internal information environment. SFAS 142 removed goodwill amortization and required firms to perform a two-step impairment test, which includes calculating the fair value of the reporting units at least annually. We argue that complying with SFAS 142 induces managers to acquire new information and, therefore, improves managers’ information sets and the internal information environment. Using managers’ earnings forecast accuracy as a proxy for the quality of the internal information environment and a difference-in-differences design, we find that firms affected by SFAS 142 (i.e., treatment firms) experience an improvement in the accuracy of earnings forecasts in the post-SFAS 142 period compared to those not affected (i.e., control firms). The increase in forecast accuracy is greater for treatment firms with weaker monitoring mechanisms, more goodwill, and a higher likelihood of goodwill impairment. Lastly, we find that treatment firms with improvements in forecast accuracy have higher internal capital market efficiency, higher M&A announcement returns, ROA, and Tobin’s q. Overall, our findings illuminate one of the mechanisms through which external financial reporting can enhance the internal information environment and improve operating efficiency.
EARNINGS MANAGEMENT, VOLUNTARY DISCLOSURES AND THE INTRODUCTION OF AN AUSTRALIAN CARBON TRADING SCHEME
CHOI, BOBAE
MELIA, ADRIAN ; PSAROS, JIM
Category: FR = Financial Reporting
This article investigates the earnings management and carbon disclosure practices of Australian companies prior to the introduction of the carbon trading scheme in 2012. Companies that are most likely to be negatively impacted by the introduction of a carbon trading scheme are expected to manage both their earnings and their voluntary disclosures. The introduction of a carbon trading scheme would mean that companies that emit carbon pollution at high levels would incur significant additional expenses. Consequently, consistent with the political cost hypothesis these companies would be motivated to manage their earnings downward and hence signal a reduced capacity to afford the financial impact of the carbon trading scheme. By analysing discretionary accruals from 2007 to 2010 we find that companies that belong to emission intensive industries report greater value decreasing accruals than non-emission intensive industries. Companies that emit significant amounts of carbon pollution, will also be motivated to improve public perception of their business activities. Consistent with legitimacy theory it is expected that these firms would provide enhanced disclosures on emissions management policies, emission targets, and or investment in renewable resources. By analysing disclosures from 2009 to 2011 we find little evidence that carbon intensive firms engaged in managing carbon disclosures.
THE EFFECT OF AUDITOR INDUSTRY EXPERTISE ON MERGER AND ACQUISITION OUTCOMES
CHOI, SEUNG UK
BAE, GIL S.
Category: AU = Auditing
Industry expert auditors offer superior services to clients. We examine whether auditor industry expertise in acquiring and target clients is related to merger outcomes. When the acquirer and the target share the same industry expert auditor, deal premiums are lower, deal completion (withdrawn) rates are higher (lower), market return to a bid announcement for the target firm is lower, and post-merger performance is higher than the baseline case where the bidder and the target have two different non-expert auditors in intra-industry deals. However, in cross-industry deals, auditor industry expertise is not significantly associated with deal outcomes even when the bidder and the target share the same auditor. Our findings suggest that it is sharing an industry expert auditor in intra-industry deals rather than unconditional auditor sharing per se that affects deal outcomes. The results also suggest that the benefits associated with superior services of expert auditors accrue mostly to the acquiring clients rather than to target clients. Our study provides evidence that although auditors may not be specifically contracted to provide services to their clients in mergers and acquisitions, expert auditors still can significantly affect deal outcomes.
REAL EFFECTS OF INTERNATIONAL TAX PLANNING: EVIDENCE FROM DOMESTIC ACQUISITIONS.
CHOW, TRAVIS
KLASSEN, KENNETH
Category: TX = Taxation
This paper examines whether the tax haven subsidiary profiles of U.S. acquirers and targets affect M&A pairing. Using disclosed material subsidiary data, we develop two measures of tax haven subsidiary relatedness between the acquirer and its target. Examining the associations of these measures with the probability of merger pair formation, the results suggest that acquirers are more likely to select targets whose subsidiaries are located in tax havens similar to their own, consistent with economies of scale in tax planning. This relation suggests that firms’ past tax planning decisions have significant effects on their future real corporate decisions.
EXPLOITING QUALITATIVE (NARRATIVE) INFORMATION FROM ANNUAL REPORTS FOR THE PURPOSE OF ACCOUNTING BASED FIRM VALUATION – A MARKOV CHAIN APPROACH
CHRISTEN, DAVID
GROTTKE, MARKUS
Category: FA = Financial Analysis
There can be little doubt that accounting research is increasingly facing a narrative turn that comes across all different research paradigms. Accounting practice, that is, standard setters as well as practitioners on the other hand increasingly face a valuation gap springing from the fact that the value drivers of companies are not captured in the financial statements. Providing tailwind to this narrative turn we present an extension of the well-known Ohlson valuation model (1995) based on markov chains that allows for empirically estimating the firm value of arbitrary qualitative information. Moreover, econometric implementation issues are discussed.
DOES THE FIRM'S CORPORATE GOVERNANCE INFLUENCE THE EFFECT OF IFRS ADOPTION ON ANALYSTS' EARNINGS FORECASTS?
CHU, JAEYON
HEO, KYONGSUN; PAE, JINHAN
Category: GV = Accounting and Governance
This paper examines whether the corporate governance structure influences the effect of the International Financial Reporting Standards (IFRS) adoption on the analyst’s earnings forecasts in Korea. Prior literature points out that the effect of IFRS adoption could be varied by country-specific or firm-specific factors. Extending prior studies, we examine whether the level of corporate governance moderates the effect of IFRS adoption. We posit that corporate governance structure influences firms’ information environment. For instance, strong corporate governance fosters more transparent information environment. Consistent with our hypothesis, we find that analysts’ forecast error is significantly decreased under middle level of corporate governance structure while the adoption of IFRS does not affect the analysts’ absolute forecast errors if the firms have sound corporate governance structure. We also find that there is no effect of IFRS adoption under the firms that have a weak corporate governance structure. These findings suggest that the effect of IFRS adoption differs according to the firms’ characteristics such as the level of corporate governance structure.
DO COMPENSATION CONSULTANTS ENABLE HIGHER CEO PAY? NEW EVIDENCE FROM RECENT DISCLOSURE RULE CHANGES
CHU, JENNY
CHU, JENNY; FAASSE, JONATHAN; RAU, P. RAGHAVENDRA
Category: GV = Accounting and Governance
In July 2009, the SEC announced additional disclosure rules requiring firms that purchase other services from their compensation consultants to disclose fees paid for both compensation consulting and other services. This exogenous requirement dramatically increased both the turnover of compensation consultants and the number of specialist firms. After the rule change, client firms that switched to specialist consultants paid their chief executive officers (CEOs) 7.4% more in median total compensation than a matched sample of firms that remained with multi-service consultants. Compensation consultants retained solely by the board are associated with 15.1% lower median pay levels than a propensity-score matched sample of firms with management-retained consultants. Moreover, firms where CEOs enjoy a greater increase in pay this year are less likely to turn over consultants the following year. Overall, our study finds strong empirical evidence for the hiring of compensation consultants as a justification device for higher executive pay.
NON-AUDIT SERVICES AND IMPROVEMENTS IN CLIENTS’ OPERATING PERFORMANCE AND RISK MANAGEMENT
CICONTE, WILLIAM
KNECHEL, W. ROBERT; MAYBERRY, MICHAEL
Category: AU = Auditing
We examine whether, and when, non-audit services (NAS) purchased jointly with the audit provide economic value to clients through improvements in operating performance and risk management. Our investigation is important as it contributes to the ongoing debate between critics and proponents of the joint provision of auditing and NAS. Using DuPont analysis, we find NAS are positively related to subsequent increases in operating performance, consistent with NAS providing access to human capital and other organizational resources. We further find that NAS are negatively related to future operating risk, indicating that NAS enhance client firms’ risk management. We find no evidence of NAS that are related to improvements in operating performance increasing earnings management. Regulators considering whether to further restrict NAS provided by a client’s auditor should exercise caution as restrictions could result in unintended, negative consequences as they would be forcing firms to unbundle the purchase of such services.
THE CHOICE OF ACCOUNTING STUDIES AND ACCOUNTING PERCEPTION BY ACCOUNTING AND FINANCE STUDENTS IN POZNAN UNIVERSITY OF ECONOMICS
CIESLAK, MAREK
NAPIECEK, REMIGIUSZ
Category: ED = Accounting Education
What do accounting students think of accounting as they start their studies? What drives them towards accounting and finance studies, is it a hope of high income or is it passion and interest? Or both? This study was organized around three themes: (a) how decisions about the choice of a university and the field of study are made, (b) what do the students think or feel about accounting, entrepreneurship and economy, and (c) what they expect from higher education and what are their plans for the future. More bachelor than master students indicated that they started tertiary education because of potentially higher income than after high school, while the latter more often chose ‘will to learn’ statement. A well paid job is mostly what drives students towards finance and accounting, but interesting field of study is also important. Bachelor students are more ‘money driven’ that their older colleagues, and interesting field of study means less to them. Accounting students do not necessarily connect accounting with creativity, but it seems to change during the course of their education.Bachelor students are less willing to pursue ethical behavior in difficult situations then the master program students. Bachelor students are less willing to pursue ethical behavior in difficult situations then the master program students. The latter perceive accounting as more creative and at the same time they tend to act more in ethical manner.
ANALYSIS OF SUPERVISORY BOARD COMPENSATION STRUCTURE, EMPLOYEE REPRESENTATION AND THE RELATION TO EARNINGS QUALITY: EVIDENCE FROM GERMAN BOARDS
CLAASSEN, DEBBIE
Category: GV = Accounting and Governance
In this paper, I examine how the compensation structure of German Supervisory Boards affects earnings management and which role employee representatives play. Supervisory Boards of German firms consist of directors appointed by shareholders and, for firms with a sufficient number of employees, directors appointed by employee representatives. The Supervisory Board participates in the firm’s decision making, but also has the key fiduciary responsibility to audit and approve the Annual Financial Statements. In numerous cases shareholder representatives’ bonus plans are tied to financial performance, raising concerns about the integrity of financial reporting. In contrast, employee representatives are required to forward their remuneration to the Hans Böckler Foundation and can only keep a small fixed amount. In my sample of 357 firm-year observations, the results indicate that Supervisory Boards that receive a long-term cash incentive are more likely to have higher levels of absolute discretionary accruals. However, I find that employee representation can weaken the positive effect a long-term bonus has on the magnitude of discretionary accruals. Finally, I also find a direct negative relation between co-determined Supervisory Boards and earnings management, indicating that co-determined Supervisory Boards are more likely to monitor the financial reporting process and have incentives to constrain earnings management.
DETERMINING THE RELATIVE OCCUPATIONAL STATUS OF ACCOUNTANTS IN NINETEENTH CENTURY ENGLAND AND WALES
CLARKE, KEVIN
FLANAGAN, JACK
Category: SE = Social and Environmental Accounting
Researchers in the social sciences have developed and applied empirical research methods to attribute social status to occupational groups within populations. To date these techniques have yet to be adapted or applied by scholars wishing to undertake longitudinal investigation of the accounting profession. This study seeks to identify, adapt and apply an appropriate technique to the measurement of the occupational status of the accounting discipline in nineteenth-century England and Wales. The outcome of this study is the construction of a sequence of measures that quantify both the rate and magnitude of any incremental changes in the discipline’s occupational status during this period of accounting history. The study concludes by identifying and briefly demonstrating potential applications of the resultant occupational status scores.
PRIVATE LENDERS’ DEMAND FOR AUDIT
CLATWORTHY, MARK ANTHONY
BAYLIS, RICHARD; BURNAP, PETER; GAD, MAHMOUD; PONG, CHRIS
Category: AU = Auditing
We conduct a comprehensive examination of the demand for audit in private lending agreements. We identify three main measures of audit demand. The first is whether the contract names a Big 4 auditor as being required to audit the financial statements on the borrower, as studied in a by Donovan et al. (2014) in Journal of Accounting and Economics. The second is whether the agreement includes an obligation for the auditor to certify compliance with the financial covenants in the contract. The third is a composite variable capturing both auditor name clauses and covenant compliance obligations. We confirm that auditor clauses are common in lending agreements, though they are not universal and Big 4 clauses typically refer to the incumbent auditor. Auditor covenant compliance obligations are associated with characteristics of borrowers’ financial reporting information and the size of the loan syndicate, consistent with contracting theory. Overall, our research contributes to the literature showing that creditors are involved in shaping corporate governance and financial reporting mechanisms and offer a new measure of lenders’ demand for audit.
SOUTH AFRICAN ACCOUNTING STUDENTS CHOICE OF PROFESSIONAL ACCOUNTING ASSOCIATION
COETZEE, STEPHEN
GAMMIE, ELIZABETH; HAMILTON, SUSAN
Category: ED = Accounting Education
The purpose of this paper is to exlpore the South African accounting students choice as to which professional accounting association to join once the have graduated. The professional accounting services environment in South Africa is characterised the remarkable exclusionary closure of that market achieved by the South African Institute of Chartered Accountants (SAICA). SAICA is the prefered accounting association of the vast majority of respondent students. The student respondents hold a collective view of the accounting profession and consider employment outcome attributes, including international recognition, enhancing career and networking oppurtunities, potential and place of work, and income potential, as the most important in influencing their choice of professional accounting association. In their marketing campaigns competing accounting associations may consider raising the awareness of these attributes. The lack of differentiation of the finding by association of choice may may however make marketing a differentiated brand challenging. Analysis of the results by gender revealed little differentation. However, some differentiation was identified between White and African students. Targeted marketing to create awareness of specific ttributes amongst a spicific population or socio-economic group should assist in delivering the appropriate message to the appropriate target audience.
BRIDGING THE “REALITY GAP”: FULL-COST PRICING AND PROFIT MAXIMIZATION
COLLER, GRAZIANO
COLLINI, PAOLO
Category: MA = Management Accounting
The “reality gap” between theoretical management accounting conventional wisdom and empirical evidence on practice, has attracted a lot of interest in both economics and management accounting research. Even though both economic and accounting literature proposed some solid explanations, the gap is still open. To address this issue we must answer the question of how a theoretically irrational pricing behaviour (fullcost pricing) may be consistent with the aim of maximizing profit. While previous research shows that this may happen only under very stringent and unrealistic conditions, we prove it not to be an unlikely case. We overcome the impossibility to identify the optimal decision, a problem affecting both econometric analyses and case studies, with a numerical experiment (simulations) in which we can compare the performance of fullcost pricing with profit maximization. We discuss the implicit marginalism argument in the light of the underlying rationality assumption (procedural vs. substantive), and with respect to market conditions (demand variability). Our results show that fullcost pricing is rational (in substantive meaning) under very stringent conditions (a precise choice of markup and stable demand); however, with more relaxed constraints, the economic loss is negligible in many cases. We conclude that within a bounded rationality framework, fullcost pricing is satisficing and rational (in procedural meaning).
ORGANIZATION CULTURE AND WELL-BEING OF SWEDISH AUDITORS
COLLIN, SVEN-OLOF
BROBERG, PERNILLA; NILSSON , SOFIE; OLSSON, EMMA; UMANS, TIMURS
Category: AU = Auditing
The paper explores relationship between organizational context and auditors’ well-being. Where organizational context is explored through the prism of three types of organizational culture: clan, hierarchy, adhocracy and market and well-being represented by job satisfaction, life satisfaction and life balance. The study is based on the survey of 209 Swedish auditors performed in spring 2014, and explored the relationship between organizational context and auditors’ well-being by the means of correlations and multiple regression analysis. Results of the study indicate that clan organizational culture is the strongest positive driver of auditors’ well-being. Study also indicates that hierarchy culture has a positive effect on auditors’ job satisfaction, while market culture has a negative influence on auditors’ life balance. Findings of the study have implications for both theory and practice, in that it established the link between different aspects of organizational context and auditors’ well-being consequently suggesting human resource strategy of managing organizational context to auditing firms.
WOMEN ON BRAZILIAN FINANCIAL MARKET: A SIGHT THROUGH GENDER LENSE
COLLINI, ITALI
CASA NOVA, SILVIA ; CASADO, TANIA; PEDRONI COLLINI, ITALI
Category: ED = Accounting Education
After nine denied attempts, the first woman to hold a seat on the New York Stock Exchange (NYSE) was Muriel Siebert, in 1967, among 1,365 male colleagues. She would still be the only woman on the NYSE for nearly a decade and years later would also be the first woman owner of a brokerage and insurance house in the United States and the first to hold the position of New York State Banking Department's superintendent. The obstacles she faced became motives to advocate in favor of women entering in the financial market, project for which she donated millions of dollars from her enterprises aiming at helping other women to work on the financial market. Due to her pioneering position as a model role to other women, her statement has a huge importance and the perception, by her life story and struggles, that there is still much to do leads us to wonder what would be the situation of women in the financial market in Brazil. Thus, this study intends to carry out a qualitative research or Fundamental Analysis of women who work or have worked in the Brazilian financial market, in positions directly related to capital market business areas, investment banking and trading desk.
RED VS. BLUE: DOES FEMALE BOARD MEMBERSHIP DEPEND ON WHETHER THE COMPANY IS LOCATED IN CONSERVATIVE OR LIBERAL STATES?
COMPTON, YING
KANG, SOK-HYON; ZHU, ZINAN
Category: GV = Accounting and Governance
We investigate whether female board representation depends on the location of the company in conservative “red” states (which tend to vote for Republican candidates) or in liberal “blue” states (which tend to vote for Democratic candidates). We find that female board representation is consistently lower for firms headquartered in red states than for those headquartered in blue states. A multivariate analysis controlling for major covariates including industry, firm size, trend, and availability of female labor force between 2002 and 2012 confirms that female representation is reliably lower in firms headquartered in red states than in firms headquartered in blue states. Regression estimates instrumented by state-level attitudes to key social issues such as abortion, same-sex marriage, and gun control yield comparable results. We also find that, for both red and blue companies, average female director compensation is lower than that of the male counterpart by about two to four percent.
THE IMPACT OF NATIONAL CULTURE ON GLOBAL REPORTING INITIATIVE APPLICATION LEVELS
COULMONT, MICHEL
BERTHELOT, SYLVIE; LOOMIS, STACEY
Category: SE = Social and Environmental Accounting
Pressures on organisations to report their performance on more than the financial bottom line have increased the practice of sustainability reporting the world over. This paper explores the relationship between national culture, as defined by Hofstede, and sustainability reporting, based on the Global Reporting Initiative (GRI) directives and using data from 620 firms in 40 countries on 6 continents. The results indicate that firms in countries with high individualism or high power distance are less likely to have A application level scores. As well, those in countries with high indulgence/restraint scores are less likely to have A application level scores or seek external assurance on their GRI reports. The findings also suggest that larger firms and firms in countries with higher economic development are more likely to have higher GRI application scores and to seek external assurance on their reports. Furthermore, firms in common law countries, firms that have a higher ratio of new assets and firms in the real estate sector are all more likely to seek external assurance on their GRI reports.
AGGREGATE MARKET ATTENTION AROUND EARNINGS ANNOUNCEMENTS
CREADY, WILLIAM
KUMAS, ABDULLAH
Category: FA = Financial Analysis
This study examines the relation between the volume of earnings disclosures by firms and aggregate stock market trading activity. Although the relation between the trading activity experienced by disclosing firms and announcement activity is negative, consistent with the firm level evidence of Hirshleifer et al. (2009a), the relations between number of announcements and both overall trading and non-announcer volume are positive. Hence, while it is true that high numbers of announcement distract investor attention within the set of announcing firms, it is also true that investor attention to the market as a whole (i.e., aggregate attention) increases with number of announcements. Results also show that the average aggregate surprise content of the announced earnings has a negative impact on investor attention to announcers and non-announcers. However, the directional news content of announced earnings (i.e., aggregate earnings news) attracts attention to non-announcers when the aggregate news signal is negative.
FAMILY FIRMS, INCOME SMOOTHING AND FINANCIAL CRISIS: EVIDENCE FROM EUROPEAN COUNTRIES
CRUZ, CRISTINA
GOMEZ MEJIA , LUIS; IMPERATORE, CLAUDIA
Category: GV = Accounting and Governance
Fulfilling the demand of capital providers is critical for managers because it affects firms’ access to financial resources. To the extent that capital markets dislike uncertainty, managers have incentives to report a smooth path of earnings to “please” them. However firms are not equal in their response to outsiders’ demands. There is ample evidence that family firms behave in a diverse way because of their peculiar non-economic interests. Thus the goal of the paper is to examine: i) how firms react when the demand for accounting information changes as result of increasing turbulence in capital markets and ii) whether family firms’ response is different. Drawing on an European sample during the period 2001-2010, we find that firms are more likely to smooth earnings as capital market conditions deteriorate but family firms are less likely to do so since the presence of the family will shield managers from the mounting external pressures. Moreover we argue and demonstrate that this is particularly the case when firm faces internal financial threats.
PLAYING WITH FINANCIAL WEAPONS OF MASS DESTRUCTION: THE DERIVATIVES LOSS THAT ENDED SADIA
CRUZ DE SOUZA MURCIA, FLÁVIA
DAHMER PFITSCHER, ELISETE; MURCIA, FERNANDO
Category: GV = Accounting and Governance
This paper critically analyses the case of Sadia, a Brazilian company that posted a net loss of R$ 2.48 billion (approximately US$ 1 billion) in the year of 2008, mainly due to a derivative loss of R$ 2.5 billion; the first annual loss of Sadia in its 64-year history. For these, we use public information available about the case, which includes financial statements, notices of material events and the administrative trial conducted by Brazilian Exchange Commission, which found nine Board Members guilty of breaching their duty as administrators of the company. Our analyzes evidence that the following causes contributed to the derivative loss: (i) the CFO reported directly to the Board of the Directors, and not to the CEO, (ii) the Board of Directors did not know which areas were responsible for controlling risk in the derivatives transactions, (iii) risk control monitoring systems were inefficient, (iv) the company was operating as “bank” and (v) under BR GAAP, derivatives financial instruments were treated as off-balance sheet items. Overall, this case evidences that formal corporate governance practices do not always prevent companies from engaging in speculation and trading in the financial market. Also, accounting standards, especially those regarding complex issues, such as derivatives financial instruments, are important mechanisms in forcing companies to recognize items in their Balance Sheet as well as having an adequate disclosure in footnotes.
IMPACT OF ACCOUNTING INFORMATION IN THE RE-ELECTION OF THE MAYOR
CUNHA, ANA
FERNANDES, MARIA JOSÉ; FERREIRA, AUGUSTA
Category: PS = Public Sector Accounting
This study aims to examine whether accounting information influences the decision to vote of citizens/voters, with consequences on the re-election of the mayor. In this sense, we start from the following research question: The accounting information provided by local authorities have influence on decision to vote of citizens/voters?. The research methodology used in the study is quantitative, having been performed a multivariate analysis of data on 308 Portuguese local authorities in the period from 2005 to 2008 (an election cycle). The empirical results from the logistic regression show that some indicators of accounting nature influence the re-election of the mayor, namely, indicators in budget management, municipal debt and financial accounting.
ACCOUNTANTS AND THEIR INTRA-ORGANISATIONAL COMMUNICATION CHALLENGES AND STRATEGIES: A NOT-FOR-PROFIT SECTOR PERSPECTIVE
DAFF, LYN
PARKER, LEE
Category: MA = Management Accounting
When accountants fail to communicate effectively, financial information may not meet the needs of users and organisational decision-making may be impaired. While prior research on accountants’ communications has focused on written reporting, this study addresses both accountants’ formal and informal communications in the not-for-profit (NFP) sector. The study, therefore, focusses on understanding accountants’ everyday communication within their organisations. Accountants working with Australian NFP organisations were interviewed to discern their perceptions of communication challenges and their strategies to address those challenges. Giddens’ structuration theory guided the study and underpinned the thematic analysis of the interviews and the interpretation of the findings. The study identifies a number of challenges that NFP accountants face. The accountants interact with a diversity of people who possess limited financial acumen. Many NFPs experience resource constraints that limit the number of accountants they employ and the currency of their information technologies. Further, NFPs’ decision-making processes tend to focus more on an organisation’s mission rather than financial imperatives. These factors create challenges for NFP accountants’ effective communication. Strategies to address the challenges include the reframing of communication and adapting to the preferred communication approaches of those with whom the accountants interact.
COMPANIES’ RESPONSES TO INSTITUTIONAL PRESSURES FOR SUSTAINABILITY REPORTING: EVIDENCE FROM A DEVELOPING COUNTRY
DAGILIENE, LINA
ADLYTĖ, RŪTA; VALANČIENĖ, LORETA
Category: SE = Social and Environmental Accounting
The article explores the impact of mandatory and normative institutional factors on the development of sustainability reporting. The vast majority of research in the scientific literature focuses on mandatory institutional factors, i.e. how legal system and market regulators affect companies’ sustainability reporting. Meanwhile, there is a lack of empirical data for companies’ reporting responses to different institutional pressures in developing countries. The theoretical background in this paper is based on neo-institutional theory. The main scope of the research is to investigate whether we can find a correlation between the voluntary sustainability reporting and the institutional factors in the developing country. The applied research methodology implies content analysis and statistical methods. In order to measure the extent of reporting, the social reporting index is developed. The research results reveal that in the absence of mandatory institutional factors, companies are not active with regard to social disclosures; they present non-systemized social information of a descriptive nature in annual and sustainability reports. Normative factors (e.g., professional NGOs, social responsible networks, social media.) positively influence the quality of social disclosure (expressed by KPIs reported), except for ISO14001.
RESOURCE ALLOCATIONS IN UK UNIVERSITIES - A CASE STUDY OF THREE UK UNIVERSITIES
DAI, RUI
DUGDALE, DAVID; LYNE, STEPHEN
Category: MA = Management Accounting
This paper identifies the impact of the major external pressures on UK universities, such as the introduction of the new £9,000 tuition fee regime, government changes to funding methods, increased transparency in teaching and research quality as well as the internal initiatives for effectiveness and efficiency. It investigates the systems and structures in three UK universities, especially their resource implications, how they have changed in response to external changes and internal initiatives and whether they can facilitate the university to fulfil its objectives. The research uses semi-structured interview and study of documentation as research methodologies and Old Institutional Economics, Laughlin’s 1991 model and Lukes’ 3 dimensions of power as the theoretical framework. It explores the structure, decision rights and culture of the three universities using multi-dimensional analysis which involves cultural and political implications as well as a chronological analysis.
THE INFLUENCE OF ACCOUNTABILITY AND BALANCED SCORECARD FRAMING ON INVESTMENT DECISIONS
DALLA VIA, NICOLA
PEREGO, PAOLO; VAN RINSUM, MARCEL
Category: MA = Management Accounting
This paper investigates how the representation of a balanced scorecard (BSC) (with or without causal chain) in combination with accountability type (process or outcome) influences investment decisions. We conduct an eye-tracking experiment in which participants have to choose how much to invest in a strategic investment initiative after observing BSC performance data. In line with our theory, the results show that the causal chain representation enhances focus on the relevant causal cues, leading to better investment decisions. We also show that process accountability enhances investment decision quality, due to increased search effort. Finally, our data show that BSC representation and accountability type interact, such that providing a causal chain is much more helpful for finding relevant cues under outcome accountability. Without a causal chain, process accountability stimulates a higher search effort and correspondingly results in higher investment decision quality. These results suggest that causal chains are crucial to the success of a BSC under outcome accountability, while process accountability can be used as an alternative.
FROM THE DIVERSITY OF THE CHARACTERISTICS OF SMES TO THE DIVERSITY OF THEIR MANAGEMENT CONTROL SYSTEM: THE CASE OF AN ELABORATED PURCHASE DASHBOARD
DANGEREUX, KATIA
CHAPELLIER, PHILIPPE; VILLESÈQUE-DUBUS, FABIENNE
Category: MA = Management Accounting
The aim of this work is: - to propose the description of a “purchase” dashboard set up in an SME in order to show that a relatively sophisticated monitoring tool can be adapted to the SME’s needs, - to identify the organizational, environmental and individual characteristics that might explain the successful implementation of this relatively elaborated tool. The study, carried out in an SME of around fifty employees within the framework of a participatory observation shows that control data are meaningful to SME managers under conditions of adaptation and that, in some cases, relatively sophisticated control systems, similar to those likely to be observed in large organizations, can be adapted to the needs of an SME.
THE ADVERSE CONSEQUENCES OF IAS 38
DARGENIDOU, CHRISTINA
TONKS, IAN ; TSOLIGKAS, FANIS
Category: FA = Financial Analysis
We identify the setting of the transition from a discretionary capitalisation (SSAP13) to a mandatory capitalisation (IAS 38) regime in the UK as an opportunity to investigate the implications of constraining discretion. In line with prior research, we establish that discretion over capitalisation provides relevant information to the market. We find that after the introduction of IAS 38, share prices of firms that engage with capitalisation reflect less forward looking earnings information. Our findings suggest that investors’ uncertainty about the future benefits of the capitalised R&D assets increases when managers follow the letter of the rule under mandatory capitalisation instead of setting their own uncertainty threshold for capitalisation as it happens under discretionary capitalisation.
THE IMPORTANCE OF MUTUAL UNDERSTANDING AND ITS IMPACT ON FINANCIAL PERFORMANCE OF BELGIAN SMES
DE BRUYCKERE, STEFANIE
COPPENS, CARINE; EVERAERT, PATRICIA ; SARENS, GERRIT; VERPLANCKE, FREDERIK
Category: FR = Financial Reporting
This study, based on 323 completed surveys, examines the relationship between external accountants and owner-managers of Belgian SMEs. The concept of Mutual Understanding between an external accountant and an owner-manager is introduced and analyzed in terms of the content of the relationship, the personal characteristics of the owner-manager and the characteristics of the relationship itself. Owner-managers with a high level of Mutual Understanding, (1) consider their accountant rather as a strategic partner, (2) experience a high level of proactive behavior of their accountant, (3) expressed a more intense formal contact and (4) perceived informal contact as more important than owner-managers with a low level of Mutual Understanding. Furthermore, (5) the level of accounting knowledge, (6) the number of accounting topics the owner-manager keeps track of, (7) his/her transparency towards the accountant and (8) the perceived added value, are positively and significantly associated with Mutual Understanding. The results show that Mutual Understanding is an important contributing factor to achieve the common goals of external accountants and owner-managers, and has an impact on the financial performance of the company.
EXPLORING THE DISCONNECT BETWEEN GRADUATE ATTRIBUTES AND EMPLOYER EXPECTATIONS
DE LANGE, PAUL
JACKLING, BEVERLEY
Category: ED = Accounting Education
This paper is motivated by the apparent disconnect between supply of quality accounting graduates and the demands of employers. To better understand this phenomena the approach taken is to give employers’ (n=70) a ‘voice’ concerning their perceptions of the actual competencies of graduates and then compare this message to the ‘voice’ of graduates (n=76) concerning their own perceptions of these competencies. First, perceptions about the typical generic and technical skills were sought from employers. Second, a set of attributes “Personal and Interpersonal Attributes” provided comparative data with graduate perceptions. Third, employers were also asked to list the three most important qualities that were sought in employees as well as the qualities most lacking. Finally employers were asked to rate the degree of emphasis that should be given to a number of skills (technical, generic skills and emotional intelligence) in undergraduate degree programs.
DEBT PRESSURE AND THE CHOICE OF INTERACTIVE CONTROL SYSTEMS
DE LAS HERAS, ELENA
DE LAS HERAS, ELENA; GARCÍA OSMA, BEATRIZ ; GÓMEZ, JACOBO
Category: MA = Management Accounting
We study if debt pressures drive the choice of interactive control systems. Simons (1990) argues that interactive use is determined by strategic uncertainties faced by top managers. We predict that debt pressures represent a key strategic uncertainty that could derail managerial vision of the future, and thus, a determining factor in the interactive use of control systems. In particular, we make two predictions: (a) managers that face high debt pressures will interactively use contemporary control systems (i.e. the balance score card), and (b) managers that face low debt pressures will interactively use traditional control systems (i.e. cost accounting and budgets).
ON THE BANK FINANCING OF INFORMATIONALLY OPAQUE SMES
DE MEYERE, MICHIEL
VAN CAUWENBERGE, PHILIPPE; VANDER BAUWHEDE, HEIDI
Category: FR = Financial Reporting
This study empirically examines whether Small and Medium-sized Enterprises’ (SMEs’) reliance on bank debt to finance their business is associated with the quality of their earnings number. We argue that earnings numbers with a higher ability to better predict future cash flows lower information asymmetries between banks and SMEs and improve the access to bank debt and debt contract terms. Using detailed financial statement information of a sample of Belgian SMEs, we find that earnings quality is positively associated with (1) having more bank debt compared to other types of debt, and (2) having relatively more bank debt with an initial maturity exceeding one year. This suggests that high-quality earnings have a positive impact on the access to bank debt.
THE DETERMINANTS OF COMBINED ASSURANCE ADOPTION: A GLOBAL SURVEY
DECAUX, LOÏC
SARENS, GERRIT
Category: AU = Auditing
Corporate governance failures and new regulation has emphasized the importance of risk management oversight. As a result, combined assurance has recently emerged as a paradigm to enhance risk management oversight. Combined assurance ensures that assurance activities are coordinated in such a way that it provides holistic assurance to the board about the effectiveness of risk management, which ultimately helps board exercise its risk management oversight role. This exploratory study presents the results of a global survey of internal auditors’ perceptions about the determinants of combined assurance adoption. Based on a unique dataset of 186 usable responses, we find that internal auditors perceive that (i) risk management oversight maturity, (ii) the existence of a board subcommittee responsible for overseeing risk management processes, (iii) the number of different assurance providers, and (iv) other organizational characteristics are significantly associated with combined assurance adoption. We discuss the implications of our findings for research and practice.
TOWARDS A CONCEPTUAL FRAMEWORK ON THE CATEGORISATION OF STEREOTYPICAL PERCEPTIONS IN ACCOUNTING
DELLAPORTAS, STEVEN
PERERA, LUCKMIKA ; RICHARDSON, BEN; RICHARDSON, PETER
Category: GV = Accounting and Governance
The stereotypical image of the profession is generally poor with the accountant appearing in the popular media as either the object of satire or the criminally inclined expert who deceives investors and the public of their savings. Research projects on the construction and portrayal of the stereotypic accountant assume a unitary concept by inferring the dominant image at a point in time arising from a specific medium. Furthermore, it is not always clear from prior research whether the dominant image is the result of perceived character traits or the duties typically undertaken by accountants. This paper examines public expositions of the stereotypical accountant drawn from research literature to construct a framework of external perceptions based on two broad criteria comprising accountants (personality traits and physical characteristics) and accounting (task functionality). The framework arises from an interactive process of two pairs of elements, the first is based on Competence (task functionality) where members are defined by their role identity (accounting) and the second is based on Warmth (personality or character traits) (accountant). The interaction of these elements manifests itself in four stereotypical images, beancounter, scorekeeper, guardian and entrepreneur. The framework developed in this paper will enable researchers to appreciate how stereotypical images are constructed in accounting as well as the nuances that distinguish one image from another.
RELIGIOUS ORDER RULES SHAPING ACCOUNTING RULES: THE IMPACT OF INSTITUTIONAL LOGICS ON INSTITUTIONAL CHANGE IN THE 15TH AND 16TH CENTURIES
DEMARTINI, MARIA CHIARA
MELLA, PIERO
Category: FR = Financial Reporting
In order to reply to the call for more research on the dynamic process of institutional change over time, especially with regard to deinstitutionalization factors, we aim at developing a conceptualisation of the role of the rules of two different religious orders, which have different approaches to the management of business activities, i.e. the Franciscan and Benedictine ones, in influencing the change in the accounting rules and practices over the period covering the late 15th and late 16th Century. The analysis is grounded onto two Italian accounting treatises, i.e. Tractatus XI Particularis de Computis et Scripturis by Luca Pacioli (1494) and Indrizzo degli Economi by Angelo Pietra (1586). Both treatises are aimed at providing rules for accountants operating in small business, commercial ones in the first case and domestic in the latter. The historical analysis will take an institutional analytical approach at the micro- and mezzo-level in order to shed some lights on the relationship between the single accountant’s traits (micro-level) and the change in accounting rules (mezzo-level) informed by the dominant culture. In so doing, we aim at investigating on the “process” of institutionalisation, rather than its effect, which is related to the new accounting rule being enforced by some actors. In the case study we argue that the rules characterising the religious orders, which the two Authors referred to are fundamentally grounded on different values.
OH WHAT A BEAUTIFUL MORNING! DIURNAL VARIATIONS IN THE TONE OF CONFERENCE CALL Q&A DISCUSSIONS AND THEIR ECONOMIC CONSEQUENCES
DEMERS, ELIZABETH
CHEN, JING; LEV, BARUCH
Category: FR = Financial Reporting
This study examines the effect of the time-of-day on the tone of question-and-answer (“Q&A”) discussions in corporate earnings-related conference calls. We document that call start times are sticky; having held an afternoon call in the prior quarter is the main determinant of the decision to hold an afternoon call in the current quarter. But what are the consequences of this choice? Relying upon prior psychological and physiological literature, we hypothesize and find diurnal patterns in the tone of call discussions: Q&As are more pessimistic and less certain (i.e., decisive) as the trading day wears on. Our results for call pessimism are robust to endogenous self-selection of afternoon call start times and they hold when we consider only firms that change their call start time during our sample period. Furthermore, the choice of a later day call start time has an economically and statistically significant mediated effect upon returns as the net pessimism of the call is negatively related to intraday returns. Our study should be of interest to practitioners and academics alike, as the implications of more negatively-toned afternoon discussions likely extends beyond the conference calls that we examine here.
FINANCIAL STATEMENT-BASED FORECASTS AND ANALYST FORECASTS OF PROFITABILITY: THE EFFECT OF MANDATORY IFRS ADOPTION
DEMMER, MATTHIAS
PRONOBIS, PAUL; YOHN, TERI
Category: FA = Financial Analysis
This study examines whether IFRS adoption is associated with an increase in the accuracy of financial statement-based forecast models for forecasting profitability. The study also examines the relation between analyst forecast accuracy and financial statement-based forecast accuracy around IFRS adoption. We find significant improvements in financial statement-based forecast accuracy around IFRS adoption and significant improvements in analyst forecast accuracy in countries with concurrent improvements in financial reporting enforcement around IFRS adoption. We also find that the improvement in analyst forecast accuracy is associated with the improvement in financial statement-based forecast accuracy. However, we find that analysts do not place greater weight on financial statement-based forecasts after IFRS adoption. In fact, analysts place less weight on financial statement-based forecasts after IFRS adoption in countries without concurrent changes in enforecement. Finally, we find that financial statement-based forecasts provide incremental information over analyst forecasts for explaining year-ahead profitability and that this incremental benefit increases after mandatory IFRS adoption in countries that bundled IFRS adoption with concurrent changes in reporting enforcement. These findings are important for understanding the impact of IFRS adoption on the predictive ability of financial statements and for understanding analysts’ use of financial statements around IFRS adoption.
CORPORATE PROVISION OF INCENTIVES FOR THE ATTAINMENT OF ENVIRONMENTAL TARGETS
DERCHI, GIOVANNI BATTISTA
OYON, DANIEL
Category: MA = Management Accounting
This paper examines the determinants influencing corporate choice to provision incentives to managers and employees for the attainment of green targets. We analyze a cross-industry sample of 820 global listed firms that, in the period 2007-2013, have reported data to Carbon Disclosure Project. Consistent with agency theory and social legitimacy predictions, we find that the probability of adopting green incentives increases with higher corporate investment in monitoring environmental performance and higher peer pressures, both at the industry and country level. In addition, compared to US companies, firms not based in the US are more likely to respond to higher environmental concern through the provision of green incentives. In line with rational and social accounts explaining the diffusion of practices, we also find evidence that innovation propensity and exogenous noise in environmental performance are associated with green incentive adoption at an earlier stage, while industry-peer pressure impacts later adoption. However, country peers exercise a more immediate effect and influence firm provision green incentives at an earlier time. Finally, contrary to our expectations, our findings indicate that companies investing more in monitoring environmental performance are more likely to be later adopters, suggesting the need for the principal to cumulate knowledge about the informativeness of environmental measures before deciding to include them in compensations contracts.
INVOLVING MANAGERS TO REDUCE BARRIERS TO PERFORMANCE MEASUREMENT SYSTEM INNOVATION
DERFUSS, KLAUS
LITTKEMANN, JÖRN; SAUER, DANIEL
Category: MA = Management Accounting
In this paper, we argue that, similar to product innovations, the implementation of performance measurement system (PMS) innovation is hindered by project-, instrument-, person-, and organization-related barriers, that these barriers negatively influence managers intention to implement PMS innovation, and that the timing of employees’ involvement reduces these barriers. To study our research questions, we focus on a family firm that has implemented a balanced scorecard-based PMS to improve control of its research and development projects. Using survey data, which we collected from 44 project managers, we show that many PMS innovation barriers exist, although not all potential barriers are perceived as important. Moreover, we find that several barriers are negatively related to managers’ intention to implement the PMS innovation. Finally, the earlier project managers were involved in PMS development, the lower they perceived the barriers to be.
MODERNITY, KNOWLEDGE AND APPEARANCE: PROFESSIONAL SOCIALIZATION IN THE AFTERMATH OF GERMAN REUNIFICATION
DETZEN, DOMINIC
EVANS, LISA; HOFFMANN, SEBASTIAN
Category: AU = Auditing
This paper examines the professional socialization of East German recruits joining audit firms following the 1990 reunification of Germany. Based on the works of Giddens, we argue that the reunification represented the instant advent of modernity and required the East German recruits to reskill extensively. Both knowledge and appearance were affected in this process as the recruits needed to make themselves familiar with the West German accounting system and auditing practices, while, at the same time, changing their ways of acting to adopt West German conceptions of professionalism, such as values, attitudes, and appearances. On a broader level, the paper argues that it is the combination of knowledge assimilation and appearance that matters in the professional socialization, although at times one aspect of the two may be more important than the other.
IS CSR REPORT QUALITY ENHANCED BY THE DISCLOSURE DECISIONS OF BOARDS OF DIRECTORS?
DI PIETRA, ROBERTO
MIRAS RODRIGUES, MARIA DEL MAR
Category: SE = Social and Environmental Accounting
The aim of this paper is to examine whether or not the quality of CSR reports is effectively improved by the adoption of two disclosure decisions by the Board of Directors: Assurance and GRI guidelines. A new measure of the quality of CSR reports is employed, based on the GRI Principles for Ensuring Report Quality. A total sample of 187 sustainability reports from energy companies is analysed. The adoption of GRI guidelines is a good first step for the purposes of comparability and harmonization. However, if companies wish to increase the perceived quality of their CSR reports, they should focus more on Assurance practices. This paper only draws on data from the energy industry. The results could differ in other sectors which are currently less engaged or experienced with the CSR approach. If companies want their CSR reports to be perceived as credible and useful by investors, and by stakeholders in general, for decision-making purposes, a greater focus on Quality is required, as well as efforts that go beyond the simple adoption of the GRI guidelines. This is one of the few empirical studies to contribute to the literature evaluating the utility (in terms of quality) of Boards of Directors’ two main CSR disclosure decisions.
REGULATION, SUPERVISION AND ACCOUNTING CONSERVATISM IN BANKS
DIAZ SANCHEZ, INMACULADA
ILLUECA MUÑOZ, MANUEL; MARTINEZ CONESA, ISABEL
Category: FR = Financial Reporting
The main purpose of this article is to evaluate the effects of the three pillars of Basel II, i.e. bank regulation, supervision and market discipline, on the timeliness of loan loss provisioning by banks. In particular, we analyze explicitly how regulatory and supervisory regimes interact with the market discipline measures, such as listing status, ownership and market concentration. Using a sample of 14.651 bank-year observations covering 54 countries over the period 1997-2009, we provide empirical evidence suggesting that a) the stringency of the regulatory and supervisory regimes is positively associated with accounting conservatism; b) unlisted banks and commercial banks are more conservative than listed entities and savings banks, respectively; and c) banks operating in more concentrated markets exhibit a lower degree of timeliness in loan loss recognition. In addition, our results suggest that strong capital requirements mitigate the effect of market concentration and governance on accounting conservatism, whereas strict regulatory regimes tend to reinforce the effect of both variables on early loan loss recognition.
THE IMPACT OF PERCEPTIBLE CORPORATE SUSTAINABILITY PERFORMANCE ON INFORMATION ASYMMETRIES IN EUROPEAN CAPITAL MARKETS
DIEBECKER, JAN
SOMMER, FRIEDRICH
Category: SE = Social and Environmental Accounting
This article examines the empirical association between perceptible corporate sustainability performance (PCSP) and information asymmetry for European firms listed in the STOXX Europe 600 from 2002 to 2011. Using a two-stage extended Heckman model to account for endogeneity, we find a significantly negative impact of PCSP on information asymmetries in European capital markets. This finding is robust to the three different common proxies for information asymmetries: bid-ask spread, trading volume, and stock price volatility. The results can be interpreted as PCSP being a viable means to reduce information asymmetries and hence to facilitate financing and increasing market efficiency. Our study contributes to the literature on the positive capital market effects of PCSP in showing the proposed effect in European capital markets. In addition, it is the first study to account for endogeneity using a Heckman selection model in the relationship between PCSP and information asymmetries.
AN EMPIRICAL TEST OF THE EFFECT OF OUTRAGE COSTS ON CEO COMPENSATION LEVEL
DIERYNCK, BART
RENDERS, ANNELIES
Category: MA = Management Accounting
Managerial power theory predicts that increased disclosure of CEO compensation will limit or even decrease the level of CEO compensation through increased outrage costs. Empirical testing of this key conjecture by using data from a mandatory disclosure setting is difficult as any change in CEO compensation after mandatory disclosure can be attributed to the fact that CEO compensation did not reflect the underlying economic determinants. By using data from Belgian listed firms, which are subject to voluntary disclosure regarding CEO compensation, this study aims to develop a cleaner test of the effect of outrage costs on CEO compensation level. In line with managerial power theory, we expect and find a decrease in compensation levels for CEOs who are in the upper part of the compensation distribution. For CEOs who are in the lower part of the compensation distribution, we expect and find that increased disclosure will instigate social comparison processes, leading to an increase in compensation levels. This paper thus provides a more nuanced view on the claim of managerial power theory that ‘sunlight is the best disinfectant’.
INTEGRATED REPORTING: THE INFLUENCE OF NON-FINANCIAL ASSURANCE REPORT LEVEL AND FORMAT ON INVESTOR JUDGMENTS
DILLA, WILLIAM
JANVRIN, DIANE; PERKINS, JON; RASCHKE, ROBYN
Category: AU = Auditing
This study examines whether the level (limited versus reasonable) and format (presented separately or combined with financial information assurance) of sustainability information assurance contained in integrated reports influences investor judgments. Nonprofessional investors viewed integrated financial and sustainability performance information accompanied by assurance reports and made investment judgments based on this information. Assurance level only influences investment judgments when the sustainability assurance report is presented separately, as opposed to combined with the financial assurance report. Participants made higher investment judgments when limited rather than reasonable assurance was provided on the sustainability information. Further, supplemental analyses show that contrary to what professional standards indicate, participants perceive that a limited assurance report conveys a higher degree of assurance than a reasonable assurance report. Participants also perceive combined assurance reports to be more difficult to understand and perceive sustainability information accompanied by a combined assurance report to be less credible and reliable.
THE EPIDEMIOLOGY OF TAX AVOIDANCE AND TAX EVASION
DILLER, MARKUS
LORENZ, JOHANNES
Category: TX = Taxation
We propose a model that captures tax avoidance as an investment under uncertainty: searching for tax loopholes or developing legal avoidance schemes is associated with costs; the tax benefit is however uncertain. Its height depends on whether or not the tax agency agrees with the chosen avoidance model. We find that increasing the tax rate causes taxpayers to devote more (less) effort to tax optimization if the variance of tax savings is below (above) a certain threshold. Using an epidemiological SIS-model we account for social contagion effects. We find that there exist parameter constellations in which increasing the tax rate causes both individual avoidance effort and the number of tax avoiders to increase, implying that tax revenue decreases. If tax avoidance is a precondition for tax evasion, the number of tax evaders can increase if more individuals avoid taxes as a consequence of an increase in the tax rate. Thus, increasing the tax rate can cause overall compliance to shrink even if all taxpayers evade by less.
GOVERNMENT AFFILIATION, EARNINGS MANAGEMENT, AND FIRM PERFORMANCE: THE CASE OF PRIVATELY HELD FIRMS
DING, RONG
DING, SHUJUN; LI, JIALONG ; WU, ZHENYU
Category: GV = Accounting and Governance
Using a moderated mediation model, we investigate the effects of political affiliation on firm’s financial reporting quality and performance with a large sample of privately held firms between 1998 and 2009. We find that politically affiliated firms tend to have superior accounting performance, but the relationship between their affiliations to different levels of government and firm performance is non-linear. Findings also indicate that politically affiliated firms are more likely to engage in earnings management, and those affiliated with lower levels of government manipulate earnings to a greater extent. Furthermore, earnings management serves as a mediator between political affiliation of privately held firms and their performance, and regional economic development moderates such relationships.
FACTORS DRIVING MEMORY FALLIBILITY: A CONCEPTUAL FRAMEWORK FOR ACCOUNTING AND FINANCE STUDIES
DING, YIKE
DE MELLO, LURION; HELLMANN, ANDREAS
Category: FR = Financial Reporting
The purpose of this paper is twofold. First, it identifies the theoretical and methodological strengths and limitations of previous literature that relate to the impact of memory on judgments and decision-making. Second, it proposes a framework which incorporates memory functions as well as factors that may cause fallibilities in judgments and decisions. This framework provides a comprehensive understanding about the relationship between judgments and memory as well as possible causes for biases and errors driven by cognitive constraints during the memory process, which have been overlooked by previous research. It may help researchers to better understand the human memory system and its impact on judgments and decisions in accounting and finance context.
JUMPING OFF THE SINKING SHIP: INFORMATIVENESS OF THE INDEPENDENT DIRECTOR DEPARTURES IN CHINA'S LISTED COMPANIES
DING, YUAN
SHEN, YONGJIAN; ZHANG, ANTHEA YAN; ZHANG, HUA
Category: GV = Accounting and Governance
Benefiting from the unique regulation in China and using a hand-collected data, this paper analyze how the different forms of independent director departures impact the future performance change of the listed firms. Its results reveal that overall, these departures are informative, as they are associated with significant future performance drop among related firms. Meanwhile, the magnitude of the informativeness varies with various forms of departure and with different uncertainty levels of the firm. More specifically, while the performance in firms with between-term non-renewal of independent directors decreases significantly, such a drop is far more pronounced in firms with in-term resignation of independent directors. Furthermore, we find that the departure of independent director is more predictive of future performance decline for firms with high uncertainty, i.e. higher leverage, firms in financial distress, privately-owned firms, and firms experienced CEO turnover.
THE EFFECT OF BONUS DEFERRAL ON MANAGERS’ INVESTMENT DECISIONS
DINH, TAMI
CHENG, MANDY; SCHULTZE, WOLFGANG
Category: MA = Management Accounting
This experiment examines the impact of deferred bonus payments and employment horizon on managers’ investment decisions. Deferred bonus is an important element of a “bonus bank” scheme designed to mitigate managers’ tendency to avoid long-term investments that can reduce their bonuses (the “impatient manager” problem). Consistent with construal level theory from psychology, we find that bonus deferral increases managers’ willingness to make a bonus-decreasing investment. Using a moderated mediation model we find that bonus deferral influences managers’ investment decisions by encouraging managers to place greater importance on advancing their company’s long-term interests and on improving their reputation within the company; but these mediation effects are significant only when participants have short employment horizon. Our study contributes to the debate on effective managerial compensation by showing that a simple deferral of bonus payments can reduce the negative consequences related to managerial myopia.
THE ROLE OF DIFFERENT VALUE-BASED MANAGEMENT IMPLEMENTATIONS AND THEIR EFFECTS ON VALUE DRIVERS AND FIRM PERFORMANCE
DIRMHIRN, MARKUS
OBERMAIER, ROBERT
Category: MA = Management Accounting
We investigate performance effects of three different common implementations of value-based management (vbm) in German corporations: value-based internal control without monetary incentives tied to value-based metrics, value-based short-term, and long-term board compensation. Our results show that adopters of highly compensated value-based metrics in long-term board compensation components are associated with outperformance. Outperformance is thereby mainly driven through differences in investing, operating and financing decisions. Further, adopters of value-based metrics in short-term board compensation components are associated with minor outperformance. Adopters of only value-based internal control are even associated with underperformance. We also show the potential dark side of vbm implementations when it comes to asset milking. Adopters of value-based board compensation cut new investments which partly results in lower performance. The analysis is based on a two-stage-least-squares approach as well as a propensity score matched differences in differences approach in structural equation models. The results question existing literature in the field of value-based management that usually neglects the effects of vbm on value drivers and regularly applies an adopter / non-adopter approach, thereby ignoring the heterogeneity of vbm implementations in corporate practice. For practice the results are important as partial implementations are insufficient to increase performance.
THE EFFECTS OF FOOTNOTE DISCLOSURE SIMILARITY ON INFORMATION ASYMMETRY AND MARKET LIQUIDITY
DITTER, DOMINIK
Category: FA = Financial Analysis
The level of disclosure length and accounting complexity is steadily increasing. While disclosures are an important source of information for investors, prior literature documents that informational efficiency decreases with higher reporting complexity and lower readability. This study predicts that footnote disclosure similarity between peer companies leads to reduced costs of acquiring information resulting in disclosure that is more useful to the capital market. Using word similarity analysis, the empirical findings indicate that firms with a higher level of disclosure similarity exhibit a lower information asymmetry or information risk and a higher market liquidity. Collectively, the results suggest that firms with comparable footnote disclosures demonstrate greater capital market efficiency.
EDUCATION IN THE AREA OF MANAGEMENT ACCOUNTING/CONTROLLING IN POLAND AND GERMANY – COMPARATIVE STUDIES
DOBROSZEK, JUSTYNA
ZARZYCKA, EWELINA
Category: ED = Accounting Education
The aim of this article is to examine the process of education in the area of management accounting/controlling in Poland and Germany. The strong link between the Polish and the German economies, e.g. numerous branches of German companies in Poland which have controlling departments make it possible to put forward the research hypothesis that the Polish education system in the area of management accounting/controlling is similar to the German model. The results of the study on Polish higher education institutions indicate significant discrepancies between the education models used in Poland and in Germany. The comparison carried out makes it possible to note that the process of educating management accountants in Poland requires significant changes. The knowledge provided to the students of studies in Finance and Accounting is in most cases insufficient to carry out required tasks. The analysis of German higher education institutions from the perspective of the researched issue can also turn out to be surprising since there are virtually no first-cycle studies in Finances and Accounting or Controlling/Management Accounting despite the fact that controlling is a common practice in German companies and there is a significance demand for management accountants, who are referred to as controllers. Only at the level of second-cycle studies, some higher education institutions offer studies directly related to accounting and management accounting/controlling.
INTEGRATED REPORTING AND THE VALUE RELEVANCE OF NON FINANCIAL INFORMATION. EMPIRICAL EVIDENCE FROM SOUTH AFRICA
DONI, FEDERICA
GASPERINI, ANDREA
Category: SE = Social and Environmental Accounting
This paper investigates the value relevance of non-financial information in Integrated Reporting through evidence from a developing country, South Africa. The present research aims to assess the convergence of three different frameworks through the analysis of the integrated reports issued by listed companies on the Johannesburg Stock Exchange: 1) GRI non-paper May 2013, and G4 2013; 2) IIRC, International <IR> Framework December 2013; 3) King III; Institute of Directors in Southern Africa. The objectives of the research are: 1) to assess whether the adoption of Integrated Reporting could enhance the disclosure of NFI; 2) to evaluate the impact of the disclosure of non-financial information on the financial markets. The methodological approach is based on: 1) the content analysis and 2) established valuation models. The empirical analysis focuses on annual reports (2009) and on integrated reports (2013). The analysis sets and tests empirically two hypotheses in order to understand the role of IR to mitigate the information asymmetry, to attract long-term investment from outside investors and to improve the firms ‟signal”, and then increase firms’ value. The empirical findings show the following considerations:1) non-financial information disclosure within Integrated Reporting is not value relevant for a company’s market value; 2) the differences in the level of compliance regards to non-financial information disclosure between 2009 and 2013 is statistically significant.
FAMILY VALUES & THE TAX EXPENDITURE TIPPING POINT: CANADA AS A CAUTIONARY TALE
DONNELLY, MAUREEN
YOUNG, ALLISTER
Category: TX = Taxation
In our paper, we review the contents of the federal budgets from 2006 through 2014, and in particular, focus on the extent to which their tax expenditure measures serve to further the Conservatives’ family-values-based social agenda. The “family” measures are biased to single-earner families with stay-at-home mothers and women in caregiver roles; the “work” measures prefer male-dominated work sectors such as firefighters, tradespeople and their apprentices; and the “home” measures are targeted at already advantaged homeowners while Canada continues to be without a national housing strategy and a record number of Canadians find themselves in core housing need. Through our survey of the tax expenditures introduced by Canada's current government over the last nine years, we present a picture of who they favour. The arguments against tax expenditures are well documented: they reduce transparency and target special-interest groups, increasing inequality and distorting economic behaviour. Nevertheless they "persist and proliferate". Through our survey of the tax expenditures introduced by Canada's current government during their tenure, we certainly have a clear picture of who they serve. We conclude that the true beneficiaries of this government’s largesse as demonstrated through its nine years of tax changes are wealthy men living in traditional families and married to women who have been unrelentingly disincentivized from entering or re-entering the labour force.
THE REVERSAL OF IMPAIRMENTS OF PPE: A TEST OF FAIR VALUE ACCOUNTING
DONNELLY, RAY
CAMPA, DOMENICO; CAO, TONGYU
Category: FR = Financial Reporting
This study examines if the reversal of impairments allowed by IAS 36 as undertaken by UK quoted companies can be justified as unbiased adjustments to reflect the fair value of the property, plant and equipment assets to which they pertain. We test if the reversals are reflected in the change in stock market prices in an indirect test. We also employ a direct test to establish if the reversals are positively related to changes in subsequent operating performance. Our results suggest that the reversals of impairments are positively related to changes in future performance. Only those reversals that are undertaken when the pre-reversal net income is not negative are reflected in stock market returns. This is somewhat justified by the finding of a differential relation between the ability of the reversals to predict future operating performance and whether the firm is profitable pre-reversal or not. We argue that the results based on the direct test are more convincing and that our results support the decision of the IASB to allow the reversal of impairments.
THE PERCEPTION OF FINANCIAL ANALYSTS ON RISK, RISK MANAGEMENT AND INTERNAL CONTROL DISCLOSURE: EVIDENCE FROM BELGIUM AND ITALY
D'ONZA, GIUSEPPE
SARENS, GERRIT
Category: GV = Accounting and Governance
In this study, we investigate to what extent and how financial analysts in Belgium and Italy take the information about risks, risk management and internal control disclosed by companies into account in their analyses. Overall the findings show that financial analysts take more into account the information on individual risks than the information regarding the risk management and the internal control systems. Analysts perceive this last one as not highly relevant because they find the description of these systems too generic and standardized. The extent to which they take into account the public risk disclosure depends on the degree of detail, customization and the future orientation of the risk reporting. Analysts are aware that companies cannot be fully transparent in their public risk disclosure because of the sensitiveness of the information. According to financial analysts, risk disclosure helps to strengthen the company’s reputation as it creates openness and transparency and reinforces the trust analysts have in companies. Companies also tend to avoid surprises and use risk disclosures as an alternative for profit warnings. Finally, the absence of this disclosure may create compliance problems. The findings of this study lead to a debate on the usefulness of mandatory disclosure as well as the focus of that disclosure.
WHO MAKES IT TO THE TOP? – DETERMINANTS OF CAREER SUCCESS IN THE AUDITING PROFESSION
DOWNAR, BENEDIKT
ERNSTBERGER, JÜRGEN; KOCH, CHRISTOPHER
Category: AU = Auditing
This study examines determinants of career success in the auditing profession. While previous literature focuses on selected determinants of promotions in the auditing profession using data from interviews, surveys, or field-studies, this paper analyzes promotions using a comprehensive framework and archival data from a business-oriented social networking service in Germany. Building on sociologic theory we argue that not only individual characteristics but also job specific aspects influence career success. We examine both characteristics of auditors at different career levels and determinants of partner promotions in Big 4 audit firms. We find that most auditors leave the auditing profession at the manager level. In addition, we provide evidence that partners are more likely to be male and sportive, generate higher audit fees and audit more prestigious clients compared to non-partners. We also show that networking and client management abilities are of particular importance for partner promotions. In contrast, we find little evidence that academic and job specific qualifications influence career success.
FAILURE TO INSTITUTIONALIZE CLINICAL BUDGETING PRACTICES IN AN IRISH HOSPITAL
DOYLE, GERARDINE
BURNS, JOHN
Category: PS = Public Sector Accounting
The paper presents a case study of failure to institutionalize new clinical budgeting practices in an Irish hospital. Conceptually we draw from extant research that presents budgeting practices as significantly rules-based, frequently routinized and with potential to become ‘institutionalized’ over time. Our starting point is that the clinical budgeting practices in our case hospital constitute organizational rules, which in time appear to become routinized, at least to some extent. However, we find little evidence to suggest that clinical budgeting actually becomes institutionalized within the hospital, meaning that such practices do not become intertwined with generally accepted assumptions concerning the nature of organization and management, as was the original intention of its champions. The main reason for such failure, we suggest, was the ‘institutional contestation’ between deep-set medical institutions underpinning patient-care and intended, budgeting-grounded ways.
PEER PERFORMANCE AND EARNINGS MANAGEMENT
DU, QIANQIAN
DU, QIANQIAN; SHEN, RUI; SIKVELAND, MARIUS
Category: GV = Accounting and Governance
This study analyzes the influence of peer performance on a firm’s earnings management behavior. We measure peer performance as the average of idiosyncratic equity returns of a firm’s industry peers. We find that a firm’s discretional accruals are positively correlated with peer performance. The higher the analyst coverage and industry competition is, the more pronounced the influence of peer performance on the focal firm’s earnings management. We further examine the effects of different components in peer idiosyncratic returns on the focal firms’ earnings management behavior. The evidence shows that managers of the focal firm manage earnings in responses to both the part related to short term analyst revisions and the residual part related to long term prospects and discount rate. However, when peer firms experience negative liquidity shocks, managers of the focal firm manage earnings upward instead of downward. In sum, our study provides strong evidence suggesting that peer firms’ performance affects the focal firms’ earnings management choice.
INFORMATION PROVISION TO BOARDS OF PRIVATELY-HELD FIRMS: THE INFLUENCE OF BOARD INDEPENDENCE AND FAMILY CONTROL
DU, YAN
JORISSEN, ANN ; UHLANER, LORRAINE
Category: GV = Accounting and Governance
The recent global financial crisis has brought the issue of whether boards of directors are well informed to be vigilant in monitoring management again at the heart of the governance debate. From a theoretical perspective, the information provided to the board is an important element of a board’s context that might help to built-up of board capital. Therefore this study sets out to study the conditions under which a board receives more financial and nonfinancial information in the setting of privately held firms. Using survey data collected from 574 standalone firms, we find that boards receive more information when board meetings are held frequently. Boards receive less information in privately held family firms and in older firms. Delving deeper in these findings, we conduct analyses for our sub-sample of family firms and find that boards of later-generation family receive even less information. Moreover, the independent directors’ presence increases the supply of information to the boards of family firms only when board meetings are held regularly. Finally, the supply of information improves the board’s involvement in monitoring management. Combined, the results support the agency views on family firms and especially the views on within family agency issues which increase over generations. Our study also highlights the differences in information provision to boards in privately-held firms. As a result of this heterogeneity the built-up of board capital might be different across firms even when initial human and social director capital is identical.
THE EFFECT OF REVIEW MODE AND REVIEWER PREFERENCE ON AUDITORS’ PERFORMANCE
DUH, RONG-RUEY
LAIO, JUNG-LING; LIN, CHING-CHIEH
Category: AU = Auditing
This study examines the joint effect on auditor performance of two accountability features in the audit review process: review mode and reviewer preference. It investigates whether the auditors’ strategic behavior can be mitigated under the e-mail review mode. Seventy-eight auditors participated in an experiment. Results suggest that, under the face-to-face review mode, auditors whose supervisors are known to be skeptical about client-provided explanations make lower likelihood assessment that the explanations can substantially account for the fluctuation of accounts receivable balance than auditors whose supervisors are known to trust the client-provided explanations. Such attitudinal shift cannot be mitigated by the e-mail review mode. In addition, under the face-to-face review mode, auditors in the skeptical condition search for more opposing (less supporting) audit evidence than those in the credence condition. However, such differences diminish under the e-mail review mode. Our finding suggests that auditors’ conformity to the reviewer preference can be moderated by review mode for process accountability but not outcome accountability.
THE ACCOUNTANT, THE ENTREPRENEUR AND THE PUBLIC FUNCTION
DUIVERMAN, SYTSE
Category: AU = Auditing
Most Certified public accountants fulfill their important public task in a commercial business environment. They are expected to be independent and objective towards their clients, but at the same time are responsible for the commercial success of their audit engagements and the firm they work in. This paper describes an experimental study about this dilemma. The paper investigates the effect of personality, measured by the novel HEXACO-personality trait model, on a preference for a study in accounting, the willingness to fulfill a public task, entrepreneurial talents and behavior in a public goods game. I find that personality influences directly, or indirectly, the willingness to sacrifice individual welfare for the public interest. It furthermore shows that personality characteristics are determinants in the study preference of business students. Accounting students do not behave better or worse with regard to the dilemma expressed above. However we do find that the commitment to public values is an important factor for desirable behavior.
DO FIRMS MANIPULATE REAL OPERATIONS TO CATER TO THE MARKET: GROWTH VERSUS MARGIN IMPROVEMENT
DUONG, CHAU
Category: FA = Financial Analysis
This paper presents evidence in line with the hypothesis that firms would engage in real earnings management to best cater to what the market is demanding. In particular, we find evidence that when the market is more sensitive to sales growth, firms would manage earnings upwards by changing sales policies to have larger sales. Meanwhile, when the market rewards firms with better profitability, there is evidence of an increase in real earnings management via overproduction and cutting down discretionary expenses, both of which would enhance reported profitability.
INFORMATION TECHNOLOGIES AND THEIR INFLUENCE ON MANAGEMENT CONTROL SYSTEMS. THE EVIDENCE FROM POLAND
DYCZKOWSKI, TOMASZ
DYCZKOWSKA, JOANNA
Category: IS = Accounting and Information Systems
Business information systems are seen as invaluable support to financial and accounting specialists. Numerous studies show, however, that information technologies do not always contribute to better decisions. Moreover, many enterprises are unable to use analytical potential of their information and communication technologies (ICTs) to the full. In this respect the paper aims at validating a positive contribution of ICTs to effectiveness of management control systems (MCSs). The authors tested three research hypotheses linking types of ICT systems supporting companies with advancement of management control systems as well as satisfaction from ICTs with evaluation of MCSs’ functionality. The immediate improvement in the latter aspect after implementation of new technologies was also scrutinised. The hypotheses were examined using quantitative and qualitative approaches on a data set from 179 enterprises operating in Poland. The results of the research demonstrated that business information systems indeed improved comprehensiveness of information support to managers. In particular control and reporting processes proved to be upgraded, not only on a long run, but also shortly after new ICT solution have been installed. It was also confirmed that ICTs provide regular employees with a better access to business analyses. Nonetheless, still large companies operating in information and communication or industrial domains, appear to be major beneficiaries of modern ICTs.
DISCRETIONARY AGGREGATION
EBERT, MICHAEL
SIMONS, DIRK; STECHER, JACK
Category: FR = Financial Reporting
Consider the following problem: a firm's manager has many sources of private information about the firm's value, and wishes to maximize the firm's share price on a market characterized by rational expectations. Everyone knows that the manager is informed, but the manager alone knows how many signals he has received. If the manager discloses anything, it must contain the truthful net impact of all his private sources of information. But he can reveal more, by partitioning the set of private signals and disclosing subtotals. What will the manager disclose? We show that he will disclose (a sufficient statistic for) all his information if and only if the news is sufficiently bad. Otherwise, he will disclose only the net result of his signals. That is, discretionary aggregation creates incentive to provide detailed information in bad states, and to provide only summary information in good states.
DETERMINANTS OF INVESTOR REACTIONS TO ERROR ANNOUNCEMENTS - EVIDENCE FROM GERMANY
EBNER, GERMAR
HOELTKEN, MATTHIAS; ZUELCH, HENNING
Category: FA = Financial Analysis
This paper contributes to the understanding of the German two-tiered enforcement set-up. The first tier is represented by the private review panel FREP, which has been investigating IFRS financial statements since 2005 and ensures consistent and faithful application of the latter. The German securities regulator BaFin, as second tier to the mechanism, enforces disclosure of errors established by either FREP or BaFin and therefore substantiates the adverse disclosure mechanism. We investigate short-term reactions to error announcements published between 2006 and 2013 and find evidence for differences of investor reactions between the early and the current years of enforcement. Disentangling the contributing factors of error severity, we provide evidence that investor reaction is primarily associated with the impact of error announcements on profitability. In addition, we detect that the amount of errors established is negatively associated with investor reaction indicating that extensive error announcements have an attenuating effect on investor reaction. Yet we caution to blindly interpret these findings, since they are also subject to change over time and partially driven by outliers. Further multivariate analyses provide additional insights referring to determinants of investor reactions by examining effects of stated errors on core earnings, effects of errors triggered due to second-guessing the use of professional judgment, and changes of investor perception over time.
ACCOUNTING FOR FAIR COMPETITION BETWEEN PRIVATE AND PUBLIC SECTOR ARMAMENTS MANUFACTURERS IN VICTORIAN BRITAIN
EDWARDS, JOHN RICHARD
Category: MA = Management Accounting
Failures in rifle supply during the Crimean War (1854-6) caused the British government to seek a more reliable method for procuring weapons for military use. Fact-finding missions to U.S. rifle manufacturers led to the introduction of the ‘American system of manufacturing’ at a purpose-built factory in north London. The extension of gun making facilities at the Royal Small Arms Factory, Enfield Lock, was accompanied by major accounting innovations driven by society’s desire for ‘cheap and efficient’ government and, within a laissez-faire environment, the need to ensure fair competition between private and public suppliers of military goods. The new accounting practices were disseminated to other government military manufacturing establishments located at the Woolwich Arsenal. The historical knowledge revealed in this paper casts doubt on a conventional wisdom that perceives the private sector as the predominant engine of accounting change in Britain.
COMPETING INFORMATION SOURCES
EINHORN, ETI
Category: FR = Financial Reporting
This study analyzes the interaction between voluntary disclosures that firms strategically provide to the capital market and the strategic activities of traders in the market to acquire private information from other sources. The analysis is based on a rational expectations model where risk-averse traders in a perfectly competitive market allocate funds between a risky stock of a firm and a riskless bond on the basis of information, which they may receive from two interrelated endogenous sources. Besides the voluntary disclosure made by the firm, which is freely available to all traders, there also exists in the model a competing information source from which traders can acquire private information at a cost. The equilibrium outcomes suggest that the presence of such a competing information source in the market may significantly alter the strategic disclosure behavior of the firm. It may explain a deviation from the conventional full disclosure equilibrium to equilibrium with partial and selective disclosure. It may also lead to an untypical equilibrium shape where any information content (both favorable and unfavorable) could be disclosed and could as well be withheld with a positive probability. The probability of disclosure occurrence, which appears to be independent of the disclosed content, is shown to be increasing in the precision of the disclosed information and deceasing in the precision of the information that traders can privately acquire from another source.
INFORMATION EFFICIENCY AND THE EUROPEAN TRANSPARENCY DIRECTIVE: DOES THE DISCLOSURE OF CHANGE IN VOTING RIGHTS MATTER? – EVIDENCE FROM GERMANY
EISENSCHMIDT, KARSTEN
MEIER, JAN-HENDRIK
Category: FA = Financial Analysis
The study analyzes the impact of disclosure of change in voting rights which must be submitted to capital markets due to the European Transparency Directive I implemented in Sections 21 - 30 German Securities Trading Law (WpHG). We apply an event study for our analysis and focus on disclosure of top 160 German corporations for the period of 2006 to 2012. We demonstrate significant capital market reactions especially for disposal announcements. The analysis regarding certain important thresholds shows that the exceeding and shortfall of the 5% threshold has an impact and results in significant reactions on the equity market while other thresholds like the 3% or the 10% level do not show the same effect. Our study extends previous primarily judicial literature concerning the disclosure of change in voting rights about a first empirical analysis regarding the information relevance. So far, there are no empirical studies which focus on this topic. The standard-setter therefore preserves a first empirical evidence regarding the information relevance of its implemented standards. The empirical analysis is not only of national interest as the European Transparency Directive I had to be implemented in all EU Member States. The study provides, based on the results for the German capital market, a first indication and also opens additional research potential for empirical analyses for participation reporting in other EU Member States.
ISLAMIC ETHICS FOR ENVIRONMENTAL RESPONSIBILITY: WHAT DOES QUR’AN SAY?
EKARA HELFAYA, AKRUM
HANAFI, RASHA ; HELFAYA, AKRUM; KOTB, AMR
Category: SE = Social and Environmental Accounting
Abstract A very close look at divine messages, particularly within the Qur’an, reveals an ethical responsibility to protect the environment and utilise the natural resources efficiently. Using interpretative content analysis of environmental responsibility themes within the Qur’an, this study calls for a move towards individual ethical responsibility, at least in the context of Muslim majority markets, thus achieving corporate and society environmental responsibility, as opposed to the Western views, which arise from the mutual relationship between the corporate domain and the community. It was found that 675 verses in 84 chapters throughout the whole Qur’an refer to a wide range of ethical environmental responsibility themes, grounded on the belief that humans are vicegerents of God on the earth and are motivated by earthly and heavenly rewards. Key words: Ethics, corporate social responsibility, environmental responsibility, Islam, Qur’an.
EARNINGS MANAGEMENT AND MANAGERIAL ABILITY - THE ROLE OF COMPETITION
EL DIRI, MALEK
CLACHER, IAIN; KEASEY, KEVIN
Category: FR = Financial Reporting
We contribute to the extensive earnings management literature by examining the effect of market competition on the relationship between managerial ability and earnings management. Increased market competition decreases information asymmetry, and as a result, changes managers’ motivations to manipulate earnings by imposing discipline or driving opportunistic behaviour. In this setting, superior managers respond by manipulating total earnings via accruals rather than by more costly real earnings management. The results emphasize the importance of understanding how industry level factors influence managerial decisions at the firm level.
INSTITUTIONAL INVESTORS NEEDS OF ACCOUNTING AND FINANCIAL INFORMATION
EL FASSI, FATEM-ZAHRA
GODOWSKI, CHRISTOPHE
Category: FA = Financial Analysis
Institutional investors are among today's leading actors in the financial marketplace. To perform their activity, these investors require information on companies in which they may decide to invest. While investors' behavior and specificities have previously been studied, research dedicated to their accounting and financial information needs has been limited or only partially addressed, whereby this need is not the central focus of the study but merely a peripheral concern. We propose herein to compensate for such a void by conducting a comparison of information required by institutional and individual investors. This study has identified the existence of different information needs between the two investor categories, with these needs being distinguished through both a typology and hierarchy. Moreover, we have attempted to explain the differences in accounting and financial information needs by relying on Schneider's theoretical framework (2000), which places the institutional investor in a dyadic contract.
ACCOUNTING AND THE PRACTICES OF SUPPLY CHAIN STRATEGY IN THE UK RETAIL SECTOR
EL SAYAD, SAMAR
STONER, GREG; WICKRAMASINGHE, DANTURE
Category: MA = Management Accounting
The roles of accounting in supply chain strategy and strategizing efforts have largely been unexplored. This paper investigates the role of accounting numbers and accounting templates in the diffusion of supply chain strategy throughout the chain in the UK retail sector, which is tightly coupled with a series of strategizing activities. In our inquiry, we draw upon Actor- Network Theory (ANT) to understand the dynamic nature of supply chain and the functioning of accounting within such context. The paper shows that accounting actants are mobilized by the powerful retailer and, then, can inspire other actors to act and undertake a series of local strategizing activities.
HIGHER EDUCATION CHALLENGES: ACCOUNTING AND FINANCE ACADEMIA IN A RESEARCH-LED TEACHING UNIVERSITIES.
EL TAWY, NEVINE
ABDEL-KADER, MAGDY
Category: ED = Accounting Education
This paper explores the problems facing the recruitment of accounting and finance staff in Research led Universities. “University accounting and finance (A&F) departments are experiencing difficulty in attracting and retaining suitably qualified staff” (Duff & Monk, 2006, p.194). The accounting and finance academy is at a cross road. The literature identifies a number of reasons for this phenomenon (e.g., Duff & Monk, 2006) including, the wide salary gap between academe and industry profession, the difficulty in achieving publications in highly rated journal, and high work load in teaching and marking due the limited number of accounting and finance staff. The data was collected from a research led University based in London. This study has resulted in eight main challenges emerged and a final theory has been generated; Recruitment criteria, PhD holders vs. qualified professional accountants, demographic effect, competition with other universities, salary level, research intensive, heavy teaching load and response to promotion. The contribution of this research will have many implications on business schools in research led Universities, the accounting and finance staff recruitment strategies and the accounting and finance research strategies in research led Universities.
THE ROLE OF INDEPENDENT NON-EXECUTIVES IN THE UK AUDIT FIRMS’ GOVERNANCE
ELDALY, MOHAMED KHALED
ABDEL-KADER, MAGDY; MOSTAFA, DIANA
Category: AU = Auditing
The code of audit firm governance has been effective since 2008 in the UK. Audit firms are required to disclose information about their audit firms through the transparency report in the annual reports and through their websites (FRC, 2010). The Audit firm code of governance code in the UK focuses on disclosing information regarding six main issues. This paper focuses on the existence of INEs on the board of audit firms, which is the third requirement of the code through evaluating their roles, the benefits and costs of hiring them and to what extent the different audit firms operating in the UK had abided by effectively implementing the role of INEs. This was achieved through a time series analysis of the transparency reports of each firm from 2008 (before the code was enforced) to 2010 (when the code was enforced) and to 2013 (3 years after the code was effective). Theories behind the new role of audit firms’ INEs have been discussed to provide a better understanding of the main motivations of the new INEs role. It was found that the INEs’ letters are very conservative when writing their letters and many of them explained the process they did rather than highlighted the results they found. Analyzing their work approaches reflects inconsistency in what they are doing as the code was principle based rather than rules based. Different duties have been conducted by different INEs who are coming from different backgrounds.
A TALE OF TWO REGULATORS: RISK DISCLOSURES, LIQUIDITY, AND ENFORCEMENT IN THE BANKING SECTOR
ELFERS, FERDINAND
BISCHOF, JANNIS; DASKE, HOLGER; HAIL, LUZI
Category: FR = Financial Reporting
This paper examines the effects of heterogeneity in regulatory supervision on firms’ disclosure behavior and the ensuing capital market consequences. The effectiveness of regulation depends not only on the written rules, but also on how regulators and the firms they regulate enforce and adhere to these rules. We exploit the fact that banks are subject to quasi-identical risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II accord), but that different regulators enforce these rules at different points in time. We find that banks substantially increase their risk disclosures upon the adoption of Pillar 3 even if they had to comply with the same requirements under IFRS 7 beforehand. The increase is larger in countries where the banking regulator has more powers and resources and is less involved in the general oversight of securities markets. It is also larger for banks most likely to attract regulatory scrutiny from the banking supervisor due to higher distress risk. The improved risk disclosures translate into higher market liquidity around Pillar 3 but not around IFRS 7. The results indicate that the success of regulation depends on the fit between regulator and regulatee and that having multiple regulators may lead to inconsistent implementation and enforcement of the same rules.
CORPORATE GOVERNANCE QUALITY AND ANALYSTS' INFORMATION ENVIRONMENT. A STUDY OF THE US BIOTECH SECTOR
ENACHE, LUMINITA
ENACHE, LUMINITA; PARBONETTI, ANTONIO
Category: GV = Accounting and Governance
This paper uses a sample of US biotech firms to examine the joint impact of product-related voluntary disclosure and corporate governance on firms’ information environment, in particular on analysts’ forecast accuracy, dispersion, and precision of public and private information. We also investigate whether such information was consistently disclosed over time. Our findings, show the quality of corporate governance affects information transparency and plays a role in reducing uncertainty associated with firms’ future performance by increasing the precision of analysts’ common information and forecast accuracy when voluntary disclosure is constant over time. Analysts forecast dispersion decreases when more independent directors sit on the board. Voluntary disclosure and corporate governance quality are two mechanisms that act in tandem to improve the quality of information available to financial analysts.
PERFORMANCE MEASUREMENT AND CONTROL SYSTEMS IN GLOBAL AUDIT FIRMS - COMPARATIVE CASE STUDIES FROM GERMANY AND ITALY
ENDENICH, CHRISTOPH
DITILLO, ANGELO; HOFFJAN, ANDREAS
Category: MA = Management Accounting
It is widely argued that performance measurement and control systems (PMCSs) in global audit firms are increasingly likely to be uniformly shaped across firms and countries instead of reflecting characteristics of the according firm or country. We argue that this harmonization does primarily concern the macro-level of control systems – e.g. control techniques and IT-systems – whereas the micro-level of control systems – e.g. the style of using PMCS information – is likely to differ significantly across countries. To illuminate possible micro-level differences across countries, we conducted in-depth case studies within the Italian and German business units of a Big 4 firm. Our case studies highlight considerable efforts to globally harmonize PMCSs at the macro-level in the Big 4 firm analyzed which is manifested by an according global initiative taking place in the firm at the time of our field-visits. In contrast, we identify remarkable differences at the micro-level of PMCSs: Whereas our German interviewees experience a considerable flexibility and discretion in the execution of their tasks and in the control processes over this execution – which allows for case-specific decisions – our Italian interviewees report to focus much more on the strict compliance with the prescribed rules and procedures. At the same time, our Italian interviewees seem to be confronted with higher targets and expectations than their German peers.
CONSTITUENTS’ LOBBYING IN CONCEPTUAL PROJECTS – A STUDY OF THE FASB/IASB’S FRAMEWORK REVISION
ERB, CARSTEN
PELGER, CHRISTOPH
Category: FR = Financial Reporting
When revising or creating accounting standards, private standard-setters routinely pass through the requirements of the due process which include formal consultations with constituents, usually in the form of comment letters. Lobbying activities by constituents are a continuous phenomenon in the due processes of private financial reporting standard-setters, such as FASB and IASB. This paper investigates constituents’ lobbying in a standard-setting project dealing with the conceptual foundations of financial reporting. We carry out an explorative empirical case study which focuses on the framework revision of FASB and IASB between 2004 and 2010. In this revision project two controversial debates arose about the questions whether stewardship should be stated as a separate objective and whether reliability should be replaced by faithful representation. We find that the sample of constituents in terms of professional backgrounds in a conceptual project differs markedly from that in usual standard-setting projects. A second finding is that constituents’ attitudes towards the boards’ proposals and the arguments they employed in the comment letters were mainly rooted in the respondents’ socialisation in a specific accounting mind-set and terminology. In this line, regional differences in particular become obvious between the US on the one hand and Europe and Commonwealth countries on the other hand, for example with regard to concepts such as stewardship or prudence.
ECONOMIC CONSEQUENCES OF DETERRENT CLAWBACK PROVISIONS
ERKENS, MICHAEL
GAN, YING; YURTOGLU, BURCIN
Category: GV = Accounting and Governance
A clawback policy is a governance mechanism to deter executives from misbehavior and to recover erroneously awarded compensation. While prior studies focus on the mere adoption of voluntarily adopted clawback provisions, we emphasize their firm level variation. We employ a Deterrent Index, which is based on a comprehensive linguistic analysis of clawback provisions, to quantify the deterrent level of each clawback. Using a difference-in-differences analysis, we report a significantly lower incidence of misstatements and accounting restatements only for firms that adopt a high deterrent clawback policy, but not for firms that adopt a low deterrent clawback policy. We also document an increase in audit fees after firms adopt a high deterrent clawback. There is no evidence that firms with a high deterrent clawback policy face higher costs in the form of higher CEO pay following adoption. Our results indicate that the mere adoption of clawback policies is not sufficient to experience benefits, but that the effectiveness of voluntarily adopted clawback policies depends on their deterrent level.
RISK MANAGEMENT FOR VOLUNTARY ASSURANCE SERVICES? - A PROVIDER'S PERSPECTIVE ON SUSTAINABILITY ASSURANCE
ERNSTBERGER, JUERGEN
STEINMEIER, MARIA ; STICH, MICHAEL
Category: AU = Auditing
This study examines an assurance provider's risk-management strategies in a voluntary reporting and voluntary assurance setting. An assurance provider can utilize the flexibility arising from the absence of a regulatory corset to manage engagement-related risks specifically by rejecting clients and/or by tailoring the scope and level of its assurance services. We explore whether and how litigation and reputation risks related to voluntary sustainability assurance engagements affect an assurance provider's decisions regarding engagement acceptance and tailoring of the assurance services. Using a unique dataset on sustainability assurance practices of firms in 20 countries around the world over the period 2006 to 2011, we find that despite the lack of regulatory requirements an assurance provider's decision on client acceptance or tailoring of services depends on the assessment of engagement-related risks. Our findings suggest that providers address reputation risks predominately through their engagement acceptance decision whereas they react on litigation risks by tailoring the scope and level of assurance services.
THE INFLUENCE OF EXPERIENCE ON AUDITORS’ PROFESSIONAL VALUES
ESPINOSA-PIKE, MARCELA
BARRAINKUA , ITSASO
Category: AU = Auditing
Auditors’ professional values have been questioned in last years. The aim of this study is to explore how the professional and ethical attitudes of auditors differ between postgraduate auditing students and experienced auditors. In particular, this study investigates the differences in perception of postgraduate students compared to experienced auditors with respect to key issues for the auditing profession as public interest commitment, ethical awareness, ethical judgement and rules versus principles orientation. The results of this study conducted among 122 auditors and 47 post-graduate students reveal that students present higher commitment to the public interest and higher ethical awareness than those of the auditors. Moreover, these professional attitudes erode as auditors gain experience. These results may suggest that students in the postgraduate auditing course have adopted the beliefs and attitudes of the profession. Further the results of this study may suggest the negative influence of auditing context in auditors’ public interest ideal. The demise of the auditors' ethical awareness and commitment with the public interest implies new challenges for audit firms and professional organizations.
AUDITING AND PRIVATE CAPITAL FORMATION: A FIELD STUDY
ESPLIN, ADAM
JAMAL, KARIM; SUNDER, SHYAM
Category: AU = Auditing
Audited financial reports are supposed to promote capital formation by reducing information asymmetry between companies and investors. To understand the underlying incentives, we interview a small sample of private company CFOs, auditors, bankers, board members, bonding agencies, and private equity firms to learn why and how private companies hire auditors, and how audited financial statements are used to make decisions. We find that a wide variety of agents demand audited financial statements of such companies, and their management selects the auditor. When the demand for audit arises from current or potential owners of equity, CFOs and users prefer a Big-4 audit firm. Other users (e.g., banks) are indifferent between large and small audit firms. CFOs and users want auditors to help improve the reliability of financial statements, identify internal control and governance issues, and provide general business advice to increase the company’s profitability.
BIAS IN SUBJECTIVE PERFORMANCE EVALUATIONS - CURSE OR BLESSING FOR PERFORMANCE-BASED COMPENSATION?
ESSERT, IRENE
Category: MA = Management Accounting
Prior research on subjective performance evaluations provides evidence of leniency and centrality bias, which lead to upward and compressed performance ratings. While determinants of their antecedents are extensively discussed, studies examining the implications of biased performance ratings are scarce, with the few studies indicating partially conflicting findings. Providing a LEN-model on biased performance ratings, this study analytically examines the implications of performance evaluation bias on managerial performance. More precisely, it explains the ambiguous implications identified in prior research by incorporating contextual factors of performance-based contracting. Considering the total effect of both leniency and centrality biases, the results indicate an enhancing impact of upward bias and a diminishing impact of downward bias on managerial motivation and performance. However, due to contextual factors of social preferences and bonus pool arrangements their impacts - both the negative and the positive ones - may be reduced or even reversed, depending on the total amount of the bonus pool or the degrees of inequity aversion, respectively. Hence, I argue that interaction effects between evaluation bias and existing contextual factors are important to consider, when designing optimal incentive systems.
THE IT AUDITOR FUNCTION ON FINANCIAL STATEMENT AND INTEGRATED AUDITS: DESCRIPTION OF PRACTICE AND AVENUES FOR FUTURE RESEARCH
ESTEP, CASSANDRA
BAUER, TIM
Category: AU = Auditing
IT plays a critical role in the production of financial statements, and thus, audits over financial statements. However, audit standards provide limited guidance related to the reliance on IT and use of IT auditors; academic literature is sparse on these topics as well. We seek to fill this gap by gaining an understanding of the IT auditor function on financial statement and integrated audits, especially in light of recent PCAOB concerns over undue reliance on IT as a root cause of ICFR-related audit deficiencies. We analyze data from 33 interviews with practicing financial and IT auditors using a research question framework highlighting key points in the audit process. We posit a number of interesting implications including 1) involvement of IT auditors in audits is a subjective process and thus social and behavioral forces could have a significant influence on the way the two teams work together, 2) while IT auditors are typically involved in planning, the extent can vary and there is likely room for increased involvement, especially around fraud-related procedures, and 3) financial and IT auditors have contrasting views on whether increased involvement of IT auditors on business process-related work is needed, but both groups cited the need for mutual respect and knowledge in both domains. Our findings provide a foundation for academic researchers to identify important research issues, develop theory-based predictions, and design empirical studies to address these issues.
CONTINUOUS AUDITING BETWEEN THEORY AND PRACTICE - A REVIEW OF CONTINUOUS AUDITING-LITERATURE AND PRACTICAL APPEARANCE IN THE CONTEXT OF THE IAF -
EULERICH, MARC
KALINICHENKO, ARTUR
Category: IS = Accounting and Information Systems
This paper investigates the importance of continuous auditing for IAF from a theoretical and a practical point of view. We analyzed the importance of continuous auditing in Germany, Austria and Switzerland empirically and provided a holistic literature overview to compare the practical relevance and the current state of research addressing the topic of continuous auditing. We identified a high acceptance of continuous auditing by large public companies from the financial. Furthermore, our results indicated high relevance of continuous auditing for risk based audit plan. Our literature review summarize and classify the existing literature address the topic of continuous auditing to examine the current state of the knowledge about continuous auditing and to give future research opportunities. Therefore, we analyzed 82 papers from the last 25 years.
THE EFFECT OF RELATIVE PERFORMANCE INFORMATION ON NONCOMPLIANCE IN DIFFERENTLY COMPLIANT WORK CLIMATES
EWELT-KNAUER, CORINNA
KNAUER, THORSTEN; SHARP, DAVID
Category: AU = Auditing
This study investigates experimentally how one important formal control and the behavior of peers affect individual behavior in accounting contexts. Specifically, we analyze how relative per-formance information (RPI) affects noncompliance in differently compliant work climates when employees have economic incentives for noncompliance. We examine the effect of the absence or presence of RPI in a weakly versus a strongly compliant work climate. Drawing on behavioral theories, we predict and find that a weakly compliant work climate increases noncompliance compared to a strongly compliant one. Moreover, we predict and find that the provision of RPI reduces noncompliance in a strongly compliant work climate but increases noncompliance in a weakly compliant work climate. We attribute this finding to externalities inherent in the competi-tion frame created by RPI that strengthen the relevance of a compliant work climate. Our study informs accountants about the effects of RPI, an important performance evaluation system, on the critical aspect of noncompliance. We demonstrate that RPI magnifies the effects of the compliant work climate on noncompliance in firms.
DOES BRANCH RELIGIOSITY INFLUENCE BANK RISK TAKING?
FABRIZI, MICHELE
CHIRCOP, JUSTIN; IPINO, ELISABETTA; PARBONETTI, ANTONIO
Category: FR = Financial Reporting
Previous literature shows a strong link between religiosity and risk aversion (Noussair, 2012), and documents that religiosity influences corporate behavior (McGuire et al. 2012; Hilary and Hui 2009). Since both the social norm and legitimacy theories posit that corporations take into account the religiosity of stakeholders in their decision-making process, in this study we investigate whether the religiosity of the geographic areas in which banks operate affects overall bank’s risk taking. Using data about the location of branches of 2,228 public and private U.S. banking institutions, we find a significant association between our weighted measure of branch religiosity and bank risk taking. In particular, we find that higher branch religiosity translates into lower levels of bank risk taking. Importantly, we document that when we control for headquarter religiosity, only branch religiosity influences bank risk taking. This result is particularly interesting because it suggests that the main driver of firm’s behaviors is not necessary captured by the religiosity of the headquarter, as claimed by most previous research. To the best of our knowledge, this is the first study that investigates the impact of branch religiosity on corporate behavior.
CORPORATE TAX AGGRESSIVENESS AND CSR: DO OWNERSHIP STRUCTURE AND ENVIRONMENTAL DISCLOSURE MATTER?
FALLAN, EVEN
FALLAN, LARS
Category: SE = Social and Environmental Accounting
The payment of taxes is an under-researched aspect of corporate social responsibility (CSR). The degree of corporate tax aggressiveness (tax planning, avoidance or evasion) affects shareholders’ residual claims. Tax payments are also contributions to the society that makes it more difficult to insulate the firm against the pressure to comply with the tax law. While corporate management decides both tax behaviour and the CSR reporting strategy, it is interesting to study the relation between social responsibility signalling and tax aggressiveness. The analysis is based on agency theory, and cross-sectional data from the annual reports of corporations listed on the Oslo Stock Exchange, excluding sectors with different tax regimes. The study indicates that ownership structure affects corporate tax aggressiveness behaviour. Further results reveal that corporate tax compliance is positively related to the degree of compliance with mandatory environmental disclosure requirements. This might follow from a stick-to-the-rules attitude. Tax aggressiveness is positively related to the extent of voluntary environmental disclosure, which indicates opportunistic behaviour. The main contribution of the study is that different motivations for a high degree of tax compliance and high degree of tax aggressiveness, also affect mandatory and voluntary environmental disclosure in the same way.
THE INFLUENCE OF ACCOUNTING STANDARDS ON CEO COMPENSATION IN HIGH-TECHNOLOGY FIRMS
FARIA, PAULA
BRANDÃO, ELISIO; VITORINO MARTINS, FRANCISCO
Category: GV = Accounting and Governance
This study examines the effects of introducing the accounting statement on Chief Executive Officer (CEO) compensation in high-technology firms in the corporate performance perspective. Particularly, the SFAS 123 (R) is analyzed in total CEO compensation in short- and long-term compensations, and tested in terms of corporate performance. Panel data SUR models were estimated that describe total compensation and cash compensation as a proportion of total pay, for the period between 2000 and 2010. The findings indicate that there is a positive relation between CEO compensation and firm performance in high-tech firms after the FASB statement 123 (R) is implemented, but with less intensity than before. This econometric study provides a better understanding of the relationship between CEO compensation and performance in high-technology firms after introducing the SFAS 123 (R) accounting statement.
STEWARDSHIP, INCENTIVES, AND ACCOUNTING PERFORMANCE MEASURES: EVIDENCE FROM GERMANY
FEILS, DOROTHEE
SABAC, FLORIN
Category: GV = Accounting and Governance
Based on a Coasian perspective on corporate governance, we propose that the use of accounting-based performance measures, employee representation on corporate boards, and industry levels of skill-specific intensity interact in providing incentives for investments in firm-specific human capital. Using a sample of German firms, we provide evidence that the likelihood of using accounting-based performance measures in managerial incentives increases with the level of employee representation on supervisory boards and with the level of industry skill-specific intensity, but decreases in the interaction between the two. Our results lend support to a broader view of the stewardship role of accounting as a key ingredient in corporate governance, beyond the agency-based view that equates stewardship value with informativeness.
EDUCATION OF BOARD MEMBERS AND IFRS DISCLOSURE COMPLIANCE: EMPIRICAL EVIDENCE FROM BRAZIL
FERNANDES, SÓNIA
LOURENÇO, ISABEL
Category: GV = Accounting and Governance
Compliance with IFRS disclosure requirements is a key issue for external users. This study analyses the level of compliance with IFRS 3 disclosure requirements and examines whether it is influenced by the nature of the board members. The empirical study relies on an emerging country, where the managers’ education is an essential feature in the labour market. Our results indicate a moderate level of compliance with IFRS 3 disclosure requirements, which is greater the greater the weight of younger board managers with post-graduate education, specially obtained abroad. This study contributes to the literature by providing empirical evidence on the importance of education to explain the transparency of accounting information, namely in an country where there are many inequalities in education. These results are of interest to regulators, investment analysts and market participants.
ACCOUNTING DATA AS SHARE PRICE EXPLANATORY VARIABLES: A STUDY IN AN EMERGING MARKET STOCK EXCHANGE
FIGLIOLI, BRUNO
LIMA, FABIANO GUASTI; LOPES, ENNIO POLITI; RIBEIRO, ANTONIO DE CISTOLO
Category: FA = Financial Analysis
Brazil, as an emerging market, has converged its internal accounting rules to IFRS rules on 2008, effective to all companies listed on exchange market for the end year of 2010. Researching behavior of investors, based on accounting information in Brazilian market, can provide useful insights for other emerging economies. As Brazil has a very developed financial market, most as result of past high inflation periods and the capital market is also a mature market with several professional traders, researches based on Brazilian market can also be relevant for other developed markets. We determined the relationship between share price/value and accounting earnings (accruals and cash flow) by analyzing panel data from companies listed on the Securities, Commodities and Futures Exchange in Sao Paulo Brazil (BM&FBOVESPA) from March 2005 to March 2014 (509 data points). Our analysis showed that cash flow provides relevant data for the pricing of shares, whereas accruals does not.
FINANCING, FIRE SALES, AND THE STOCKHOLDER WEALTH EFFECTS OF ASSET DIVESTITURE ANNOUNCEMENTS
FINLAY, WILLIAM
MARSHALL, ANDREW; MCCOLGAN, PATRICK
Category: FA = Financial Analysis
We examine the impact of financial distress conditions at the level of individual firms, their operating industry, and the overall economy on the market reaction to divestment announcements. Stockholders suffer significant wealth losses when firms sell assets during periods of industry distress, which supports the fire sale explanation of divestment announcements. We find limited support for the financing explanation of the market response to divestments. Industry distress dominates firm and economic distress in explaining the market response to divestments and stockholder wealth losses during industry distress conditions are increasing with the relative size of the divested assets.
ANALYZING THE PRACTICES OF CORPORATE GOVERNANCE IN UNIVERSITIES: THE COLOMBIAN CASE
FLÓREZ-PARRA, JESÚS MAURICIO
LÓPEZ-HERNÁNDEZ, ANTONIO MANUEL ; LÓPEZ-PÉRREZ, MARÍA VICTORIA
Category: GV = Accounting and Governance
In a context of greater demands in terms of accountability and transparency in management, we analyze the extent to which Corporate Governance (CG) mechanisms have been adopted and we define the model of governance that is being adopted by universities. In the field of higher education, there are usually no compulsory requirements related to CG. Nevertheless, governance mechanisms are nowadays considered to be crucial in terms of efficiency and effectiveness. Based on a survey of 81 rectors of higher education institutions of Colombia, we analyze and assess the perception of the leaders of Colombian universities regarding the degree of implementation and disclosure of CG aspects. The results show that Colombian universities are incorporating CG aspects into their management systems. We can identify different CG models: stakeholder, managerial, and mixed. In addition to contributing to a better understanding of key CG in universities, this study may be of use for the organisms responsible for establishing rules and regulations as a reference model and for promoting their implementation. The study has analyzed the perception of the rectors in terms of the CG model that characterizes their university, and this perception may be influenced by their professional profiles and/or the public or private nature of their institution.
THE EFFECTS OF REWARDS ON TAX COMPLIANCE DECISIONS
FOCHMANN, MARTIN
KROLL, EIKE
Category: TX = Taxation
We analyze how the redistribution of tax revenues influences tax compliance behavior by applying different reward mechanisms. In our experiment, subjects have to make two decisions. In the first stage, subjects decide on the contribution to a public good. In the second stage, subjects declare their income from the first stage for taxation. Our main results are threefold: First, from an aggregated perspective, rewards have a negative overall effect on tax compliance. Second, we observe that rewards affect the decision of taxpayers asymmetrically. In particular, rewards have either no effect (for those who are rewarded) or a negative effect (for those who are not rewarded) on tax compliance. Thus, if a high compliance rate of taxpayers is preferred, rewards should not be used by the tax authority. Third, we find an inverse u-shaped relationship between public good contribution and tax compliance. In particular, up to a certain level, tax compliance increases with subjects’ own contributions to the public good. Above this level, however, tax compliance decreases with the public good contribution.
INSTITUTIONAL MONITORING, POLITICAL CONNECTION AND THE COST OF DEBT IN MALAYSIA
FOO, YEE-BOON
GUL, FERDINAND A; TEE, CHWEE MING; TEH, CHEE GHEE
Category: GV = Accounting and Governance
In this paper, we examine the main and joint effects of institutional monitoring and politically connected (PCON) firms on the cost of debt. Based on a sample of 1,565 firm-year observations for the period 2005-2010, we provide evidence that (1) institutional ownership (IO) is associated with lower cost of debt, and (2) institutional ownership attenuates the positive association between PCON firms and the cost of debt. When we split IO into local and foreign institutional investors, we find that it is the local IO, and not foreign IO that leads to lower cost of debt and attenuates the association between PCON firms and the cost of debt. Overall, our results suggest that IO, particularly local IOs, can alleviate agency problems in PCON firms through active monitoring and contributes to a better understanding of the monitoring role of institutional investors in Malaysian firms.
THE MATERIALITY PRINCIPLE IN THE INTERNAL CONTROLS OVER FINANCIAL REPORTING
FORNACIARI, LUCA
AZZALI, STEFANO; MAZZA, TATIANA; TRINCHERA, LAURA
Category: AU = Auditing
The paper investigates the materiality principle in the internal controls over financial reporting. Based on private data collected from Italian listed companies, the paper aims to evaluate the relative importance of: 1) quantitative and qualitative factors; 2) identify entities; identify significant accounts; associate account to process; performing walkthrough. Using structural model and path diagram, finding reveals that both quantitative and qualitative factors affect the use of materiality in scoping, planning and risk assessment. Among quantitative factors, total assets, sales and earning before taxation are the best accounting measure used by companies to select entities while income statement value are more useful than balance sheet in selecting significant account. This last activity is relatively more relevant that the others. Among qualitative factors, scoping results show: 1) the relevance to implement the identification of entities to a group level; 2) the multiple association accounts – processes is better than single association.
THE REASONS BEHIND COSTING SYSTEM USE IN NON-PROFIT ORGANISATIONS IN NEW ZEALAND
FOWLER, CAROLYN
TAN , YIH LING
Category: MA = Management Accounting
Non-profit organisations (NPOs) contribute in a significant way to the New Zealand economy. To ensure their long-term sustainability, it is fundamental that each NPO has effective governance and management. Cost information helps managers make informed judgements for better internal management and provides the information necessary for good governance. This research explores NPO costing system use and the factors that determine its use as well as identifying the purposes for which the cost information produced is utilised. Based on exploratory case studies of four large NPOs involved in education, health, social services and religious areas it was found that all use a direct-indirect costing system, but only three allocate indirect costs to service/programme cost centres. Costing systems complexity also varied. The predominant contingent factors determining cost system use were the NPO type, its size, how important the cost information was and whether the NPO had good information technology. The key management accounting purposes that the cost information was used for was to determine the cost of their service or programme, prepare budgets, identify areas for cost reduction, measure cost and budgeted-related performance and make decisions relating to contract pricing and capital investment. However, the results are only a snapshot of costing in four NPOs and more research needs to be done within the NPO sector to enable us to better understand their costing information needs.
MANAGING THE UNMANAGEABLE: A CLOSER LOOK AT THE RELATIONSHIP BETWEEN CONTROL SYSTEMS AND THE PERFORMANCE OF UNIVERSITIES
FRANCO, MONICA
BATTISTA, VALENTINA; LUCIANETTI, LORENZO
Category: MA = Management Accounting
It is generally assumed that the use of performance measures, targets and individual performance reviews improves organizational results. This is why many organizations, regardless of industry or sector, are increasingly relying on these management control mechanisms to influence their performance. This research challenges this assumption, examining the management control systems used in UK universities. With a unique data set combining survey and archival research, we find that UK universities use multiple control mechanisms that can be grouped in two categories: directive, which includes the use of performance measures, targets and individual performance reviews to control what people do; and enabling, which comprises mechanisms that stimulate collaboration, encourage staff’s collective responsibility for results, help staff to derive intrinsic rewards from working towards a valuable mission, and cultivate self-efficacy and determination by supporting on-going training and development. We investigate the relationship of these control means and university performance in terms of research and teaching excellence. We find that directive mechanisms negatively influence performance whilst enabling mechanisms enhance it. We also highlight the importance of staff selection as a moderator of the relationship between control systems and performance.
GENDER DIVERSITY ON BOARDS: TOWARD A STAKEHOLDER APPROACH TO CORPORATE GOVERNANCE?
FRANCOEUR, CLAUDE
BALTI, SOUHA; FRANCOEUR, CLAUDE; LABELLE, REAL
Category: GV = Accounting and Governance
This study examines the presumed link between board gender diversity and different dimensions of corporate social performance. In a sample of U.S., Canadian, and Australian firms from 2004 to 2011 and relying on stakeholder management and institutional theory, we find that gender-diverse boards are associated with greater CSR performance related to three types of stakeholders, namely, the environment, the contractors, and the community. We explain these results by the differential power between these stakeholders and other groups, such as employees and customers, who are highly empowered by institutions.
NEW ASSET PRICING FACTORS AND EXPECTED BOND RETURNS
FRANKE, BENEDIKT
MÜLLER, SEBASTIAN; MÜLLER, SONJA
Category: FA = Financial Analysis
This paper contributes to the recent literature on profitability and investment factors in equity returns by analyzing how these two new factors are priced in corporate bonds. Implied risk premia embedded in corporate bond spreads (an ex-ante measure for expected returns) are reliably negatively related to profitability measured as firm characteristic and/or factor loading. The relation between the implied risk premium and the firm characteristic/factor loading version of the investment factor does not suggest that high-investment (low-investment) firms face lower (higher) cost of capital. Moreover, realized equity returns of a portfolio being long in firms with high implied risk premia on outstanding corporate debt and short in firms with low implied risk premia covary negatively with the realizations of the profitability and investment factor as defined by Fama and French (2014). Overall, our results, which are robust in a variety of alternative tests, are largely inconsistent with a risk-based explanation for the new return factors.
LEADERSHIP STYLE, MANAGEMENT CONTROL SYSTEM AND TECHNOLOGICAL INNOVATION: THE ROLE OF BELIEFS, INTERACTIVE, DIAGNOSTIC AND BOUNDARY SYSTEMS
FREZATTI, FABIO
CAPUANO DA CRUZ, ANA PAULA; DE SOUZA BIDO, DIÓGENES
Category: MA = Management Accounting
Based on transformational and transactional leaderships (Bass, 2008), as well as on Simons’ levers of control framework (1995), this study explores the leadership style as an antecedent for the definition of use of the management control system (MCS) and the role of its different types of use in technological innovation. The data was collected via an electronic survey, with a sample of 164 companies, and analysed by structural equation modelling. Evidence was found that transformational leadership is an antecedent for the interactive use of MCS and the beliefs system. Findings also indicate that beliefs, interactive and boundary systems positively influenced technological innovation. Companies seeking to innovate must invest: (i) in the communication of values and goals related to innovation; (ii) in discussions involving distinct areas and members of the business, even considering the possibility of interacting with agents outside of the company, and (iii) in establishing boundaries which specify a field of action for the employees, providing focus and creating conditions for the development of the intended actions. The hypothesis that the diagnostic system influences technological innovation was not confirmed, suggesting that innovation is not fully integrated to the MCS of the organizations surveyed. In summary, this research extends the knowledge about management control indicating the ways organizations use MCS to promote innovation and to obtain strategic renewal.
PSYCHOSOCIAL AND NEUROBIOLOGICAL RESPONSES TO ACCOUNTING: EFFECTS OF FORMAL PERFORMANCE EVALUATION ON ENERGY MOBILIZATION
FRIMANSON, LARS
ANDERZÉN, INGRID
Category: MA = Management Accounting
Research suggests that accounting-based, formal performance evaluations (FPE) frequency should impact energy mobilization in subordinates. This hypothesis was tested in a randomized intervention study. Seventy-three healthy female subordinates completed a structured, one-year FPE program treated with a 48% lower or maintained evaluation frequency compared to pre-study conditions. Six variables reflecting three facets of energy mobilization were assessed at baseline and in response to 6 and 12 months of intervention: two constructs reflecting self-rated psychosocial energy mobilization (mental energy and work-related exhaustion), two hormones reflecting anabolic energy mobilization (dehydroepiandrosterone sulphate and testosterone), and two hormones reflecting catabolic energy mobilization (thyroid-stimulating hormone and triiodothyronine). The results showed significant improvements across groups in anabolic energy mobilization in spite of significantly adverse psychosocial and cellular-level catabolic energy mobilization as marked by increases in triiodothyronine. Participants treated with a lower evaluation frequency showed a lagged decrease in mental energy scores and a prolonged increase in thyroid-stimulating hormone levels confirmed by a significant Time × Group interaction effect, indicating a prolonged increase in central nervous system activation. This suggests that catabolic, but not anabolic, energy mobilization is causally related to FPE frequency.
THE INFORMATIVE VALUE OF THE AUDITORS’ GOING-CONCERN OPINION INCREMENTAL TO SIGNALS FROM OTHER INFORMATION INTERMEDIARIES
FUNCKE, NADINE
Category: AU = Auditing
The value of auditors’ going-concern opinions (GCOs) to equity investors has widely been debated and existing literature argues that markets only value GCOs when they are unexpected. This paper therefore examines whether preceding signals regarding firms’ future viability by other professional market intermediaries, namely credit rating agencies and equity analysts, alter market reactions to GCOs. The evidence reveals that investors react less strongly to GCOs which have been preceded by credit rating downgrades or downward revisions of analysts’ cash flow forecasts. Market reactions to GCOs seem to be muted only when these signals predict that there is little to no ambiguity that a GCO is expected. Changes in analysts’ investment recommendations only seem to function as a warning signal of an approaching GCO in cases of very severe downward revisions, which occur rarely. Overall, the findings imply that markets value GCOs above and beyond information provided by other information intermediaries.
AUDITORS’ RESPONSE TO ORGANIZED LABOR IN CLIENT FIRMS
FUNG, SIMON
LEE, WOO JONG; SRINIDHI, BIN ; SU, LIXIN (NANCY)
Category: AU = Auditing
Using a sample of US firms for the period 2000-2011, we examine whether organized labor in audit client firms affects their financial statement quality and auditor decisions such as audit fees and going concern qualifications. We do not find evidence supporting the association between unionization and financial statement quality metrics such as future accounting restatements, discretionary accruals and the likelihood of reporting small profits. However, we find that labor unionization is associated with higher audit fees and higher likelihood of going-concern qualifications but shorter audit report lags. Because the auditor’s response seems to be unrelated to inherent earnings quality differences, these findings support the contention that the auditors mitigate the higher litigation risk in unionized firms by giving more going concern qualifications (thereby deflecting the legal threat away) and by charging higher audit fees to compensate for the additional risk.
AUDITOR INDEPENDENCE: A MATTER OF TRUST
GAA, JAMES
STAIHAR, JIM
Category: AU = Auditing
Independence from their clients has been the core ethical principle of auditors for many years. Since the turn of the 21st century, it has taken on new importance because of breakdowns in the the world’s securities markets. The result has been heightened questions on the part of securities market regulators about whether auditors act in the public interest. This exploratory paper describes the current situation as a pervasive problem of trust (and possibly of distrust) in the auditing profession. In this context, the fundamental issue is the extent to which it is reasonable to trust auditors, and not whether they are independent of their clients. Auditor independence – independence in appearance, but not independence of mind – is seen as a way of assuring sufficient confidence in the profession to reduce the risk of vulnerability to auditors, and thus for investors and regulators to trust auditors to act in the public interest.
WHO BENEFITS FROM VOLUNTARY PUBLIC DISCLOSURE? EVIDENCE FROM ITALIAN MARKET MICROSTRUCTURE DATA
GABBIONETA, CLAUDIA
GASSEN, JOACHIM; MAZZOLA, PIETRO
Category: FA = Financial Analysis
Using proprietary market microstructure data of Milan Stock Exchange this study investigates the impact of public news arrival on sell-side and buy-side trading behavior. We use strategic plan presentations as voluntary disclosure events and cluster investors by their respective trading sizes. While trading activity increases around news arrival irrespective of investor type, large (small) investors buy on positive (negative) announcement returns. We also find that large investors increase their holdings prior to news arrival irrespective of its information content. Around news arrival, they off-load this inventory to small investors in case of bad news. This strategy seems to pay off: over the two-month period around our disclosure events, large investors earn a 5.9% positive abnormal return, whereas small investors experience a 5.3% negative abnormal return. These findings are particularly pronounced for smaller, less liquid firms, and consistent with sophisticated investors systematically exploiting attention-based trading behavior of unsophisticated investors triggered by voluntary public disclosure events in the Italian market.
ANTECEDENTS AND CONSEQUENCES OF MINORITY SHAREHOLDER ACTIVISM: EVIDENCE FORM BOARD ELECTION
GAIA, SILVIA
Category: GV = Accounting and Governance
This study investigates antecedents and consequences of minority shareholders activism in board elections. By studying Italy listed firms, this study shows that minority shareholder activism is driven by their perceived risk of wealth expropriation: they appoint a director in firms whose controlling shareholders’ wedge between voting rights and cash flow rights is wider and in firms that undertake more relevant related-party transactions. This study provides also evidence that directors appointed by minority shareholder improve effectively corporate governance only when they are expression of an independent minority shareholder. By contrast they exacerbate governance problems when appointed by minority shareholder whose relationship with the controlling shareholders is questionable. This study extends agency theory literature by suggesting that directors appointed by minority shareholders are a key governance mechanism in closely-held firms. It suggests policymakers that giving minority shareholders an effective voting power on board election should be considered a governance solution to mitigate principal-principal problems. However, it warns that controlling shareholder may abuse of this tool and exacerbate the agency problem if the director is appointed by a minority shareholder whose relationship with the controlling shareholders is questionable. This raises policymakers’ awareness of the need to prevent controlling shareholders from adopting self-serving behaviors.
CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE AND CORPORATE
GALLEGO ALVAREZ, ISABEL
QUINA-CUSTODIO , IVO ALEXANDRE
Category: SE = Social and Environmental Accounting
The aim of this paper is to analyse the voluntary disclosure of corporate social responsibility (CSR) in international companies. A total of 79 indicators were analysed, nine of which correspond to economic aspects of the company, 30 to environmental aspects and 40 to social aspects, according to the Global Reporting Initiative (GRI G3). Moreover, a dependence model was set up to see which variables may affect the disclosure of economic, social and environmental information, both separately and as a whole. Based on a sample of 110 international companies for the year 2011, a model is defined in which CSR disclosure is a function of firm size, leverage, performance, innovation, Dow Jones Sustainability Index (DJSI), market return, civil law and activity sector. The companies in the sample showed an average of six economic indicators, 19 environmental indicators and 25 social indicators. Regarding the explanatory variables tested, the results obtained showed that company SIZE, LEVERAGE and DJSI were the most significant variables, most affecting a company’s decision to make voluntary disclosure in relation to CSR issues. In contrast, the ROA (Return on Assets) variable did not turn out to be significant for any of the models. Previous studies have provided scores to reflect whether or not companies disclosed corporate social responsibility, whereas the present study goes deeper by making a detailed analysis of the type of economic, environmental and social information presented by companies internationally. This finding is in agreement with legitimacy theory, which many researchers argue explains the disclosure of environmental and social information (Guthrie and Parker, 1989; Patten, 1992; Deegan and Gordon, 1996).
ACCOUNTING, SPIRIT AND PROFITS:EXPLORING THE INTERRELATIONSHIP BETWEEN ACCOUNTING AND THE SPIRITUALITY IN THE WORKPLACE MOVEMENT
GALLHOFER, SONJA
Category: SE = Social and Environmental Accounting
Since the 1990s there has been a resurgence of the spirituality in the workplace movement. Popular writings explicitly linking spirituality to business and growing academic attention are an indication of the increasing interest in spirituality in the workplace. Despite the significant growth of the academic literature on spirituality in the workplace, the launch of a specialist academic journal and the establishment of a special interest group of the Academy of Management, there is a paucity of research in accounting, which explores accounting’s role within the spirituality in the workplace movement. This study thus contributes to the literature by critically exploring the neglected interrelationship between accounting and the spirituality in the workplace movement, focusing on its negative as well as positive aspects. Such a critical appreciation of accounting’s role is of particular interest as the spirituality in the workplace movement has not been without its critics. The main point of critique was that spirituality had been appropriated in the context of business and management and that the promotion of spirituality had been motivated by a concern to increase productivity and performance and thus enhance shareholder wealth. The paper concludes that although accounting has been an accomplice in the appropriation of spirituality it has the potential to facilitate attempts to enhance wellbeing within the context of the spirituality in the workplace movement.
BANK RELATIONS AND BORROWER CORPORATE GOVERNANCE STRUCTURES
GALLIMBERTI, CARLO MARIA
LAMBERT, RICHARD; XIAO, JASON
Category: GV = Accounting and Governance
We provide new evidence on how borrowing companies that enter into relationship-based lending arrangements adapt their existing corporate governance structures to minimize banks’ risk of expropriation. When firms and banks enter into long-term relationships, both parties may have incentives to modify the borrower’s existing governance structure to ease monitoring and minimize the risk of expropriation. Surveying prior literature, we identify and focus on four corporate governance levers through which such concerns can be alleviated: managerial entrenchment, composition of the board of directors, CEO compensation, and firm disclosure policy. We then examine whether the four levers vary over time as the firm-bank relationship becomes more intense. Consistent with our theoretical expectations, we find a positive association between the strength of firm-bank relationships and (i) managerial entrenchment, (ii) bank interlocks among borrowers’ boards of directors, (iii) the sensitivity of borrowing executives’ compensation to firm stock volatility (vega), and (iv) borrowers’ information asymmetry. Our results are robust to alternative proxies for firm-bank relationship strength and model specifications. Overall, our results shed new light on extra-contractual mechanisms borrowers and lenders use to minimize the agency costs of debt and point to potential shareholder costs of relationship lending.
THE EFFICACY OF SHAREHOLDER VOTING IN STAGGERED AND NON-STAGGERED BOARDS: THE CASE OF AUDIT COMMITTEE ELECTIONS
GAL-OR, RONEN
HOITASH, RANI; HOITASH, UDI
Category: GV = Accounting and Governance
We examine whether the efficacy of shareholder votes in influencing the audit committee actions is uniform across non-staggered and staggered boards. We find that low shareholder votes are associated with improvements to the audit committee structure, diligence, and financial reporting quality. However, these results are only significant in firms with non-staggered boards. These findings suggest that future studies examining the efficacy of shareholder votes should consider examining staggered and non-staggered boards separately. Otherwise, results may be obfuscated by the election structure. In addition, the non-responsiveness of staggered audit committees presents an additional explanation for the weaker performance that is often observed among firms with staggered boards. We further examine whether the lack of responsiveness of staggered audit committees can be attributed to the delayed elections that are inherent to staggered boards. Specifically, we investigate whether the majority of staggered audit committee members are “shielded” from shareholder scrutiny following revelations of financial statement restatements. We find that most, but not all audit committee members in staggered boards are held accountable. These results may partially explain why staggered board members are less responsive. Overall, our results show that shareholder votes are less effective under staggered board elections, further supporting the movement to de-stagger boards.
ISSUES ON VALUE STREAM COSTING IMPLEMENTATION: AN IN-DEPTH ANALYSIS WITH INSIGHTS FROM A LEAN ENVIRONMENT
GAMAL, SARAH
KUMAR, MANEESH
Category: MA = Management Accounting
With the growing interest in lean manufacturing, threat increases on management accounting to follow the wind of change towards a lean oriented accounting system. Even with the development of a lean accounting system, available literature on management accounting practices still lags behind lean transformation. This paper discusses some implementation issues relating to the adoption of the lean accounting Value Stream Costing (VSC) tool. A case study is conducted on a factory of a multinational manufacturing company operating in Egypt and using lean manufacturing for ten years. The case study tests the effect of using VSC on the product cost. The study also investigates the effect of using VSC supported by the features and characteristics costing method on the accuracy of product costs. Furthermore the study analyzes the effect of using VSC to compute product costs on the company willingness to actually implement the VSC tool. Findings of the study suggest that, given the factory current value stream identification pattern, using VSC has a negative effect on the accuracy of factory product unit cost. Features and characteristics costing is able to amend the VSC average unit cost yet not to a great extent. This was found to negatively impact managers willingness to implement VSC. The study also contributes to managers and accountants interested in lean accounting/VSC implementation through highlighting other factors affecting managers willingness to implement the VSC tool.
EMPLOYMENT OUTSIDE THE PROFESSIONAL ACCOUNTANCY SERVICE FIRM: THE FLEXIBLE FRIEND OF THE FEMALE ACCOUNTANT?
GAMMIE, ELIZABETH
MATSON, MORAG; WHITING, ROSALIND
Category: SE = Social and Environmental Accounting
This paper contributes to the literature by examining how the choice to engage in alternative working arrangements has been mediated by the context in which the decision was embedded. Specifically this paper seeks to examine (1) whether the professional accountancy service firm (PASF) environment embraces alternative working arrangements, (2) whether the environment outside the PASF is more conducive to the dual work/family role that women assume and to (3) explore the role of organisational structures and women’s choice in the decision to engage in alternative working arrangements. Questionnaire data was collected from 370 female Chartered Accountants in 2005 and 175 female Chartered Accountants in 2014 in Britain, and interviews were conducted in 2010 with 7 PASF partners, and in 2012 with 6 females who had left their PASFs. Despite the wide availability of alternative working arrangements within PASFs, adopting these practices is still viewed negatively for career progression. However, the working environment outside PASFs was not dissimilar and therefore the female accountant working in an environment outside the PASF is exposed to the same gendered working norms.
FRAUD DISCOVERY IN THE CREDIT DEFAULT SWAPS MARKET
GAO, YANMIN
KIM, JEONG-BON ; TSANG, DESMOND ; WU, HAIBIN
Category: FR = Financial Reporting
In this study, we investigate the behavior of investors in the credit default swaps (CDS) market in the event that financial reporting frauds are discovered. Our findings indicate that CDS credit spreads increase significantly in the months before the public discovery of frauds, and then spike upon the discovery date. We also show that CDS credit spreads increase more significantly before the public discovery for fraud firms that exhibit a higher likelihood of experiencing a credit event, with less effective governance and monitoring, and greater information asymmetry between firms and investors. Overall, our results suggest that some credit investors may have superior information about suspected fraudulent activities prior to the public disclosure of frauds and the responses of these investors are reflected in the CDS pricing. Other credit investors who do not possess private information about frauds in advance of the discovery would react concurrently with the rest of the capital market at the time of public discovery. Moreover, the reactions in the CDS market are stronger in such fraud-committing firms that pose greater credit concerns to investors.
BOND RATING ACCURACY AND TIMELY LOSS RECOGNITION IN EARNINGS
GAO, YU
GU, ZHAOYANG
Category: FR = Financial Reporting
We find that ratings of bonds issued by firms with more timely loss recognition in earnings (TLR) are associated with less failure to warn of default but more false alarms of default. The bond price goes down on the alarming day, but will come back if the alarm is false. The bond price crashes on the default date if rating agencies do not warn the default in advance. Overall, the results are consistent with the argument by Gigler, Kanodia, Sapra, and Venugopalan (2009) that more TLR is associated with lower information quality in bad news and more false alarms of poor economic status.
THE ROLE OF FOREIGN SHAREHOLDERS IN DISCIPLINING FINANCIAL REPORTING
GARCIA LARA, JUAN MANUEL
BEUSELINCK, CHRISTOF; BLANCO, BELEN
Category: FR = Financial Reporting
We investigate the role of foreign shareholders in improving the quality of accounting information provided by firms domiciled in countries with low de facto institutional quality. Using a sample of firms from four South-European countries (Portugal, Italy, Greece and Spain) for which we observe detailed ownership evolutions over the period 2002-2007, we find that firm-level earnings quality is positively associated with foreign shareholdings. More particularly, we show that increases in foreign ownership from firms domiciled in countries with strong institutional quality lead to a subsequent increase in firm-level earnings quality, while the opposite is not true. Further, we find that the improvement in earnings quality is more pronounced when we consider the effect of institutional investors. Finally, we find that the results hold before and after the introduction of the International Financial Reporting Standards (IFRS) in 2005. Combined, these results are consistent with the institutional environment and the presence of foreign ownership having a greater impact on earnings quality than a mandatory switch to superior reporting standards.
BOARD EFFECTIVENESS AND TRANSPARENCY OF CORPORATE SOCIAL RESPONSIBILITY REPORTING: A PARTIAL LEAST SQUARES ANALYSIS
GARCÍA TOREA, NICOLÁS
DE LA CUESTA, MARTA; FERNANDEZ-FEIJOO, BELEN
Category: GV = Accounting and Governance
This paper analyzes the relationship between board effectiveness - based on the shareholder perspective of corporate governance - and transparency of corporate social responsibility (CSR) reporting. In doing so, we tried to determine if that approach to board effectiveness is also applicable for the emergent stakeholder perspective of corporate governance. We applied a partial least squares regression to an international sample of 2366 companies. With this technique, we measure the latent variables of board effectiveness and transparency of CSR reporting. Our main result shows that board effectiveness enhances transparency of CSR reporting. We also found that industry, firm size and the orientation of the corporate governance system of the country have significant effects on CSR reporting. This paper contributes to literature on corporate governance. It evidences that traditional board effectiveness is suitable for the emergent stakeholder orientation of corporate governance, and it proposes a method to measure board effectiveness using a partial least squares regression. In addition, the results offer insights for research in CSR reporting, showing that effective boards promote more transparent CSR information. This study has also implications for policy makers. Codes of Best Practice around the world have already included several characteristics that improve board effectiveness. Our findings show that these recommendations are also promoting better CSR reporting.
MANAGERS' PERSONAL VALUES OR ENTERPRISES CHARACTERISTICS AS DRIVERS OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN SOES
GARDE SANCHEZ, RAQUEL
ALCAIDE-MUÑOZ, LAURA; LÓPEZ HERNÁNDEZ, ANTONIO M.; RODRÍGUEZ BOLÍVAR, MANUEL PEDRO
Category: SE = Social and Environmental Accounting
The public administration, including state owned enterprises (SOEs), have developed various information disclosure practices in response to stakeholders’ demands as has taken place in the private sector. This paper analyses the corporate social responsibility (CSR) information disclosed by SOEs and their influence according with SOEs characteristics (size, sector, dependence or public sector and operating years) or public managers characteristics (age, gender, studies and CSR responsibilities on their workplaces). For the purposes of this article, we created one index of CSR information disclosure, based on an analysis of the information provided on questionnaire. An empirical regression model was then applied to test and categorise the factors analysed. According to the results obtained, the SOE’s size and sector, together with CSR responsibilities on their public manager’s workplaces, were found to be the factors most significantly affecting the online disclosure of CSR information.
COMPLEX ACCOUNTING CONCEPTS: IMPORTANCE OF REDUCING COGNITIVE LOAD TO OBTAIN MORE USEFUL FINANCIAL INFORMATION
GARVEY, ANNE MARIE
GONZALO ANGULO, JOSÉ ANTONIO; PARTE-ESTEBAN, LAURA
Category: FR = Financial Reporting
The TFV concept requires the use of a conceptual framework and the application of financial accounting standards as well as the use of professional judgement to provide quality financial information. The objective of this paper is to investigate if academics and non-professional users´ share similar cognitive structures. A survey method was used to obtain data for this study. The survey allows us to explore academics’ and non-professional users’ cognitive structures in order to discover differences and the reasons for these variances if any. Our results show that academics and students do not share similar cognitive structures in four areas of interest: i) compliance with accounting rules and the fulfilment of True and Fair View, ii) the need to provide a written definition of True and Fair View, iii) the interpretation of True and Fair View, and iv) the use of FV to achieve the True and Fair View. The evidence can be interpreted due to the fact that academics and students tend to use different cognitive schemes in problem solving at least in complex concepts such as TFV. The evidence is supported by the cognitive load theory.We believe that useful financial information can be improved by understanding these differences and by subsequently implementing criteria in order to reduce the gap between academics and professional users’in the area of information comprehension and presentation with the use of simplification and schemes in the written standards and training material.
INTERNAL AUDITOR AS A SECOND ORDER OBSERVER: A NEED TO IDENTIFY AND ASSESS RISKS WITHIN ORGANIZATIONS
GAUTIER, FREDERIC
CAKAR, COSKUN
Category: AU = Auditing
IIA’s professional standards provide authoritative and normative guidance to internal auditors which rely on a risk based approach. This research, based upon an effective audit engagement performed within a global industrial company, provides a qualitative analysis of the audit risk assessment process to better understand how auditors proceed to identify and select in practice risks during their engagement planning. We used as conceptual framework the social systems’ theory combined with the sociology of risk which develops the idea that risks are socially constructed. The methodology followed is case study research with a participant observation. As result, we find that risk assessment is not only dependent of technical skills and a strict application of audit standards, but also the results of interactions between auditors and auditees. A risk is also function of the point of observation: observers do not see the same risk object depending of their position within the organization. Internal auditors have a specific position as they are second order observers.
WHAT GUIDES SUBJECTIVE PERFORMANCE EVALUATION: INCENTIVE PROVISION OR NORM ENFORCEMENT?
GILLENKIRCH, ROBERT
KREIENBAUM, HEIKE
Category: MA = Management Accounting
This paper investigates the objectives guiding a superior’s subjective evaluation of subordinate performance. In a laboratory experiment, we implement a team production setting under uncertainty, where subordinates contribute to joint output by choosing effort levels, but individual contributions are subject to random shocks. After observing joint output, the superior can invest into additional (perfect or imperfect) information about effort levels. We test two competing hypotheses about objectives guiding a superior’s subjective performance evaluation. The incentive provision hypothesis states that the superior is guided by the objective to provide efficient incentives and has a focus on results. In contrast, the norm enforcement hypothesis states that the superior has a focus on subordinate behavior and wants to enforce the norm of cooperation by rewarding high and punishing low effort. Our results reject the incentive provision hypothesis and provide strong support for the norm enforcement hypothesis.
REVENUE MANAGEMENT: THE USE OF ORDER BACKLOG TO MEET REVENUE REPORTING TARGETS
GILLIAM, THOMAS
HEFLIN, FRANK ; PATERSON, JEFF
Category: FR = Financial Reporting
Prior studies show that the market rewards companies that meet earnings and revenue reporting targets. While findings of earnings management are abundant, the extant literature does not show that managers can smooth revenue recognition without violating GAAP. This study investigates the use of order backlog to manage revenue reporting. My results show that managers use order backlog to report positive revenue growth, to smooth revenue reporting, and to meet analysts’ revenue forecasts. Managers also use order backlog to limit the magnitude of large positive forecast surprises and in so doing delay revenue recognition. This study adds to the earnings management literature, which typically focuses on earnings, by showing that managers also manipulate reporting to meet revenue targets. An implication of this study is that more expansive order backlog disclosure requirements could bring greater transparency to this type of revenue manipulation.
DOES THE ACCOUNTING METHOD FOR JOINT VENTURES AFFECT THE FINANCIAL ANALYSTS´ INFORMATION ENVIRONMENT?
GINER, BEGOÑA
IÑÍGUEZ-SÁNCHEZ, RAUL; POVEDA-FUENTES, FRANCISCO
Category: FA = Financial Analysis
This paper investigates whether analysts perceive differently accounting information if included in the primary financial statements or disclosed in the notes. It focuses on the accounting treatment for joint ventures, as IAS 31 allowed venturers to choose between proportionate consolidation and equity method. We analyze a sample of Spanish firms during 2005-2010. We not only consider earnings forecasts, but also target prices and stock recommendations. Following Barron et al. (1998) we also look at how the accounting decision affects the analysts´ information environment. Our results suggest that the decision does not affect the bias and accuracy of forecasted earnings, nor target prices nor recommendations. Despite the proportionate method implies lower dispersion in analysts’ forecasts than the equity method, our tests do not allow to confirm that the information environment depends on the accounting method.
YOU ARE WHAT YOU DO. INVESTIGATING THE ROLE OF AUDITORS IN PRACTICE
GIULIANI, MARCO
DE SANTIS, FEDERICA
Category: AU = Auditing
According to some scholars auditors have divided duties (Jenkins and Lowe, 2011; Öhman, et al., 2006) because they must act in the interest of owners and external stakeholders and, at the same time, they must satisfy and maintain a functional working relationship with client firms’ management (Jenkins and Lowe, 2011; Sanchez, et al., 2007). In all, a problem of balancing different expectations emerge. The aim of this paper is to analyse which role auditors believe to perform in their relationship with client firms (i.e. whether they behave as “advocates” or as “watchdogs”) and which factors contribute in shaping their role, as well as to compare the results of this analysis with the perceptions of the client firms’ management about the role and the value of the external audit function. In order to achieve this aim, a multiple case study methodology was adopted. The collected data have been thus interpreted on the basis of the role theory developed by Katz and Kahn (Katz and Kahn, 1978). The main findings are the following. Auditors’ role must be considered as a multifaceted concept, resulting from the coordination between different behaviours intended to fulfil divergent expectations expressed by the various role senders with which auditors interact. Moreover, auditors’ behaviour is affected by three main elements: the degree of influence of each role sender; the client’s expectations about auditors’ role and the duration of audit engagement.
DOES ACCOUNTABILITY ENHANCE COGNITIVE CONTROL? EXPERIMENTAL EVIDENCE
GODEC, MINA
HARTMANN, FRANK; REPOVŠ, GREGA; SLAPNIČAR, SERGEJA
Category: MA = Management Accounting
Accountability is typically introduced in organizations to enhance performance of agents. This positive performance effect is thought to occur because of increased cognitive effort and greater ‘rationality’ of decision making that accountability induces in human agents. However, the effects of imposing accountability are not always positive, nor predictable, due to the fact that human decisions are not always analytical and are often subject to cognitive flaws. To enhance our understanding of what makes accountability effective thus requires an examination of how accountability affects fundamental drivers of cognition. In this paper we examine the effect of accountability on cognitive control, which is the human ability to control impulses and think analytically. We investigate the effects of three accountability mechanisms, monetary incentive, peer pressure and authority’s instructions. In a within-subject experiment we tested 56 subjects performing the so called AX-CPT task to assess their cognitive control modes under varying accountability conditions. We find that under all three accountability regimes cognitive control mode shifts from the default reactive mode to a proactive control mode. Furthermore, results show that the highest improvement in performance is achieved under monetary incentive compared to peer pressure and authority’s instructions. Our findings suggest that cognitive control is a mediator of the accountability-performance relationship.
RELATIVE PERFORMANCE EVALUATION IN PRESENCE OF EXPOSURE RISK
GOEX, ROBERT
Category: MA = Management Accounting
I study the consequences of a random exposure to common risk factors for relative performance evaluation (RPE). I show analytically that the volatility of firms' exposure to common risk precludes the perfect filtering of observable luck from firm performance. It also limits the ability to reduce the exposure to common risk and is a critical factor for the composition of peer groups. If the exposure risk becomes large, RPE becomes essentially useless. Simulated regression analyses of my model indicate that an increasing exposure risk can have the following consequences: First, it limits firms' ability to correctly identify correlated performance signals and reduces the explanatory power of regressions of firm performance on peer performance. Second, it increases the likelihood of a type-II error in empirical compensation studies. Third, it constrains the correct identification of relevant performance peers and thereby biases the composition of peer groups. Overall, my analysis suggests that the randomness of firms' exposure to common risk can be an important factor in determining the use(fulness) of RPE.
INTERNAL CONTROL AND OPERATIONAL EFFICIENCY
GOH, BENG WEE
CHENG, QIANG; KIM, JAE BUM
Category: GV = Accounting and Governance
In this study, we examine whether and how internal control over financial reporting affects firm operational efficiency. We find that operational efficiency, derived from the frontier analysis, is significantly lower among firms with material weaknesses in internal control relative to firms without such weaknesses. We document some evidence suggesting that effective internal control leads to greater operational efficiency through reducing the likelihood of misappropriation of corporate resources and through enhancing the quality of internal reports for decision making. We also document that smaller firms benefit more from having effective internal control in terms of operational efficiency. In addition, we find that the market appears to understand the effect of ineffective internal control on operational efficiency: within firms with internal control material weakness, those with more negative market reaction experience a larger deterioration in operational efficiency. Lastly, we find that the firms that remediate their material weaknesses subsequently experience an improvement in operating performance and stock returns, and this effect is mainly driven by the improvement in operational efficiency. Overall, our study extends the literature by presenting systematic evidence on the effects of effective internal control on operational efficiency and firm performance.
THE SOCIAL PERCEPTION OF ACCOUNTANTS PORTRAYED IN THE 19TH CENTURY PORTUGUESE REALISTIC LITERATURE: AN ENGLISH FAMILY AND THE IDIOSYNCRASIES OF A YOUNG BLONDE WOMAN
GOMES, DELFINA ROSA DA ROCHA
LEÃO, FERNANDA
Category: ED = Accounting Education
This study explores the portrait of accountants in popular culture by examining Portuguese realistic literature from the second half of the 19th century. Two popular literary works – An English Family (1867) and The Idiosyncrasies of a Young Blonde Woman (1873) – were examined through a qualitative content analysis. The findings show a professional stereotype close to the traditional accountant stereotype notwithstanding the ability for business, giving support to the fact that specific social and cultural settings influence the social construction of the image of accountants. The study highlights the existence of an occupation colonized by people with a lack of theoretical knowledge, but capable of promoting upward social mobility, not beyond the lower bourgeoisie. It underlines the perception of the accountant as: the minimalist man; the financial manager; the servant of the capitalist; the unadventurous practitioner; and the sentimental bookkeeper. By bringing to the literature evidence from a small country in continental Europe, Portugal, in a time of social transformations anchored on liberalism ideals, this study contributes to a better understanding of the perceived role of accounting and the social positioning of accountants in different social, economic, political and cultural contexts. Importantly, the study proposes a taxonomy for content analysis that can be used and developed by future researches in this area.
STAKEHOLDER ENGAGEMENT AND CSR INFORMATION COMMUNICATION ON SOCIAL MEDIA: THE CASE OF TWITTER AND THE SPANISH BANKING INDUSTRY
GOMEZ CARRASCO, PABLO
GARCIA OSMA, BEATRIZ; GUILLAMON-SAORIN, ENCARNA
Category: SE = Social and Environmental Accounting
We study how companies and stakeholders engage in social media communication to discuss Corporate Social Responsibility (CSR). We analyse the content of over a million microblogs on Twitter associated to the Spanish banking sector between November 2013 and February 2014. The content analysis is based on key issues considered by banking institutions in their CSR reports, which are the classified into Core and Supplementary CSR. We present evidence that CSR information has a relevant presence on social media. Second, our evidence suggests that internal users’ information is opportunistic as their microblogs are biased towards favourable information. Third, we show that information interests of internal and external users are significantly different. Core CSR information is mainly referred to by outsiders, whilst insiders mainly communicate Supplementary CSR information. Finally we provide descriptive evidence that firm size, listing status and impact on society are determinants for firm-initiated communication on social media.
VALUE-RELEVANCE OF BIOLOGICAL ASSETS UNDER IFRS
GONÇALVES, RUTE
LOPES, PATRÍCIA
Category: FR = Financial Reporting
Using 389 firm-year observations of listed firms worldwide in 27 countries that adopted International Financial Reporting Standards (IFRS) until 2010, for the period between 2011 and 2013, the purpose of this paper is to examine the value-relevance of fair value accounting of biological assets under the International Accounting Standard (IAS) 41 – Agriculture. In order to operationalize it as the book value’s ability to explain market equity value, this study adjusts the original Ohlson model (Ohlson, 1995). The results support that recognized biological assets are value-relevant. After including the effect of the disclosure level of biological assets in the model, the results show that biological assets are more value-relevant in firms that exhibit higher disclosure levels. Repeating this last analysis according to the classification bearer and consumable biological assets supported by the IAS 41, the results are the same for bearer biological assets. For consumable biological assets, it seems that investors do not value recognized biological assets in firms that exhibit higher disclosure levels. Given the current adjustment in the IAS 41, under which firms will be permitted to choose either the cost or the revaluation models for mature bearer plants according to the IAS 16 – Property, plant and equipment, for annual periods beginning on or after 1 January 2016, this paper seeks to help standard setters to better understand the market valuation implications of this standard.
FAIR VALUE ACCOUNTING, EARNINGS VOLATILITY, AND STOCK PRICE VOLATILITY
GONCHAROV, IGOR
Category: FR = Financial Reporting
This paper examines the effect of fair value accounting and its implementation on the volatility of stock prices. Extant literature shows that investors use earnings volatility in their risk assessment, and that earnings volatility and stock price volatility are strongly correlated. Fair value accounting is argued to facilitate investors’ risk assessment through transparent reporting of underlying economic income. However, regulators are concerned that fair value accounting and its implementation can make firms appear more volatile than they actually are. This paper uses the U.K. investment trust setting to derive the theoretical relationship between stock price volatility and the volatility of fair value earnings components. It then examines whether the effect of fair value earnings components on stock price volatility is consistent with the theoretical predictions. I find that stock price volatility is higher than the volatility of fair value earnings, and that this effect is due to unrealized (fair value) earnings component. I further find that measuring assets at fair value and measuring liabilities at historical cost artificially increases earnings volatility, which in turn exuberates stock price volatility. The remainder of excess stock price volatility over volatility of fair value earnings is explained by noise trading. I do not find that using unobservable fair value inputs affects volatility of fair value earnings or volatility of stock prices.
THE IMPLEMENTATION AND MANAGEMENT SYSTEMS OF CONTROL IN THE INITIAL PHASE OF ENTREPRENEURSHIP: A LITERATURE REVIEW
GONZÁLEZ , RAÚL
Category: MA = Management Accounting
The field of accounting and control has changed significantly in the last decade. New concepts and new empirical evidence have questioned the paradigm of traditional control. The objective of this work is a literary review that allows us to know what the trends management control system in start-ups. To this end, it is reviewed 66 articles published in 25 accounting journals in the period 1968-2014. The findings of this literature review are presented in three parts. First, review of the literature in these fields. Second, the reviewed articles are categorized by topics, research settings, theories, research method, and primary data analysis techniques. Third, the contributions of research to the field and the lessons learned from these studies are discussed, knowledge gaps in existing research are identified, leading to consideration of several ideas for future research.
MANDATORY DISCLOSURE REFORM AND EXECUTIVE COMPENSATION: IS EXECUTIVE PAY HIGHER AFTER THE MANDATORY ADOPTION OF IFRS?
GORDON, ELIZABETH
BALSAM, STEVE; GORDON, ELIZABETH; LI, XI
Category: GV = Accounting and Governance
We document an increase in executive compensation following the mandatory adoption of International Financial Reporting Standards (IFRS). This increase is positively correlated with the difference between pre-existing accounting standards and IFRS. Consistent with the theory that disclosure reform leads to higher executive compensation due to improved monitoring (Hermalin and Weisbach, 2012), we find the increase to be larger in countries with weaker shareholder monitoring and greater private benefits. We also find evidence that the increase is related to increased responsibility, as the increase began once the country announced its intention to adopt IFRS and is greater for CFOs than CEOs.
ACCOUNTING PROFESSIONALS' PERCEPTIONS OF GOODWILL ACCOUNTING UNDER US GAAP
GORTON, M. DAVID
DJATEJ, ARSEN; PAJUNEN, KATI; SAASTAMOINEN, JANI
Category: FR = Financial Reporting
This paper studies accounting professionals’ perceptions of goodwill accounting under US GAAP with a survey to professional accountants, CPAs and financial analysts in the Pacific Northwest region of the United States. Principal component analysis is used to find prevailing lines of thought among recipients. Six lines of thought emerge which express either a critical perception toward management’s behavior in goodwill impairment testing or a positive attitude toward the treatment of goodwill in US GAAP. The analysis of how a respondent’s background affects his/her perceptions shows that the respondents with a background in auditing are less likely to see a connection between managerial opportunism and goodwill accounting. In contrast, experienced professionals are more likely to perceive increased earnings management resulting from goodwill accounting.
EQUITY MARKET INTERACTIONS: EXPLORING MANAGERS' AND ANALYSTS' ROLE ENACTMENT AT EARNINGS PRESENTATIONS
GRAAF, JOHAN
Category: FA = Financial Analysis
This study aims to extend the understanding of equity markets by exploring interactions and relationships between key market actors and the roles they perform when in one another’s immediate presence. Drawing on Erving Goffman's dramaturgical approach and role enactment, this study investigates the interactions of analysts, managers and, to some extent, investors in face-to-face earnings presentations. The findings suggest that managers and analysts are co-constructing the performance of equity markets by carefully acting in accordance with an idea of their counterparts' back stage preparations. The actors are reenacting their roles and relationships whilst trying to combine the efforts of (a) gaining/giving information; (b) nurturing their relationships with the other professional group, and; (c) constructing an image of themselves as competent, rational and intelligent professionals. Central to this process is the addition of the video camera, in which there is a constant possibility that professional investors, i.e. analysts' customers and managers' principals, are silently watching at a distance. The findings especially indicate a rather submissive role of financial analysts in equity markets where the intermediary position, instead of being given, must be carefully reenacted and performed to be sustained.
ENGAGING WITH THE CONCEPT OF SUSTAINABILITY: INTEGRATED REPORTING AS A DISCURSIVE OBJECT
GRANÀ, FABRIZIO
BUSCO, CRISTIANO; GIOVANNONI, ELENA
Category: MA = Management Accounting
This paper aims to explore the way in which the concept of sustainability is constructed within organizations and, eventually, how it is embedded into discursive objects – i.e. objects that become meaningful as they are attached to undefined phenomena [Hardy, C., Palmer, I., & Phillips, N., (2000). Discourse as a Strategic Resource. Human Relations, 53(9), pp. 1227-1248]. By relying upon the case of LOGIC, a Large Oil & Gas International Company that operates in more than eighty countries around the world, this paper explores the role played by management accounting and reporting practices in providing a space where multiple discourses on sustainability are generated. In particular, we investigate the process through which the concept of sustainability is objectified (i.e. translated into performable and performing objects) as accounting and reporting practices attempt to represent it. Because of their inherent incompleteness, accounting and reporting representations can be interpreted as “discursive objects” able to sustain diverse conversation on undefined phenomena – in our case the concept of sustainability – while unfolding in practice through the engagement that they generate.
RISK PREFERENCE, AUDIT EFFORT AND AUDIT FEE: AN EXPERIMENTAL INVESTIGATION OF THE AUDITOR AND INVESTOR’S PERSPECTIVES
GRASCHITZ, SABINE
Category: AU = Auditing
Auditing is intended to fulfill a bundle of functions and specifically should ensure that high quality information is provided for the addressees of financial statements. Although there is no single agreed definition of audit quality that is used as a standard, audit quality can roughly be interpreted as investing the “appropriate” audit effort to issue an “appropriate” audit report on the auditee’s compliance with the relevant accounting principles. Within this paper the auditor and investor’s perspectives on audit effort and audit fees based on their individual risk preference is analyzed. This experimental analysis is based on the audit market model of Pummerer & Steller (2013). Preliminary results of the case based experimental analysis show that the higher the auditor’s risk aversion the higher the audit effort and the audit fee. This indicates that risk averse auditors provide higher audit quality than risk neutral auditors but also charge a higher audit fee. The results also show that risk averse investors prefer a higher audit quality and assess the auditor’s liability as more important than risk neutral investors.
A RESEARCH AGENDA FOR ANALYZING THE POTENTIAL ROLES AND ISSUES OF BIG DATA IN AUDITING
GRAY, GLEN
ALLES, MICHAEL
Category: AU = Auditing
The purpose of this paper is to develop a framework for systematically analyzing the potential role of big data in auditing, enabling an understanding to be attained of both the value that it can provide to audit practice and the hurdles that will have to be overcome if auditors are to adopt big data. The framework is developed by synthesizing the large and growing literature on big data to identify those factors that will determine the impact of big data on auditing. When considering the drivers and inhibitors facing big data in auditing, the overall point is that auditors do not have the discretion or the incentive to experiment with big data and find novel applications of it the way that managers or scientists do. Other methodologies that expand the use of data such as continuous auditing, process mining and advanced statistical tools have had only limited interest shown in them by auditors and only in limited circumstances and the same may be true with big data. Part of the reason is the satisficing rather than optimizing objective in auditing, part the fact that even where standards allow the use of such techniques they certainly do not compel it and part because auditors do not feel that they have the skill set to implement them effectively. Overall, if big data is to play a role in auditing then a proper understanding needs to be obtained of the unique characteristics of both auditing and of big data.
INTERNATIONAL INTEGRATED REPORTING IN PRACTICE: THE CONTENT AND QUALITY OF DISCLOSURES BY JAPANESE, FINNISH AND SOUTH AFRICAN COMPANIES
GRAY, SIDNEY
GILLIES, HANNA
Category: GV = Accounting and Governance
This paper provides an in-depth exploration of the content and quality of International Integrated Reporting () in practice in a comparative analysis of Japanese, Finnish and South African companies. A sample of 20 integrated reports from each country were rated on 47 disclosure items for their consistency with the IIRC’s International Framework. The findings indicate that while there are moderate levels of consistency overall with the Framework there are many companies have not yet fully embraced key aspects of related to integrated thinking and long term value creation, namely providing sufficient information about governance, risks and opportunities, and future outlook. Despite an apparent similarity in overall reporting performance across countries, analysis of the disaggregated data by content element provides strong evidence of the impact of country-specific factors on the content and quality of practices.
AUDITORS’ MATERIALITY JUDGMENTS UNDER INTEGRATED REPORTING:
GREEN, WENDY
CHENG, MANDY
Category: AU = Auditing
This study reports an experiment conducted to examine auditors’ materiality judgments for nonfinancial performance information (NFPI) in the context of Integrated Reporting <IR>. We examine two factors that are predicted to influence auditors’ NFPI materiality judgments, namely, the level of strategic relevance associated with the NFPI being assessed, and the presence of strategic linkages in the client’s performance measurement system. Our study provides evidence that auditors judge misstated NFPI of low strategic relevance to be less material than misstated NFPI with high strategic relevance when the client’s performance measurement system contains strategic linkages, but not when strategic linkages are absent. Our results also show that auditors generally make more conservative materiality judgments when the integrated report is directed at a broader audience. These findings have implications for standard setters developing further guidance for determining audit materiality under <IR>, and auditors who are providing assurance services for NFPI.
REGULATORY INCENTIVES AND ACCRUALS QUALITY: EVIDENCE FROM ENGLISH NATIONAL HEALTH SERVICE FOUNDATION TRUSTS
GREENWOOD, MARGARET
BAYLIS, RICHARD
Category: PS = Public Sector Accounting
This paper contributes to the growing literature on accruals quality in public sector entities by investigating the variation in accruals in response to regulatory incentives. The setting is English National Health Service Foundation Trusts which are subject to an independent regulatory regime where intervention in the form of additional monitoring and potential removal of the Board is determined by performance against a small range of financial metrics. In addition to an analysis of the distribution of reported financial performance, we investigate the responsiveness of aggregate and specific accruals to I&E thresholds and find evidence of the smoothing of reported performance consistent with the avoidance of regulatory intervention.
SUSTAINABILITY REPORTING IN THE AUSTRIAN, GERMAN, AND SWISS PUBLIC SECTOR
GREILING, DOROTHEA
STOETZER, SANDRA; TRAXLER, ALBERT
Category: PS = Public Sector Accounting
Sustainability reporting is a hot topic across the sectors. While there are many studies evaluating the quality of sustainability reporting practices in the private sector, we lack similar evidence in the public sectors. This is surprising because public sector organisations draw their legitimacy from being public benefit organisations. Against this background the paper assesses current practices of sustainability reporting in public sector entities in Austria, Germany, and Switzerland. The assessment is based on an analysis of external reports of all public entities that are currently included in the Global Reporting Initiative’s (GRI) database for the years 2012-2014. As GRI reporting pursues a triple bottom line approach, a high compliance with the GRI guidelines can be seen as step towards enhancing public accountability. Methodologically a documentary analysis is performed. The paper provides an overview of the state of the art of GRI reporting practices in core administrations as well as state-owned enterprises in three Central European Countries with a common law tradition. International comparative results are presented in an area where most of the studies have a single country focus. The findings highlight that the GRI Guidelines are applicable for public organisations but the reporting organisations could make more use of it for communicating the public value they create.
NON AUDIT SERVICES, AUDIT QUALITY AND ENFORCEMENT – EVIDENCE FROM GERMAN ENFORCEMENT EXAMINATIONS
GROS, MARIUS
Category: AU = Auditing
In this paper I use unique data from German enforcement examinations to examine the association between fees paid to the statutory auditor for non audit services (NAS) and audit quality or auditor independence, respectively. My results show neither a positive nor a negative significant association between NAS fees and enforcement examinations resulting in an error finding. The results do not change when controlling for the specific type of NAS provided as well as for abnormal NAS fees. However, I find some evidence that the level of audit fees (and total fees) is positively associated with the likelihood of enforcement examinations finding no material error. In sum, I do not find evidence that NAS fees impair auditors’ independence. However, I find some evidence for a positive association between the level of audit fees paid and audit quality.
THE ROLE OF INDUSTRY PEER CONSISTENCY FOR ANALYST FORECASTS
GROSS, CHRISTIAN
PEROTTI, PIETRO
Category: FA = Financial Analysis
Prior literature calls for in-depth analyses of the decision mechanisms that underlie firm valuations by sell-side financial analysts (e.g., Bradshaw 2011). We take on step in this direction by examining one specific property that could ease relative firm assessments for financial analysts: industry peer consistency (IPC). First, we argue that a stable set of industry peers improves analyst forecast accuracy, as previously developed heuristics of identifying industry peers and valuing target firms against their peers can continuously be used. Second, we conjecture that a constant set of industry peers decreases forecast dispersion, as analyst put more weight on industry peer information if its perceived uncertainty is lower. To test these hypotheses, we use a measure of financial statement comparability (De Franco et al. 2011) to compute a peer-based industry-comparability ranking for our sample firms. From changes in these rankings, we form various IPC measures. Here, we assume that relatively small (large) ranking changes over time are indicative of high (low) IPC. Moreover, we also test whether IPC has moderating effects on the associations of accounting comparability and forecast accura-cy/dispersion. Finding the hypothesized results, we extend prior literature on the use of industry peers in financial analysis by documenting effects of IPC on analyst forecast accuracy, forecast dispersion and on the relations of accounting comparability and forecast accuracy/dispersion.
A HUMBOLDTIAN PERSPECTIVE ON THE ACADEMIC ACCOUNTANT
GROTTKE, MARKUS
PELGER, CHRISTOPH
Category: ED = Accounting Education
Multi-paradigmatic accounting research seems to be developing ineluctably into a homoge-nous discipline. While this trend has been widely discussed and criticised in the literature, few remedies have been identified to counter the trend. The present paper outlines the systemic features of the current environment faced by accounting researchers, using elements of Latour‟s actor-network and Schatzki‟s practice theory. We contrast this situation with a nor-mative framework based on the thoughts of the German scholar Wilhelm von Humboldt. This framework stresses the way in which the researcher‟s individual personality ought to evolve and the role he ought to play within a fruitful academic discourse. From this perspective, we reveal possible opportunities for both the individual academic accountant and the accounting community to move beyond the current state of accounting research.
THE VALUE-RELEVANCE OF CSR REPORTING QUALITY
GRÜNER, ANDREAS
GUTSCHE, ROBERT; SCHULZ, JAN-FREDERIC
Category: SE = Social and Environmental Accounting
We examine the value-relevance of corporate social responsibility (CSR) reporting quality in the so-called D/A/CH-region (Germany, Austria, and Switzerland). We provide empirical evidence that higher CSR reporting quality reduces stock return volatility and abnormal returns from unexpected CSR performance risk. We argue, when the quality of CSR reporting is high, then the market is pricing firms’ future CSR performance more precisely. We also find that the amount and quality of CSR reporting has significantly increased from 2002 to 2012. Particularly, the use of separate sustainability reports and integrated reports has increased over time. The data is hand-collected and obtained through an analysis of CSR reporting in annual reports, status reports, integrative reports, and CSR reports. The data set represents the complete composition of DAX30 (Germany), ATX (Austria), and SMI (Switzerland) listed firms as of December 2012.
DO SCHOOL TIES BETWEEN AUDITORS AND CLIENT EXECUTIVES INFLUENCE AUDIT DECISIONS?
GUAN, YUYAN
SU, NANCY; WU, DONGHUI; YANG, ZHIFENG
Category: AU = Auditing
In this study, we identify connected auditors as those who attended the same university as the CEO, CFO, or the board chairman of client firms and examine the school tie effect on audit decisions in terms of audit quality and audit fees. Using manually collected data from the Chinese audit market, we document the following findings. First, connected auditors are less likely to issue modified audit opinions and severe modified audit opinions, especially for firms that are likely to be in financial distress. Second, companies audited by connected auditors report significantly higher discretionary accruals and have less persistent earnings and lower earnings response coefficients. Third, companies audited by connected auditors are more likely to subsequently restate earnings downward. Fourth, connected auditors earn higher audit fees. We also document evidence indicating that the impact of school ties on audit quality is mitigated when 1) the audit firm is larger, 2) the audit firm and client firm are not in the same region, and 3) the audit is not the auditor’s initial engagement with the client. Collectively, our empirical evidence suggests the impairment of audit quality when auditors and client executives are connected via school ties and that auditors are able to charge higher audit fees because of social reciprocity derived from school ties.
THE COST OF SOVEREIGN DEBT IN ECONOMIC CRISIS TIMES
GUILLAMÓN, MARÍA-DOLORES
BASTIDA, FRANCISCO; BENITO, BERNARDINO; RÍOS, ANA-MARÍA
Category: PS = Public Sector Accounting
This paper analyses which factors determine the cost of debt, specifically in the light of the deep economic crisis the world is immersed in today. We evaluate the impact of transparency, financial indicators and sovereign ratings on public debt interest. We consider several measures related to transparency: transparency index, corruption index and public trust in politicians’ financial honesty index. We work with 2008 (the beginning of the economic crisis) and 2012 data for OECD and BRICS countries. Our results show that all measures connected with fiscal transparency negatively impact on the cost of sovereign debt, increasing therefore the financing costs of the government in 2008. A comparison of 2008 with 2012 reveals a substitution effect. On the one hand, transparency, corruption and public trust indexes explain interest rates in the first year considered. On the other, in 2012, when the crisis started to be overcome, the fiscal situation, rather than transparency indexes, explains interest rates. In the whole time window, sovereign rating holds its explanatory power.
POSITIVE AND NEGATIVE CEO PERSONALITY TRAITS AND FIRM COMMUNICATION
GUILLAMON SAORIN, ENCARNA
GARCIA OSMA, BEATRIZ GARCIA OSMA; GUILLAMON SAORIN, ENCARNA
Category: GV = Accounting and Governance
We investigate whether CEO personality traits determine managerial communication styles. In particular, we use a novel approach based on graphology analysis to measure self-esteem and narcissism and investigate how these CEO personality traits link to optimism and bias in managerial disclosures. Building on prior research in psychology, we consider self-esteem as a positive trait, reflecting a strong self-concept built on a true sense of self-confidence. Narcissism however, is a negative trait, associated with a more fragile self-view reflected by demonstrations of grandiosity and arrogance. We hypothesise that both traits are interrelated and lead to more optimistic disclosures. However, we expect that only narcissists CEOs engage in attributional bias to justify their performance, a mechanism of self-defence and preservation of their self-esteem. Consistent with our hypotheses, our results suggest that CEOs with high self-esteem issue more optimistic disclosures but do not engage in attributional bias, implying a willingness to take responsibility. These CEOs are optimistic, but also, accountable. However, narcissistic CEOs are more likely to show negative attributional biases and link any firm underperformance to external causes, whilst attributing positive outcomes to their own merits.
POLITICAL CONNECTIONS, TAX AVOIDANCE AND INSTITUTIONAL MONITORING: EVIDENCE FROM MALAYSIA
GUL, FERDINAND
KASIPILLAI, JEYAPALAN; MAJID, ABDUL; TEE, CHWEE MING
Category: TX = Taxation
This paper examines the likelihood that politically connected (PCON) firms engage in greater tax avoidance than their politically unconnected counterparts and, if so, whether institutional ownership (IO) moderates the relationship between PCON firms and tax avoidance. Results using observations from Malaysian listed firms show that PCON firms are associated with higher tax avoidance. However, the relationship is weaker when institutions own shares in the firms concerned. But whether the institutional ownership is foreign or local does make a difference. We find that it is the foreign intuitional investors rather than the local institutional investors that drive the moderating role of institutional ownership. In other words, foreign institutional ownership is more effective than local institutional ownership in mitigating tax avoidance in PCON firms.
FIRM-SPECIFIC DETERMINANTS OF GOODWILL DISCLOSURE QUALITY UNDER IFRS
GULLKVIST, BENITA M.
Category: FR = Financial Reporting
Using a matched-sample approach, this study examines firm-specific determinants of disclosure quality regarding goodwill impairment testing under IFRS for listed Finnish and Swedish companies in 2006−2012. Disclosure quality is measured by using a self-constructed disclosure index. The descriptive findings indicate an increase in the indices measuring disclosure quality, implying an increase in disclosure quality over time. The results also indicate a significant cross-country difference, which persists over time. Firm-specific determinants, such as firm size, level of goodwill-intensity and ownership concentration, seem to significantly determine disclosure quality. Further, there are some significant industry effects for the Finnish subsample and significant effects of profitability for the Swedish subsample at 0.1 level. Implications for further research and practice are discussed.
PROVIDING DISCLOSURE IN THE FACE OF COMPETITION - AN ANALYSIS OF FINANCIAL STATEMENTS IN IMPERIAL GERMANY
GÜNTHER, JENS
Category: FR = Financial Reporting
This paper revisits the relationship between product market competition and voluntary disclosure. Empirical archival evidence is mixed. One potential explanation for this is an insufficient identification of the firms’ overall voluntary disclosure strategy. Hence, I transfer the research question to Imperial Germany in the 1890s, because the comparably less complex reporting environment allows for a cleaner identifica-tion of voluntary disclosure. Since the presentation of financial statements is essentially unregulated at that time, I use the level of disaggregation of financial information in these financial statements as a proxy for voluntary disclosure. I capture existing and potential competition as well as industry profitability by ap-plying the principal component analysis of Li (2010). Based on a balanced panel of 570 firm-years, I find a negative association between voluntary disclosure and potential competition. This association is more pronounced for industry leaders. I find a negative association between industry profitability and voluntary disclosure. This association is also more pronounced for industry leaders. Finally, I find a positive association between existing competition and voluntary disclosure for industry followers. The associations are statistically significant and economically recognizable. The results are robust against the consideration of firm-level control variables capturing agency conflicts, firm size, firm performance, and capital structure.
THE BIG-4 PREMIUM AND ITS ROOTS AND IMPLICATIONS ON THE GERMAN AUDIT MARKET
GÜNTHER, JOHANNES
JOHA, PHILIPP
Category: AU = Auditing
The majority of audit fee research has identified that BIG-N audit firms charge higher fees than other auditors. To detect the reasons for such a fee premium in a concentrated audit market it is necessary to compare audit pricing in the con-centrated market to pricing behavior in a competitive market. We follow this approach proposed by SIMUNIC (1980) but unlike most researchers we separate the German audit market in a segment for listed and non-listed auditees. This allows us to capture the difference in the amplitude of an audit mandate in a more universal way as well as to separate the audit market in a competitive and a concentrated segment more accurately. Thereby, to our knowledge we are also the first to examine audit fees of non-listed companies in Germany. We observe a fee premium for BIG-4 auditors in both market segments when applying an aggregated BIG-4 variable as well as looking at these audit firms separately. This suggests product differentiation as the root for higher prices and competitive audit pricing refuting regulators` concerns of monopolistic pricing behavior due to a high market concentration. This is supported by a Fee Cutting effect. Furthermore, our results demonstrate that similar to listed firms audit pricing for private firms is influenced by client`s size, complexity and risk factors.
THE ITERACTION OF USE, LEVEL OF SOPHISTICATION AND BENEFITS OF PERFORMANCE MEASUREMENT SYSTEMS
GÜNTHER, THOMAS
HEINICKE, ANJA
Category: MA = Management Accounting
The study examines the interaction of the emphasis on the interactive and diagnostic use of performance measurement systems (PMS), of the chosen level of the PMS and of the perceived benefit of the PMS for the firm. We also examine whether firm size moderates the described relationships. Using survey data of 276 mid-sized enterprises, the study provides empirical evidence that the interactive use of the PMS is positively associated with the level of PMS. The results also indicate that interactive and diagnostic use both influence the perceived benefit of the PMS, and that the level of PMS is also positively associated with the perceived benefit. Moreover, we found that larger firms benefit more from an interactive use of the PMS than smaller firms, while in the latter benefit more from the diagnostic use of the PMS.
STRATEGY EVALUATION WHEN USING A STRATEGIC PERFORMANCE MEASUREMENT SYSTEM: AN EXAMINATION OF MOTIVATIONAL AND COGNITIVE BIASES
GUO, LAN
GUO, LAN; LIBBY, THERESA ; WONG-ON-WING, BERNARD; YANG, DAN
Category: MA = Management Accounting
The multiple performance measures in strategic performance measurement systems should be selected to represent a set of causally-linked strategic drivers and outcomes. The pattern of results thus can provide information concerning the proper execution of the strategy (i.e., the performance evaluation role) and the strength of the cause-and-effect linkages assumed by the strategy (i.e., the strategy evaluation role). Unfortunately, managers’ tendency to re-evaluate the strategy when performance falls short of target is low in practice. Possible explanations include self-serving attributional bias and cognitive limitations. We experimentally examine two decision aids, attribution aid and decomposition aid, designed to help managers ease these challenges. Study 1 shows the decision aids, individually and in combination, increase managers’ tendency to re-examine a problematic strategy. Study 2 demonstrates the effectiveness of the two decision aids under a different pattern of results, and among a sample of more experienced managers.
CLIENT MERGERS, AUDIT FEE PRICING AND AUDIT OPINION
GUO, QIANG
Category: AU = Auditing
This paper studies how the merger and acquisitions among client firms affect the dynamic of the relationship between auditors and their clients. Merger and acquisitions between client firms present an interesting scenario for the audit firms. In general, after the merger and acquisition transaction finish, one of the two firms has to drop his auditor. And typically the auditors of target firms are the ones losing their business. Hence this paper provides empirical evidence on how client mergers and acquisitions affect the audit fee pricing and the auditors' behavior to issue audit opinions. From a price competition perspective, the paper also shows how the other audit firms which are not involved in any M&A transactions respond to client mergers. In general, audit firms charge less audit fees after more client merger and acquisition transactions happened. And such fee reducing effect would appear even before the actual merger transaction took place. Given the fact that some of these transactions were rumored or announced relatively long time before the transaction date, it is possible that the auditors anticipate and react to such competition pressure. After experiencing more M&A activities in certain industry, auditors are more likely to issue qualified opinion for the clients in the same industry. Such effects are more pronounced in the post 2008 period.
ACCOUNTING FOR RESEARCH: ACADEMIC RESPONSES TO RESEARCH PERFORMANCE DEMANDS IN AN AUSTRALIAN UNIVERSITY
GUTHRIE, JAMES
GUTHRIE, JAMES; IRVINE, HELEN; SARDESIA, ANN; TOOLEY, STUART
Category: MA = Management Accounting
This paper examines an accounting for research performance in the Excellence for Research in Australia (ERA) assessment, and the Performance Management Systems (PMS) of an Australian university over the period 2006 – 2012. Academic policy and organisational literature are interpreted from an institutional perspective and academic responses to a survey are analysed both quantitatively and qualitatively. The findings indicate improved research performance in the ERA assessment exercise. Also, the results indicate increasing stress and decreasing job satisfaction levels, with academics being forced to make choices about their research due to strongly research focused PMS within the university. The paper focuses on one case study which has undergone change and based on perceptions of academics. As research expectations intensify globally, future research could be reinforced by further longitudinal and comparative research. The study creates awareness to management of the need to balance PMS on all three aspects of academic performance, namely, teaching, research and administration. It also highlights the importance for regulators and higher education leaders to take account of academics’ views in the design and implementation of research assessment. This study investigates in detail the responses of individual academics to Australia‟s ERA initiative. It reveals a disconnection between the institutional demands placed on the higher education sector, university changes made to accommodate these demands, and the ability of academics to meet these demands in a sustainable way.
EARNINGS MANAGEMENT IN TAKEOVERS: DO TARGETS RUN AWAY WITH CASH?
HAJBABA, AMIR
CAMPA, DOMENICO
Category: GV = Accounting and Governance
Extant research on Mergers and Acquisitions (M&A) reports evidence that acquirers underperform subsequent to the takeover completion. Such evidence is more unequivocal for acquirers that finance the acquisition by issuing equity relative to those that use cash. Current literature recognizes various reasons for this underperformance, most of which suggests overvaluation of the acquirers and/or targets at the time of acquisition announcement. Alternatively, this paper aims to investigate whether acquirers’ post-takeover abnormal return is also attributed to target firms’ earnings treatment, specifically earnings manipulation. Our results indicate that target companies, overall, manage earnings upwards the year before the acquisition using sale manipulation. There is no significant evidence of target’s earning management impacting post-acquisition performance of the acquirers in the overall sample. However, further analyses reveal that sales manipulation evidence is specific to targets of cash acquisitions and that, in cash-finance takeovers, target’s earnings management is significantly and negatively associated with post-acquisition performance of the acquirers. These findings suggest that the method of financing in acquisitions could impact the level of earnings management in target firms, which eventually affect the post-takeover performance of acquirers.
PERCEIVED RESPONSIBILITY TO ACT: AN INVESTIGATION OF AUDITORS’ WILLINGNESS TO DETECT FRAUD IN THE UAE
HALBOUNI, SAWSAN
Category: AU = Auditing
This study investigates the circumstances in which internal and external auditors in the UAE feel and are motivated by the responsibility to detect financial reporting fraud. This study uses a survey of internal and external auditors’ perceptions of the effectiveness of ISA 240 indicators in predicting the risk of fraud in the UAE. The study used a triangle model of responsibility consisting of three key components—“prescriptions,” “identities,” and “events”—to measure internal and external auditors’ perceived sense of responsibility to detect fraud. The results indicate that internal and external auditors have a low-moderate perception of their ability to influence the occurrence or nature of fraud. The results show a significant association among the “Task Clarity” (ISA 240 fraud risk indicators; incentive/pressure, opportunity, and attitudes/rationalization), the “Personal Control”, and the “Professional Obligation”. The results reveal that internal and external auditors perceived ISA 240 fraud risk indicators as effective in predicting fraud. The results also show that attitudes/rationalization fraud indicators are the most strongly predictive indicator. These findings suggest the need to clarify the professional rule of conduct, which has a significant impact on internal and external auditors’ prediction of the risk of fraud. The findings also suggest that internal and external auditors must be made more aware of their responsibilities to act against fraud. This study is limited in that it does not consider the perceived responsibility of agents, such as boards of directors and auditing committees, who are primarily responsible for independently supervising the managerial identification of fraud risk and implementing antifraud measures. Due to the study’s small sample size, moreover, the results should be generalized with caution. The findings concerning the low–moderate clarity of the ISA 240 risk fraud indicators and the low personal control among internal and external auditors suggest the need to clarify the fraud detection responsibilities of the local professional bodies with the cooperation of international standards setters. The results also suggest that regulatory authorities, accounting professional bodies, regulators, and politicians to ensure the quality of the financial information produced by listed companies, should play a stronger role. This study represents a significant contribution to the literature on auditors’ responsibility to act to detect fraud. The study may also assist national and international professional bodies and regulatory authorities in combating fraud.
UNCONTROLLABLE RISK AND MANAGEMENT CONTROL SYSTEM DESIGN: EXPLORING ON-TIME DELIVERING PERFORMANCE IN A MANUFACTURING FIRM
HANSEN, ALLAN
FRIIS, IVAR; GEVOLL, LINN; VAMOSI, TAMAS
Category: MA = Management Accounting
The uncontrollable risk related to an agent’s performance is in management control research typically portrayed as a challenge that hinders effective control. Consequently, the issue of management control system (MCS) design is often characterized as a question of designing the system so that the impact of uncontrollable risk is mitigated, improving the facilitation of control. Be that as it may, this paper takes another point of departure. It aims to explore how MCS design might also be characterized by its risk-producing role in organizations. By means of an in-depth case study we illustrate how different elements of the MCS in a manufacturing firm (in our case related to the incentive system, planning system and organizational design) are involved in a dual role of both reducing and producing uncontrollable risk for organizational decision-makers. We suggest that this insight contributes to research for several reasons. First, it highlights important trade-offs involved in management control system design. Second, it provides more insight to what uncontrollable risk is and how it occurs which is decisive for developing specific control practices like performance evaluation, delegation etc. Third, it illustrates how different elements within a MCS co-produce uncontrollable risk and provides yet another argument for studying the interrelations between MCS elements which has also recently been highlighted in research.
TRANSPARENCY AND ACCOUNTABILITY LOST? FULL COST ACCOUNTING REPORTING IN THE SWEDISH MUNICIPAL SOLID WASTE BUSINESS
HARALDSSON, MATTIAS
Category: PS = Public Sector Accounting
The aim of this paper is to explore the causes of variation in financial accounting and disclosure practices in a municipal setting highly influenced by governance reforms. This focus is motivated by the claim that recent governance reforms have made municipal service delivery more diversified and fragmented with possibly a negative effect on transparency and accountability. Using a conceptual framework, complementing the basic variables that are considered to influence public sector financial accounting and disclosure practices with governance forms, the aim was empirically explored within the context of the Swedish municipal waste management, a public sector influenced be deregulation and have a high penetration of governance reforms. The results show that compliance accounting and disclosure transparency partly has different antecedents, where the external environment including market competition, size and economic input influences both practices. However, the governance forms, on the other hand, only influenced compliance accounting (negatively and positively) and not the willingness to disclose information in general. The overall conclusion is that changing the economic and intuitional playground mixed with different municipal governance forms introduces a multiplicity of forces that makes the accounting practices themselves diversified and fragmented and not necessarily only in a “negative” direction. From a policy perspective the results indicate that the changing institutional and organizational environment has not been matched by attention to, and regulation of, reporting structures that secure external vertical accountability processes.
ACCOUNTING COLONIZATION AND EMANCIPATION: CONTRASTING CASES FROM NIGERIAN PUBLIC SERVICE ORGANIZATIONS
HASLAM, JIM
FERRY, LAURENCE; GALLHOFER, SONJA; GREEN, STUART
Category: PS = Public Sector Accounting
Critical writers have emphasized and illustrated a coercive, negative accounting colonization in public services (e.g. Broadbent & Laughlin, 2013). Gallhofer & Haslam (1991, 2003), however, highlight that even conventional accounting has emancipatory dimensions that may develop and impact more in trajectories of social and organizational processes. Oakes & Berry (2009) offer framing reflecting not only accounting colonization’s coercive power but also emancipatory potential thereof. We draw on comparative case studies of Nigerian public service organizations seeking to improve their financial governance (one case supported by the EU’s Support for Reforming Institutions Programme). We critically analyze ostensible accounting colonization at one organization to articulate how change in accounting usage indicates more emancipatory process development. We offer an interesting comparison in presenting a case organization that, ostensibly, after statutory relaxations vis-à-vis its budget, had more possibilities to deliver meaningful public service (consistent with emancipatory development) but actually in some ways was more indirectly negatively colonized through accounting. Interestingly, these colonization negatives here manifested with little coercion. By tracing movement towards more emancipatory accounting vis-à-vis colonization and the opposite movement in an ostensibly non-colonizing context, we deepen appreciation of accounting colonization and emancipatory accounting.
IS FORWARD-LOOKING FINANCIAL DISCLOSURE REALLY INFORMATIVE? EVIDENCE FROM UK NARRATIVE STATEMENTS
HASSANEIN, AHMED
HUSSAINEY, KHALED
Category: FR = Financial Reporting
Forward-looking financial disclosure (FLFD) is potentially uninformative if it does not change from the previous year, especially after a significant change in firm performance. This study aims to examine whether and to what extent managers change their FLFD from year to year in response to changes in firm performance. In addition, it investigates the effect of such changes in FLFD on firm value. This study uses a sample of UK narrative OFR statements over the period from 2005 to 2011. It finds an association between change in FLFD and change in firm earnings performance. However, it finds weak evidence that firms with larger changes in earnings performance tend to change their FLFD more than those with smaller performance changes. In addition, when we distinguish between well-performing and poorly performing firms, we find that the changes in FLFD are more positively associated with poorly performing firms compared to well-performing firms. Finally, the change in FLFD has no effect on the firm value of well-performing firms, while it negatively affects poorly performing firms. Our results suggest that forward-looking financial information in UK narratives includes some content about firm performance. However, it neither affects the valuation of well-performing firms nor enhances investors’ valuation of poorly performing firms.
FAMILY OWNERSHIP AND INVESTOR PERCEPTION OF FINANCIAL REPORTING QUALITY
HASSO, TIM
Category: FA = Financial Analysis
In this paper I investigate whether family ownership influences investor perception of financial reporting quality (FRQ) in publicly listed firms. While prior work has acknowledged that FRQ is determined by supply and demand, the existing literature has only studied the association between family ownership and the supply of FRQ. The perception of the information is however a critical component. Without knowing about perception and thus demand, the literature is unable to comment on the economic efficiency of the level of FRQ supplied by family firms. This paper addresses this gap in research and investigates how family ownership influences investor perception of FRQ through the use of an experiment with nonprofessional investors. My results suggest that nonprofessional investors do not perceive family ownership by itself to influence FRQ. It appears that investors have some concerns about the possibility of wealth expropriation, and that the presence of non-family blockholders is able to mitigate these concerns. Consequently, family owned firms that also have major non-family blockholders are perceived to supply high FRQ.
INFORMATION AND COMMUNICATION TECHNOLOGY AS A CHALLENGE FOR INFORMATION LITERACY SKILLS OF MANAGEMENT ACCOUNTANTS
HAUGENEDER, DANIELA
GREILING, DOROTHEA; TRINKL, FRANZ
Category: IS = Accounting and Information Systems
Excellent information skills are considered as a crucial ability of management accountants. Information and communication technologies (ICT) provide great amount of information which has to be handled by management accounting. Information literacy supports management accountants in handling the acquisition, processing and presentation of information properly. It consists of traditional literacy skills and ICT skills for handling all information systems used in a company. Hence, this research paper focuses on ICT skills which are required to be an information literate management accountant. First, a theoretical model containing different levels of ICT skills and traditional information literacy skills for management accountants has been derived from literature. Then, the model was tested by conducting semi-structured interviews with groups of management accountants and IT-project managers in large Austrian companies. Comparing both groups, a consensus exists about the main topics. Basic and advanced ICT skills are considered as essential requirements for management accountants. How important conceptual and product specific knowledge is depends on the job tasks of the management accountants. Substantial differences can be found in the terminology used by both groups. The willingness of the management accountants was much higher to develop a common understanding than the IT-Project managers. The latter boundary spanner activities need to be improved for a better collaboration.
PERCEIVED TRUST IN AUTHORITIES, NORMS AND TAX COMPLIANCE IN SLOVENIA: EMPIRICAL EVIDENCE
HAUPTMAN, LIDIJA
GÜRARDA , ŞEVIN
Category: TX = Taxation
The paper describes the purpose of tax compliance and the factors that influence taxpayers’ compliance behaviour. Recent research indicates that among different factors, tax compliance depends on trust in tax authorities and norms. This paper contributes to the tax compliance literature, which still lacks empirical evidence in Slovenia. A quantitative survey (N = 332) in Slovenia was conducted to explore the relationship between trust and norms toward tax compliance. M2 tests performed for this study suggests that social norms and voluntary tax compliance are found as statistically significant dependent variables with a positive linear trend.
LOAN LOSS ACCOUNTING AND PRUDENT RISK MANAGEMENT
HAUSSMANN, KATRIN
SCHWEINBERGER, ANDREAS
Category: FR = Financial Reporting
Research to date on earnings management and capital management by banks through loan loss provisioning has so far paid no attention to a third motive which may influence their provisioning significantly: provident behavior of bank managers, also known as prudent risk management. Despite the importance of prudent risk management, existing studies of provisioning have not controlled for it, which may explain the inhomogeneous conclusions to date on the respective influence of earnings management and capital management. Using 37,352 bank-year observations from 27 OECD countries between 1997 and 2012, the paper presents an analysis of prudent risk management, of regional differences in provisioning by banks and of the influence of a bank’s main business on its loan loss provisioning. We find that loan loss provisioning is mainly influenced by bank managers’ expectations about the future development of the economy, i.e. prudent risk management is an important determinant of loan loss accounting. Furthermore, we find regional differences in the use of loan loss provisioning: U.S. banks do not use their provisioning to manage earnings and capital, but in the Euro area both these motives play a significant role in the case of cooperative and holding banks.
INSIDER TRADING AND VOLUNTARY NONFINANCIAL DISCLOSURES
HE, GUANMING
Category: GV = Accounting and Governance
Voluntary nonfinancial disclosure of product and business expansion information occurs frequently in practice and is an important vehicle by which managers convey corporate information to outsiders, but little is known about how managerial opportunistic incentives affect the choice of the nonfinancial disclosures. Unlike management earnings forecasts that could be verified by subsequent audited earnings reports, qualitative nonfinancial disclosures are relatively hard to be verified ex post by outsiders who generally do not have access to a firm’s private information. Therefore, managers could manipulate their nonfinancial disclosure policies to fulfil personal incentives without bearing high disclosure risk. This study examines whether managers strategically choose the nonfinancial disclosure policies for self-serving trading incentives. Accounting for the endogeneity between disclosures and insider trades, I find strong and robust evidence that insiders manipulate their nonfinancial disclosures to maximize trading profits. In particular, managers tend to disclose bad (good) news on product or business expansion information before purchasing (selling) shares. Overall, the results contribute to understanding managers’ use of nonfinancial disclosure strategies for fulfilling personal trading incentives, and should be of interest to board of directors, which monitors and restricts opportunistic disclosures and insider trading within a firm.
MANDATORY AUDITOR ROTATION AND AUDIT QUALITY–FROM THE ASPECT OF AUDITOR INDUSTRY SPECIALIZATION
HE, LI-JEN
CHIANG, HSIANG-TSAI; CHIN, CHEN-LUNG
Category: AU = Auditing
Mandatory auditor rotation has been considered to be one of the most important mechanisms to strengthen auditor independence and improve audit quality. However, the cost and efficiency of mandatory rotation are still controversial for accounting academic and practice. This study use data of companies listed in Taiwan from 2006 to 2012 as the sample and performance-adjusted discretionary as proxies for audit quality to explore the association between mandatory auditor rotation and audit quality from the aspect of auditor industry specialization. The empirical results suggest that, the influence of mandatory auditor rotation on audit quality may have distinct effects for the dismissing or engagement of industry specialist auditors. Besides, we find that, while mandatory rotation may be harmful for audit quality of companies that switch away their specialist auditors, it may be helpless for enhancing audit quality for engaging specialist auditors to be the succeeding auditors of mandatory rotation. However, compared to switch to non-specialist auditors, the negative effect will be less significant for switch between specialist ones. The current study is expected to fill a gap in the existing economics of auditing literature by discussing mandatory rotation issues on the auditor industry specialization perception of rotation rules while prior studies are mainly focused on the perception of auditor independence.
REGULATOR LENIENCY AND MISPRICING IN BENEFICENT NONPROFITS
HEESE, JONAS
KRISHNAN, RANJANI; MOERS, FRANK
Category: MA = Management Accounting
We posit that nonprofits that provide a greater supply of unprofitable services (beneficent nonprofits) are less likely to face regulatory enforcement for mispricing in price-regulated markets. Consequently, beneficent nonprofits exploit such regulatory leniency and exhibit higher mispricing. We draw on organizational legitimacy theory and argue that both regulators and beneficent nonprofits seek to protect their legitimacy with stakeholder groups that include those that demand unprofitable services. Using data from U.S. hospitals, we examine mispricing via “upcoding”, which involves classifying an ailment as more severe than it actually is in order to earn higher revenues without incurring commensurate costs. Archival analysis indicates that regulators are less stringent in enforcement of upcoding for beneficent nonprofit hospitals, defined as hospitals that have an established record of higher performance on charity care and medical education. Subsequent to observing regulator leniency, beneficent hospitals demonstrate higher upcoding. Our results suggest that lenient enforcement indirectly assists beneficent nonprofits to obtain higher revenues in price-regulated markets thus enabling them to continue offering unprofitable services.
AUDIT QUALITY CONTROL MEASURES: A PRACTICAL INVESTIGATION
HEGAZY, MOHAMED
HEGAZY, IBRAHIM ; KAMAR ELDAWLA, NOHA
Category: AU = Auditing
The research investigates and analyzes a set of auditor performance related measures (i.e. control risk assessment, fraud risk assessments and audit evidence determination) to serve as indicators for the effective application of some of the quality control elements set by ISA 220, mainly engagement team experience and direction and supervision elements. A review of the auditing literature on the impact of experience and direction and supervision elements on auditor performance was made, followed by reviewing the excessive need for developing audit quality measures. Data was collected through an experiment with 50 less experienced auditors and 22 more experienced auditors in a number of audit firms with international affiliation in Egypt. The results were analyzed using descriptive statistics, t-tests, and analysis of variance. Results suggest that proper experience of engagement team could have a significant impact on their performance toward fraud risk assessment and audit evidence determination rather than control risk assessment, a task that had less experience impact. Results also suggest that direction and supervision inside audit firms have a significant impact on the auditor proper control risk assessment rather than fraud risk assessment and audit evidence determination.
INTERNAL INFORMATION AND INVESTMENT SENSITIVITIES TO MARKET VALUE AND CASH FLOW
HEITZMAN, SHANE
HUANG, MENGJIE
Category: FA = Financial Analysis
A growing literature shows how external information quality affects investment responses to market value and cash flow—frequently used proxies for investment opportunities and internal funds. However, such associations are also shaped by internal information quality. We predict that investment is more sensitive to internal cash flow signals and less sensitive to external market value signals when managers have higher quality internal information. In line with recent theoretical and empirical research, we proxy for internal information quality using observable information properties. We find that the sensitivity of investment to cash flow is increasing while the sensitivity of investment to market-to-book is decreasing in information quality. This evidence is consistent with internal information-based predictions and inconsistent with external information-based explanations. Our results offer a new and unique insight robust to several alternative explanations and hold up using recently-developed techniques to correct for measurement error in market valuations.
FINANCIAL ANALYSTS AND THE EVALUATION OF CORPORATE ACQUISITIONS: SURVEY EVIDENCE ON THE KNOWLEDGE OF ACCOUNTING STANDARDS AND THE USE OF ACCOUNTING INFORMATION FOR EQUITY VALUATION PURPOSES
HELLMAN, NICLAS
ANDERSSON, PATRIC
Category: FR = Financial Reporting
The combination of IFRS 3 (Business combinations) and IAS 36 (Impairment of assets) introduced about a decade ago represented a novel approach to accounting for acquisitions designed to enhance decision usefulness. These standards have been described as complex and therefore provide a suitable context for investigating issues related to the understandability characteristic in IASB conceptual framework according to which users are expected to have a reasonable degree of financial knowledge and to study financial information diligently. The paper reports results from a survey examining Swedish financial analysts’ knowledge of IFRS 3 and IAS 36 and their use of such accounting information for equity valuation purposes. The results indicate that these users, on average, have relatively low knowledge of the relevant standards, but still place much importance on this information when evaluating the impact of acquisitions on equity valuation. Separating the sample into high-knowledge and low-knowledge analysts, the latter group was more inclined to let their valuations be influenced by goodwill impairment and there was also a tendency among these analysts to take hypothetical amortisation of goodwill into account. The observed pattern of analysts relying on complex accounting information despite having relatively low knowledge of the standards, is discussed in the paper in relation to literature on analyst incentives and their use of use non-sophisticated valuation methods.
THE EFFECT OF COGNITIVE LOAD IN INVESTMENT DECISIONS
HEMMERICH, KRISTINA
FOCHMANN, MARTIN; KIESEWETTER, DIRK
Category: TX = Taxation
We investigate by laboratory experiment how cognitive load influences subjects’ investment behavior when a linear income tax with full loss offset is introduced. The results show that a Perception Effect which biases the decisions towards more risky investments exists. However,the extent of the observed Perception Effect depends on the cognitive load of the investment decision, with the Perception Effect being significantly higher for subjects facing high cognitive load, compared to the medium and low cognitive load levels.
SOCCER PLAYERS` HUMAN CAPITAL AS AN ASSET CLASS: WHICH FACTORS DETERMINE THE MARKET VALUE OF PROFESSIONAL SOCCER PLAYERS?
HERBERGER, TIM ALEXANDER
WEDLICH, FLORIAN
Category: FA = Financial Analysis
Institutional investors (e.g. private equity funds) invest in individual soccer players` human capital via so-called third party ownership. While this investment vehicle is forbidden in some countries (e.g. England), it is a legally in the German and other European soccer markets as well as in Latin America. Valuing this asset class and identifying relevant value drivers are the consequent challenges for affected investors. However, the existing literature on a market valuation approach of soccer players` human capital and corresponding value drivers suffers from significant selectivity bias due to many non-disclosed figures on transfer prices and associated contracts. We offer an alternative market approach method and determine the value drivers for soccer players` market quotes as proxy for the market value. Our database covers 468 players in the Premier German Soccer League (“Erste Bundesliga”) as one of the leagues with highest transfer prices volumes in the world and contains market quotes and soccer players` performance data from 2010 to 2013 (transfermark.de). Using a series of regressions we identify relevant player characteristics as market value drivers. We find that assists scored, minutes played and titles won positively influence individual soccer players` market value. In contrast to our expectations, the results also show that even dismissals and days injured have positive influence.
THE EFFECT OF BANK QUALITY ON CORPORATE CUSTOMERS
HERLY, MARIE
JUSTESEN, LENE GILJE
Category: FR = Financial Reporting
This paper examines how a bank's own quality affects its monitoring and screening role. We particularly study the way a bank?s quality impacts the performance of its corporate customers and the strength of its relationship with those customers. Bank quality is measured with financial stability, CAMELS ratio, and financial reporting quality. Controlling for the endogenous bank-firm match we do not find an association between bank quality and firm performance. However, we find that bank monitoring is more important when alternative firm monitoring is weak during the financial crisis. This indicates that high quality bank monitoring is more important during times of financial distress and when other monitoring devices fail. We also find clear evidence that firms with high quality banks and poor performance have weaker relationships with their bank. This indicates that high quality banks force weak customers to seek financing elsewhere. The paper sheds new light on how bank monitoring differs with their own quality and how the effect differs with alternative firm monitoring and the business cycle. The paper also extends current knowledge on how bank characteristics influence lending relationships.
AN EXPLANATION OF LOCAL GOVERNMENT DEBT IN SPAIN BASED ON INTERNAL CONTROL SYSTEM
HERNANDEZ, JOAQUIN
GRAS, ESTER; PALACIOS, MERCEDES
Category: PS = Public Sector Accounting
The literature reflects a growing interest in the research of Public Sector debt. However, this is the first time that a variable of internal control is used to analyse interaction with the level of debt. This paper analyses the influence of the level of internal control in Spanish Local Government on indebtedness. We have obtained a sample of 1,806 Spanish municipalities. The main finding is that the level of internal control system influences the municipal debt per capita, so the higher the level of internal control, the lower the level of debt. Furthermore, we confirm previously reported results.
THE CHIEF ACCOUNTANT AT GUINNESS, C. 1920-1940: THE PRECURSOR OF A MODERN-DAY CFO?
HIEBL, MARTIN R. W.
MARTÍNEZ FRANCO, CARMEN; QUINN, MARTIN
Category: MA = Management Accounting
Contemporary studies on the role of Chief Financial Officers (CFO) create a picture that before the 1960s, predecessor-positions of the CFO were bean-counters. While historical accounting publications shed some doubt on this assumption, they tend to lack detail on the roles of CFO predecessors in the early parts of the 20th century. Here, we provide a more in-depth analysis of a Chief Accountant in the period from 1920 to 1940 at the Guinness Company. Informed by concepts from Old Institutional Economics, our results suggest that the Chief Accountant at Guinness does not fit into the bean-counter cliché. In contrast, we find that even in the first half of the 20th century before any substantial company law or regulation of accounting the Chief Accountant at Guinness was significantly advising top management, managing risks and interacting with external financiers in additional to the bean-counting tasks. Our paper thus suggests a more gradual development of the role which we today term the CFO, implying that historical reflection is useful to help us fully understand modern-day, often taken-for-granted terms.
BANK RELATIONSHIPS AND PRIVATE FIRMS’ FINANCIAL REPORTING OPACITY
HILLEBRAND, CHRISTA
BIGUS, JOCHEN
Category: FR = Financial Reporting
Private firms with relatively high costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting and requires the bank to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit higher levels of financial reporting opacity. Controlling for many other factors, firms with a single bank relationship exhibit more earnings management exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. They also disclose their financial reports about 14 days later and are considerably more likely to miss the mandatory filing date. The length of such firms’ financial reports is also smaller, containing approximately 7.4% fewer characters than the median report. The results are robust to different econometric specifications including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of relationship lending.
HOW BRANDS HELP TO OVERCOME CAPITAL CONSTRAINTS
HIMME, ALEXANDER
Category: FA = Financial Analysis
The ability to finance strategic investments (e.g., brand building investments) is directly linked to the idiosyncratic capital constraints that each firm faces. I provide a conceptual framework and an empirical application that shows how marketing has an important function to generate financial resources from internal and external resources. I conceptualize a dynamic financial brand value chain at the firm level that shows how advertising and other marketing expenditures generate financial resources through a chain of intermediate marketing and financial outcome measures including brand equity, financial leverage, and cost of debt. This study is an important indicator that advertising and brand investments are not only a cost that hinders a firm’s ability to access fresh capital. I provide evidence that the reverse is true: Firms with stronger brands face lower capital constraints. By using data covering 155 firms from Harris EquiTrend, Bloomberg, COMPUSTAT, and the Center for Research in Security Prices over the 2005-2012 period, I find strong empirical support for the chain. Our results suggest that brand expenditures (financial resources) other than advertising are equally important for building the brand asset. In addition, I find strong evidence for a new relationship that an intangible asset such as a brand impacts the capital structure decision of a firm. Derived elasticities for the different relationships are significant and substantial.
SHOULD WE STOP USING THE STEP METHOD? A SIMULATION-BASED ANALYSIS OF METHODS FOR ALLOCATING SUPPORT SERVICE COSTS
HOCKE, SINA
MEYER, MATTHIAS
Category: MA = Management Accounting
It is widely acknowledged that the amount of support service costs is steadily increasing for many companies. With respect to the accuracy of a costing system, this underlines the importance of allocating support service costs correctly. In this context the step method is commonly presented as good compromise between effort and accuracy. However, surprisingly little is known about the scope of the deviations resulting from the different allocation methods and recommendations are derived mainly from the properties of the alternative allocation methods. By using a wide range of simulation experiments, this paper quantifies the inaccuracy of the less laborious step method, the simple direct method as well as the formers’ associated sequencing heuristics. We develop a better understanding of losses in accuracy, and detect which main drivers as well as situations minimize them. We observe a maximum deviation of approximately 7 % for the step method and 5 % for the direct method. Contrary to expectations, we find the direct method to be more accurate or at least comparably accurate to the more complex step method in many settings. Overall, the results suggest that in diverse situations, the simple direct method can be preferred to the step method regarding accuracy, and when taking effort into account, it even surpasses the reciprocal method.
SUSTAINABILITY RESEARCH IN ACADEMIC RESERACH - A CONTENT AND CITATIONAL ANALYSIS
HOERMANSEDER, STÉPHANIE A.
ASCHAUER, EWALD
Category: SE = Social and Environmental Accounting
This paper investigates the emergence and development of the field of sustain- ability reporting using a systematic literature review together with content and citational analyses. We trace back the roots of sustainability reporting and analyze the permeability towards other disciplines over its development. Our results show that sustainability reporting evolved as an interdisciplinary eld of research. They not only contribute to a better understanding of sustainability reporting, but also document the features of a distinct field of research within accounting. Especially we identify which other disciplines were relevant for the development of sustainability reporting. We also contribute to the literature by providing evidence about the most influential journals and authors.
IS DELIBERATE COST STICKINESS ECONOMICALLY JUSTIFIABLE IN THE PRESENCE OF ADJUSTMENT COSTS?
HOFFMANN, KIRA
Category: MA = Management Accounting
If short-term adjustable costs fall less with a decrease in demand compared to an equivalent increase in demand, they are said to be sticky. Accordingly, stickiness can lead to a rise in the ratio of costs to activity which is oftentimes interpreted as a negative signal in fundamental analysis. However, the majority of research in this respect attributes cost stickiness to deliberate managerial decision making in order to avoid potential adjustment costs if the decline in demand is expected to be only temporary. In this case, cost stickiness may in fact be economically justifiable for profit-maximizing companies. In order to test the underlying proposition, this study complements by analyzing firm-specific effects of asymmetrical cost behavior on scaled average selling, general and administrative costs. ANCOVA and multivariate regression analysis are applied to test several hypotheses. Findings suggest that underproportional adjustment of resources, either during a demand decline (sticky costs) or during a demand increase (anti-sticky costs), may actually be economically worthwhile if managers take into consideration adjustment costs as well as expected future demand when adapting resources.
DO IT YOURSELF: THE ACCOUNTING PROFESSION SHAPING TRANSITION IN GERMANY
HOFFMANN, SEBASTIAN
DETZEN, DOMINIC; EVANS, LISA
Category: AU = Auditing
Social and economic transitions usually go along with changes in accounting and audit regula-tion that are typically shaped by the accounting profession. In many cases, these processes are characterized by the profession’s interaction with state institutions. We analyze the transfor-mation of accounting and audit regulation in the course of the German reunification between 1989 and 1990 which was characterized by regulatory chaos as a consequence of the absence of the state. Based on a framework of knowledge exchange and power we conducted inter-views with 35 East and West German accounting and audit professionals to explore how the profession shaped the transitional regulatory space and to examine practices, norms and rites employed at that time. We find that, after an initial period of symbiosis between East German and West German professionals, the West German profession soon dominated the transition. However, the interaction of East and West German auditors was characterized by a dominat-ing pragmatism, which not only facilitated the integration of the East German professionals but was crucial to make the profession successfully shape the regulatory space in the absence of state institutions.
CORPORATE PHILANTHROPY, REPUTATION RISK MANAGEMENT AND SHAREHOLDER VALUE: A STUDY OF AUSTRALIAN CORPORATE GIVING.
HOGARTH, KATE
HUTCHINSON, MARION; SCAIFE, WENDY
Category: GV = Accounting and Governance
This study examines the role of corporate philanthropy in the management of reputation risk and shareholder value. It extends current empirical data about corporate giving by Australian companies by examining the interplay between levels of corporate philanthropy with corporate reputation and shareholder value. The reasons behind corporate giving have been well researched in academic journals, but examining the direct link between reputation and shareholder value in these cases is lacking. The results of this study show that increasing a firms’ investment in corporate giving must be done concurrently with an increase in reputation risk management in order to increase shareholder value. That is, the market foresees that the impact of corporate giving for a given the level of reputational risk management occurs in the future and hence is included in an increase in shareholder value. Our results are consistent while controlling for potential endogeneity. This paper assists both academics and practitioners by demonstrating that the benefits of corporate philanthropy extend beyond a gesture to improve reputation or an attempt to increase financial performance, to a direct collaboration between all the factors where the benefits far outweigh the costs.
ANALYST INFORMATION INTERMEDIATION AND THE ROLE OF KNOWLEDGE AND SOCIAL FORCES IN ECONOMIC PROCESSES IN THE ‘MARKET FOR INFORMATION’
HOLLAND, JOHN
CHEN, LEI; DANBOLT, JO
Category: FA = Financial Analysis
We develop a model of the information intermediation role of analysts in the ‘market for information’ (MFI). A conceptual framework is developed to interpret the empirical phenomena and argue for change. We illustrate how ‘soft’ intangibles information changes through analyst information intermediation processes, from company disclosure to analyst acquisition and analysis of company information and through to analyst reporting and disclosure. ‘Soft’ information serves as a ‘litmus test’ to explore intermediation because it is sensitive to social, knowledge and behavioural factors. Banks and bank analysts are used as examples. The conventional economic rationale for analysts argues that they exist to overcome market imperfections. This paper extends this view by illustrating how knowledge, social and behavioural factors enhance analyst (and MFI) economic processes, and change ‘soft’ information during the analyst intermediation process. It also discusses how problems with knowledge and social factors play a role in destabilising information processes in analysts and MFI. We suggest solutions including transparent knowledge of the business models of companies, analysts and the MFI, as well as the development of a new theoretical narrative. Such development seeks to exploit the role of new empirical models and theoretical narratives as more critical and reflexive ‘engines’ (and not cameras) in the financial system.
DECOMPOSING FEES PAID TO AUDIT FIRMS - ASSESSING KNOWLEDGE SPILLOVERS AND INDEPENDENCE
HOLM, CLAUS
Category: AU = Auditing
Fee composition has been a central key in prior studies examining multiple audit phenomena such as independence, knowledge spillover and competition. We review prior literature from each of these vantage points in order to clarify possible implications of seemingly related and potentially conflicting research findings based on fee models. We apply a Danish dataset which allows us to examine hypotheses derived from each of the research fields in turn. The study provides two main contributions. First we examine and discuss possible implications of different fee classifications. Consistent with a majority of prior audit fee studies, we find a positive significant relationship between audit fees and non-audit fees. Our findings further identifies differences in this association related to the composition of fees into fee for the statutory audit, fee for audit-related services, fee for tax services and fee for other services. Second we examine whether audit fees and non-audit fees are jointly determined in the Danish audit market. When controlling for the joint determination of fees by two-stage testing using strong IVs, we find support for the existence of positive knowledge spillover from non-audit to audit and the possible independence problems related to this economic bonding. Our findings also yield some support for knowledge spillover from audit to non-audit services provided.
INDIVIDUAL INVESTORS AND MANDATORY DISCLOSURE: EVIDENCE FROM THE JOBS ACT
HONIGSBERG, COLLEEN
JACKSON, ROBERT; WONG, FORESTER
Category: FA = Financial Analysis
An important justification for mandatory disclosure is that it benefits individual investors by giving them access to information that puts them on an equal playing field with institutional investors. Recent work, however, has argued that individual investors do not use all of the information that the law requires firms to disclose because the overwhelming amount of information is burdensome for individual investors to process. Using a recent legal change that allows firms to choose to disclose less information in four specific areas, we examine how this reduction in mandatory disclosure affects trading by individual investors. The results show that, immediately following the firm's initial public offering, individual investors are less likely to trade in the firms that provide less disclosure. Moreover, the effect of disclosure is additive: Trading by individual investors decreases by roughly 1% for each additional area in which the firm chooses to provide less disclosure. We also find, however, that this difference in the participation of individual investors disappears after two weeks of trading. Our findings suggest that additional disclosure leads to higher levels of individual investor participation, but that other sources of information that become available after a firm goes public also play an important role in mitigating information asymmetry between investor classes.
THE IMPACT OF BOARD INTERNATIONALIZATION ON EARNINGS MANAGEMENT
HOOGHIEMSTRA, REGGY
HERMES, NIELS; OXELHEIM, LARS ; RANDØY, TROND
Category: GV = Accounting and Governance
Prior literature shows that choices regarding board composition are associated with earnings management. In this study we add to this literature by examining the effects of the presence of a foreign board member on earnings management. The effects of foreign directors on the level of earnings management are a priori unclear. On the one hand, as foreign directors come from outside the local old-boys networks, they may feel less reluctant to raise controversial issues, and thus it can be expected that they are associated with reduced levels of earnings management. However, it is also possible that they are less effective monitors because of a lack of knowledge and due to language issues, suggesting that their presence is associated with higher levels of earnings management. We investigate this empirical question using a sample of 3,250 firm-year observations representing about 575 non-financial listed Nordic firms during 2001–2008. We find that the presence of a non-Nordic, foreign director is associated with significantly higher levels of earnings management. We obtain largely similar findings from OLS, an instrumental variables approach, and propensity score matching. Moreover, in a supplementary test we provide preliminary evidence that differences in accounting knowledge, rather than language-related factors, drive this effect. Our results favor the interpretation that it may not necessarily be beneficial to appoint a foreign director to the board of directors.
BLOCKHOLDER EXIT THREATS IN THE PRESENCE OF PRIVATE BENEFITS OF CONTROL:A QUASI-EXPERIMENT FROM CHINA’S SPLIT-SHARE STRUCTURE REFORM
HOPE, OLE-KRISTIAN
WU, HA; ZHAO, WUYANG
Category: GV = Accounting and Governance
Using the Split-Share Structure Reform (SSSR) in China as a quasi-experiment, we examine whether and how non-managerial blockholder exit threats discipline managers when private benefits of control (PBC) are prevalent. SSSR removed the selling restrictions on previouslydominant non-tradable shares, thereby providing a large, exogenous, and permanent shock to the cost for non-managerial blockholders to exit. However, because such exit potentially reduces nonmanagerial blockholders’ threats to control rights and managerial blockholders could benefit from the exit, it is ex ante uncertain whether exit threats would be effective in this setting. Using a difference-in-differences design, we find that the shock to exit threats, on average, improves firms’ operating performance. Specifically, we find that firms whose non-managerial blockholders experience a larger exit-threat increase have a greater improvement in performance than those whose non-managerial blockholders experience no or a smaller increase. Within the treatment sample, better performance is observed for non-SOEs (whose managers’ wealth is more closely tied to stock prices). Our results are robust to various additional controls, different specifications, and alternative measures of operating performance. The findings suggest that exit threats discipline managers even when PBC are prevalent. Further cross-sectional analyses show that the governance effect of exit threats is weaker when PBC are a stronger concern. In particular, the governance effect for firms headquartered in coastal provinces and with less concentrated ownership (indicators for lower PBC) is significantly stronger than that for firms headquartered in inland provinces and with more concentrated ownership. Finally, we identify improvement in investment efficiency and reduction in agency costs as two potential channels through which the shock affects operating performance, and we show that the changes in performance occur around the time when the expectation of a future increase in blockholders’ exit threats is formed.
DISCLOSURE COMPREHENSIVENESS AND MARKET EFFICIENCY: EVIDENCE FROM THE TORONTO STOCK EXCHANGE
HRAZDIL, KAREL
CHUNG, DENNIS; SUWANYANGYUAN, NATTAVUT
Category: FR = Financial Reporting
This paper investigates the effect of the disclosure comprehensiveness of annual reports on the information efficiency of stock prices. Using a sample of large and actively traded Canadian companies listed on the Toronto Stock Exchange, we analyze annual reports filed on SEDAR between 2003 and 2013 and find that the comprehensiveness of annual reports is an important determinant of short-horizon return predictability from historical order flows, which is an inverse indicator of market efficiency. Our results show that longer and larger annual reports are associated with reduced information asymmetry, lower cost of immediacy, higher trading activity, and an overall improvement in the efficiency of price discovery. The results are robust to the inclusion of controls for various determinants of short-horizon return predictability, such as trading costs, volatility, informational effects, and other firm-specific characteristics. Collectively, our findings provide empirical support for the benefits of enhanced corporate disclosure in Canada.
AUDITING FAIR VALUE MEASUREMENTS IN THE REAL ESTATE INDUSTRY: AUDITORS’ RESPONSE AND THE ROLE OF INDUSTRY SPECIALISTS
HSIEH, YU-TING
LIN, CHAN-JANE
Category: AU = Auditing
This study uses investment property as a target to investigate the effect of fair value accounting on the auditing profession. IAS 40 provides options for firms to choose fair value model or cost model to recognize investment property. Fair value accounting provides more relevant information, and therefore reduces information asymmetry across traders. However, fair value estimates with high uncertainty and substantial discretion might increase the complexity and difficulty of the audit. Therefore, we examine whether auditors have different tendency to issue modified opinions for firms using fair value method relative to firms using cost method. The second purpose of this study is to investigate whether industry specialists improve the reliability of fair value estimates. There is a vigorous concern about the reliability under fair value accounting. The ambiguous nature of fair value estimates raises the importance of industry-specific knowledge. Auditors with industry expertise are more competent in detecting the potential management evaluation bias and constraining the management’s aggressive reporting, and therefore improve the reliability of fair value estimates. Investigating German and U.S. real estate firms from 2003 to 2007, we find that auditors are less likely to issue modified opinions for firms using fair value method. Moreover, we find that the reliability of fair value estimates increases when the real estate company is audited by an industry specialist.
INVESTMENT LAYERS, REGIONAL ENVIRONMENTS, AND INVESTMENT EFFICIENCY: EVIDENCE FROM FDI IN CHINA
HSU, AUDREY WEN-HSIN
LIU, HSINTAI
Category: GV = Accounting and Governance
This study investigates whether the number of investment layers for foreign direct investment (FDI) in China is related to capital investment efficiency. We measure the number of investment layers of a multinational firm from the parent firm to the lowest-tiered subsidiary. We argue that agency problems and information asymmetry between corporate insiders and outside capital providers increase with the number of layers and reduce the debt providers’ willingness to provide capital. Using the sensitivity of investment to cash flow to measure investment efficiency, we find that more investment layers are associated with less investment efficiency. In addition, we also find that the strength of the legal environment and the level of market development in each province attenuates the negative association between investment layers and investment efficiency.
DO ACCOUNTING STANDARDS MATTER FOR FIRM PRODUCTIVITY? EVIDENCE FROM MANDATORY IFRS ADOPTION
HUANG, RONG
BANKER, RAJIV; LI, YINGHUA
Category: FR = Financial Reporting
In this paper, we examine whether productivity improves after mandatory IFRS adoption. Using data envelopment analysis (DEA) to measure firm-level productivity, we show that production efficiency of mandatory IFRS adopters increases significantly after adoption of IFRS. The post-adoption production efficiency improves more for firms 1) located in countries with large GAAP differences, and experiencing a large increase in the number of comparable industry peers; 2) experiencing an increase in institutional ownership and firm-level governance; and 3) experiencing an increase in R&D activity and market-to-book ratio. Taken together, the evidence suggests that firms with significant improvements in information environment, monitoring mechanisms and real activities from mandatory IFRS adoption are able to increase productivity substantially.
THE INFORMATIVENESS AND MONITORING EFFECT OF ANALYSTS’ COMMENTS ON EARNINGS QUALITY
HUANG, ZHONGWEI
Category: FR = Financial Reporting
The paper investigates the informativeness of analysts’ comments on earnings quality (EQ comments) and how these comments affect opportunistic reporting behavior. I find that the market’s reaction to the release of analyst reports is increasing with the favorableness of EQ comments and the results are robust to controlling for broker and analyst fixed effects, quantitative forecasts and other text in the analyst reports. Further analysis suggests that the market’s reaction to EQ comments is primarily driven by comments written with certainty. In addition, firms heavily criticized by analysts regarding earnings quality have higher discretionary accruals in the current period but experience a significant decrease in discretionary accruals in the subsequent period after controlling for accruals reversal. Interestingly, the decrease in discretionary accruals in heavily-criticized firms is not accompanied by an increase in real activities management. Taken together, the evidence indicates that EQ comments are informative to investors, and have a monitoring effect on earnings management.
THE BLACK BOX UNDER SCRUTINY – A LOOK INSIDE GERMAN TAX DEPARTMENTS
HUBER, STEFAN JOHANN
FELLER, ANNA; SCHANZ, DEBORAH
Category: TX = Taxation
Companies differ substantially with respect to the amount of tax expense they incur. Research has shown that, apart from the “hard facts” of firm characteristics, other factors play a role. In a previous research project we found that three hurdles - available, desirable, and implementable tax planning methods - define which tax planning strategies are effectively put into action. These hurdles can more comprehensively explain tax expense as they comprise a company's business context as an influence of which tax planning methods are available, how the aims of tax planning determine which tax planning methods are desirable, and ultimately, how tax manager power affects which methods are implementable. We designed a 68-item questionnaire with two objectives: Firstly, we generate larger-scale insights into the “black box” of tax planning in German corporations. Secondly, we establish links between the differences in how a company approached tax planning and the tax expense it incurs. In the months from November 2014 to January 2015, we conducted telephone interviews with 155 large and capital-market oriented corporations throughout Germany, equaling a conservative response rate of just below 16%. The information collected via the questionnaire comprises a number of overarching questions on tax planning, such as the measures used to monitor tax planning or the existence of peer comparisons. Moreover, we use a set of indicators from the questionnaire to measure each of the three hurdles of tax planning independently. Hurdle one includes mostly standard control variables from firm characteristics. Hurdle 2 – desirable - and hurdle 3 – implementable - were composed as an index from 21 and 37 items, respectively. Our findings show that companies differ substantially with regard to their aggressiveness of aims of tax planning as well as the tax managers' power to implement tax planning methods to achieve the respective aims. Combining the two hurdles of aims and power, more aggressive tax planning aims and more pronounced tax manager power are significantly negatively related to tax expense. Our contribution is that we use insights into how tax managers describe the internal tax planning reality in their corporations to learn more about its impact on externally observable tax expense. We thereby contribute to the large stream of tax avoidance literature which still features puzzles why companies differ so substantially with regard to their tax expense.
AUDIT FEES AND VOLUNTARY AUDIT
HUGUET, DAVID
GANDÍA, JUAN L.
Category: AU = Auditing
Despite the extensive research on the determinants of the audit pricing in both public and private settings, there is a lack of research about the effect of voluntary audits on audit fees. Two competing views are developed to justify differences on audit pricing between voluntary and mandatory audits. Using a sample of Spanish SMEs, we test whether voluntary audited companies are charged with different fees than mandatorily audited ones. We also examine if the premium observed among large auditors is persistent in the voluntary setting, as well as whether there is a different premium between mandatory and voluntary audits. After controlling for characteristics that affect audit fees, we do not fin differences between voluntary and mandatory audits. Furthermore, we observe a premium related to Big 4 auditors, but results for Middle-Tier auditors are mixed. Moreover, we do not find significant differences in the audit pricing of large auditors depending on the character of the audit.
THE CONSTRUCTION OF PERSUASIVENESS OF SELF-ASSESSMENT BASED POST-COMPLETION AUDITING REPORTS
HUIKKU, JARI
LUKKA, KARI
Category: MA = Management Accounting
In this study we investigate how persuasiveness of the self-assessment based post-completion auditing (PCA) reports on capital investment is constructed. We examine what makes companies consider that information in these reports rises to an acceptable quality level and they agree to accept and use the reports for certain purposes, like for enhancing organizational learning and discharging accountability. The investigation was motivated by the extant agency informed theory (AT) literature suggesting that self-auditing will entail obvious risks for the quality of PCA reports in terms of data manipulation, yet leaving the process of constructing the persuasiveness of these reports a black box. In responding to our research objective, we employed Actor-Network Theory (ANT) as our method theory, and accordingly followed human and non-human actors in heterogeneous networks in producing the reports. The empirical evidence of our case study came from 24 semi-structured interviews and the analysis of the construction of 22 PCA reports of strategic investments in one of the major European forest companies. We add to the capital budgeting literature by identifying and discussing the role of various conditions affecting the construction of persuasiveness of PCA reports. We maintain that the simultaneous existence of three conditions (i.e. an appropriate collective process, alignment with relevant external reference points, and following of the formal guidance) is necessary in producing a persuasive PCA report. Our second contribution is related to the used method theory. Drawing on ANT as our method theory, the paper is able to make sense of the complex process of fabricating the persuasiveness of the PCA reports, which would remain a black box when examined, for instance, from the AT viewpoint only.
THE NATURE OF MANAGERIAL CAPTURE IN SUSTAINABILITY ASSURANCE ENGAGEMENTS
HUMMEL, KATRIN
SCHLICK, CHRISTIAN
Category: SE = Social and Environmental Accounting
This study investigates the nature of managerial capture in sustainability assurance engage-ments in an empirical setting. We hypothesize that managerial capture, i.e., a client’s influence on the process and outcome of an assurance engagement, affects the assurance process and outcome in either a beneficial or a detrimental way with respect to transparency and ac-countability toward external stakeholders. To assess the nature of managerial capture, we concentrate on the relationship between the intensity of the sustainability assurance services requested by the client and a firm’s corporate sustainability performance. Based on a sample of 122 European companies, our results reveal a negative relationship between assurance in-tensity and firms’ sustainability performance, indicating the existence of a beneficial form of managerial capture.
RETURN NEWS DECOMPOSITION AND CONDITIONAL CONSERVATISM
HUNG, SHENGMIN
QIAO, ZHENG
Category: FR = Financial Reporting
Stock return is widely used as the proxy for earnings news in the Basu (1997) model to examine the timeliness asymmetry between news and earnings. However, total return could be a noisy measure for earning news by including various non-cash flow news, which are irrelevant to firm fundamentals. This paper follows Campbell (1991) and Voulteenaho (2002) by decomposing return news into two components, cash flow news and discount rate news. We argue that cash flow news component is the “return news” that directly affects earnings in the conditional conservatism model. And our results support the notion by showing timeliness asymmetry for cash flow news. Our financial restatement subsample results further reveal that post-restatement announcement conservatism only improves with regard to cash flow news. Our results suggest that decomposed cash flow news is a refined measure for earnings news and display robust explanation power for conditional conservatism model.
THE STOCK MARKET REACTION TO AUDIT FAILURE: AN INDIVIDUAL AUDITOR AND FIRM LEVEL ANALYSIS
HUNG, YUSHUN
YEN, SIN-HUI
Category: AU = Auditing
This study investigates the influence on capital markets of the Financial Supervisory Commission (FSC) disciplining audit partners over audit failure arising from corporate fraud, and how investor perceptions of the audit quality and consistency of specific audit partners influence their perceptions of their own CPA firms. Three contagion effects are examined: individual auditor contagion effect, firm contagion effect, and external contagion effect. The results indicate that clients of disciplined auditors and other auditors - whether in the same or other CPA firms experience significantly negative cumulative abnormal returns. Comparison analysis of these contagion effects reveals a significant difference between internal (both individual and firm) and external contagion effects. However, no significant difference exists between the stock price contagion effect on clients of the disciplined CPA versus those of other CPAs in the same firm. These findings suggest that investors probably infer audit quality based on overall CPA firm brand, rather than assessing quality based on individual CPAs. This investigation presents research-based evidence that the PCAOB can consider when formulating policy proposals dealing with engagement partner signature in audit reports (PCAOB, 2009, 2011).
IS THE STRENGTH OF THE FORECAST ARGUMENT ASSOCIATED WITH FORECAST ACCURACY? – EVIDENCE FROM EUROPEAN HALF-YEARLY FINANCIAL REPORT FORECASTS
HURSTI, KRISTIAN JUHANA
Category: FA = Financial Analysis
Building on the Claim-Data-Warrant model of argumentation by Stephen E. Toulmin (1958/2003), this paper investigates whether the argumentative strength of company-issued forecasts is related to eventual forecast accuracy. Previously the Toulmin model has been used to evaluate the persuasiveness of several kinds of management messages such as strategy proposals and press releases explaining a company’s decisions. Using a sample of 517 half-yearly revenue, earnings and profitability forecasts by European listed companies, this paper documents a positive relationship between the strength of the forecast argument and forecast accuracy. Focusing on the strength of the argument and forecast accuracy, this study adds to prior studies on the importance of supporting information in textual forecasts.
ON THE MANAGEMENT OF LEGACY ASSETS
HUSON, MARK
WIER, HEATHER
Category: GV = Accounting and Governance
We consider the role of legacy assets in the performance of newly appointed CEOs. Using selling, general, and administrative expenses to measure investments in organizational capital we find that on average, CEOs manage legacy assets less well than they manage their own investments in organizational capital. This on-average result is driven by turnovers involving outside successors, and is robust to controls for the quality of the outgoing CEO’s performance. In addition we provide indirect evidence that style can manifest itself in the types of investments that managers make, independent of their magnitude. Finally our results speak to the efficiency implications of managerial style.
EARNINGS QUALITY OF INDONESIAN FIRMS SURROUNDING INITIAL PUBLIC OFFERINGS (IPOS)
HUTAGAOL, YANTHI
WYDIANTO, FELITA
Category: FA = Financial Analysis
This research aims to examine the changes in earnings quality of Indonesian firms transitioning from private to public companies; by examining the accrual quality, earnings persistence, and earnings predictability one year before and after IPO. Accrual quality is assessed using the abnormal accrual model and Dechow and Dichev (DD) model; whereas earnings persistence and predictability are assessed through net income autoregressive model. Using the 2009-2011 Indonesian non finance and finance-related IPO firms, this research finds that, post-IPO accrual quality increases due to a decrease in unintentional estimation errors. Further, this research finds no earnings management indication surrounding IPO. It is also found that the earnings persistence increases after IPO. However, post-IPO earnings preditability decreases due to the nature of IPO firms.
DOES GENDER DIVERSITY ON THE COMPENSATION COMMITTEE REDUCE EXCESSIVE RISK-TAKING?
HUTCHINSON, MARION
GUL, FERDINAND; LAI, KAREN
Category: GV = Accounting and Governance
Since the GFC there has been an increased focus on incentivising excessive risk-taking. This paper sets out to determine if gender diversity on the compensation committee is associated with lower financial distress/bankruptcy risk. Based on the notion that females are more conservative or risk aware, they are therefore more likely to actively monitor managers’ compensation. The results of this study support this proposition by finding empirical evidence of a negative association between the gender diversity of the compensation committee and excessive compensation. Concurrently, firm distress, as measured by the Altman Z-score is negatively associated with gender diversity on the compensation committee. Subsequently the results of this study show that, while controlling for potential endogeneity, that a gender diverse compensation committee reduces excessive risk taking.
AUDIT FEES AND THE SALIENCE OF FINANCIAL CRISIS - EVIDENCE FROM SLOVENIA
IGLIČAR, ALEKSANDER
TROBEC, DOMEN; ZAMAN GROFF, MAJA
Category: AU = Auditing
The field of audit fee research, being the focus of numerous researchers in a number of settings, seems to be ever evolving with new areas of interest in the field. In spite of the recent developments in the EU economies there is not much evidence on the behavior of audit fees in times of financial crisis. Financial crisis represents a setting tightly related to the concepts of audit risk and liability. In such setting higher audit fees can be expected to account for increased audit engagement. However, scarce empirical evidence, predominantly on U.S. data, reports trends of decreasing audit fees since the beginning of the crisis. The aim of our study is twofold. First, it aims to identify the characteristics of audit fees in Slovenia, a country with a relatively short auditing tradition where the recent developments in the audit market have led to comparatively low audit fees. And second, to contribute to the evolving area of research, the study attempts to investigate audit fee trends in times of financial crisis. The results of the study provide evidence of declining audit fees in times of financial crisis in Slovenia. It seems that the negative effects on audit fees, triggered by reduced demand for audit services, increased competition in the market and cost reduction measures of the auditees, outweigh the opposing positive effect on audit fees due to increased audit engagement.
WE ARE FAMILY! IMPRESSION MANAGEMENT IN THE LETTER TO SHAREHOLDERS AND THE FAMILY QUEST FOR CONTROL
IMPERATORE, CLAUDIA
BOZZOLAN, SAVERIO; MATTEI, MARCO
Category: GV = Accounting and Governance
Abstract Prior works show that family firms undertake a number of actions to obtain the support of external actors and maintain control and influence over the firm. We contend that impression management is an additional tool family might use to achieve this end but the family will adopt it in diverse way depending on the position held within the firm. Family is less likely to engage in impression management techniques when it is already able to impose its goals and influence over the firm (e.g. high ownership stake or strong board control). Whereas impression management is more used when the family lacks a dominant position and needs to persuade outsiders to keep controlling the firm (e.g. family management). We test our predictions by analysing impression management in Letters to Shareholders of Italian listed firms. Empirical evidence confirms our expectations: the presence of the family systematically affects impression management practices but the effect varies with the characteristics of the family involvement.
DO COMPANIES OPPORTUNISTICALLY MANAGE ESO FAIR VALUE ESTIMATES?
ISAKINA, EKATERINA
Category: FA = Financial Analysis
Abstract: Executive compensation in the form of stock options often constitutes a significant expense for companies, in particular since the IASB and FASB recently mandated firms to recognize these expenses in income. At the same time, much discretion is left to managers on the choice of a fair value measurement model and the input parameters for such a model. Given the well-known association between stock prices and earnings news, as well as the fact that managers’ wealth often depends on the company’s stock price, managers face incentive to bias executive stock option expense downwards and thereby inflate earnings numbers. Importantly, unlike accruals or real earnings management, this type of earnings management has no reversing effect on future periods and is therefore potentially less costly. Using publicly available data on U.S. listed companies for the period between 2005 and 2012, I test whether firms’ sensitivity of stock price to earnings news affects firms’ ESO expense reporting. The empirical evidence is not consistent with the presence of systematic earnings manipulations, even after conditioning the main incentive on the proximity to analysts’ earnings forecasts and the relative size of ESOs expense. These findings suggest that the latitude given to managers in estimating fair values is not used in an opportunistic manner, at least in the setting investigated here.
THE EFFECT OF ACCOUNTING CONSERVATISM ON CORPORATE FINANCING ACTIVITY: EVIDENCE FROM JAPAN
ISHIDA, SOUHEI
Category: GV = Accounting and Governance
This study examines how two types of conservatism―unconditional conservatism and conditional conservatism―affect Japanese firms’ financing activity, in particular, borrowing money from banks. This study obtained the two main findings. First, firms practicing a higher level of unconditional conservatism borrow more money from banks under the condition of facing a funding shortfall. Second, the degree of their conditional conservatism does not significantly relate with the degree of proceeds from loans. These results are robust to the endogeneity problem between conservatism and firms’ borrowing activity. In addition, I find that firms having a strong relationship with the main bank benefit from unconditional conservatism and conditional conservatism is useful for firms having a weak relationship with the main bank. This paper reveals that the economic consequences of conservatism vary across institutional factors and suggests the possibility that the nature of conservatism has been misjudged by focusing only on the accounting system when considering its economic consequences.
ERM AND CHANGES IN CAPITAL ALLOCATION PRACTICES – THE CASE OF A LARGE NON-LIFE INSURANCE COMPANY
JABBOUR, MIRNA
ABDEL-KADER, MAGDY
Category: MA = Management Accounting
This paper aims to study changes in capital allocation routines following the introduction of a new risk management system, enterprise risk management (ERM). The institutionalisation of ERM-related practices is explicated based on an institutional framework and drawing on empirical evidence from multiple sources in a large UK non-life insurance company. We focus on intra-organisational changes around capital allocation routines rather than extra-organisational processes of change. We found out that change agents introduced new capital allocation routines that are more risk-based as a part of ERM embedding process. Capital allocation routines were found to be programmatic rule-based behaviours that explain the way in which new risk management rules became institutions over time. This study extends the scope of institutional analysis to the risk management field and to the explanation of how institutions and rules play a key role in introducing new capital allocation routines within the organisational environment.
FIRM TAX UNCERTAINTY, CASH HOLDINGS, AND THE TIMING OF LARGE INVESTMENT
JACOB, MARTIN
WENTLAND, KELLY ; WENTLAND, SCOTT A.
Category: TX = Taxation
Firms accumulate cash holdings for a variety of reasons, including as a buffer against uncertainty and to finance large investments. This paper explores whether there is a trade-off between two competing uses of cash holdings: precautionary savings that result from increased tax uncertainty and savings devoted to large investments. Specifically, we test whether firm-specific tax uncertainty affects the timing and incidence of large investments (or investment spikes) made by firms. In our baseline analysis, we find that firms with higher tax uncertainty have higher cash holdings and lower investment, and that this adverse impact is more pronounced at higher levels of investment where we expect the trade-off effect to be larger. We then focus on the timing of large investments using a hazard framework and find that greater tax uncertainty delays large capital investments. This trade-off between tax uncertainty and investment implies that, from a policy standpoint, a reduction in tax uncertainty could free up valuable financial capital for firm investment, which may currently be tied up as a cash buffer for firms that are highly uncertain about their future tax incidence.
MEET/BEAT MARKET EXPECTATION, ACCOUNTING CONSERVATISM AND CORPORATE GOVERNANCE
JAGGI, BIKKI
NG, ANTHONY; XIN, HUA
Category: FR = Financial Reporting
Accounting conservatism has been recognized as a reporting strategy that benefits shareholders and financial statement users. We hypothesize that managers in general are likely to sacrifice the benefit associated with accounting conservatism when adopting meeting/beating market expectations (hereafter MBME). Our findings show a negative association between MBME, proxied by analysts’ consensus forecasts, and accounting conservatism, defined in terms of conditional conservatism (Basu, 1997; Ball and Shivakumar, 2005, 2006) and we show that such relationship is not a mechanical connection between reporting strategy and managerial incentives to report higher earnings. Further analysis show that the negative relationship still exists after controlling for expectation as well as accrual-based and real earnings management. However, we document that G-index (Gompers et al., 2003), reflecting corporate governance in terms of anti-takeover provisions, has a significant impact on the negative association between accounting conservatism and MBME. Such finding shows that firms with less anti-takeover provisions, proxied by G-index, are less likely to sacrifice the benefit associated with conservative accounting for MBME.
THE DISCIPLINING ROLE OF DISAGGREGATED ACCOUNTING INFORMATION
JANSSEN, WIM
Category: FR = Financial Reporting
I propose that a firm’s commitment in providing disaggregated accounting information disciplines managers such that they provide more disaggregated forward looking disclosures. As of 1998, SFAS 131 allows US firms to withhold audited profitability accounting information on geographical segments. I predict and find that firms that do not show commitment in continuing to provide segmented profitability accounting information (the profit segment stoppers) reduce their forward looking disclosures on foreign operations in the MD&A. These firms reduce both good and bad news. Furthermore, they reduce predominantly forward looking information on segment sales, but this only occurs for firms where the disciplining role of segmented sales accounting information is not likely to work. Finally, I find that profit segment stoppers use the number of foreign sales segments in the accounting report as an alternative disciplining mechanism.
ACCRUAL ESTIMATION ERRORS AND CEO TURNOVER
JARVA, HENRY
KALLUNKI, JUHA-PEKKA; LIVNE, GILAD
Category: GV = Accounting and Governance
This paper investigates whether accrual estimation errors impact a board’s ability to learn about the unknown talent of a chief executive officer (CEO). We posit that the information content of accrual estimation errors is asymmetric in that negative accrual estimation errors are considered as “bad news” about CEO talent. Consistent with our prediction, we provide empirical evidence that the probability of forced CEO turnover is significantly related to negative – but not to positive – accrual estimation errors. We cannot find evidence that CEOs voluntarily leave their position during periods of positive accrual estimation errors.
DISCLOSURE AND RECOGNITION OF INTANGIBLE ASSETS - INSIGHTS FROM PURCHASE PRICE ALLOCATIONS
JENY-CAZAVAN, ANNE
ASTOLFI, PIERRE; PAUGAM, LUC
Category: FR = Financial Reporting
Accounting for intangible assets is the object of an intense debate between advocates of increasing mandatory disclosure requirements and partisans of the current voluntary disclosure regime. This paper aims to provide empirical evidence shedding light on this debate. Examining disclosures following business combinations enables to measure the market consequences of newly acquired intangible assets because they must be completely recognized under FAS 141, either as separately identified intangibles or as part of purchased goodwill (FASB, 2001). After explaining the determinants of disclosures related to intangible assets in purchase price allocation, we investigate: (1) the consequences of intangible-related disclosures on various measures capturing investors’ reactions to new information, namely revision of analysts’ forecasts and abnormal stock returns, and (2) the association between purchased goodwill and separately identified intangibles and market value of equity. We show that intangible-related disclosures are positively associated with the materiality of the acquisition, acquirer’s market-to-book and negatively associated with acquirer’s size and leverage. Additionally, disclosures are positively associated with the magnitude of analysts’ revisions but independent from cumulated abnormal returns around the first disclosure of the purchase price allocation. Finally, we document that the amounts of purchased goodwill and separately identified intangibles are both value relevant.
LINKING KEY PERFORMANCE INDICATORS TO NEW VENTURE SURVIVAL
JERMIAS, JOHNNY
CHEN, YASHENG
Category: MA = Management Accounting
Based on the four major challenges faced by firms at the early stage of their life cycle, we identify and use financial and non-financial performance measures to predict the survivability of new ventures. We use a sample of 3,729 new manufacturing ventures drawn from the Chinese Foreign Invested Enterprises Database. Overall, the results are consistent with our hypotheses. Using the Cox survival model, we find that employee training, employees’ productivity, accounts receivable collection period, export intensity, and sales growth are positively related to new venture survival. This study contributes to the existing business venturing and accounting literature in three ways. First, it fills the gap in existing literature on bankruptcy prediction by focusing on firms at the early stage of their life cycle. Second, it uses survivability as a measure of business success. Survivability is a more comprehensive measure of firm performance than traditional financial measures at the start-up stage because at this stage, firms tend to carry large losses which make the financial measures inappropriate. Finally, this study has the potential to help new venture managers to improve a firm’s chances of success by using customized performance measures to fit its unique situation.
FURTHER EVIDENCE ON THE EFFECT OF REGULATION ON THE EXIT OF SMALL AUDITORS FROM THE AUDIT MARKET AND RESULTING AUDIT QUALITY
JIANG, ALICIA
FARGHER, NEIL ; YU, YANGXIN
Category: AU = Auditing
ABSTRACT: This paper provides evidence on the effect of regulation on the ability of small auditors to continue to provide audit services, their exit from the audit market after the introduction of increased regulation including PCAOB inspections, and the resulting impact on audit quality reflected in absolute discretionary accruals reported by audit clients. Using client discretionary accruals as the proxy for audit quality we do not find that the exiting auditors are of lower quality. We find that the companies audited by the exiting auditors had on average higher absolute discretionary accruals than other companies audited by non-exiting auditors. The results suggest that the higher absolute discretionary accruals are explained by the overall firm specific characteristics of these clients rather than these companies being audited by the auditors that exited the market.
INFORMATION TECHNOLOGY INVESTMENTS AND THE TIMELINESS OF FINANCIAL REPORTS
JOHNSTON, JOSEPH ATKINS
ZHANG, JOSEPH
Category: FR = Financial Reporting
The advances in IT have changed the way companies conduct business, prepare financial reports, and have their financial statements audited. As a result, firms’ IT implementation could affect the timeliness of financial reporting and auditing. On one hand, IT complexity creates challenges for financial statement preparers and auditors in the areas of internal control, reporting processes, and detecting misstatements. On the other hand, IT implementation helps improve internal control and reporting effectiveness. Using firm-level IT data from 1999 to 2009, we find IT implementation is negatively related to both earnings report lag and audit lag. From the lowest to the highest deciles of IT implementation, both lags are on average shortened about four days. We further find that IT implementation is more negatively related to earnings reporting lag for more financially distressed, complex, and larger firms and more negatively related to audit lag for more complex and larger firms.
QUO VADIS, INTERNAL AUDITING? FUTURE PROSPECTS OF INTERNAL AUDITING IN 2030
JOKIPII, ANNUKKA
Category: GV = Accounting and Governance
Recent literature has discussed significant transformations in internal auditing following the evolution of its role as a result of both new laws and regulations and demands from stakeholders (Speklé & al. 2007: Kapoor & Brozzetti 2012). The current study aims to facilitate discussion between 22 experts (board members, management and internal auditors in public and private firms alongside academics and a legislator) on issues which may influence the future development of internal auditing and possible outcomes in 2030. The study adopts a Delphi approach with the Classical and Argument variations in the form of a multi-stage and anonymous survey process. As a result, driving forces for change in internal auditing were defined, the experts’ dissenting opinions were analyzed, and three images of futures (scenarios), labeled a team nerd, the lonely soldier and legal coordinator were devised. The panelists agreed first, that future internal auditing legislation will detract from organizational flexibility; second, that collaboration between the internal auditing function and the whole organization will increase; third, that the board and management will exploit the potential of internal auditing better in the future; and fourth, that internal auditing will be capable of exploiting the opportunities presented by modern digitalization. Opinions diverged on issues like the effects of standardized education, team working, and the polarization of internal audit departments.
STRATEGIES OF MANAGERIAL JUSTIFICATION IN BANK NARRATIVE COMMUNICATION
JONALL, KRISTINA
RIMMEL, GUNNAR
Category: FR = Financial Reporting
Accounting narratives potentially provide contextual information on company-specific events, industry specific events or the overall economic-specific events. Accounting narratives have become an increasingly important part of a company's annual report. In particular, statements by the chairman or CEO have become essential management commentaries where company’s top management can contextualise the company’s annual performance. These statements provide a personal reflection upon what can be impersonal and complex financial statements as well as permitting a forward-looking evaluation of the company. Accounting narratives are unaudited and may be influenced by corporate management and thus may be subject to impression management. This paper focuses on the chairman's narratives in top banks before, during and after the first banking crisis. It discusses how banks' reporting strategies and narratives depend on underlying financial performance. The study examines how the financial crisis affects the accounting narratives over time. This study explains the legitimisation strategies of managerial justifications of the crisis in CEO letters.
THE BEST OF ALL POSSIBLE WORLDS: ANALYST EX ANTE VALUATION FORECAST OPTIMISM AND THE DISTRIBUTION OF SCENARIO-BASED VALUATIONS
JOOS, PETER
PIOTROSKI, JOSEPH D.
Category: FA = Financial Analysis
We show that analysts’ valuation forecasts that appear equally optimistic based on their implied return to investors are not all created equal. Using a unique dataset of analysts’ state-contingent valuations, we use the embedded “tilt” in analysts’ base case valuations, relative to their distribution of state-contingent valuations for the covered firm, as a measure of the ex ante optimism inherent in analysts’ valuation forecasts. Consistent with analysts overweighting the likelihood of extreme outcomes, we find that ex post optimism (analysts’ valuation errors) is increasing in the degree of ex ante state-contingent optimism and that the investment value of a given valuation forecast is diminishing in its degree of extremity. Finally, we show that this embedded tilt is a function of firm specific and time period specific factors that appear to reflect both investor sentiment and fundamental risk factors.
REGULATION OF MANDATORY DISCLOSURES: EVIDENCE FROM OIL & GAS
JORGENSEN, BJORN
BADIA, MARC; DURO RIVAS, MIGUEL ; ORMAZABAL, GAIZKA
Category: FA = Financial Analysis
Regulators mandate disclosures supplementary to information recognized in the financial statements. We consider a setting where regulators chose to decrease discretion of mandatory disclosures. In 2009, the U. S. Securities and Exchange Commission tightened the definition and standardized the estimation process of fair value estimates of oil and gas (O&G) reserve disclosures, which was followed by a material decrease in the disclosed fair value estimates. We investigate the economic consequences of this regulation and find that bid-ask spreads decreased after the regulation and that O&G reserves fair value disclosures became more informative. We document similar economic consequences around the reduced discretion in mandatory O&G reserve disclosures implemented in Canada in 2003. However, the stock market reaction to key regulatory events is positive in the US, but negative in Canada likely due to additional mandatory disclosure requirements in Canada. Notwithstanding the loss of managerial discretion, our evidence is overall consistent with the notion that regulators can improve market liquidity and enhance informativeness of disclosures.
INTERNAL INDEBTEDNESS OF INTERNATIONAL COMPANIES A DECADE AFTER TAX REFORM – THE CASE OF SLOVENIA
JOVANOVIĆ, TATJANA
Category: TX = Taxation
International companies transfer profits through permanent establishments and branches, also called foreign direct investments (FDI). The fragmentation of the market, with several different accounting and tax systems, is an ideal place for tax planning, as well as using direct and indirect financial structures. One of the most common ways to protect national tax revenues from excessive debt financing is with the thin capitalization rule (TCR). The existing literature generally indicates its effectiveness in limiting internal borrowing. Slovenia implemented the thin capitalization rule in 2005, following the footsteps of many countries. The research question focuses on testing internal indebtedness of FDI operating in Slovenia in years 2003/04 and 2012/13. Contrary to expectations, internal indebtedness increased in the observed period. The paper provides valuable insight into the recent corporate income tax developments in Slovenia and presents one of the pioneering research efforts attempting to assess the impact of enacted tax regulations concerning transfer prices between foreign direct investors.
PROJECT CONTROL IN RECORD PRODUCTION DURING THE 1960S: RECORD PRODUCERS AS HYBRID ACCOUNTANTS
JUBB, DARREN
JACKSON, WILLIAM J.; PAISEY, NICHOLAS J.
Category: MA = Management Accounting
Many people would consider accounting controls to be incompatible with innovative behaviour yet recent research has found a positive relation between management control and innovation at the level of the organisation. This paper identifies record production projects during the 1960s as a potentially fruitful area for extending the fledgling accounting and popular culture research agenda. In particular this study aims to extend management control research beyond the previous preoccupation within the organisational context by considering the control exercised at the project level during the production of records. There is an emphasis on the accounting skills and techniques used by record producers aligned with their specialist knowledge of the recording industry to identify record producers as examples of ‘hybrid accountants' i.e. individuals with the skill set of the accounting but working in another unrelated occupation.
AN ANALYSIS OF DIFFERENT ACCOUNTING STANDARDS FOR DIFFERENT PURPOSES APPROACH TO GLOBAL ACCOUNTING CONVERGENCE
KAI, HISAO
Category: FR = Financial Reporting
This paper analyzes how the difference between the single accounting standards approach and the double accounting standards approach to global accounting convergence affects compensation contract ‘relevance’ and value relevance by using the standard agency model. In studying the value relevance, this paper uses stock pricing formula which subtract compensation from gross firm value. Although there is a significant body of literature related to stewardship versus valuation issue, there is no analytical study on the difference between the single accounting standards approach and the double accounting standards approach. Using the standard multi- action and multi-performance-measure agency model, this paper sheds lights on how the difference in the two approaches to global accounting convergence affects compensation contract ‘relevance’ and value relevance of both of parent-only and consolidated performance measures. This paper reports the assertion of advocates of the double accounting standards approach is not correct. If an accounting regulatory body adopts the double accounting standards approach, the regulatory body cannot separate compensation contract ‘relevance’ from non-domestic accounting standards setting activities. Also, the domestic accounting standards setting activities influence the value relevance of the non-domestic standards based consolidated performance measure even in the double accounting standards approach.
FAMILY INFLUENCE ON CORPORATE TAX PLANNING
KAISER, STEFANIE
GLAUM, MARTIN; HAUSSMANN, KATRIN
Category: GV = Accounting and Governance
Based on data for German stock-listed firms from 2005 to 2012, we examine whether family firms practise more or less tax planning than non-family firms. The German two-tier governance system provides us with the opportunity to further analyze the effects of different intensities of family involvement on the extent of corporate tax planning. We find that, overall, German family firms engage in less intensive tax planning than non-family firms. The extent of corporate tax planning decreases with the intensity of family involvement, being the lowest for family firms with family members on both the management board and the supervisory board. Furthermore, we find that family firms bearing the same name as the founding family practise less tax planning than other family firms emphasizing the importance of family’s identification with their firm. In additional analyses, we find evidence that first-generation family firms are less prone to engage in tax planning activities than next-generations family firms and that family firms engage in less intensive tax planning activities than non-family firms even when they are confronted with high market competition.
THE USE OF COST INFORMATION IN ANGLOPHONE SUBSIDIARIES IN GERMANY - EVIDENCE ON MICRO LEVEL RESISTANCE TO CORPORATE COST ACCOUNTING STANDARDS
KAJUTER, PETER
SCHRÖDER, MORITZ
Category: MA = Management Accounting
This paper reports how outright executives in 46 German subsidiaries of Anglophone MNEs resist corporate cost accounting standards. In comparison to a control group of 45 domestic German firms, we find the avoidance and defiance of corporate standards to be more common in Anglophone subsidiaries. The data, however, does not suggest that this finding is especially due to cross-national differences in Anglophone and German cost accounting (technical fit of corporate standards). Instead, we find that local executives in the Anglophone subsidiaries resist corporate standards if they perceive their subsidiary’s relationship with its parent company to be unfavourable (political fit) and if they hold negative connotations about the application of cost accounting for decision-making (cultural fit). We discuss these findings on the grounds of new institutional sociology and complementary explanations on the diffusion of management practices. By aligning the resisting usage behaviours to the achievement of cost accounting objectives, the paper concludes that Anglophone MNEs must consider whether a cost accounting standard, despite macro level adoption, finds its way into local decision-making. Moreover, we reason that the management of relationships between subsidiaries and parent companies might be an overlooked performance lever for cost-systems in Anglophone MNEs.
LABORISM AND CORPORATE EMPLOYMENT EFFICIENCY AROUND THE WORLD
KANG, TONY
JUNG, BOOCHUN; KANG, TONY; LEE, WOO JONG; ZHOU, GAOGUANG (STEPHEN)
Category: FA = Financial Analysis
We examine whether laborism, country-level labor-friendliness, hinders managers’ optimal hiring decision based on 33 countries from 1996 to 2012. We hypothesize that due to higher costs arising from hiring inflexibility in high laborism countries, laborism constrains managers’ efficient hiring decision. We consider various dimensions of laborism such as a left-leaning government, rigidity of employee protection laws, and collectivism culture. Consistent with our hypothesis, we document a negative relation between laborism and hiring efficiency. We further show that laborism increases hiring inefficiency by either over-hiring or under-hiring employees. Finally, we find that laborism reduces labor productivity and future operating performance, and hence aggravates future GDP per capita.
BOARD INDEPENDENCE AND EARNINGS CONSERVATISM: EVIDENCE FROM FINLAND
KANKAANPÄÄ, JARI
Category: GV = Accounting and Governance
This study examines the link between the board independence and asymmetric timeliness of earnings in Finnish markets. The modified models by Basu (1997) and Ball & Shivakumar (2005) are re-estimated. This study extends prior research in this area and investigates the relationship between the board compositions and asymmetric timeliness of earnings in a Nordic corporate governance regime and capital markets, which are commonly considered more bank than market based. The results show that bad news (negative returns) are reflected in earnings on a timelier basis than good news (positive returns). Moreover, I find the supporting empirical evidence that firms with better corporate governance (i.e. a higher percentage of independent directors on board) have a less conservative accounting. The findings indicate, that rather than conservatism being a complementary mechanism when governance is strong, the greater accounting conservatism is demanded by contracting parties as a substitute for inadequate monitoring when governance is weak.
IFRS, EARNINGS CONSERVATISM AND VALUE RELEVANCE: A CROSS-COUNTRY EXAMINATION
KAO, HUI SUNG
Category: FR = Financial Reporting
Earnings conservatism (C-Score) and value relevance is highly important characteristic of accounting quality and IASB or FASB establish financial accounting standard to reach these goals of accounting quality. But after using IFRS, how to affect the earnings conservatism and value relevance, exiting trade off or increasing both, is very important issue of financial accounting research. The purpose of this study use Taiwan’s switch IFRS effects and Europe countries’ seven year experience to explain the relationship between earnings conservatism and value relevance in Post-IFRS periods. First, this paper find there is a relationship between switching IFRS effects and C-Score and there are positive relationship between switching IFRS effects and value relevance. The second, after adopting IFRS, that would decrease C-Score, and enhance value relevance of statement of comprehensive income in European. Third, this study find that exist substitute effects between C-Score and value relevance. Finally, this paper discover when legal enforcement is strong, adopting IFRS could enhance C-Score and value relevance at the same time and exist complementary effects. Thus, this result suggest we should consolidate legal enforcement to enhance accounting quality under IFRS. Furthermore, this empirical result could suggest the government and regulator to practice some related and important policy to enhance the earnings conservatism and value relevance of accounting quality after adopting IFRS.
COVERAGE TERMINATION DUE TO REALLOCATION OF RESEARCH RESOURCES: EUPHEMISM FOR BLEAK BUSINESS PROSPECTS?
KARAMANOU, IRENE
CHARITOU, ANDREAS; KOPITA, ANASTASIA
Category: FA = Financial Analysis
Given the scarcity of sources of negative information in capital markets, investors rely on financial analysts for informing them on negative business prospects of the firms they cover. Instead, prior literature has documented analysts’ reluctance to voice negative opinions as well as their relative optimism for the stocks they cover. Using a unique hand collected dataset of 12419 US announcements made according to the SEC provision between 2005 and 2012 and referring to investment banks’ decision to terminate research coverage, this study constitutes the first empirical analysis of the reported reasonings behind analysts’ decision to drop coverage of a specific firm. We provide evidence that analysts are unwilling to provide explicit and comprehensive explanations in their final report. Instead, non-firm specific termination rationales referring to resource constraints or reallocation of research resources are not perceived by the market as negative news on the day of their announcement.By taking into consideration the ex post industry research activity of investment banks, we show that on average, firms that were terminated for non-credible reasons significantly underperform their peers by -3.3% 12 months after the termination announcement. Results indicate that the long run performance of terminated firms is significantly lower when the termination announcement did not have information content or was not expected, as well as when the within industry competition was lower.
THE SOLAR SHAKEOUT — TRANSNATIONAL AND DOMESTIC INTRA-INDUSTRY EFFECTS OF BANKRUPTCY ANNOUNCEMENTS IN THE PHOTOVOLTAIC INDUSTRY
KASPEREIT, THOMAS
LOPATTA, KERSTIN
Category: FA = Financial Analysis
This study investigates how bankruptcy and credit default events in the world’s solar industry affect the stock market returns of the bankrupt firms’ competitors. Based on an event study with 24 events during the period 2004-2014 and a sample of 80 listed solar firms from Germany, U.S. and China, we show that German and U.S. firms suffer from bankruptcy or credit default announcements of Chinese competitors. While German firms, whose domestic market is driven by the withdrawal of subsidies, also suffer from bankruptcies of domestic competitors, firms from the U.S. and China are not significantly affected by bankruptcy announcements of their local rivals. Chinese firms even benefit from bankruptcies or credit defaults of their U.S. competitors. Therefore, we conclude that China is the clear winner in the struggle for survival of the world’s solar firms. A cross-sectional analysis reveals that intra-industry effects are magnified by higher leverage, and that positive intra-industry effects are stronger the higher industry concentration and industry growth. Furthermore, intra-industry effects can serve as predictors in an industry-specific model of probability of default, which makes our results interesting to credit portfolio managers. Additional tests show that these results also apply to bankruptcy and credit default announcements of non-listed firms. We further find evidence that increases in government subsidies result in positive abnormal returns of domestic solar firms.
INTERNAL AUDIT IN THE MID-NINETEENTH CENTURY RAILROAD COMPANIES:COMPARING THE PRACTICES OF AMERICAN AND BRITISH RAILROAD COMPANIES
KASUKABE, MITSUNORI
AIHARA, MOTOHIRO; SAWANOBORI, CHIE
Category: AU = Auditing
This paper examines the function of internal audit in the mid-nineteenth century. It is a historical/empirical study based on annual and semiannual reports in American and British railroad companies. No previous research has studied the processes concerning the development of internal audit in detail. (1)Both American and British railroad companies had controllers, internal auditors, or employees in charge of internal audit in the 1850s. They were expected to inspect cash receipts and expenditures, or to verify the stores accounts for supporting senior management. The practice of internal audit was instituted to prevent both suspected accounting misconduct and misconduct by employees working in remote geographical locations from the head office. (2)The practice of direct management for inspecting cash receipts and expenditures was not found in British railroad companies, which might imply the cash management were more centrally managed than those in American railroad companies. (3)Contrary to the current understanding that internal auditors are positioned to assist the work of external accountants, internal auditors sought assistance from external accountants in both American and British railroad companies with internal check systems in the 1850s. External accountants could get a knowledge of the organization, management, and accounting systems. This experience worked as a training opportunity in audit practice and influenced a course of developing external audit.
AN EXPERIMENTAL INVESTIGATION OF AUDITOR LIABILITY AND CLIENT REJECTION
KATO, TATSUHIKO
Category: AU = Auditing
The aim of our paper is to examine whether the legal liability of auditors influences auditor’s client acceptance and rejection judgment as well as investor’s investment decision. An experimental investigation is conducted. Our research indicates that the strictness of legal liability does not have much impact on auditor’s judgments nor investor’s decisions. However, it suggests that the high frequency of the bad type entrepreneur should produce mutual defection between auditors and investors, that is, less frequent great effort at evaluating clients and less frequent investment. Our experimental setting makes the same auditor and investor interact over a long horizon and it may have some impact on their behaviors. It reflects the tendency towards the dominance of the small number of big audit firm and investment fund in the IPO market.
DON'T KILL THE GOOSE THAT LAYS THE GOLDEN EGGS: STRATEGIC DELAY IN PROJECT COMPLETION
KATOLNIK, SVETLANA
SCHOENDUBE, JENS ROBERT
Category: MA = Management Accounting
It's puzzling that most projects fail to complete within the predetermined timeframe given that timing considerations rank among the major goals in project management. We argue that when managers can extract private benefits from working on a project, project delay becomes optimal. We introduce a continuous-time framework for project management activities that incorporates this feature. A manager's unobserved effort cumulatively increases the project's success probability, but decreases the expected duration of the project and with it the expected ow of on-the-job benefits. A strict deadline limits incentives for effort delay, but also decreases the probability that the project will be terminated in due time. In this trade-off, the optimal deadline balances the increase in expected project value against the expected increase in project duration and costs. Because the manager does not want to "kill the golden goose" prematurely, he always prefers a stricter deadline compared to the principal. As a result, project completion is threatened by both effort provision over time and contractual agreements on time.
THE DEREGULATION OF THE SWEDISH PHARMACY SECTOR: SUCCESS OR FAILURE?
KATSIKAS, EPAMEINONDAS
ANDRIKOPOULOS, PANAGIOTIS; BERGSTROM, HANNA; KATSIKAS, EPAMEINONDAS
Category: GV = Accounting and Governance
ABSTRACT The deregulation in the Swedish pharmacy industry in 2009 resulted in two major changes that affected the pharmacy market. First, monopoly was abolished and competition was introduced. Second, the market now consists of state-owned as well as privately owned firms. This study examines the impact of the deregulation on the industry performance. We compare the industry performance and assess the change in performance of the state owned former monopolist pre and post the deregulation; as well as, that of the state-owned and privately owned actors in the pharmacy market in the period following the deregulation. The findings show that the industry became more efficient. Moreover, we observe that the new business environment negatively influenced the state-owned former monopolist as it appears to have prioritised market share at the expense of profitability. On the contrary, the state-owned former monopoly appears to be more efficient compared to the privately-owned actors during the period of the study. Hence, the result makes it difficult to confirm the view that privately-owned companies perform superior relative to state-owned companies. Taking into consideration that the data covers a relative short time of the deregulated period this study may contain more information on transitory effects than on permanent or long-term effects.
CONSISTENCY BETWEEN THE RECOGNITION OF WINDFALL, SUBJECTIVE GOODWILL, AND THE CONCEPT OF INCOME
KATSUO, YUKO
Category: FR = Financial Reporting
In July 2013, the International Accounting Standards Board (IASB) released a discussion paper in which it was revealed that many investors accord high importance to a company’s net income or losses because they evaluate the company’s financial performance based on these parameters. However, it is unclear why the concept of net income is useful for investors when making decisions. Further, because net income incorporates a realized part of expected excess profits, it is essential to know the mechanism by which excess profit (subjective goodwill) is recognized. However, the recognition process has not been made sufficiently clear, especially under conditions of uncertainty. Thus, this study first aims to clarify the recognition process of windfall and subjective goodwill in light of a previous study that highlights the difference between economic income and net income. Then, it attempts to differentiate the realization part and non-realization part of subjective goodwill, namely windfall and subjective goodwill. Finally, it clarifies the measurement structure of windfall and subjective goodwill, and suggests the lack of definitions of these basic concepts as attributable to the inconsistency between the income concept and windfall and subjective goodwill recognition.
JUST “SOME FUZZY MATH”? VALUE RELEVANCE OF DVAS
KAUMANNS, SEBASTIAN
Category: FR = Financial Reporting
This study examines the value relevance of controversial debt value adjustments due to a change in own credit risk (DVAs) for investors. Based on a sample of 135 annual reports from US banks between 2007 and 2013 and using an established return model, the paper’s findings suggest that DVAs are value relevant to investors. Specifically, the findings indicate that DVAs contain information about changes in own credit risk beyond the information provided by the remaining net income. Additional tests of quarterly DVA results reveal that the information contained in DVAs is timely. Against the background of the ongoing DVA debate and the Proposed Accounting Standards Update by the FASB, these results should be of interest.
SMALL AND LARGE TRADER REACTION TO OPTIMISM BIAS IN LANGUAGE TONE AROUND MANAGEMENT FORECAST PRESS RELEASES
KAUSAR, ASAD
BAGINSKI, STEPHEN; DEMERS, ELIZABETH; YU, JULIA
Category: FR = Financial Reporting
This study investigates the role of optimism bias in language tone of management forecast press releases by examining aggregate investor trading behavior as well as by types i.e., small and large investors. We find that the magnitude of the trading volume reaction is an increasing function of language tone in managerial earnings forecasts. These findings hold for trading volume responses of both small and large investors. We further examine the net buying behavior of small and large traders and find significantly different responses. In their response to language tone, small investors are net buyers while larger investors are net sellers around management earnings forecasts. Small trader buying behavior is positively related to the magnitude of language tone. In sharp contrast, the net buying behavior of large investors is negatively related to the magnitude of language tone. Further tests show that such differences are limited to optimistic tone. These findings suggest that optimistically biased language tone creates substantial disagreement between small and large investors. It seems that small investors interpret language tone at face value while large traders discount optimistic tone in the press releases of management earnings forecasts. Finally, we examine the role of unintentional managerial “bias” in language tone and demonstrate that language tone is significantly positively related to CEO over-optimism.
HOME AND HOST COUNTRY EFFECTS ON STRATEGIC OUTSOURCING CONTRACTS
KAWAI, TAKAHARU
DEKKER, HENRI; SAKAGUCHI, JUNYA
Category: MA = Management Accounting
Prior research finds that cross-border business relationships often involve significant risk. Yet, little is known about the contracting practices related to such relations. We examine differences in contract design and contracting costs for strategic outsourcing relations in firms’ home and host countries. To test our predictions, we collect survey data from Japanese firms with strategic outsourcing relations in Japan and from Japanese firms outsourcing activities in a host country, The Netherlands. Results show that while contract complexity does not differ between similar home and host country relations, host country contracts have a shorter duration, make more use of renewal provisions and provide less flexibility. In addition, controlling for contract design and outsourcing characteristics, we find that the cost of contracting is greater for host country relations.
SIZE MANAGEMENT BY EUROPEAN PRIVATE FIRMS TO MINIMIZE DISCLOSURE AND AUDIT COSTS
KAYA, DEVRIMI
BERNARD, DARREN; BURGSTAHLER, DAVID
Category: FR = Financial Reporting
Mandated public disclosure of financial statement information potentially subjects the firm to proprietary costs. In Europe, disclosure requirements increase at “bright-line” firm size thresholds, creating incentives to manage size to remain below the thresholds. We examine evidence of size management among small private firms, a setting where proprietary costs of disclosure should be relatively important. Audit requirements for these firms are also linked to size thresholds. In situations where the disclosure and audit thresholds coincide, we find substantial evidence that firms manage size to remain below the threshold, which suggests that combined proprietary costs and net audit costs exceed the costs associated with size management. In settings where the disclosure and audit thresholds are separate, we find 1) no significant evidence of size management to remain below the disclosure threshold, but 2) significant evidence of size management to remain below the audit threshold. This evidence suggests the costs of mandated disclosure are typically smaller than the costs of size management while net audit costs are typically larger than the costs of size management. Because net audit costs are relatively low for small private firms, the empirical evidence provides little support for the proposition that mandatory disclosure of financial statement information imposes substantial proprietary costs.
THE DISCHARGE OF ACCOUNTABILITY BY SOCIAL ENTERPRISE ORGANISATIONS: DO AS WE SAY, NOT AS WE DO
KELLY, MARTIN
CONNOLLY, CIARAN
Category: PS = Public Sector Accounting
Drawing on a theoretical accountability framework specifically developed for social enterprise organisations (SEOs), this paper examines the disclosure practices of SEOs in the United Kingdom in order to assess whether they discharge accountability in a manner consistent with their raison d’être. We conclude that while such organisations would be expected to report in line with normative stakeholder theory, they are not using the annual report as a medium to account for their social and environmental impacts to their wider stakeholders, and that the annual report is being used as a legitimising device to ensure that legal obligations are complied with.
THE DECISION TO OUTSOURCE RISK MANAGEMENT SERVICES
KENT, PAMELA
CHRISTENSEN, JACQUELINE
Category: MA = Management Accounting
We apply transaction cost economics to identify factors influencing companies’ decision to internally generate or outsource risk management services. Assessing and evaluating an entity’s risk management system is fundamental to the audit process and we use a unique sample combining publicly available data with private information supplied by 281 Australian listed companies. We find that expenditure on research and development, environmental uncertainty, behavioural uncertainty and transaction frequency are associated with less outsourcing of risk management services. Uncertainty due to environmental diversity is associated with more outsourcing of risk management services. Companies that outsource risk management services also have lower overseas sales, lower staff turnover and provide more specialised training and longer contracts for risk management suppliers.
INCENTIVES FOR PRIOR PERIOD ERROR CORRECTIONS UNDER IAS 8
KENT, RICHARD
CARROL, AMANDA; KENT, PAMELA
Category: FR = Financial Reporting
International Financial Reporting Standard IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) requires prior period errors in the income statement to be amended in the first statement of changes in equity statement, following the detection of the error (International Accounting Standards Board, 2009). Hence, the impact of any prior period errors is shown through retained earnings rather than being included in the current period income statement. This study examines whether Australian companies use IAS 8 to engage in opportunistic reporting practices. Prior research has shown that certain variables predict the presence of earnings management and this study examines whether these variables have an association with error adjustments under IAS 8. The results show a positive association between IAS 8 error adjustments and the ratio of Chief Executive Officer (CEO) cash bonus to salary, poor performance and change of CEO. The results indicate that companies are using IAS 8 as a method of earnings management.
BOARD INDEPENDENCE, AUDIT QUALITY AND EARNINGS MANAGEMENT: EVIDENCE FROM EGYPT
KHALIL, MOHAMED
OZKAN, AYDIN
Category: GV = Accounting and Governance
Using a unique data set for Egyptian firms, we investigate the relationship between board independence, audit quality and earnings management. We test whether firm-level corporate governance provisions matter in an emerging market setting characterised by weak legal enforcement and inadequate external discipline by the market for corporate control. Our results cast doubt on the notion that a higher ratio of non-executive members is associated with lower earnings management. We find that the effect of board independence on earnings management practices is contingent on the levels of ownership held by executive directors and large shareholders as well as the composition of audit committee composed. In addition, the results are consistent with the view that high quality auditors are effective in reducing earnings management.
DO IFRS BASED EARNINGS ANNOUNCEMENTS HAVE MORE INFORMATION CONTENT THAN CANADIAN GAAP BASED EARNINGS ANNOUNCEMENTS?
KHAN, SHAHID
ANDERSON, MARK; WARSAME, HUSSEIN; WRIGHT, MICHAEL
Category: FR = Financial Reporting
This paper investigates whether the information content of earnings announcements increased for Canadian Venture Exchange (TSXV) firms and Toronto Stock Exchange (TSX) firms following mandatory adoption of international financial reporting standards (IFRS) in Canada. A priori, it may be argued that information content would increase for both TSXV and TSX firms if IFRS allows greater flexibility to provide relevant information. However, the additional flexibility might reduce reliability in the information of the earnings announcements. The TSXV firms trade in an environment characterized by a higher percentage of retail traders vs. institutional traders and lower following by analysts and the financial press than the generally larger, more established TSX firms. Thus, the tradeoff between relevance and reliability of accounting standards may have different implications for the TSXV firms vs. the TSX firms. Our findings indicate that information content, measured by 1) abnormal stock return volatility and 2) abnormal trading volume during the earnings announcements decreased following the adoption of IFRS for TSXV firms but did not change for TSX firms. A long widow test indicates that the earnings/returns relationship did not change appreciably in the post IFRS period for either TSXV or TSX firms. Together, our results suggest that investors in TSXV firms rely less on the IFRS earnings announcements than they did on the Canadian GAAP based earnings announcements.
CREDITOR CONTROL RIGHTS AND CORPORATE TAX AVOIDANCE
KHURANA, INDER
WEI, WANG
Category: TX = Taxation
This paper is the first to study the effect of debt covenant violations (state-contingent allocation of control rights) on corporate tax avoidance. Using a regression discontinuity design, we find that firms avoid income taxes more after covenant violations. Moreover this effect is more pronounced for violators experiencing financial constraints, violators facing low Internal Revenue Service (IRS) audit risk, and violators exhibiting more information opacity. These results are consistent with lenders placing more value on tax avoidance when the marginal benefits (costs) of tax avoidance are higher (lower).
APPROACHES TO VALIDATION AND EVALUATION IN QUALITATIVE STUDIES OF MANAGEMENT ACCOUNTING
KIHN, LILI-ANNE
IHANTOLA, EEVA-MARI
Category: MA = Management Accounting
This study contributes to the limited body of knowledge on the reporting of management accounting field research. The objective of this study is to further investigate the ways researchers have reported the use of evaluation criteria in qualitative management accounting studies. In so doing, we aim to provide new knowledge about the different evaluation approaches and criteria used in management accounting studies, and about whether the approaches adopted are associated with certain paradigmatic affiliations. Our study hence combines three approaches using either traditional, alternative, or none of these criteria; and the main paradigmatic choices to improve the understanding of the validation and evaluation of qualitative research. It examines these questions empirically using a recent sample of peer-reviewed articles published in some of the top accounting journals over a 7-year period (2006-2012). The findings of this study specify and refine Eriksson and Kovalainen’s (2008) classification system.
RELATIVE PERFORMANCE EVALUATION WITHIN BUSINESS GROUPS :EVIDENCE FROM KOREA
KIM, EUNG GIL
HEO, JINSUK; KIM, JINBAE
Category: MA = Management Accounting
This paper investigates whether firms belonging to Korean business groups evaluate their CEOs relative to performances of affiliated firms in the same business groups. Because firms in Korean business groups are interdependent in terms of strategies, business transactions and corporate culture, those firms are exposed to a common risk. So it is hypothesized that firms in business groups will use performance of affiliated firms to filter out a common risk. Using compensation data of 424 firms in Korean business groups, we find that affiliated firms are more likely to use RPE compared to non-affiliated firms and that firms in business groups evaluate their CEOs relative to performances of affiliated firms. In case of accounting measures, performances of affiliated firms affect CEO compensation while performance of firms in the same industry does not. These results imply that firms in business groups share common risk even though they are different in size and are operating in diverse industries, and that firms use performances of affiliated firms to improve CEO compensation contracts.
ACCOUNTABILITY PROCESSES IN BOARDROOMS: A CONCEPTUAL MODEL OF MANAGER-NON-EXECUTIVE DIRECTOR INFORMATION ASYMMETRY
KIRWAN, COLLETTE
BRENNAN, NIAMH M.; REDMOND, JOHN
Category: GV = Accounting and Governance
Understanding the influence of information/knowledge exchange and sharing between managers and non-executive directors is important in assessing the dynamic processes of accountability in boardrooms. By analysing information/knowledge at multiple levels, invoking the literature on implicit/tacit and explicit information/knowledge, we show that information asymmetry is a necessary condition for effective boards. Using Nonaka’s knowledge conversion framework, we introduce a conceptual model of manager-non-executive director information asymmetry as an outcome of our interpretation of information/knowledge sharing processes amongst board members. Our analysis of information/knowledge exchange, sharing and creation and the resultant conceptual model are based on: (i) manager-non-executive director information/knowledge, (ii) management-board information/knowledge and (iii) board dynamics and reciprocal processes converting implicit/tacit into explicit information/knowledge. Our paper provides new insights into the dynamics of information/knowledge exchange, sharing and creation between managers and non-executive directors (individual level)/between management and boards (group level). We characterise this as a two-way process, back-and-forth between managers/executive directors and non-executive directors. The importance of relative/experienced “ignorance” of non-executive directors is revealed, which we term the “information asymmetry paradox”.
A LITTLE LESS WAITING, A LITTLE MORE ACTION? INHERITANCE TAX PLANNING UNDER UNCERTAINTY
KITTL, MAXIMILIAN
DILLER, MARKUS
Category: TX = Taxation
To reduce the inevitable tax burden resulting from a bequest, taxpayers can make use of preceding inter vivos transfers. This transfer procedure is naturally characterized by uncertainty concerning the donor’s remaining lifespan. Starting with the well-known ascending allocation structure under certainty, we analytically analyze the impact of this kind of uncertainty on the pattern of the optimal wealth transfer process. We find evidence that the relevance of the initial transfer is significantly increased if the inherent uncertainty is considered. As a consequence, replacing the known ascending order of the transfer amounts by a U-shaped structure could be a reasonable strategy. This is especially true for donors of an advanced age.
DESIGN AND USE OF COST ACCOUNTING MODELS IN NORDIC UNIVERSITY HOSPITALS
KJOLLESDAL, KARL SAEBJORN
Category: MA = Management Accounting
Van Helden (2005) has reported that issues related to costing and cost management have not been much investigated by accounting researchers when exploring the public sector. A review of the accounting literature supports this finding and indicated that researchers have discussed very little about the actual design and use of cost accounting systems in hospitals (Kjollesdal, 2014). This represents a research problem. The research question in this study is: What is the actual design and use of cost accounting systems in major Nordic hospitals? The theoretical frame of reference of the study focuses on the link between the cost accounting data and the management control system in a hospital (Anthony & Young, 2003; Horngren et.al., 2009; Kjollesdal, 2014). A comparative case study of Nordic university hospitals was carried out. The first conclusion is that there is diversity in how the hospitals design their cost accounting models. The second conclusion is that the different configurations seem to form different “packages” with distinctive characteristics. On the one extreme, rather simple systems are designed as more mechanistic and arbitrary allocation models. In other cases more advanced tools are used for planning, allocating resources and to measure performance. The third conclusion is that we have observed on a more speculative basis a link between the design and use of systems and the funding model. We have seen the importance of funding and governance and their impact on the design and use of management control systems. In a healthcare system-context this can be formulated as a research question: What is the relationship between the model for allocating resources to the hospitals and a given hospitals’ mix of cost accounting models?
CAUSAL EFFECTS OF QUARTERLY REPORTING – AN ANALYSIS OF BENEFITS AND COSTS
KLASSMANN, FLORIAN
KAJÜTER, PETER; NIENHAUS, MARTIN
Category: FR = Financial Reporting
This paper exploits a natural experiment to analyze the causal effects of mandatory quarterly reporting in Singapore: While firms with a market capitalization above S$75 million had to publish quarterly financial statements starting in 2003, firms with a market capitalization below this threshold were excluded from the regulation. By isolating the causal effect of quarterly reporting using regression discontinuity analysis, we provide evidence on the benefits and costs of mandatory quarterly reporting. We find that mandatory quarterly reporting does not reduce information asymmetry, but causes firms to deviate from their prior investment strategy. Important implications for regulators are discussed.
INTEGRATION OF SUSTAINABILITY REPORTING AND PERFORMANCE MEASUREMENT SYSTEM IN SMES: A LITERATURE REVIEW AND RESEARCH AGENDA
KLOVIENE, LINA
SPEZIALE, MARIA TERESA
Category: SE = Social and Environmental Accounting
Small and medium-sized enterprises (SMEs) are important to maintain strong economic growth. However, how to sustain their performance in the long term is a big challenge. As for today’s SMEs is very important to manage their social and environmental responsibility, sustainability reporting is common practice to respond to expectations from the stakeholders. For SME, the adoption of advanced managerial practices in the main business processes is a key to the successful improvement of their business performance and competitiveness. According to position of SME, implementation of new theoretical performance measurement methods passes over with rational usage of internal resources. This paper aimed at providing a systematic literature review of scientific works on the performance measurement system (PMS) and sustainability reporting (SR) in small and medium enterprises (SMEs), applying content analysis, in order to highlight literature gaps and contribute at mapping, consolidating and developing a research agenda for an integration of SR and PMS in SMEs. The literature review shows there is a clear need to stimulate the development of PMS in SMEs by expanding its functions, adapting structure suitable for social and environmental reporting.
FINANCIAL EXPERT RESPONSES TO NOTE DISCLOSURE PRACITCES UNDER IFRS REQUIREMENTS
KO, WAN SUK
Category: FR = Financial Reporting
IFRS’s (International Financial Reporting Standards) requirements for extensive note disclosure have been recognized as possibly posing a significant challenge not only for the preparers but also for the auditors and users of the financial statements prepared according to IFRS. Specifically, concerns have been raised as to whether these requirements are producing disclosure overload. This paper investigates the views of financial experts (users, preparers and auditors of financial statements) on whether firms properly identify and understand the large amount of the note disclosure contents and provide information in the relevant form and substance. It examines note disclosure practices as reported in the K-IFRS financial statements (prepared according to IFRS adopted in Korea) and conducts a survey of financial experts’ opinions about sufficiency and usefulness of the note disclosure in the K-IFRS financial statements. Then, it analyses the survey results and provide suggestions for future improvement of the note disclosure.
INTERNAL AUDIT FUNCTION QUALITY AND THE FINANCIAL REPORTING PROCESS – RESULTS OF A SURVEY ON GERMAN LISTED COMPANIES
KOCH, SEBASTIAN
GROS, MARIUS; WALLEK, CHRISTOPH
Category: AU = Auditing
The internal audit function (IAF) is considered to be an essential element of effective corporate governance and to play an important role within the external financial reporting process. However, little research has focused on this topic yet. Most prior studies are conducted for the US setting and regularly rely on SOX material weakness disclosure requirements as a proxy for IAF quality. In this study, we use survey data to measure IAF quality more directly and examine the association of several IAF quality characteristics and a self-developed IAF quality score with accounting quality, audit delay and audit fees. The applied German setting deviates from the commonly applied US-setting as it is characterized by a two-tier board system. Therefore the prerequisites of the serving-two-masters-problem differ. Furthermore in Germany there is no obligation to report on material weaknesses of the IAF. However, our results are in line with prior research and indicate that a high quality IAF is able to constrain earnings management, ensure a more efficient audit and to reduce audit fees and thus may contribute to an enhanced financial reporting process.
MITIGATING THE DILUTION EFFECT OF NON-DIAGNOSTIC INFORMATION ON AUDITORS’ JUDGMENTS USING A FREQUENCY RESPONSE MODE
KOCHETOVA-KOZLOSKI, NATALIA
EILIFSEN, AASMUND ; MESSIER, JR., WILLIAM F.
Category: AU = Auditing
This paper investigates the potential of using a frequency response mode to reduce the dilution effect of non-diagnostic evidence on auditors’ fraud risk assessments. We test one hypothesis and examine a research question related to the dilution effect where response mode (frequency vs. probability) and type of non-diagnostic information (neutral vs. favorable vs. unfavorable) are manipulated in a between–subjects experiment with professional auditors as participants. Results of the hypothesis test show that auditors’ fraud risk judgments demonstrate a significantly lower dilution effect when they evaluate diagnostic and non-diagnostic evidence using a frequency response mode, as compared to the probability response mode. This effect is most pronounced when auditors are provided with favorable non-diagnostic evidence.
ROLE, STRUCTURE, AND DETERMINANTS OF DEBT COVENANTS: EVIDENCE FROM JAPAN
KOCHIYAMA, TAKUMA
NAKAMURA, RYOSUKE
Category: FR = Financial Reporting
We examine types of financial covenants and how they are used in Japanese loan markets. Since previous literature on covenants focused on US firms, little is known about financial covenants in the so-called bank-oriented countries. We use a hand-collected dataset to explore the (1) types of financial covenants and (2) determinants of the use and strictness of financial covenants. Our binominal regression analysis shows that financial factors such as profitability, leverage, and interest rates affect the use of financial covenants. Most interestingly, we find that factors specific to Japan, dependence on the main bank and foreign shareholder ownership, also affect the use of financial covenants. Furthermore, we present that the borrower’s leverage is a key determinant for the strictness of financial covenants.
PROFESSIONAL SKEPTICISM AND BELIEF REVISION IN AUDITING
KOEHLER, ANNETTE
KOCH, CHRISTOPHER; YANKOVA, KRISTINA
Category: AU = Auditing
In this study we experimentally investigate whether and how professional skepticism influences auditors’ information processing. In an experiment with experienced auditors involving a going concern task, we manipulate the order of information presentation and measure participants’ trait professional skepticism. We find that more skeptical auditors are less prone to an overweighting of the most recently presented piece of evidence. In addition, we contribute to the literature by investigating how professional skepticism and its components influence the different steps in the processing of new information. Our results provide support for Hurtt’s (2010) notion of trait pro-fessional skepticism as a complex, multi-dimensional, and neutral construct.
THE EARNINGS MANAGEMENT EFFECTS OF PROXIMITY TO POLITICAL POWER
KOENIGSGRUBER, ROLAND
GROß, CHRISTIAN; PANTZALIS, CHRISTOS; PEROTTI, PIETRO
Category: FR = Financial Reporting
In this study, we identify a new channel through which politics can affect financial reporting: policy risk-induced information uncertainty. We argue that an increase in policy risk has a detrimental effect on the opaqueness of firms’ information environment. This facilitates opportunistic earnings management by corporate managers. Results from political science suggest that partisan gridlock impedes policy changes, lowering policy risk. We therefore use a measure of the alignment along party lines between politicians elected at the state level and the federally elected President as our measure of policy risk. We find a significant positive association between the political alignment of firms’ home states and their level of absolute discretionary accruals. Consistent with the idea that firms engage in corporate political activities (lobbying and financial contributions) to hedge against policy risk, our results only hold for firms not engaging in such activities. Further investigations show that high levels of discretionary accruals of politically aligned firms are largely uninformative with respect to future earnings. This is in line with our interpretation that earnings management by firms from politically aligned states is indeed driven by managements’ opportunism.
THE EFFECT OF PERFORMANCE MEASUREMENT SYSTEMS USED BY HEADQUARTERS OF GLOBAL ORGANIZATIONS ON THE SUBSIDIARY PERFORMANCE
KONDO, TAKAHITO
NISHII, TAKESHI
Category: MA = Management Accounting
This study examines the effect of a performance measurement system (PMS) used by the headquarters of a global organization on the foreign subsidiary’s performance. In the midst of the current competition, global organizations are often faced with a tension resulted from pursuing centralization and decentralization. In such organizations, the headquarters allows the subsidiaries to deal with local affairs autonomously, which requires a certain degree of decentralization. At the same time, the headquarters sometimes intervenes in the affairs of a subsidiary to ensure global efficiency, which requires a certain degree of centralization. It is often said that global organizations need to balance such tension to acquire global competitive advantage. This study supposes that PMS plays important roles in combining centralization with decentralization by improving decisions of headquarters and foreign subsidiary. We collected data through questionnaires emailed to 5,410 headquarters' managers of global organizations. The results from the structural equation modeling suggest that PMS used by headquarters has positive effects on the subsidiary’s performance. Furthermore, we find the moderating effect of the type of goods sold by a subsidiary on the relation between PMS and headquarters’ information gathering.
TO BE OR NOT TO BE IN THE SAMPLE? ON THE CONSEQUENCES OF USING MANIPULATION CHECKS IN EXPERIMENTAL ACCOUNTING RESEARCH
KOTZIAN, PETER
HOOS, FLORIAN; STÖBER, THOMAS; WEISSENBERGER, BARBARA E.
Category: MA = Management Accounting
Manipulation checks are used to improve the quality of experimental evidence by making sure that only those participants who are tested as having successfully received the experimental treatment are included in the analysis. While standard experimental designs do not call for such a check, they are quasi-obligatory in many disciplines and also in accounting research. In our paper, we discuss the consequences of using manipulation checks resulting in the exclusion of participants. Using an analytical model, we show that this may translate into a bias towards more significant differences between the experimental and control groups, thereby jeopardizing results to be mere artifacts (alpha error). We also provide a simulation indicating that such biases can occur even when only few participants have been excluded. We contribute to the literature by providing an in-depth discussion and analysis of the consequences of using manipulation checks for experimental accounting research. Based on our discussion, we develop recommendations as to how manipulation checks can be used to gain further insights into mechanisms that drove the observed results of an experimental study. In particular, we recommend that data obtained from manipulation checks should be used as an explanatory variable, not as a justification to exclude participants from the final sample.
QUALITATIVE CORPORATE DISCLOSURE AND CREDIT ANALYSTS' SOFT RATING ADJUSTMENTS
KRAFT, PEPA
BOZANIC, ZAHN
Category: FR = Financial Reporting
Credit ratings are determined by both quantitative and qualitative inputs. While academics have extensively studied quantitative models of credit risk analysis, far less is known about "qualitative" adjustments to credit analysts' models' outputs ("soft adjustments"). We examine whether and how credit analysts employ borrowers' credit risk relevant qualitative disclosure in making their credit risk assessments. We provide evidence which suggests that credit analysts impound the information conveyed by borrowers' qualitative disclosure in their credit ratings. Our results further indicate that the "soft", but not "hard", adjustments are the mechanism by which the information in borrowers' qualitative disclosure is impounded into the publicly reported rating. We next examine whether the efforts analysts expend to extract credit risk relevant information from qualitative disclosure affects the informativeness of credit ratings. We find that credit rating downgrades that involve soft adjustments or greater amounts of qualitative disclosure are more informative than those that do not; however, the increase in informativeness diminishes after the repeal of the Regulation Fair Disclosure exemption for credit rating agencies.
E-LEARNING IN ACCOUNTING EDUCATION. WHAT DETERMINES STUDENTS’ SATISFACTION?
KRASODOMSKA, JOANNA
GRABINSKI, KONRAD; KEDZIOR, MARCIN
Category: ED = Accounting Education
Nowadays, universities increasingly exploit the potential of the internet implementing e-learning as a key feature of modern education. The paper examines the impact of applying e-learning in academic accounting education. It is focused on the quality, benefits and drawbacks of e-learning courses. On the basis of literature review and previously performed empirical studies we have developed four research hypotheses. In order to verify them, we have conducted a survey among students at Cracow University of Economics in Poland. The sample consists of 713 students who participated in blended learning courses on International Accounting, Bank Accounting and Controlling and Accounting Computer Systems. The results of the survey have shown that e-learning is positively perceived by students. Over half of them stated that e-classes did not differ from the traditional ones in terms of difficulty. The most important benefits of e-classes were: the possibility of learning at any place and time, saving time and lower costs of education. The most serious drawbacks included the impossibility to ask questions on a regular basis, the lack of direct contact with the teacher and the need for independent education organization. The regression analysis has provided evidence that students’ attitude towards e-classes is the most important determinant of their satisfaction with the course after its completion.
ENTERPRISE RISK MANAGEMENT AND THE FINANCIAL REPORTING PROCESS: THE EXPERIENCES OF AUDIT COMMITTEE MEMBERS, CFOS, AND EXTERNAL AUDITORS
KRISHNAMOORTHY, GANESH
COHEN, JEFFREY; WRIGHT, ARNOLD
Category: GV = Accounting and Governance
The financial crisis has brought to the forefront the need for companies to effectively manage their risks. One approach that has gained prominence is enterprise risk management (ERM), but little is known about the link between ERM and the financial reporting process. This link is important, because it is imperative that the financial reporting process adequately depict the performance and associated risks of a company. Additionally, ERM affects the risks of misstatement and potential lack of adequate risk disclosures, which impact audit planning. Accordingly, the objective of this study is to examine how audit partners, CFOs, and audit committee (AC) members (“the governance triad”) view ERM as it relates to the roles of governance parties, financial reporting quality, internal controls, and external auditing. To address these issues, we conduct semi-structured interviews of experienced individuals from 11 public companies that form 11 governance triads. Results suggest that across all three types of participants, respondents emphasize risk assessment/identification and operational efficiency/effectiveness when defining ERM. However, there is substantial variation in responses which suggests that there is still lack of consensus among key players on what constitutes ERM. Interestingly, only a minority of auditors mention strategy or strategic risks in their definition of ERM. To the extent this is reflective of auditors not fully leveraging the strategic elements of ERM, auditors may be underutilizing ERM in the audit process. This concern is further corroborated in a number of comments made by CFOs and AC. Moreover, participants perceive that the audit committee and the CFO play a large role with ERM and auditors are perceived to play a lesser role. Additional analysis of the responses indicates that while participants view ERM and its effect upon the financial reporting process from both an agency and resource dependence perspective, there is a greater focus on the agency framework. In all, resource dependence may be under-emphasized by all members, but especially by CFOs and auditors. Implications for practice and research are discussed.
ACCOUNTING COMPARABILITY IN INSTITUTIONAL INVESTORS' PORTFOLIOS
KROECHERT, SARAH
Category: FR = Financial Reporting
This study investigates accounting comparability in portfolios of institutional investors. I argue that institutions express accounting preferences by means of investment selection and (in)direct influence and that firms incorporate these preferences into their decisions. Within portfolios, this mapping of preferences should then result in similar accounting information. I derive a firm-level comparability measure based on industries in line with DeFranco et al. (2011) and extend the concept to a firm-level comparability measure based on portfolios. The comparison of both yields significant comparability effects on the portfolio level that are robust to various alternative specifications. In support of the notion that institutional investors induce similarity in accounting outcomes, portfolio-based comparability is higher for quasi-indexers, the institutional type usually characterized by an actual interest in accounting information, and increasing in the level of ownership. In a second set of tests, I provide evidence consistent with a mapping of institutional investors' preferences into four particular accounting choices, ranging from annual report readability to earnings attributes. The impact of institutional type and the level of ownership on the strength of the mapping varies however greatly across accounting choices.
SIGNALING IN DEBT CONTRACTING VIA VOLUNTARY VERIFICATION OF TIMELY INFORMATION
KRONENBERGER, SANDRA KATARINA
KRONENBERGER, SEBASTIAN
Category: AU = Auditing
The importance of timely and reliable information is increasing in the focus of lenders, especially when they make investment decisions during the financial year, far apart from the firm’s annual report. If firms want to get better financing conditions, they need to provide this information in order to fulfil the lenders’ needs. We are interested in the conditions under which firms choose to signal their private information by hiring the auditor for an additional task in the form of a review of interim financial statements (verified disclosure signaling). In order to point out the benefits of this structure we deploy a setting only with annual audits as a benchmark case and a hypothetical setting where the auditor overpays the annual audit fees (pure signaling). We find that a firm with good underlying economic earnings only signals if the beliefs about the market are pessimistic and it uses verified disclosure signaling over pure signaling whenever the review costs are low enough. If the interim review effort is cheap, the auditor can earn a rent from the review even though he operates in a perfectly competitive market. Only for very low review costs it is beneficial for all firms to hire an auditor for the review, which economically justifies a one-size-fits-all regulation for mandatory reviews. These insights are relevant for regulators in the discussion whether to adopt mandatory reviews. We also derive valuable insights for empiricists about the structure of audit fees.
BALANCING CONTROL STRUCTURES: AN EMPIRICAL ANALYSIS OF THE LEVERS OF CONTROL FRAMEWORK
KRUIS, ANNE-MARIE
SPEKLÉ, ROLAND; WIDENER, SALLY
Category: MA = Management Accounting
The impact of the Levers of Control (LOC) framework on the accounting literature is undeniably large. The framework, however, has also been criticized for being vague and ambiguous. One of the central, but unclear, concepts in the LOC framework is the notion of balance. That is, the framework holds that control systems must be in balance in order to manage competing tensions such as that found between predictable goal achievement on the one hand and innovation on the other. The goal of our study is to examine the concept of balance and to provide empirically informed insights on different balancing arrangements that exist in a cross-section of business units. We develop a survey and administer it in person to a convenience sample of business unit managers. Using responses from 217 managers, cluster analysis reveals a stable solution with four distinct patterns of balance, which we interpret using configurational thinking. We label the clusters strategic vigilance, strategic exploitation, strategic responsiveness, and strategic stability respectively, and examine organizational and contextual factors that validate and help explain the observed patterns of balance. By identifying empirical manifestations of balance, our study sheds light on one of the key concepts in the LOC framework, providing an empirically informed starting point for future theoretical analysis and interpretation.
FRS 30 HERITAGE ASSETS IN THE UNITED KINGDOM - SUCCESS OR FAILURE?
KRUPOVA, LENKA
Category: PS = Public Sector Accounting
In June 2009, the new standard FRS 30 Heritage Assets was issued in the United Kingdom. The standard has been effective from April 2010. The objectives of this paper are to describe general problems related to the recognition of heritage assets in the Balance sheets of museums, galleries and similar entities; to evaluate the development of UK accounting standard FRS 30 Heritage Assets and to compare this with various accounting practices used for heritage assets in selected countries (UK, USA, Australia and Canada) and in the International Public Sector Accounting Standards (IPSAS). The crux of the paper lays in research focused on the impact of FRS 30 Heritage Assets on a sample of financial statements of British museums and galleries in the accounting period 2011/2010 when the standard came in force. Findings have shown that there was practically no impact of adoption of FRS 30 Heritage Assets on British museums and galleries as most of FRS 30’s requirements are impracticable for them to meet. This fact leads the author to the conclusion that probably the best approach to accounting for heritage assets in the UK would be the non-capitalisation approach.
STOCK PRICE ASSOCIATIONS WITH EXPECTED AND UNEXPECTED EARNINGS
KUBATA, ADRIAN
SHEVLIN, TERRY; WATRIN, CHRISTOPH
Category: FA = Financial Analysis
Prior research fails to explain why theoretically predicted magnitudes of earnings response coefficients (ERCs) and price-to-earnings ratios (P/E ratios) differ from their empirical counterparts. Therefore, we (re)investigate the associations between earnings innovations, persistence of expected earnings, investors’ expectation revisions, and the magnitudes of P/E ratios and ERCs. In doing so, we compare the traditional price model with our extended price model, which is based on a new model of investors’ expectation formation incorporating the following assumptions: (i) expected earnings are less than purely persistent; (ii) only the value-relevant fraction of an earnings innovation triggers future expectation revisions; (iii) expected earnings’ time series is nonstationary but integrated of order 1; and (iv) high persistence in expected earnings requires a low level of expectation revisions. We show on a theoretical level that under these assumptions: (a) P/E ratios and ERCs differ in their magnitudes and it thus becomes necessary to distinguish between these two constructs in modelling price-earnings relations; (b) ERCs are negatively associated with the persistence of expected earnings, contradicting prior results; (c) expected magnitudes of P/E ratios (ERCs) range between 10-60 (0-7). The empirical results are consistent with our predictions, closing the gap between theoretically predicted and empirically estimated P/E ratio and ERC magnitudes.
DOES THE STANDARD DEDUCTION INFLUENCE TAXPAYERS' BEHAVIOUR REGARDING INCOME-RELATED DEDUCTIONS? – EVIDENCE FROM GERMANY
KÜHNE, DANIELA
DILLER, MARKUS
Category: TX = Taxation
This paper empirically assesses tax planning activities in the area of employment income using German wage and income tax return data. For employees, work-related deductions provide one of the few opportunities to reduce their tax burden. We analyse the level and composition of income-related deductions of taxpayers in receipt of labour income in dependence of their personal income situation and the existence of a professional tax preparer. In particular, we address the question whether the existence of a standard deduction leads to a change in behaviour of employees. In order to identify tax planning activities, we differentiate between invariable income-related deductions, arising from the predetermined working situation of the taxpayers and additional deductions that can be varied to a certain extent according to the taxpayers’ attempt to exceed the standard deduction. We find that taxpayers behave in a counterintuitive manner, generating higher income-related deductions when having low invariable work-related costs. In addition, we find a positive relationship between additional deductions and the existence of a professional tax preparer as well as between additional deductions and the existence of other types of income.
AUDIT COMMITTEES AND FINANCIAL REPORTING QUALITY IN SINGAPORE
KUSNADI, YUANTO
LEONG, KWONG SIN; SUWARDY, THEMIN; WANG, JIWEI
Category: GV = Accounting and Governance
We examine three characteristics (independence, expertise, and overlapping membership) of audit committees and their impact on the financial reporting quality for Singapore listed companies. The main finding is that financial reporting quality will not improve if audit committees are made up of accounting experts only. Instead, it is beneficial for audit committees to have mixed expertise in accounting, finance and/or supervisory in order to provide better financial reporting quality, which extends the findings of Dhaliwal et al. (2010) for the U.S. firms. In addition, we do not find evidence that independence of audit committee members and overlapping membership in audit committee and remuneration committee are statistically associated with financial reporting quality. Overall, the results have policy implications on improving corporate governance effectiveness in terms of financial reporting quality.
IN SEARCH OF EARLY TRIAL BALANCES AND EARLY FINANCIAL STATEMENTS (BY THE EXAMPLE OF FRANCESCO DATINI’S COMPANIES IN PISA AND BARCELONA)
KUTER, MIKHAIL
GURSKAYA, MARINA
Category: ED = Accounting Education
Luca Pacioli was the first to describe and give names to “bilancio del libro” and “summa summarium” balances, although their practical application has already had more than a century history. As for “bilancio del libro”, neither its name nor function nor formation procedure ever raised doubts among the subsequent researchers. The obscure interpretation of “summa summarium” in the treatise as well as the lack of the example allowing to accept the balance unambiguously, led to a varied perception of the treatise text. The paper presents the results of many years’ research into the archives of Francesco Datini’s companies, in the course of which probably the earliest in application the account-balance of “bilancio del libro” type (1394) was found, about its existence wrote neither Federigo Melis nor Raymond de Roover, who worked with these archival materials and paid their attention only to “summa summarium” balance. The situation when in one accounting cycle a company simultaneously formed both balances presents a particular interest: “bilancio del libro” served as a trial balance and “summa summarium” was used as a balance statements. In addition, the fact of constructing a periodic interim balance statements between the dates of opening and the nominal (legal) closing of the company is established. In this paper the author's method of research, i.e. logical and analytical modeling of medieval account complexes has been applied.
INVESTIGATION OF FACTORS INFLUENCING COST SYSTEM FUNCTIONALITY USING MACHINE LEARNING
KUZEY, CEMIL
DELEN, DURSUN; UYAR, ALI
Category: MA = Management Accounting
The purpose of this study is to investigate the factors that influence cost system functionality (CSF) by using the machine learning system. The originality of the paper stems from both the topic examined and the research methodology used. CSF functionality is a critical attribute of business organizations since it provides data and cost information on which many critical managerial decisions are based. Moreover, we utilized a novel approach named the machine learning technique to carry out the analyses. The results indicated that some variables influence CSF more heavily than others. Firstly, we can say that utilization of management accounting practices require a functional cost system which supports those applications with comprehensive cost data. Secondly, we observed that information technology (IT) plays very important role in CSF. This implies that to implement a functional cost system, there needs to be a functional IT system feeding it with a strong database. Thirdly, cost data usage for various managerial decision-making purposes also impacts CSF.
THE EFFECT OF OWNERSHIP TYPES ON HOSPITAL EFFICIENCY
KWON, CHAD
ZHOU, HAIYAN (HELEN)
Category: PS = Public Sector Accounting
Regulators, taxpayers, and care-receivers have much interest in the best treatments for their beloved ones demanding services at hospitals. Due to the recent Veterans Administration scandal in which management manipulated patient waiting periods to obtain performance based compensations, the general public calls for a nationwide investigation of the efficiency of hospital in using federal- and state-level funding. Current literature on hospital efficiency lacks composite efficiency analysis of US hospitals for their technical, profit and cost efficiency. In this study, we propose that government-operating hospitals show lower inefficiency than non-profits, and the latter shows lower inefficiency than for-profits. Using an econometric approach to measure the degrees of inefficiency types among various ownership-based hospitals, we present empirical evidence that greater financial oversight by outside organizations and the economies of scale for hospital operations leads to lower inefficiency types at these facilities.
VALUE RELEVANCE OF ENVIRONMENTAL PROVISIONS PRE AND POST IFRS
LABELLE, REAL
WEGENER, MATTHEW
Category: SE = Social and Environmental Accounting
This study examines and compares the value relevance of the environmental provisions recorded under the former Canadian GAAP and under the IFRS accounting frameworks. Our results indicate that the environmental provisions recorded under either framework only act as liabilities for large oil and gas firms that release stand-alone sustainability reports. For other firms in the oil and gas industry, and the mining industry, the liability nature of these environmental provisions appears to be discounted by the market. Furthermore, for firms in the oil and gas industry that do not have stand-alone CSR reports as part of their communication strategy, provisions appear to be interpreted by the market as a costly signal about future growth. Instead of downwardly affecting market values, this information is associated with higher market values. In terms of the transition to the IFRS, we find that, while the IFRS provisions are significantly higher than under former GAAP, they do not improve value relevance for investors, as measured by their correlation with market values after IFRS adoption. Taken all together, we conclude that the transition to IFRS has resulted in the recording of environmental provisions that are not more informative than those recorded under Section 3110 of Canadian GAAP, but both standards are less informative than the original Canadian requirements under Capital Assets section 3060.39, which was shown to be a value relevant proxy for unbooked liabilities (Li and McConomy, 1999; Bewley, 2005).
PROTECTING RIGHTS AND THEIR IMPACT ON THE NCI REPORTING – A PROPERTY RIGHTS BASED VIEW ON ACCOUNTING
LABRENZ, HELFRIED
Category: IS = Accounting and Information Systems
The article deals with a property rights perspective concerning the NCI-recognition. The suggested accounting approach is based on the assumption that shareholder lawsuits, equipped with temporary blocking abilities, might gain the value of the corresponding NCI by restricting the property rights of the parent company. The design of the examination is embedded in the context of the information analysis.
IS EMPIRICAL MANAGEMENT ACCOUNTING RESEARCH PROGRESSING? – EVIDENCE ON ITS DIVERSITY AND METHODOLOGICAL SOPHISTICATION OVER THREE DECADES
LACHMANN, MAIK
ESSERT, IRENE ; TRAPP, ROUVEN
Category: MA = Management Accounting
This paper assesses three decades of empirical management accounting research in light of its diversity and methodological sophistication. In doing so, we first address concerns recently voiced by distinguished scholars regarding an increasing homogenization of research approaches that may compromise our understanding of management accounting practice. Second, we complement the methodological papers that have prescribed what researchers should account for to ensure the validity of their findings by evaluating how four important types of validity – internal, external, construct and statistical conclusion validity – are de facto considered. Our study provides initial empirical evidence on these issues based on a quantitative content analysis of 415 papers published in ten leading accounting journals. We find a growing narrowness of research content as management control issues become increasingly prioritized, whereas the range of methods employed remains broad. Given the corresponding disclosures, validity improves over time, suggesting that management accounting research is progressing with respect to its rigor. Based on our findings, we discuss avenues for further research.
CONTINGENCY LIABILITIES: THE EFFICACY OF THREE ALTERNATIVE STYLES OF REPORTING
LAGRANGE, BRUCE
ANANDARAJAN, ASOKAN; VIGER, CHANTAL
Category: FR = Financial Reporting
Commencing January 2011, the IASB in passing new IFRS relating to contingencies officially replaced the accounting standards relating to contingent liabilities of the CICA for publicly accountable enterprises. Although both contingent liability standards (IFRS and CICA) are based on fundamentally similar conceptual frameworks, they differ significantly in certain aspects. We examine the implications to regulators of the changes required in contingency reporting. Initially, rules regarding contingency reporting were under the aegis of GAAP formulated by the CICA. It then came under the aegis of the IASB. However, the IASB has proposed a new version under its IFRS, titled IAS 37. We investigate the message conveyed by the three different forms of reports. Our results indicated variations in four categories of judgments of the Canadian loan officer subjects. The decision to grant a loan was not affected by the change to IASB’s IAS 37. However, the interest premium charged did differ significantly when financial statements were based on the proposed IAS 37 exposure draft relative to presentation under former Canadian requirements and original IFRS. These results indicate that judgments of loan officers are influenced by the style of presentation of contingent liabilities which has implications to regulators. The main implication is that, in the case of contingent liabilities, the proposed IAS 37 reporting style may send a clearer signal to readers of financial statements.
DIFFERENTIAL NEWS TIMELINESS BASED ON THE AMOUNT OF GOOD AND BAD NEWS
LAI, CHENG
Category: FR = Financial Reporting
This study extends Basu (1997) and re-examines differential timeliness with the amount of good and bad news rather than the signs of news as news content. The return variable in the earnings-return relation is decomposed into good and bad news components, using the sums of positive and negative log monthly return. The differential news timeliness (DNT) in this study compares the good and bad news timeliness of the same firm rather than comparing the earnings timeliness between good and bad news firms. DNT is observed in both good and bad news firms and varies in a predictable way with conservatism determinants – market-to-book ratios, leverage, size, and volatility. The universal presence of conservatism is thus supported with a measure that bypasses the controversial piecewise regression. DNT does not differ between good and bad news firms but increases with the amount of good and bad news. Thus, asymmetric timeliness in Basu (1997) is not due to bad news firms being more conservative and what matters to conservatism is the quantity rather than the signs of news.
AUDITOR-PROVIDED FINANCIAL INFORMATION SYSTEM DESIGN AND IMPLEMENTATION SERVICES, AUDIT REPORT LAG AND AUDIT QUALITY
LAI, KAM-WAH
Category: AU = Auditing
This paper examines whether clients have shorter audit report lag when they pay their auditors higher fees for financial information system design and implementation (FIS) services and whether audit quality is lower because of the provision of FIS services by auditors. When incumbent auditors provide FIS services for their audit clients, they are likely to obtain client-specific knowledge that may facilitate the performance of audit work. Consequently, audit report lag may be shorter because of knowledge spillover from the provision of FIS services to audit work, ceteris paribus. Using a sample of firms that reported non-zero FIS fees paid to incumbent auditors in 2000 or 2001, this paper reports that clients are likely to have shorter audit report lag when they also pay higher FIS fees to their auditors. At the same time, the results of tests do not suggest that audit quality, measured by discretionary accruals, loss avoidance and the reporting of positive change in net income, is lower. Hence, the reduction in audit report lag is not likely to be achieved at the expense of audit quality.
THE INTERRELATIONSHIPS OF AUDIT QUALITY OUTCOME MEASURES: AN ANALYSIS ON INDIVIDUAL AUDITOR LEVEL
LAITINEN, ERKKI K.
HERNESNIEMI, TOMMI; LAITINEN, TEIJA
Category: AU = Auditing
There is a recent call from academics to study audit quality at individual auditor level (DeFond and Francis 2005; Kachelmeier 2010). This study uses a set of individual auditor variables in a partial least squares (PLS) model to examine whether they have an effect on audit quality. Multiple measures, which are peer review ratings, discretionary accruals and going concern opinions, are used to capture audit quality. Five hypotheses are developed for the relationship between auditor characteristics and the three measures of audit quality. The hypotheses are assessed by PLS using data from 160 Finnish individual auditors. Empirical findings partly support the hypotheses but show that the quality measures are affected by different auditor characteristics leading to an inconsistent interrelationship between the measures. The construct of auditor characteristics affects negatively audit quality when measured by accruals but positively quality based on peer review. This construct does not affect audit quality based on going concern opinions.
TRANSPARENCY AND THE PROXY ADVISOR: AN INTRIGUING RELATIONSHIP IN CORPORATE GOVERNANCE
LAMBERT, DAMIEN
Category: GV = Accounting and Governance
Despite all its limits, transparency as a mode of governance has become a new mantra. Reasons for such success and pervasiveness have been explored either at a macro or micro level but the ability of transparency to operate across different levels has rarely been considered. Focusing on the nascent proxy advisory industry – a new potentially influential actor in corporate governance – this paper shows that the emergence and development of this new industry are tightly intertwined with the notion of transparency. More specifically, this study finds that at a micro level, transparency shaped the identity of the proxy advisor, at a macro level, transparency boosted the development of the proxy advisory market and at a meso level, in a sort of boomerang effect, the proxy advisory industry has become an object of transparency. These results suggest that transparency’s current success may lie in its ability to operate across different levels.
HETEROGENOUS EARNINGS STABILITY AND THE EARNINGS DISCONTINUITY
LAMP, FELIX
Category: FA = Financial Analysis
This paper claims that earnings stability explains discontinuities at zero in the earnings changes and earnings levels frequency distribution. Stable earnings, size deflated earnings with low variation, tend to be small and positive. Unstable earnings, in contrast, have high variation and tend to be negative. Consequentially, earnings has a mixture distribution where the presence of stable earnings causes a high peak at small positive earnings such that the whole distribution has a discontinuity at zero. Similarly, heterogeneity in stability of earnings changes produces a discontinuity in the earnings changes distribution. Latent class analysis supports the presence of stable and unstable firms in the population of listed US-firms. Histograms for the most stable and most unstable earnings and earnings changes do not exhibit the discontinuity and probit analyses show that stability predicts whether companies beat an earnings benchmark.
DISCRETIONARY COST CLASSIFICATION AND THE R&D TAX CREDIT
LAPLANTE, STACIE
SKAIFE, HOLLIS A.; SWENSON, LAURA A.; WANGERIN, DANIEL D.
Category: TX = Taxation
We investigate a tax planning strategy where managers classify more operating costs as research and development (R&D) costs, i.e., engage in R&D discretionary cost classification, in order to obtain benefits from the R&D tax credit. We document that firms identified as engaging in more R&D discretionary cost classification have lower GAAP and cash effective tax rates, and greater uncertain tax positions. We also document that firms engaging in more R&D discretionary cost classification are more likely to take the R&D tax credit as proxied by R&D tax credit narratives in their 10-Ks. Our study contributes to the tax literature by highlighting another setting where managers can use their reporting discretion to minimize their firms’ tax obligations.
CASH FLOW MANAGEMENT AND THE COST OF EQUITY
LARI DASHTBAYAZ, MAHMOUD
MCLEAY, STUART
Category: FR = Financial Reporting
The aim of this study is to examine why firms may manipulate not just their earnings but also their cash flows, and to investigate the effects of this behaviour on the cost of debt. The study highlights the discretion afforded in IFRS and US GAAP with regard to the reporting of operating cash flow. Using samples of firms in the UK and the USA, the results show that, for the ten years to 2010, the cost of debt has a significantly positive association with the managed (abnormal) component of operating cash flow. The market is more likely to incorporate abnormal operating cash flow information into pricing when firms are experiencing financial problems, especially when such companies are faced with low cash flows.
FAIR VALUE MANAGEMENT: A CASE STUDY OF EMPLOYEE STOCK OPTION (MIS)PRICING MODELS
LARMANDE, FRANCOIS
BELZE, LOIC; SCHNEIDER, LORENZ
Category: FR = Financial Reporting
This paper examines the fair value management of Employee Stock Options (ESOs). Departing from earlier literature focused on input estimates, we study the management of the pricing model itself, which is sometimes freely interpreted by companies. Relaxing certain assumptions of the Black-Scholes-Merton (BSM) model can lead to a range of possible prices. We first show that when estimating the ESO cost for the company, only prices equal to or above the BSM model price should be considered, whereas discounts are in fact observed at issuance. Second, based on a specific class of listed ESO in an IFRS context, our empirical study finds an overall average discount of 64% on our model price after controlling for ESO-specific characteristics. The discount results mainly from model management. These results provide interesting insights into the scope for model management under different accounting standards, and are also relevant for authorities in charge of enforcement.
PROCYCLICALITY OF US BANK LEVERAGE
LAUX, CHRISTIAN
RAUTER, THOMAS
Category: FR = Financial Reporting
We provide empirical evidence on the prevalence and determinants of leverage procyclicality for US commercial and savings banks. We find that bank leverage is strongly procyclical even after controlling for a large set of economic and bank-specific determinants of leverage. Our findings do not suggest that marking-to-market is a main driver of procyclical leverage. Instead, our findings are consistent with banks using an expansion of their business to adjust their leverage and capital ratios towards target levels, which gives rise to procyclicality. The drivers of leverage procyclicality differ for savings banks as well as commercial banks with more, respectively less, than 20% of their assets recognized at fair value. Understanding the magnitude and determinants of procyclical bank leverage is important for the identification of possible problems and remedies that are as diverse as reporting, regulation, and management.
THOUGHTS ON COMPETENCY INTEGRATION IN ACCOUNTING EDUCATION
LAWSON, RAEF
BLOCHER, EDWARD; BREWER, PETER; SORENSEN, JAMES; STOCKS, KEVIN; TAYLOR MORRIS, JAN
Category: ED = Accounting Education
Lawson et al. (2014) is the first report of a Task Force convened by the Management Accounting Section (MAS) of the American Accounting Association (AAA) and the Institute of Management Accountants (IMA) charged with the responsibility of developing curricular recommendations for accounting education. Lawson et al. (2014) provides a conceptual framework for accounting education based on a premise as to how accountants add value to a diverse set of organizations. This educational framework focuses on the development of an integrated set of professional competencies thought important to the long-run career success of accountants. Left unanswered, however, is a detailed discussion of various curricular-implementation issues, including strategies for achieving the competency integration envisioned in the educational framework proposed by Lawson et al. (2014). This paper extends the discussion by offering thoughts on competency integration in the accounting curriculum. The paper begins by identifying four plausible levels of curricular integration and then provides specific examples of competency integration using two broad-based topics: capital investment decision analysis and inventory management. We illustrate how it is possible to cover multiple learning objectives within each of these two topics. In addition, we discuss in some detail two selected implementation challenges associated with curricular integration in accounting: (1) defining the set of learning objectives that span accounting and broad-management competencies and (2) defining the scope of integration. Fundamentally, an “incremental” approach to curricular integration in accounting is envisioned and recommended. In short, this paper is meant to begin the dialogue of how curricular integration, as envisioned in the educational framework presented in Lawson et al. (2014), could be implemented in practice. Additional dialog regarding alternative curricular-integration strategies in accounting is encouraged.
THE EFFECT OF ADDING OR DROPPING COMPANIES ON ANALYSTS’ EARNINGS FORECAST ACCURACY
LEE, CHANGHEE
CHEONG, FOONG SOON; PALMON, DAN
Category: FA = Financial Analysis
We examine how analysts’ forecast accuracy changes when they choose to add or drop companies that they follow. The first question explores whether analysts attain higher or lower forecast accuracy than peer analysts when they follow a new company. The second question investigates whether analysts’ forecast accuracy is higher or lower than peers when they drop a company. We find that analysts’ forecast accuracy for newly followed company is lower than their peers. In addition, analysts’ forecast accuracy for dropped companies is also lower than their peers. Further analysis shows that the result is not driven by the rookie analysts or analysts who leave the I/B/E/S sample permanently.
THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FIRM ENTERPRISE RISK MANAGEMENT PRACTICE
LEE, DOOWON
CHOI, BO BAE; SEAMER, MICHAEL
Category: GV = Accounting and Governance
This study profiles the Enterprise Risk Management (ERM) adoption practices of Australia’s top companies. Its focus is the investigation of the role corporate governance plays in determining the extent to which ERM practices adopted comply with Australian Securities Exchange (ASX) risk management recommendations. The key corporate governance mechanisms investigated include board independence, segregation of the roles of CEO and board chair and audit committee structure and effectiveness. While each corporate governance variable exhibits a significant positive effect on compliance with ASX risk management recommendations when considered separately, the results show the existence and independence of the audit committee as well as the existence of a financial expert on that committee to be the dominant factors determining ERM compliance.
GEOGRAPHIC PROXIMITY BETWEEN AUDITOR AND CLIENT: DOES LACK OF PROXIMITY LOWER AUDIT QUALITY?
LEE, GLADYS
CHIEN , MINH DANG; FARGHER, NEIL
Category: AU = Auditing
Prior research suggests that excessive distance between the location of the principal auditor and the location of the client firm’s business reduces audit quality. We consider the auditor-client location mismatch problem within an international context. We expect that excessive distance between the location of the principal auditor and the location of the client firm’s business will reduce audit quality where the audit firm is not a member of an effective global audit firm network. We specifically examine audit quality for client firms based in mainland China and Hong Kong that are listed on U.S. exchanges with principal auditors that are either local or foreign. We find some evidence that when audit quality is measured using the propensity to issue a going-concern, the auditor-client location mismatch is associated with lower audit quality for small audit firms. We do not find differences in audit quality by auditor location when using discretionary accruals as the proxy for audit quality.
THE INCLUSION OF GENERAL COUNSEL IN TOP MANAGEMENT AND TAX AVOIDANCE
LEE, JIMMY
GOH, BENG WEE; NG, JEFFREY
Category: TX = Taxation
We examine whether the inclusion of general counsel in top management is associated with a firm’s tax avoidance. We find that firms where the general counsel is part of the top management team are more aggressive in their tax planning, as evidenced by a larger discretionary permanent book-tax difference, a higher likelihood of engaging in tax shelter activities, and more uncertain tax positions. In addition, we find that the positive association between having a general counsel in top management and tax avoidance is attenuated in the post-FIN 48 period, consistent with FIN 48 constraining general counsels from facilitating tax avoidance. Finally, we document some evidence that the positive association between a general counsel in top management and tax avoidance is stronger when the CEO has a higher degree of influence and weaker when the general counsel also sits on the board of directors or has more equity incentives.
THE IMPACT OF TAX AVOIDANCE NEWS ON CORPORATE TAX REPORTING
LEE, SOOJIN
Category: TX = Taxation
Drawing upon media agenda setting theory and previous studies in organizational impression management, this paper empirically investigates the impact of tax avoidance news on corporate tax reporting. This study is based on the pronounced discontinuity in the amount of news articles related to tax avoidance in the UK over two periods of 2010-2011 and 2012-2013. A difference-in-differences design is employed in order to enable the media effects on the firms that have been reported in tax avoidance news versus those without media attention to be distinguished. A sample of annual reports of UK FTSE 100 companies is examined across the period 2010 to 2013 to test two hypotheses. The results show that there is a higher use of a verbal claim of a firm’s disconnection from tax avoidance in the high media-attention period. Such verbal claims are more sensitive to the amount of tax news during the high media-attention period. However, support for the relationship between the amount of tax avoidance news and the extent of tax disclosure has not been found. I attribute these results to corporate impression management efforts and the firm’s rigid tax reporting practices, considering the distinct nature of tax disclosure which contains financially sensitive and confidential information.
CONSISTENCY OF CSR ACTIVITIES AND FIRM VALUE
LEE, WOO JAE
BAE, SEONG HO ; JEONG, KWANG HWA ; JEONG, SEOK WOO
Category: SE = Social and Environmental Accounting
In this paper, we investigate how firms’ corporate social responsibility activities affect firm value. When firms do CSR activities strategically, they are more likely to do these activities consistently over time, and improve the performance of firms. In the other hand, if managers do CSR activities by overspending firms’ resources for their private benefits such as improving their personal reputation and self-satisfaction of doing philanthropic activities not related to firms’ value, it may negatively affect firm value due to agency cost caused by managers’ opportunistic behavior. We adopt an earnings response coefficient model to address hypothesis and examine the effect of CSR on firm value via ERC. We believe the coefficient for the interaction variable between unexpected earnings and a dummy for CSR activities provides the incremental valuation effect of CSR activities on the relation between earnings and stock returns, and the coefficient for the interaction variable between unexpected earnings and a dummy variable for the consistency of CSR activities provides the differential effect of CSR activities on the relation between earnings and stock returns. We document these variables are positively and negatively significant. Our research has following contributions. Our paper provide an explanation for the inconsistency among the results of previous studies by showing the differential implication for firm value depending on firms’ CSR activity patterns.
DOES PROXY VOTING ADVISORY MATTER IN A EUROPEAN CONTEXT? EMPIRICAL EVIDENCE FROM GERMAN ANNUAL GENERAL MEETINGS
LEHMANN, NICO
HITZ, JOERG-MARKUS
Category: GV = Accounting and Governance
This paper complements the discussion initiated by the European Securities and Markets Authority (ESMA) about the role of proxy advisors at European AGMs by providing first descriptive evidence on the influence and method consistency of these advisors for a major European market. In doing so, it exploits a sample of 1,664 annual general meeting (AGM) agenda items and the corresponding proxy voting recommendations issued by Institutional Shareholder Services (ISS) for the German proxy season 2010. The results suggest that negative ISS voting recommendations significantly correlate with 8.5% less supportive shareholder votes. This correlation is even more pronounced for firms with high free float, low voting turnout, and high ISS client base. In addition and in contrast to recent U.S. findings, the results further suggest that ISS’ recommendations significantly correlate with ISS’ commercially available corporate governance ratings (GRId). These findings highlight a potential method consistency with respect to ISS’ employed governance perceptions. Overall, this paper extends the growing but U.S. dominated literature on proxy voting advisory and contributes to the current European debate on the regulation of proxy advisors.
AUDITOR RATIFICATION AND SHAREHOLDERS' PERCEPTION OF FINANCIAL REPORTING QUALITY
LEIDNER, JACOB JUSTUS
HÖRNER, SVEN
Category: AU = Auditing
Auditor ratification by shareholders is typically a routine matter and non-binding. This study uses a returns-earnings design and demonstrates that the auditor ratification vote also constitutes market-relevant information. The empirical evidence reveals that higher percentages of votes in support of an auditor's engagement lead to greater market reactions to earnings surprises. Moreover, this effect appears to be larger for firms with higher amounts of free float. In addition, there are moderate indications that the time lag between the auditor ratification date and the date of the earnings announcement also influences this association. In light of these results, it appears appropriate and economically reasonable for shareholder activists---and the Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury---to call for mandatory shareholder ratification of auditors. The results support our theoretical reasoning that auditor approval ratios signal shareholders' satisfaction with the expected level of (perceived) audit quality. Concurrently, auditor ratification also indirectly enables shareholders to signal their satisfaction with the expected (perceived) external financial reporting quality.
ACCOUNTING AND CLAIMS OF ASSET SECURITIZATIONS
LEJARD, CHRISTOPHE
Category: FR = Financial Reporting
This study seeks to determine, by exploiting accounting disclosures regarding variable interest entities required by SFAS No.167, whether the accounting design assigned to an asset securitization defines its claim, or in other words, whether bank managers consider asset securitizations as being efficient financings or as credit-risk outsourcing tools. The findings from this study suggest that banks structure their asset securitizations as asset sales to improve their profitability, while asset securitizations accounted for as secured borrowings are assigned to efficiently finance investments. In addition, results do not reject the assumption under which banks engage into off-balance sheet securitizations to outsource credit-risk.
CEO COMPENSATION DISCLOSURES: A STUDY OF IMPRESSION MANAGEMENT TACTICS
LENIHAN, ORLA
BRENNAN, NIAMH
Category: FR = Financial Reporting
This paper provides initial descriptive evidence on impression management behaviour within U.S. CEO compensation disclosures. Drawing on agency theory assumptions of managerial self-interest and information asymmetry, the paper conducts a manual analysis of the Compensation Discussion and Analysis (CD&A) section of ten firms’ proxy statements. Firms are required to explain their CEO compensation in the CD&A, but these disclosures can be manipulated to distort readers’ perceptions of the CEO’s performance for compensation purposes. The study examines the discussions surrounding the CEO’s performance, finding evidence of a positively biased disclosure tone and a selectivity bias in the performance comparisons disclosed. This suggests that CEOs are trying to create a favourable impression of their performance, in the hope of securing shareholder approval of their compensation in the say-on-pay vote. Based on these initial findings, a number of hypotheses are formulated and proposed for further empirical testing in the future.
COST OF EQUITY EFFECTS FROM MANDATORY IFRS ADOPTION – THE IMPORTANCE OF REPORTING INCENTIVES
LEUNG, RAYMOND WT
Category: FR = Financial Reporting
ABSTRACT This research paper examines how the cost of equity associates with reporting incentives in mandatory IFRS adoption for [18] European Union (EU) countries. First, with more data available for the post-adoption period, prior studies are extended by measuring if the mandatory adoption of IFRS in 2005 reduce the cost of equity. Second, using a comprehensive set of reporting incentives by both firm-specific core business factors (CBF) and internal corporate governance (ICG), and country-specific institutional environment factors (IEF), this study further investigates if both individual and interactive effects of reporting incentives in mandatory IFRS adoption are associated with cost of equity effects. Using a sample of 7,294 firm-year observations in the EU between 2000 and 2009, the findings show that, on average mandatory adopters have a significantly lower cost of equity of 1.2% (significant at the 1% level using a two-tailed test). Also, the results provide evidence that mandatory IFRS adoption interacts with both firm-specific CBF and ICG and associates with significant differential effects in the cost of equity. In addition, when sampling firms are partitioned into different comprehensive legal, economic, social and cultural characteristics, mandatory adopting firms interact with CBF and/or ICG based on their particular IEF settings. Overall, these findings support the pro-incentive view that significant capital market benefits to shareholders cannot be derived
THE EFFECT OF REGULATORY HARMONIZATION ON CROSS-BORDER LABOR MIGRATION: EVIDENCE FROM THE ACCOUNTING PROFESSION
LEUZ, CHRISTIAN
BLOOMFIELD, MATTHEW; BRUEGGEMANN, ULF; CHRISTENSEN, HANS
Category: FR = Financial Reporting
The paper examines the effect of international regulatory harmonization on cross-border labor migration. We analyze directives in the European Union (EU) that harmonized accounting and auditing standards. This regulatory harmonization should make it less costly for those who work in the accounting profession to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that, on average, labor migration in the accounting profession increases relative to comparable professions by roughly 15% after harmonization. The findings illustrate that diversity in rules constitutes an important economic barrier to cross-border labor mobility and, more specifically, that accounting harmonization can have meaningful effect on cross-border migration.
BUSINESS SIMULATION AS AN ACTIVE LEARNING ACTIVITY FOR DEVELOPING SOFT SKILLS
LEVANT, YVES
COULMONT, MICHEL; SANDU, RALUCA
Category: ED = Accounting Education
Business simulations are among the new instruction models of active or cooperative learning. In this paper, we look at the social constructionist roots of these education models in light of current needs to develop employability skills in undergraduate and graduate studies. More specifically, we analyze the role of business simulations in developing soft skills, based on an international survey of students’ perceptions of acquiring/developing soft skills during business simulations. Our objective is to test whether business simulations contribute to the development of soft skills, and whether gender, ethno-cultural origin, professional experience, education level and other factors affect the acquisition process. We also discuss the use and benefits of these innovative (yet not entirely new) instruction models.
EARNINGS ANNOUNCEMENTS ON MARKET VALUE, DIVIDEND CHANGES, INSIDE AND INSTITUTIONAL STOCKHOLDINGS: THE GREEK EXPERIENCE
LEVENTIS, STERGIOS
DASILAS, APOSTOLOS; SIKALIDIS, ALEXANDROS
Category: FR = Financial Reporting
This paper examines the value relevance of earnings announcements for the whole population of Greek listed firms between 2000 and 2006 employing the standard event study methodology. In specific, we explore the stock price, trading volume and volatility reaction to the announcement of annual and interim financial results. The idiosyncracies of the Greek listed firms such as the simultaneous announcement of annual earnings and dividends as well as the ownership concentration makes intriguing the further investigation of the information content of earnings announcements in association with the dividend change announcements and the ownership structure. The results display significant market reaction to quarterly earnings releases especially for the unaudited (first and third) financial reports. Moreover, we document a strong market reaction to contemporaneous dividend and earnings announcements of the same direction. However, the signal of dividend change announcements is stronger than that of earnings when the two announcements are contradictory. Finally, the examination of the effect of heterogeneous ownership structure on the value relevance of earnings announcements reveals a significant market reaction in cases of large institutional shareholdings, high information asymmetry and positive earnings surprises. Herding behaviour is alleged to enhance the information content of earnings announcements.
THE EFFECT OF DISCLOSURE AND INFORMATION ASYMMETRY ON THE PRECISION OF INFORMATION IN DAILY STOCK PRICES
LEVI, SHAI
AMIR, ELI
Category: FR = Financial Reporting
We examine the effect of public disclosure and information asymmetry on the precision of information in daily stock prices. We find that public information increases the precision of prices upon its disclosure. Specifically, the returns on earnings announcement days more precisely reflect the change in the long-term value of the firm, whereas returns on non-announcement days contain relatively more noise. Disclosure also increases precision on non-announcement days, and firms providing guidance during the quarter have less noisy returns. Moreover, we find that stocks with lower information asymmetry have more precise daily returns, as liquidity and other non-informative trades that increase noise have a smaller impact on their prices. When prices reflect value more precisely investor risk in trading individual stocks diminishes. Interestingly, we find that the precision of information in daily prices is also associated with lower expected returns.
THE OVERSIGHT ROLE OF REGULATORS
LI, BING
LIU, ZHENBIN
Category: FR = Financial Reporting
This study investigates how regulator oversight affects IPO firms’ information environment. We provide evidence on the oversight role of the United States Securities and Exchange Commission (SEC) by examining the effects of comment letters issued by the SEC in the process through which companies are initially listed. We find that issuers revise their offering proceeds (price and shares) downward if they have more comment letter correspondences with the SEC. This finding is consistent with our hypothesis that the SEC plays an important monitoring role by preventing issuers from hyping new IPOs. Our results hold under an alternative differences-in-differences research design and alternative measures of SEC comment letters.
BOARD INTERLOCKS AND PROPERTIES OF ACCOUNTING EARNINGS
LI, JIAYAN
KARIM, KHONDKAR; LIN, KAREN
Category: GV = Accounting and Governance
We test whether board interlocks between two firms increase similarities in the firm-pair’s accounting practices. In particular, we examine whether differences in accounting conservatism and timeliness are smaller when two firms share one or more board members. We measure firm-level accounting conservatism (reporting timeliness) using C_Score (G_Score) (Khan and Watts, 2009). We find that board interlock reduces the difference in accounting conservatism practices between interlocked firms, but has no significant impact on the firm-pair’s differences in reporting timeliness. A further examination reveals that when two firms are linked through key directors (i.e., CEO, CFO, the board Chair, Audit Committee Member and Audit Committee Chair), differences in both conservatism and timeliness are smaller compared to the rest of interlocked firms that are not linked by key directors. Our study adds to the evidence that network among companies affects accounting practices in general.
DIRECTORS FROM RELATED INDUSTRIES AND MANAGEMENT FORECAST ACCURACY
LI, MENG
KE, RUIHAO; ZHANG, YUAN
Category: FR = Financial Reporting
To make accurate forecasts, managers not only need information about their own firms, but also information outside the firms, such as information about their upstream and downstream industries. We investigate one potential channel that can help managers gather such information—directors who are current directors or executives of firms in these related industries (DRIs). We hypothesize that DRIs bring valuable information to the managers who, in turn, make more accurate management forecasts. Consistent with this hypothesis, we document that the percentage of DRIs on board is positively associated with the accuracy of management earnings forecast. This association is stronger when the related industries have higher uncertainty, or when the firms have higher uncertainty themselves or face adverse environments. Our results are robust to various tests that control for endogeneity. Our study sheds new light on directors’ role as information conduits to the managers.
IMPACT OF MANDATORY CHANGES IN CONVERTIBLE DEBT ACCOUNTING
LI, NA
Category: FA = Financial Analysis
Using a set of hand-collected data, I study the economic consequences of APB 14-1, adopted in 2008, which requires that issuers of cash-settled convertible debt divide the total proceeds from the issuances into liability and equity components (“bifurcation”). First, I find that issuers are more likely to reduce the outstanding amount of cash-settled convertible debt when the increase (decrease) in interest expense (leverage ratio) resulting from the bifurcation process is higher (lower). The probability of early repurchase is higher when mandatory accounting changes are included in the calculation of debt covenant compliance. Next, I examine whether credit rating agencies evaluate the issuers’ accounting information differently after the adoption of APB 14-1. I find that the financial ratios in the post-2008 period, such as interest coverage ratios and leverage ratios, can better explain the issuers’ credit ratings than those in the pre-2008 period. These empirical results are consistent with the notion that mandatory changes in financial reporting of cash-settled convertible debt have real effects on managerial behavior and the usefulness of information from financial statements used by the credit market.
HIGHER ERC OR HIGHER FUTURE ERC FROM INCOME SMOOTHNESS? – THE ROLE OF INFORMATION ENVIRONMENT
LI, SHUO
CHENG, C.S. AGNES ; JOHNSTON, JOSEPH
Category: FR = Financial Reporting
We examine the differential effects of income smoothness on value-relevance of current future earnings (termed as earnings response coefficient, ERC, and future earnings response coefficient, FERC, respectively) as affected by different information environments. In theory, if reported earnings are permanent, earnings should explain concurrent returns fully. In this case, the FERC should approach zero. However, a rich information environment provides more information and more sophisticated users that help the market better assess the firm’s future profitability. To the extent that current permanent earnings cannot fully predict future realized earnings, we should find a positive FERC in rich information environment. Based on the premise that smoothing brings reported earnings closer to permanent earnings, we predict and find that for firms with poor information environment, income smoothness improves ERC but not FERC. For firms with superior information environment, income smoothness improves FERC. Many recent studies have focused solely on FERC in assessing the informativeness of earnings. We remind researchers that theoretically more value-relevant earnings do not effectively improve FERC in an environment with little or no other information.
FAIR-VALUE RECOGNITION OF ENVIRONMENTAL LIABILITIES BY NATURAL RESOURCE COMPANIES
LI, YUE
MCCONOMY, BRUCE; SCHNEIDER, THOMAS
Category: SE = Social and Environmental Accounting
This study investigates the valuation impact and stock market reaction to the recognition of asset retirement obligations by oil & gas and mining companies listed on the Toronto Stock Exchange (TSX) following the implementation of a new accounting standard. We find that (a) explicit recognition of future environmental cleanup costs as asset retirement obligations (AROs) improves the market valuation of resource companies, but the corresponding increase in total assets is not valuation relevant; (b) some resource companies appear to “manage” the AROs by choosing discount rates higher than our benchmark predictions and the market takes this into account for valuation purposes; and (c) firms that voluntarily disclosed undiscounted environmental cleanup costs prior to the new ARO standard mitigated information asymmetry, and had less adverse investor reaction when they adopted the ARO standard relative to non-disclosers. The combined evidence from this study suggests that formal recognition of AROs provides valuation relevant information, and investors appear to anticipate firms' strategic behavior in this regard.
THE EFFECT OF INTERNAL CONTROL MATERIAL WEAKNESSES ON EXECUTIVE EQUITY INCENTIVES AND CORPORATE RISK-TAKING
LIAO, CHIH-HSIEN
HUANG, HSIN-YI
Category: GV = Accounting and Governance
Prior studies take different approaches to assess the costs and benefits of SOX Section 404 internal control requirement. In this study we examine how CEO equity incentives and firms’ risk-taking behavior are influenced by the material weaknesses in internal controls. We find that the disclosure of the material weaknesses is negatively associated with vega and delta of CEO compensation, suggesting that firms with adverse SOX 404 opinions reduce equity incentives to discourage the CEO from taking excessive risks. In addition, we find that after controlling for the effect of equity incentives on risk-taking, firms receiving adverse SOX 404 opinions have less R&D and capital investments. Our empirical reuslts are robust to controlling for the endogeneity of internal control quality as well as the selection bias.
THE EFFECTS OF PRODUCT MARKET COMPETITION AND NON-FINANCIAL PERFORMANCE ON CAPITAL EXPENDITURE
LIAO, LI-KAI
LIN, TSUNG-WEN; LIN, YI-MIEN; WU, YI-CHEN
Category: MA = Management Accounting
This study applies the fixed effects model to examine the effect of non-financial performance on capital expenditure and the effect of market competition of a product on the above relationship. Next, it examines the effect of the agency cost of a firm on the relationship between market competition and nonfinancial performance to capital expenditure. The findings show that the firm will improve product quality using expanding capital expenditure to promote the competitiveness of a firm. The current sales growth rate is positively related to the next capital expenditure. The current market share rate is negatively related to the next capital expenditure. However, when considering the endogenous effect of the current capital expenditure, sales growth rate is negatively related to the next capital expenditure. Under consideration of the product market competition, when a firm faces higher market competition, it may not input more capital expenditure in the next period. We also find consistent results with evidence without considering product market competition. Moreover, the interaction terms between three nonfinancial performance measures and industry competitiveness are unrelated to the next capital expenditure regardless of considering the endogenous effect of the current capital expenditure. Furthermore, we find evidence that agency cost may affect the relationship between non- financial performance measures and the next capital expenditure.
THE EFFECTIVENESS OF BOARD IN CONTROLLING CARBON EMISSIONS: EVIDENCE FROM UK 350 COMPANIES
LIAO, LIN
LUO, LE (LAURA); TANG, QINGLIANG
Category: GV = Accounting and Governance
This paper investigates the effectiveness of corporate board in controlling carbon emissions for a sample of listed companies in the United Kingdom over the period of 2008-2013. Hillman and Dalziel (2003) suggest two functions for the boards: (1) monitoring management to ensure that it acts in the interests of shareholders, and (2) providing resources to firms. We use the existence of CSR committee, board independence and CEO-chair duality as the proxies for board monitoring role, while the proportion of female directors, board size, expertise and experience are used as the proxies for board resource provision role. The empirical evidence shows that the board size, the proportion of female directors in the board and board experience are negatively and significantly associated with carbon emissions, consistent with the resource provision role hypotheses. However, we do not find the results to support the monitoring role hypotheses. Findings suggest that boards of directors are effective in reducing carbon emissions through their resource provision role, rather than their monitoring role.
THE EFFECTS OF EX POST GOAL ADJUSTMENT AND SOCIAL IDENTITY WITH A SUPERIOR ON SUBORDINATES’ PERFORMANCE
LIBBY, THERESA
BURT, IAN; PRESSLEE, C. ADAM
Category: MA = Management Accounting
Firms often evaluate employee performance relative to a goal set at the beginning of the evaluation period. For many, a mechanism exists by which these goals may be adjusted downward at the end of the period to account for unanticipated negative factors beyond the employee’s control. We examine experimentally how the availability of an ex post goal adjustment affects subordinates’ performance, and whether high social identity, defined as high perceived social connectedness between the superior and subordinate moderates this effect. Results show that the availability of an ex post adjustment has a negative effect on subordinates’ performance and that this negative effect is minimized when subordinates highly identify with their superior. High social identity between the superior and the subordinate strengthens the subordinate’s expectancy that the superior will adjust the goal and thus, the subordinate will achieve the offered rewards. Consequently, they exert higher effort than when social identity between the superior and subordinate is low. Our results provide evidence that allowing ex post goal adjustment can have negative effects on subordinates’ performance except when social identity between the superior and subordinate is high.
FROM CONTROVERSY TO ACCOUNTABILITY: HOW CONTROL SYSTEMS FACILITATE THE DEPLOYMENT OF CORPORATE SOCIAL RESPONSIBILITY IN A GAMBLING COMPANY.
LIGONIE, MARION
Category: MA = Management Accounting
This study examines CSR implementation process in GamesCo, a European gambling company, from 2005 to 2013. The analysis focuses on how CSR was deployed through specific control tools and into organizational control tools in order to identify underlying dynamics, facilitating elements and barriers to this process. The findings point to two underlying dynamics in this process: compartmentalization refers to the deployment of CSR through CSR-specific control systems which remain independent from organizational control systems; convergence refers to the progressive irrigation of CSR into organizational control systems. This paper extends existing knowledge by depicting these two phenomena as dynamics instead of stable situations. This perspective enables to highlight how they evolved and intermingled to promote CSR integration: rather than hampering CSR deployment, CSR primary operationalization through independent CSR-specific control systems actually opened the way to its integration into organizational control systems.
JUSTIFYING ACCOUNTING CHANGE: HOW GLOBAL DISCOURSES WIN ORGANISATIONAL LEGITIMATION
LIGUORI, MARIANNUNZIATA
HYNDMAN, NOEL
Category: PS = Public Sector Accounting
Traditionally, accounting is viewed as a neutral technology that, in the hands of rational managers, can support effective and efficient decision making within organisations, a foundation of managerial discipline. However, the introduction of new accounting practices can be framed in a variety of ways, ranging from value-neutral procedures to ideologically-charged instruments. This paper investigates how accounting changes are decided and introduced through the use of global accounting discourses; and how organisational actors subsequently legitimate such discourses at different organisational levels. It focuses on accounting change in the UK central government using extensive textual analysis and semi-structured interviews in three government departments. The research shows that in political discussions there is consistency between the global accounting discourses and the related changes. Furthermore, the research suggests that a cocktail of legitimation strategies was used to construct a sense of accounting change, with authorisation, often in combination with rationalisation strategies, to the fore. While previous literature suggests that different actors tend to use the same rhetorical sequences during successive periods of change, this study highlights differences as different organisational levels are considered and greater complexity is taken into account.
MANAGING EMPLOYEE STOCK OPTION EXPENSE: A FAIR-VALUE APPROACH
LIN, I-CHENG
HUANG, YI-TING; WU, MING-CHENG
Category: FR = Financial Reporting
Classical option pricing models are not well suited to the valuation of employee stock options due to their special characteristics. This paper try to conduct a more general fair-value estimation based on the feature of attaching performance targets to option vesting. Considering the setting that options may be exercised early at the employee’s discretion, the employee exit rate and the firm’s default risk, this paper presents a sensitivity analysis and empirical tests of the option value. The results highlight the importance of considering the characteristics of employee stock options in the design of performance-vested option plans to provide the right incentives for employees.
DISCOVERING MAIN CONCERNS IN COMMENT LETTERS TO TWO FASB EXPOSURE DRAFTS
LIN, KAREN JINGRONG
KARIM, KHONDKAR; ZHU, HONGWEI
Category: IS = Accounting and Information Systems
Using latent semantic analysis (LSA), this study examines the 234 comment letters responding to the exposure draft proposed by the Financial Accounting Standard Board (FASB) in 2008 and 2010. The commenters are various entities including public companies, individual investors, accounting firms and legal practitioners. We address two research questions: First, what are the focuses of these comment letters? Second, what are the incentives behind the comment letters? To answer the first question, we identify the commenters’ main focuses by looking at terms that have the highest loadings. To answer the second question, we investigate the identities of commenters that are corresponding to the high-loading terms. Interestingly, our results show that there exist clear focuses of these comment letters and the corresponding commenters tend to have common characteristics, indicating different incentives behind these comment letters. Our study applies LSA to a narrowed topic in accounting; it contributes to the existing accounting literature of content analysis by introducing a method that minimizes the biases resulted from researchers’ prior beliefs.
SPILLOVER EFFECT OF FINANCIAL FRAUD: DOES CORPORATE GOVERNANCE MATTER?
LIN, XIAOMIN
Category: GV = Accounting and Governance
This paper investigates whether the quality of corporate governance mechanism can predict financial fraud and explain the spillover effect of financial fraud. Using a sample of 92 shareholder initiated class action lawsuits against 289 U.S. listed Chinese firms, I find that both fraud firms and non-fraud firms react negatively to the fraud revelations. Investors’ economic discount on fraud firms spreads over to the non-fraud firms. Based on the Bayesian theorem, I attempt to provide a theoretical explanation for the notion of information-based spillover effect. In the cross-sectional analysis, a hand-collected corporate governance matrix is developed and employed to test the relation between the corporate governance and the fraud propensity. I find that firms with financial experts on the audit committee are less likely to commit fraud. There is no evidence that the quality of corporate governance associates with the financial fraud spillover effect.
THE EFFECTS OF EARNINGS QUALITY AND LEVERAGE DEFICIT ON FINANCING POLICY
LIN, YI-MIEN
LEE, TZU-WEN
Category: FA = Financial Analysis
This study first examines the relation between earnings quality and leverage deficit as well as the impact of earnings quality on financing activities when the firm's actual leverage is higher than the target leverage. The paper considers net external financing activity and its components and both accrual-based and real earnings management. The findings indicate that the firm with leverage deficits has lower earnings quality regardless of being over- or under-leveraged, and the underleveraged firm with better earnings quality and the overleveraged firm with worse earnings quality tend to choose equity financing. Moreover, the firm with external financing or debt financing tends to engage in real earnings management, but the firm with equity financing tends to engage in accrual-based earnings management. Compared to the underleveraged firm, the overleveraged firm is less likely to use real earnings management when conducting net external financing and debt financing activities and is unlikely to engage in the accruals method when choosing equity financing. Under considerations of environmental uncertainty, an overleveraged firm is more unlikely to engage in real earnings management.
AUDIT COMMITTEE QUALITY AND DOWNWARD AUDITOR CHANGES
LIN, YU-CHUN
Category: AU = Auditing
This study examines whether equity-based compensation (i.e., stock plus option) affects audit committee effectiveness in selecting and overseeing external auditors. Using a sample of 829 dismissal firms in U.S. during 2003-2012, we find that audit committee equity-based compensation is negatively associated with financial reporting quality, especially by firms downgrading to non-Big 4 auditors or switching within non-Big 4 auditors. These results suggest that equity-based compensation has an impact on audit fees, auditor choices and subsequent influence. It seems that impaired audit committee independence is the driver explaining the downward auditor switches after SOX.
INCENTIVES, MOTIVATION, AND SOCIALLY RESPONSIBLE BEHAVIOR (SRB)
LINDER, STEFAN
MOTTIS, NICOLAS
Category: MA = Management Accounting
Firms increasingly see a need to foster Socially Responsible Behavior (SRB) by their managers. Tying managers’ bonuses to the achievement of certain environmental, social or societal objectives seems a natural suspect for enhancing their engagement in SRB. Yet, we know very little about the actual effects of such incentives for SRB. In particular, it is unclear whether such incentives are effective or whether they risk to (partially) “crowd-out” individuals’ autonomous motivation for SRB. Based on an experiment with 35 managers we provide first empirical evidence on this matter. Financial rewards seem neither to enhance their engagement in SRB, nor show significant interaction effects with their autonomous motivation to engage in SRB. Thus, our findings suggest that managers react little to attempts to “bribe” them to engage in SRB.
UNDERSTANDING FINANCIALIZATION IN THE UK AND GERMANY THROUGH NEO-DURKHEIMIAN CULTURAL THEORY
LINSLEY, PHILIP
Category: GV = Accounting and Governance
The impacts of financialization have attracted substantial attention and multiple definitions of financialization have been developed. However, as yet there appears to be no integrative framework that might pull together the different ideas that have arisen in the field of financialization. This paper proposes that neo-Durkheimian cultural theory can provide a basis for conceptualizing the notion of financialization. The different patterns of financialization in the UK and Germany are explored and it is proposed that these differences are a product of the different cultural dialogues in the two countries in the period after the Second World War. These two settings were selected for comparison as financialization occurred at different times and in very different forms in the two countries. Specifically, we propose that individualistic attitudes became dominant in the UK at the outset of the 1980s and this marks the commencement of financialization in the UK. In the case of Germany, financialization only began to gain traction in the mid-1990s and in a much more muted form, and it is proposed this corresponds to a period when the individualistic outlook or solidarity began to win some of the policy arguments in Germany. However, in Germany the influence of the individualistic solidarity was restrained by being embedded within a hybrid hierarchical-egalitarian-individualist culture, which partly explains why financialization was muted in this setting. Moreover, expanding this analysis the paper proposes that the relatively greater post Eurozone crisis resilience of the German economy may be due to the hybrid hierarchical-egalitarian-individualist form of cultural dialogues having a correspondence with a clumsy solutions approach to the resolution of wicked problems.
PARENT-SUBSIDIARY INVESTMENT LAYERS, DEVIATION, FAMILY CONTROL, AND THE VALUE OF CORPORATE CASH HOLDINGS
LIU, SOPHIA H.T.
GUL, FERDINAND A.K.; HSU, AUDREY; LIU, SOPHIA
Category: GV = Accounting and Governance
Our study investigates whether information asymmetry and agency costs arising from organizational structure in terms of layers which connects the parent firm and the lowest-tiered subsidiaries within the corporate pyramid are associated with value of cash holdings. First, we find a negative association between value of cash holdings and the number of layers, supporting the agency theory of free cash flows. Consistent with prior studies (e.g., Claessens et al., 2002) that the agency cost is high when the deviation between cash flow rights and voting rights is high, we find that the negative association between value of cash holdings and the number of layers in firms with high deviation is stronger. In addition, we investigate whether this association varies with the presence of family control which may exacerbate agency problems between controlling and non-controlling shareholders and find that more number of layers along with the presence of family control is negatively associated with value of cash holdings.
A STUDY OF CARBON DISCLOSURE BEHAVIOUR OF UK ENERGY INTENSIVE INDUSTRIES
LIU, STEPHANIE
YANG, JESSICA
Category: SE = Social and Environmental Accounting
The paper investigates how energy-intensive industries respond to recent government-led carbon emission schemes through the content analysis of 306 annual and standalone reports of 25 UK listed companies from 2004 to 2012. This period of reporting captures the trend and development of corporate disclosures on carbon emissions after the launch of EU Emissions Trading Schemes (ETS) and Climate Change Act (CCA) 2008. It is found that in corresponding to strategic legitimacy theory, there is an increase in both the quality and quantity of carbon disclosures as a response to these initiatives. However, the change is gradual, which reflects in the achievement of peak disclosure period two years after the launch. It indicates that the new legislations have a lasting impact on the discourses rather than an immediate legitimacy threat from the perspective of institutional legitimacy theory. The results also show that carbon disclosures are an institutionalised practice as companies in the same industries and/or with same carbon trading account status appear to imitate and adopt the industry’s ‘best practice’ disclosure strategy to maintain legitimacy. The trend analysis suggests that the overall disclosure practice is still in its infant stage, especially in the reporting of quantitative and monetary items. The paper contributes to the social and environmental accounting literature by adopting both strategic and institutional view of legitimacy.
STAKEHOLDER ORIENTATIONS AND COST MANAGEMENT
LIU, XIAOTAO
LIU, XIAOXIA; REID, COLIN
Category: MA = Management Accounting
This study examines the effect of stakeholder orientations, an important institutional factor, on firms’ cost management as proxied by Selling, General and Administrative (SGA) cost stickiness. Based upon adjustment costs theory and agency theory, we predict that customer- and employee-orientated firms are more hesitant to cut SGA expenditures when sales decline, and exhibit greater cost stickiness. Using a sample of 19,783 firm-years, we provide robust empirical evidence consistent with our predictions. Moreover, our supplemental analyses show that SGA cost stickiness increases with customer orientation (employee orientation) for firms with high (low) SGA created future value, growth (mature) firms, firms with higher (lower) institutional ownership, and firms with smaller (larger) and independent (less independent) boards. In summary, the findings from supplementary analyses suggest that the observed SGA cost stickiness as related to customer orientation is more consistent with adjustment costs arguments, and managers managing customer relations to increase shareholder value. Conversely, the observed SGA cost stickiness as associated with employee orientation is more reflective of managers’ agency considerations, e.g. empire building or managers’ preference for a quiet life. Overall, our findings expand our understanding of the impact that stakeholder orientations have on managers’ resource capacity adjustment decisions.
SHAREHOLDER WEALTH EFFECTS OF ANTICIPATED TAX AGGRESSIVENESS TRANSFERS
LIU, YANJU
CHOW, TRAVIS; KLASSEN, KEN
Category: TX = Taxation
This paper investigates whether and how the relative tax aggressiveness of the acquirer and target affects value creation in corporate M&A. We find that acquisitions of more tax aggressive targets by less tax aggressive acquirers reduce M&A transaction value, on average. We also find that acquisitions of less tax aggressive targets by more tax aggressive acquirers create values only when the acquirer is well governed. The value-reducing effects of negative tax aggressiveness transfers are primarily accrued to acquirer shareholders. This paper contributes to the literature by using a strong setting to examine the value of tax aggressiveness to shareholders.
DOES SOCIAL PERFORMANCE INFLUENCE BREADTH OF OWNERSHIP?
LIU, ZHENBIN
KIM, JEONG-BON ; LI, BING
Category: SE = Social and Environmental Accounting
This study examines the hitherto unexplored question of whether and how a firm’s social performance influences the breadth of that firm’s share ownership. We predict and find that firms with higher corporate social responsibility (CSR) ratings attract more institutional investors (especially long-term, low-stake and green institutional investors) and more individual investors. In addition, we show that better CSR performance is associated with greater investor attention and/or demand for information, as proxied by Google and EDGAR search volume. All these findings suggest that investors are more interested in firms with higher CSR ratings and thus prefer to hold stocks of such firms. Our results are robust to potential endogeneity, the use of alternative model specifications, and an alternative proxy for CSR performance.
CEO CAREER CONCERNS AND CORPORATE TAX AVOIDANCE
LOBO, GERALD
SUN, AMY; ZHANG, DANA
Category: TX = Taxation
This study investigates the effect of career concerns on corporate tax avoidance and how the effect evolves over the CEO’s tenure. We hypothesize that because new CEOs have strong career concerns, they have incentives to reduce the effective tax rate in order to signal their superior ability to shareholders and the board of directors. Consistent with this career concerns hypothesis, we document that CEOs engage in a higher level of tax avoidance in the first year of their service than in later years. We also find that the level of tax avoidance in the CEO’s first year of service increases in idiosyncratic risk, but decreases in systematic risk, the proportion of outsiders on the board, institutional ownership, and shareholder rights. Our results are robust to alternative measures of tax avoidance, alternative time horizons to proxy for the early period during a CEO’s tenure, controlling for firm and manager characteristics that may impact tax avoidance, and including firm-manager fixed effects to deal with unobservable firm-manager specific factors that may affect tax avoidance. Together, our findings are consistent with career concerns providing strong incentives for mangers to reduce cash tax payments.
INDEPENDENT AUDIT OVERSIGHT: RHETORIC OR REALITY? AN INTERDISCIPLINARY APPROACH TO COMPARING ACCOUNTING REGULATION.
LOEHLEIN, LUKAS
Category: AU = Auditing
The independence of audit oversight systems is the most essential prerequisite for restoring public confidence in audits after the past accounting scandals and financial crisis. This study is the first that provides insights into the question as to how independent the ‘independent’ audit oversight boards are. Their independence is measured both in terms of their organizational composition (e.g. appointment procedures of the board members) and regulatory competences (e.g. the way audit firms are inspected). Hence, this study takes a first step towards providing a quantifiable measure of the formal independence of audit oversight authorities. The results are visualized by a Partial Order Scalogram Analysis (POSAC), which allows conclusions about the similarities of various countries and their relative levels of independence. Although all countries encounter similar pressure to establish public (i.e. profession-independent) oversight systems, this study identifies how differently ‘independence’ has been translated in regulatory outcomes. Whereas all countries claim to possess formal public oversight systems, there is a visible gap between countries with comparatively materially independent oversight systems, such as Italy and Luxembourg, and the states with accounting bodies that still maintain far-reaching regulatory competences in the audit sector, such as Ireland and Belgium.
IS THERE A HONEYMOON FOR NEW CEOS?
LONT, DAVID
GEERTSEMA, PAUL; LU, HELEN
Category: FR = Financial Reporting
Recently appointed CEOs of firms with poor stock market performance tend to enjoy a honeymoon period from the company’s investors. After appointment, stock prices drop less on average in response to the announcement of bad earnings news relative to companies that have not had a recent change of CEO. Surprisingly,unexpected earnings in the first year of tenure of the new CEO do not appear to contain information regarding the new CEO’s capability or the success of the new strategy. Stock prices are not more responsive to unexpected earnings of firms with new CEOs than to those of firms without a change in CEO. Previously documented evidence for the capability and strategy hypothesis appears to be driven by investors’ “pessimistic” interpretation of the outgoing CEO’s earnings news in our sample.
THE STUDENTS´ PERCEPTION OF THE ETHICAL COMMITMENT OF COMPANIES. A STUDY ABOUT THE DEVELOPMENT OF THE ETHICAL COMPETENCE IN ACCOUNTING STUDENTS
LÓPEZ PÉREZ, MARIA VICTORIA
GARDE-SÁNCHEZ, RAQUEL; RODRÍGUEZ-ARIZA, LAZARO; RODRÍGUEZ-GÓMEZ, SARA
Category: ED = Accounting Education
The increase of companies demand of ethical actions and the introduction of ethical competences in undergraduate studies in business and economics leads us to consider, first, the students’ perception about the society ethical demands towards the companies and the ethical policies that companies should to develop to meet their social commitments, in order to define the students’ ethical principles; and, secondly, we test how the ethical activities affect the students’ ethical perception. To answer these questions, a survey was conducted in two moments to students of accounting in the first course of the degree -at the beginning and the end of the term-, before and after developing ethical activities (introducing ethical situations in the normal cases of accounting). The results show that students do not follow general or universal ethical principles and their personal ethical approach is relativistic. This situation makes difficult for students to understand in depth the ethical commitments that companies have with their stakeholders. In general, training in knowledge of economic subjects that students receive is much stronger than ethics training taught in the context or transversely, making approaches closest to consider the company as a single agent, obviating the responsibilities towards the society. The results show that other more systematic teaching methodology (uses of case method, works specific units) is required for greater assimilation of the ethical competence.
EVOLUTIONARY DYNAMICS OF TAX COMPLEXITY AND TAX EVASION
LORENZ, JOHANNES
Category: TX = Taxation
There are two ways for taxpayers to avoid paying taxes: legally, through tax optimization and illegally, through tax evasion. The government reacts by closing tax loopholes, thus complicating the law, and by conducting audits. These phenomena are modeled as a population game, a strategic interaction between all taxpayers: the more taxpayers optimize, the lower the optimization result as a consequence of higher tax complexity. The more taxpayers evade, the higher the audit probability. It emerges that in equilibrium, the population shares of optimizers and evaders are not interdependent; rather, they both increase to the detriment of the share of honest taxpayers. If the government reacts to changed optimization behavior with too large a delay, an equilibrium complexity value cannot be reached. If the legislative process is costly, tax codes should be updated rapidly in order to avoid having to change the law permanently.
ACCOUNTING QUALITY AND DEBT CONCENTRATION: EVIDENCE FROM INTERNAL CONTROL WEAKNESS DISCLOSURES
LOU, YUN
LI, NINGZHONG; OTTO, CLEMENS; WITTENBERG-MOERMAN, REGINA
Category: FR = Financial Reporting
This paper examines the role of accounting numbers in creditor coordination by investigating the effect of accounting quality on the degree of debt concentration (i.e., the tendency to rely predominantly on only a few types of debt) in corporate capital structures. Building on theoretical and empirical studies arguing that information asymmetry increases the renegotiation and bankruptcy costs associated with relying on multiple types of debt, we predict that lower quality accounting numbers induce firms to have more concentrated debt structures. Measuring (low) accounting quality with the existence of material internal control weaknesses over financial reporting (ICWs), we find evidence consistent with our prediction: Firms have more concentrated debt structures after experiencing ICWs. This effect is stronger for more severe ICWs and for firms with higher bankruptcy likelihood. We find similar results using accounting restatements and audit quality as alternative measures of accounting quality.
THE EFFECTS OF CORRUPTION ON EARNINGS MANAGEMENT
LOURENCO, ISABEL
CASTELO BRANCO, MANUEL; RATHKE, ALEX ; SANTANA , VERÓNICA
Category: GV = Accounting and Governance
This study provides empirical evidence on the effects of corruption, as proxied by Transparency International’s Corruption Perception Index, on earnings management. It tests the hypothesis of positive association between the countries’ level of corruption and the level of earnings management using a sample of foreign firms with American Depositary Receipts (ADR) in the U.S. market. Findings indicate that corruption perception is related to higher incentives for firms to manipulate earnings in the case of emerging countries, while such results are not identified in developed countries.
CAN FEEDBACK HURT? ADVERSE IMPACT OF FEEDBACK UNDER NEGATIVE FINANCIAL INCENTIVES
LOURENÇO, SOFIA
BATES, DAVID; GREENBERG, JEFFREY ; NARAYANAN, V. G. ; SPINKS, MELISSA
Category: MA = Management Accounting
Our field experiment with 181 physicians from a North American hospital studies the effect of feedback in the context of negative financial incentives (i.e., performance below an e-prescribing threshold leads to termination). Most feedback-incentives studies use positive financial incentives (e.g., Balcazar et al 1985; Alvero et al 2001), making our scenario important as prior research shows that people react differently to losses and gains (Kanhneman and Tversky 1979; Tversky and Kahneman 1991). We demonstrate that performance feedback is detrimental when performers are ex ante below the termination threshold. We find that these “low performers” improve their e-prescribing rates less and later than low performers in the group that receive no information about their distance from the goal. This negative effect of feedback, however, does not apply to physicians who are committed to the task.
INFORMATION SIGNALS AND FINANCIAL DISTRESS IN THE CORPORATE DEBT MARKET
LOY, THOMAS
HOFMANN, RONNY
Category: FA = Financial Analysis
This study extends recent research in the corporate debt market by investigating the use and importance of (accounting) information signals and its association to the level of financial distress inherent in the debt market. Controlling for the presence of systematic risk and private information of credit rating agencies, we provide evidence that accounting accruals and cash flows are not associated with corporate bond returns during periods characterized by a low level of financial distress. However, using a point estimate of the conditional mean of annual bond returns, we find a positive and significant association of accounting accruals and equity book value with annual bond returns during financial distress periods, such as the recent global financial crisis (GFC). Additionally, using a semi-parametric technique to include conditional quantiles of bond returns, we show that the rate of change in the regression coefficients is dependent on the distribution of bond returns. Our results suggest that debt market investors base their investment decisions on credible accounting-based measures (i.e., accruals and leverage information extracted from 10-K financial statements) during financial distress periods, but on average neglect accounting information if the financial distress in the market is negligible.
IMPROVING AUDIT QUALITY THROUGH AUDITOR MERGERS
LU, YINGFA
ZENG, CHENG
Category: AU = Auditing
We utilized a unique setting to test the association between audit quality and auditor size when a considerable wave of auditor mergers took place after the Chinese regulators intentionally raised auditor licensing requirements to promote auditor consolidation. The mergers are completed in a relatively short time span as the direct result of this policy shock, which we consider as a natural experiment with clearer causal chain and less noises caused by conjunctive events. We developed a new measure of auditing quality, audit responsiveness, integrating discretionary accruals and the probability of non-standard audit opinion. We employed a pre- and post- design, and matched our samples from non-treatment group. The results indicate a post-merger improvement in audit quality. Decomposition on auditors and clients suggests that this effect is more pronounced for mergers among auditors of equivalent sizes and for clients with state ownership. Our study provides new evidences for the impact of auditor size on audit quality. We also provided evaluations of the impact of policy intervention re auditor size.
ARE BANKS' BELOW-PAR OWN DEBT REPURCHASES A CAUSE FOR PRUDENTIAL CONCERN?
LUBBERINK, MARTIEN
Category: FR = Financial Reporting
In the lead-up to the implementation of Basel III, European banks bought back debt securities that traded at a discount. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that the accounting and prudential rules exclude from regulatory capital calculations, this to safeguard the safety and soundness of the banking system. For a sample of 720 European LMEs conducted from April 2009 to December 2013, I show that banks lost about 9.3 billion Euros in premiums to compensate investors for parting from their debt securities. This amount would have been recognized as Core Tier 1 regulatory capital, if regulation would accept the recognition of fair value gains on debt. The premiums paid are particularly high for the most loss absorbing capital securities. More importantly, the premiums increase with leverage and in times of stress, right when conserving cash is paramount to preserve the safety and soundness of the banking system. These results weaken the case of the exclusion from regulatory capital of unrealized gains that originate from a weakened own credit standing.
HISTORY OF AUDITING IN RUSSIA: PERIODIZATION AND CHALLENGES OF DEVELOPMENT
LVOVA, DINA
GUZOW, YURY; SOKOLOV, VYACHESLAV
Category: AU = Auditing
This paper discusses the recent history of auditing in Russia from 1987 to the present time. This kind of research, like any inquiry into history, calls for a well-grounded periodization. The authors of this paper chose to apply the method of logical addition to chronological climaxes of regulatory and methodological development of auditing and used it as the basis for its periodization. For the purposes of this study, factors were determined which influence the regulatory and methodological support of auditing; in accordance with the results of the analysis of their time intersections – the logical addition – qualitative leaps in the development of auditing in Russia were identified, which are represented as stages of its evolution. The findings were summarized in the form of a matrix representing the factors influencing periodization of modern history of auditing in Russia, where the horizontal axis shows the factors that influence the evolution of auditing, while the vertical axis represents the time series for the operation of a given factor. Through the application of this method, four stages in the recent history of auditing in Russia were identified: pre-history (the birth of the Russian auditing, the “wild” auditing); establishment of auditing in Russia; government regulation and licensing; self-regulation of audit activity.
THE EFFECTS OF INFORMATION ORGANIZATION AND PRESENTATION FORMAT ON SUBJECTIVE PERFORMANCE EVALUATIONS
MAAS, VICTOR
VERDOORN, NIELS
Category: MA = Management Accounting
This paper reports on an experiment that investigates whether the layout of performance reports affects the leniency and compression of subjective performance evaluations. Relying on psychology theory, we predict that subjective ratings will be higher and more compressed if performance reports contain alphabetically listed indicators rather than categorically listed indicators (as in a balanced scorecard). Moreover, we predict that ratings will be higher and more compressed if performance reports present indicator target and actual values in tables than when this information is presented in graphs. The results from the experiment provide strong support for the hypothesis that performance ratings are lower if measures are listed in a four-category balanced scorecard format as opposed to in alphabetical order. However, there is no support for the other hypotheses. We discuss the implications of the study for management accounting research and practice.
GOVERNMENT OWNERSHIP AND CORPORATE TAX AVOIDANCE: EVIDENCE FROM A WESTERN ECONOMIC CONTEXT
MAFROLLA, ELISABETTA
D'AMICO, EUGENIO
Category: TX = Taxation
This paper examines whether government block-ownership has an impact on firms’ tax avoidance by considering a sample of Italian corporations listed between 2006 and 2011. We measured the tax avoidance of the government owned firms with the aim of assessing whether this type of institutional owner, who is supposed to be more shareholder-focussed compared with other types of owners, was more or less tax aggressive than private owners in Italy. We found that government ownership had a systematically negative effect on corporate income effective tax rate, with a prevalence of tax planning policies focussed on a long-term horizon. Nevertheless, by separating state ownership from local government ownership, we found that local government proprietorship strongly and negatively affected firms’ effective tax rate. Collectively, our results document that compared to all other counterparts, in local government owned firms managers with political connections pursued tax-minimizing policies (which imply insider rent maximizing policies), that were particularly effective over the long-term. These findings should alert policy makers and might provide useful insights into the provision of peculiar governance rules for enhancing tax compliance in politically connected corporations.
INFLUENCE OF BUDGETING STYLE ON EXECUTIVES' PERCEIVED USEFULNESS AND CRITICISMS OF BUDGETING
MAGALHAES MUCCI, DANIEL
BIDO, DIÓGENES; FREZATTI, FÁBIO
Category: MA = Management Accounting
This study investigates the influence of the style of budgeting use on executives’ perceived usefulness and criticisms of budgeting. The style of budgeting use is conceptualized following the framework of Adler and Borys (1996), which includes coercive and enabling use. Perceived budget usefulness comprises the utility to management and the relevance of the information provided for decision making. The level of criticism covers budgeting’s perverse effects on individuals, the inability of budgets to adapt to the environment, budgeting as a ritual and excessive focus on the short term. The study employs an electronic questionnaire administered to a sample of 75 managers from different areas of a large Brazilian electric company. The data collected by the survey were analyzed using descriptive statistics and multivariate Structural Equation Modeling. Respondents have a mean of 25 years of experience in the organization. The structural equation model identified an indirect influence of the enabling style of budgeting use on the level of criticism. It was found that both the perceived usefulness and criticism of budgeting were influenced by the style of budgeting use, which has practical implications regarding the role that budgeting is expected to play in Management Control Systems. The level of criticism was found to be low and managers from all areas of the organization consider budgeting to be an important management tool to manage teams and make decisions.
MAPPING MANAGEMENT ACCOUNTING 2002 - 2012
MAHLENDORF, MATTHIAS
HERSCHUNG, FLORIAN ; WEBER, JÜRGEN
Category: MA = Management Accounting
This article provides a summary graphic representation (maps) of the quantitative evidence in management accounting published from 2002 to 2012. These maps display variables, causal links, and the level of analysis for 257 studies. We allocate these studies to six maps and 29 individual sub-maps, thus providing an easily accessible overview of the existing quantitative evidence in management accounting. We compare our results to those provided by Luft and Shields (2003) and find that research interest in empirical quantitative management accounting has increased substantially. Additionally, the complexity of the tested models has increased. In spite of this, the maps reveal potential issues regarding the robustness of results caused by a lack of standardization of measurement instruments and scarcity of replications. Finally, we exemplify how our maps may be used to identify research gaps and to inspire future research projects. For example, we show how the graphical representation of the combined evidence from multiple studies reveals competitive mediations that have not been explicitly tested in the individual studies and require more research. Moreover, we point out conflicting results which need further elaboration and explain how existing evidence may be combined to develop new testable empirical models.
HOW DO FINANCIAL ANALYSTS INTERPRET INDUSTRIAL FIRMS’ CORPORATE REFOCUSING ANNOUNCEMENTS?
MAK, CHUN YU
Category: FA = Financial Analysis
I investigate how analysts perceive the effect of refocusing announcements on firms’ future earnings, how they react to the good news and bad news of refocusing announcements, and how they utilize sources of information to forecast under the uncertainty resulting from refocusing events. These three objectives provide a clear picture about how analysts derive forecasts for firms announcing refocusing. The results show that analysts expect a decline in the earnings performance of refocusing firms in the short run but do not exclude the possibility of an improvement in the long run. Furthermore, they already derive a view about firms’ future performance by reviewing their valuation for firms before any refocusing announcement. Their forecast revisions are more strongly associated with bad news than with good news in the refocusing announcement year. This suggests that they are aware of the asymmetric timeliness in the realization of the costs and benefits resulting from refocusing activities. Firms’ stock excess return is the key source of information for them to derive forecasts for a firm in the refocusing announcement year. The above results imply that analysts process information efficiently and derive forecasts promptly.
ADAPTING TO CRISIS: THE MOTION OF MANAGEMENT CONTROL IN A GREEK HOTEL-CHAIN
MAKRYGIANNAKIS, GEORGIOS
Category: MA = Management Accounting
In the paper I provide data on the adaptation of management control in response to the financial crisis; a topic where there is little theoretical and empirical knowledge in our field. Under a structuration framework, I present the adaptation of budgeting and management control practise, as well as the subsequent reconfigurations of control structures in a Greek hotel-chain. I apply Aristotle’s motion theory in order to make sense and analyse the dynamics of management control stability. The agents chose a patience strategy to respond to the crisis. They prepared to accept smaller profits or small losses in order to keep their quality performance. Yet, the actualisation of the strategy flirted with the paradox of cost reduction and quality retention. Budgeting had to get more intense and budgets got ‘deeper’ in an effort to reduce cost without affecting quality. They introduced rolling forecasts, in parallel to budgets, in order to monitor environmental frustrations. The result of the motion to budget actualisations is the closer interconnection and balancing of the predominant quality control structures with the budgeting ones. Their control structures moved to be more stringent, formal, and centralised than before, also providing more visibility and possibilities for action.
HOW SELL-SIDE AND MANAGEMENT TIES AFFECT FORECAST TIMING AND ACCURACY
MALEVERGNE, YANNICK
SAMI, HIND
Category: FR = Financial Reporting
We model the impact of ties with management on analysts’ information gathering behavior and timing of forecasts release. We find that an analyst seeks to develop closer ties with corporate managers as a means to obtain better access to managerial information whenever his ability to process earnings information is more limited. Ties with corporate insiders substitute for the analyst’s processing of earnings information leading him to issue his forecast as soon as possible in order not to lose his informational advantage. Instead, an analyst of higher ability does not seek to gain an informational edge from privileged access to corporate management since his greater expertise in processing public information is enough to deliver valuable predictions leading to forecasts released later due to time and diligence expended in information acquisition and processing. We also discuss systematic evidence that support or detract from our findings that analysts characteristics drive information production and forecast timing.
REVISITING 30 YEARS OF SMA LITERATURE: A FOCUS ON COST, PRICE AND VALUE
MALLERET, VERONIQUE
Category: MA = Management Accounting
This article presents a summary of the Strategic Management Accounting (SMA) literature and suggests to re-organize its intellectual contribution around the concepts of costs, price and value. In its first part, the article shows how authors define SMA (by its characteristics, its practices and methods) and compares SMA to Strategic Cost Management (SCM). The second part of the article discusses the empirical research work conducted in the SMA/SCM field and its main results. The article then questions the theoretical contribution of the SMA/SCM literature and its limitations before proposing a framework which relates the concepts of costs, value and price, and incorporates many of the practices usually connected to SMA.
POLITICAL UNCERTAINTY AND ANALYST PERFORMANCE
MAMO, KALEAB
BALORIA, VISHAL
Category: FA = Financial Analysis
This study examines whether political uncertainty affects the forecasting performance of financial analysts. We conjecture that political uncertainty increases the complexity of the forecasting task for analysts, resulting in less accurate earnings forecasts. We find robust evidence that forecast accuracy decreases in the presence of political uncertainty. We also document that the negative association between forecast accuracy and political uncertainty is more pronounced when political uncertainty is particularly high and when firms are more sensitive to political uncertainty. Our results hold consistently across alternative measures of political uncertainty and analyst performance. Collectively, our evidence suggests that political uncertainty contributes to the complexities analysts encounter in predicting firm performance.
BANK TRANSPARENCY AND THE CRISIS
MANGANARIS, PANAYOTIS
BECCALLI, ELENA; DIMITROPOULOS, PANAGIOTIS
Category: FR = Financial Reporting
This paper explores the level of transparency in the banking sector and investigates the impact of the recent financial crisis. We interpret transparency in terms of conservatism and timeliness, as in Ball, Kothari, and Robin (2000, p. 2). Based on a sample of 98 European listed banks over 2005-2011, we use three models to proxy for conservatism (Nichols, Wahlen, & Wieland, 2009; Ball, Kothari, & Nikolaev, 2013; Ball & Shivakumar, 2005) and two metrics of timeliness (Raonic, McLeay, & Asimakopoulos, 2004; Ball, et al., 2000). Our findings do not document the existence of conservatism during the first years of mandatory IFRS adoption in the EU banking industry. However, the levels of conservatism significantly increased after the outbreak of the financial crisis (higher timeliness of loan loss provisions, timelier “bad news” recognition and asymmetrically increased negative accruals). Moreover, timeliness significantly increased after the outbreak of the crisis. This evidence on combined timeliness and conservatism suggests an attempt of banks to increase transparency after the outbreak of the financial crisis to mitigate the adverse consequences of the opaqueness typically characterising the industry.
THE SPILLOVER EFFECTS OF MD&A DISCLOSURES FOR REAL INVESTMENT: THE ROLE OF PRODUCT MARKET COMPETITION
MANGEN, CLAUDINE
DURNEV, ART
Category: FR = Financial Reporting
We explore the association between a company’s investments and the tone of its peers’ MD&A disclosures; we ask whether the direction and the strength of this association is affected by product market competition. We find that the direction of the association can differ according to whether investing companies and disclosing peers in a product market have positive or negative interdependencies. Moreover, we document that the strength of the association between a company’s investments and the tone of its peers’ MD&A disclosures varies with product market fundamentals: the association is stronger when entry costs are lower, the product market is larger and products are less substitutable. Finally, we show that our results regarding investments generally carry over to investment efficiency.
STRATEGIC INCENTIVES FOR THE ADOPTION OF THE INTERNATIONAL FINANCIAL REPORTING STANDARDS BY NON-LISTED COMPANIES IN GREECE
MANTZARI, ELISAVET
SIGALAS, DR. CHRISTOS
Category: FR = Financial Reporting
In this paper, we examine the strategic incentives of non-listed companies in adopting the International Financial Reporting Standards (IFRS) voluntarily. Previous literature, drawing mainly on archival data, justifies the voluntary adoption of the IFRS based on economic efficiency arguments. We complement this literature by exploring the wider dynamics that reinforce the international diffusion of the IFRS focusing on the adoption of IFRS by Greek non-listed companies. We combine and analyse evidence based on a cross-sectional survey and interviews with senior managers. Our analysis indicates that voluntary adoption is less common as it is asserted to be, while the incentives and expected benefits are not primarily related to the improvement of the quality of financial reporting information or the technical competence of the standards; rather, power-based institutional forces are considered more important in the diffusion of the IFRS. Voluntary adoption is driven mainly by the pressures exerted by parent companies on their subsidiaries and other legal requirements. Another incentive for the voluntary adoption of the standards is that they facilitate the raising of funds. Non-listed companies gain legitimacy from IFRS adoption while powerful groups, such as financial and banking institutions, and the state play a pivotal role in supporting the establishment of the IFRS at a national and international level.
DO MANAGERS MANIPULATE EARNINGS PRIOR TO MANAGEMENT BUYOUTS?
MAO, YAPING
RENNEBOOG, LUC
Category: GV = Accounting and Governance
To address the question as to whether managers manipulate accounting numbers downwards prior to management buyouts (MBOs), we implement an industry-adjusted buyout-specific approach and receive an affirmative answer. In our sample of UK buyout companies, negative earnings manipulation (understating the earnings prior to the deal) occurs, both by means of accrual management and real earnings management. We demonstrate that MBOs are significantly more frequently subject to negative manipulation than institutional buyouts (IBOs). In non-buyout firms, positive earnings management frequently occurs because it affects managers’ bonuses and the likelihood of meeting or beating analysts’ expectations which may trigger a positive market reaction. By means of an instrumental variables approach, we examine competing incentives affecting the degree and size of earnings manipulation. Our evidence implies that the (ex ante) perceived likelihood that an MBO will be undertaken has a strong significant effect on negative earnings management, while the external borrowing incentive does not mitigate downward earnings manipulation. The implementation of the revised UK Corporate Governance Code of 2003 has somewhat reduced the degree of both accrual earnings and real management in MBOs, but since then real earnings manipulation is more frequently used, which may be induced by the fact that it is more difficult to detect.
COME ON OVER: ANALYST/INVESTOR DAYS AS A DISCLOSURE MEDIUM
MARKOV, STANIMIR
KIRK, MARCUS
Category: FR = Financial Reporting
We investigate the role of analyst/investor days as a distinct disclosure medium and in conjunction with conference presentations. We find that analyst/investor days are less frequent but have six times larger price impact than conferences presentations. We find 25% of firms hosting analyst/investor days in a year do not participate at broker conferences, consistent with firms responding to analyst lack of interest in organizing investor interactions. The remaining 75% operate more segments and engage in more R&D and M&A activities than firms that only make conference presentations, consistent with analyst/investor days offering unique disclosure benefits. Moreover, the occurrence of an analyst/investor day prior to a conference presentation erodes the presentation’s price impact but not vice versa, consistent with firms favoring analyst/investor days as a disclosure medium.
COACHING ON DEMAND: THE ROLE OF THE MANAGEMENT ACCOUNTANT AT THE SWEDISH SOCIAL INSURANCE AGENCY
MÅRTENSSON, MARIA
HOLMGREN CAICEDO, MIKAEL ; TAMM HALLSTRÖM, KRISTINA
Category: MA = Management Accounting
Based on a qualitative interview study we trace the development of the management accountant role at the Swedish Social Insurance Agency (SIA). As of 2012 the SIA has begun to reform itself in order increase customer trust by among other things introducing and implementing Lean as its new operational strategy. The management accountant role at the operative level has followed suit and has now developed into consultative coaching while other groups such as specialists and teams, also at the operative level, have begun to perform management accounting tasks. The present study bears thus witness of the expansion of available roles to the management accountant as well as the hybridization of other groups and professions who now perform the management accounting function along management accountants.
BOARD’S FINANCIAL INCENTIVES, COMPETENCE, AND FIRM RISK DISCLOSURE
MARTIKAINEN, MINNA
KINNUNEN, JUHA; MIIHKINEN, ANTTI; TROBERG, PONTUS
Category: GV = Accounting and Governance
This paper examines some novel corporate governance-based determinants of risk disclosures among index listed Finnish companies. Firms’ risk disclosures are analysed in terms of their quantity and coverage. We focus on two board characteristics not examined in prior related literature: (1) non-executive board members’ self-interested financial incentives, measured by their share or option ownership and annual compensation, and (2) non-executive board members’ competence measured by their experience in the company as well as managerial capability proxied by prior education. The sample is composed of the OMXH25-listed firms representing the most traded and followed firms among Finnish publicly listed companies. We find that the risk disclosures of these firms can be explained by the financial incentives (wealth and compensation) as well as competence-related factors (attrition rate and education). The results indicate that among the ‘best disclosers’ the narrative risk disclosures are, on average, on a high level and variation in risk reporting is largely associated with board characteristics. Moreover, board members’ financial incentives and competence impact the dynamism of board working. This way they are also associated with board members’ disclosure decisions. Paper contributes to the extant literature by demonstrating the impact of previously unexamined board characteristics on the quality of highly followed firms’ narrative risk disclosures.
MULTIPLE SUPERVISORS IN AUDIT: FAIRNESS AND THE MANY-TO-ONE PERFORMANCE APPRAISAL ENVIRONMENT
MARTIN, REBECCA
SIMMERING DICKERSON, MARCIA
Category: AU = Auditing
Auditing presents a unique environment in which associate auditors (lower-level auditors) are often managed by multiple supervisors. Prior research indicates that increased fairness can improve organizational outcomes such as job satisfaction and performance, but this has yet to be investigated in a setting with multiple supervisors. The present study examines the role of internal locus of control and consistent standards on perceptions of procedural justice, predicting organizational commitment and perceived learning in a multiple-supervisor environment. Using a student sample, we find support for this model and present implications of our findings.
CORPORATE SOCIAL RESPONSIBILITY AND ITS EFFECT ON ORGANIZATIONAL INNOVATION AND FIRM PERFORMANCE: AN EMPIRICAL RESEARCH IN SMES
MARTINEZ CONESA, ISABEL
PALACIOS MANZANO, MERCEDES; SOTO ACOSTA, PEDRO
Category: FR = Financial Reporting
This paper extends previous studies on CSR by measuring different dimensions of CSR in a single integrative construct. In addition, although the link between CSR and business value have been investigated, a significant research gap remains when considering the relationship between CSR and innovation. Few works have analyzed whether intangibles such knowledge or creativity might be the missing link between CSR and firm performance. To cover these research gaps in the literature, this paper develops a research framework, which adopts a comprehensive view of CSR, and analyzes not only the direct effect of CSR on firm performance within SMEs, but also the mediating effect of organizational innovation in this relationship. The paper’s hypotheses are tested on a data set of 550 Spanish firms by using partial least squares (PLS) structural equation modelling.
THE CAUSAL LINKS BETWEEN VOLUNTARY CSR DISCLOSURE, COST OF CAPITAL AND INFORMATION ASYMMETRY. THE MODERATING ROLE OF THE STAKEHOLDER PROTECTION.
MARTÍNEZ FERRERO, JENNIFER
CUADRADO-BALLESTEROS, BEATRIZ; GARCÍA-SÁNCHEZ, ISABEL-MARÍA; VAQUERO-CACHO, LUIS-ANDRÉS
Category: SE = Social and Environmental Accounting
This paper is focused on demonstrating whether those companies that voluntarily disclose information regarding CSR to a greater extent by increasing the availability of information – not only for investors but also for stakeholders –achieve a decrease in information asymmetry problems. In addition, we analyse this relationship in environments characterized by a greater commitment and orientation to stakeholders. Making use of an international sample of 575 companies for the period 2003–2009, our empirical evidence shows how voluntary disclosure regarding CSR aspects reduces the problems of asymmetric information between the different market agents, which is especially important in environments characterized by a strong focus and commitment to stakeholders. In addition, this evidence is complemented by showing the bidirectional relationship between voluntary disclosure and asymmetric information in such environments. Thus, greater asymmetric information leads to higher voluntary information disclosure practices, which are able to reduce the agency problem in environments characterized by strong socially responsible commitment.
A MULTILEVEL DIFFUSION FRAMEWORK OF ERP TECHNOLOGY
MASQUEFA, BERTRAND
EGRET, PAUL
Category: IS = Accounting and Information Systems
The paper develops an ERP diffusion framework to assist accounting/accountants in implementing organization-wide ERP projects. The proposed theoretical framework, the 6I stage model, borrows from the ERP literature, the organizational learning literature and the contingency perspective of innovation literature. The 6I stage model differs from previous life-cycle stage model as it embraces the organizational context. The study attempts to move forward from descriptive life-cycle stage research to more prescriptive process research. With this aim in mind, a longitudinal case study research was conducted at a world leader Defence Company. Data were collected from a three-year action research and 90 semi-structured interviews.
THE PROVISION OF NON- AUDIT SERVICES AND AUDIT FEES: DOES SOURCING ARRANGEMENT OF INTERNAL AUDIT MATTERS?
MAT ZAIN, MAZLINA
ABDUL WAHAB, EFFIEZAL ASWADI ; GIST, WILLIE. E.
Category: AU = Auditing
Abstract: This study examines the interactive influence between the provision of non-audit services (NAS) by the incumbent auditor and the firm's internal audit function (IAF) sourcing arrangement on external audit fees. Using a 1021 firm-year observations sample of Malaysian listed firms for the period 2007-2009, we find a positive association between (NAS) and audit fees. Results also show that audit fees charged to their audit clients are significantly lower when firms outsource their IAFs. Additionally, results indicate that the provision of NAS to firms with outsourced IAF is significant and negatively related to external audit fees. The reduction of audit fees could be due to the “knowledge spillover” benefits that exist for the provider of NAS (incumbent auditor) when the firm outsources its IAF (as compared to in-sourcing IAF) which enhance audit efficiency. Results are consistent across various types of NAS. These findings are important as they highlight that external auditors make a thorough assessment regarding the quality of the IAF prior to relying on IAF as prescribed by Professional Auditing Standard (Public Company Accounting Oversight Board [PCAOB] No. 5, 2007; SAS No.65; ISA610). Keywords: Auditor independence, internal audit sourcing arrangements, non-audit services, knowledge spillover, recurring, audit-related, tax-related non-audit services. JEL Classifications: M42  
THE IMPACT OF THE PRESENCE OF OUTSIDE DIRECTORS ON THE USEFULNESS OF OPERATING INCOME IN CONTEXT OF HIGH RISK
MATHIEU, ROBERT
CHU, LING ; MBAGWU, CHIMA ; ZHANG, PING
Category: FR = Financial Reporting
The objective of this study is to examine the impact of the percentage of outside directors on the usefulness of operating income and how this relationship is affected by the level of firms’ operational risk. We initially provide evidence that the banks consider the presence of outside directors on the board when setting the interest rates on new loans. Then, we provide evidence that the presence of outside directors increases the usefulness of operating income. Further analyses reveal that the relationship between outside directors and the usefulness of operating income depends on the level of operational risk. When operational risk is low, the presence of outside directors increases the usefulness of operating income. However, the amplifying effect is significantly reduced when operational risk is high. These results hold with both a firm-specific proxy for operational risk (volatility of operating income) and a macro-economic proxy (the presence of the financial crisis). These findings suggest that the presence of outside directors is positively related to the usefulness of earnings information but only when the level of operational risk is low.  
QUALITATIVE UN-VERIFIABLE DISCLOSURES TO INFORM OR MISLEAD: INSIGHTS FROM INSIDER TRADING ACTIVITY
MATTEI, MARCO
BECCALLI, ELENA; LAGHI, ENRICO; MATTEI, MARCO
Category: GV = Accounting and Governance
Existing literature has extensively investigated if un-verifiable narrative disclosure (qualitative disclosure) gives incremental information or increases the opacity to investors. Empirical studies consistently provide evidence that qualitative disclosure is perceived useful as it has significant effects on analyst forecast revision and share prices. But these results leave unanswered the question whether managers come up with qualitative disclosure to inform or mislead investors. To disentangle this issue, we investigate whether qualitative disclosure truthfully represents the rational expectations of the manager responsible for the disclosure. Grounding on signaling theory, we consider two signals coming from the same manager: one (the insider trading) is the costly signal whilst the other (the qualitative disclosure) is the cheap signal and we verify if they are coherent. Our results suggest that the cheap signal is not aligned with the costly signal suggesting that qualitative disclosure is used to mislead investors and not to offer incremental information, irrespective on how this disclosure is considered by market participants.
DETERMINANTS OF CSR DISCLOSURES IN COMMERCIAL BANKS IN POLAND
MATUSZAK, ŁUKASZ
MACUDA, MAŁGORZATA; RÓŻAŃSKA, EWA
Category: SE = Social and Environmental Accounting
Corporate social responsibility (CSR) – the idea based on a thesis that profitability may be combined with responsibility – has long been recognised by various economic entities as an important issue. More and more banks all over the world are communicating aspects of CSR related to their operations. In Poland, we are also seeing an increase in the annual number of banks’ reports that take into account environmental and social issues. This paper aims to investigate the extent and CSR reporting trends in commercial banks in Poland in the years 2008 – 2013 as well as to examine the determinants of CSR disclosures in the banks by using panel data analysis methodology. The first part of the article consists of a literature overview. The subsequent two parts present the implementation of the idea of corporate social responsibility in the banking sector, both worldwide and in Poland, taking into account the research in this area conducted so far. The fourth and the fifth part of the article are devoted to the research hypotheses and the methodology of the research carried out by the authors. The following part presents the results of this research, while the last part of the article contains the conclusions drawn from them by the authors.
EQUILIBRIUM DISCLOSURE AND THE VALUE OF ACCOUNTING INFORMATION IN A MULTI-PERIOD TOURNAMENT
MAUCH, CAROLIN
SCHÖNDUBE, JENS ROBERT
Category: MA = Management Accounting
In this paper we analyze a principal's disclosure incentives in a tournament setting. A principal hires two agents for two periods to perform two tasks in every period. The principal can install an information system that reports a signal about the agents' productivities. Having installed the information system, the principal may have an incentive to withhold productivity information if its disclosure would induce the agents to allocate their effort among both tasks more equally. The reason is that the principal generally prefers the agents to specialize in one task while the agents prefer a more even allocation due to convex disutility of working hard. We investigate how this conflict of interest affects equilibrium disclosure incentives. Furthermore, we analyze the value of the information system for the principal and derive necessary and sufficient conditions for the information system having positive value.
TYPES OF MISSTATEMENT PUBLICATIONS AND EFFECTS ON THE STOCK MARKET - EMPIRICAL EVIDENCE FROM GERMANY
MAUL, STEFAN
Category: FA = Financial Analysis
I examine the German stock market reaction to a sample of 157 accounting misstatement announcements between 2005 and 2014 and whether the reaction is influenced by the type of the announcement (ad-hoc announcement, corporate press release and electronic Federal Gazette error notices). There is a statistically significant mean abnormal return of about 1.6 percent over a three-day event window [-1;1] for the full sample. The most severe valuation discount of -7.8 percent is documented for a subset of ad-hoc announcements. No significant negative returns are found for error publications first announced at the electronic Federal Gazette. Utilizing cross-sectional regression analysis, I find that ad-hoc announcements induce the strongest negative price reaction compared to corporate press releases and Federal Gazette error notices. The stock market penalty is lowest for Federal Gazette error notices. Different types of accounting misstatement publications seem to attract the attention of investors to different extents and, therefore, differs the magnitude of the valuation discount.
INSIGHTS INTO PERFORMANCE- BASED BUDGETING: A LITERATURE REVIEW AND A RESEARCH AGENDA
MAURO, SARA GIOVANNA
CINQUINI, LINO; GROSSI, GIUSEPPE
Category: PS = Public Sector Accounting
The performance of governments is a critical issue in public administration especially in times of austerity. Relevant efforts have been made at developing performance measures and information and incorporating them into management and budgeting processes, linking the funding of organizations to the results they deliver. These practices, here labelled as Performance- Based Budgeting, have attracted a great deal of attention over last years. Due to the high variety of findings, it is worth to review and systematize literature and empirical works on the topic to build a comprehensive picture, in trying to answer these two questions, as other reviews did in the past (Broadbent, Guthrie, 2008): “What has been done? And what else should be done?” Therefore, the present research is aimed at exploring the results achieved up to now and finding out avenues for future research. This paper employs a literature-based analysis of public management and accounting research, as published in international academic journals in Europe and elsewhere from 2000 to 2014. A descriptive analysis is performed to categorize papers according to their source, theoretical framework, methods and level of analysis (Continent and different tiers of public sector). Then, a conceptual analysis is carried out to identify relevant questions and emergent issues. Research findings are expected to underline what has been overstated and what overlooked, thus helping in broadening and deepening the knowledge on PBB.
ERP AND THE MANAGEMENT CONTROLLER ACTIVITY PROFILE: A STEPWISE EVOLUTION?
MAWADIA, ANASS
CHAPELLIER, PHILIPPE; EGGRICKX, ARIEL
Category: IS = Accounting and Information Systems
This paper studies the evolution of the management controller activity profile after ERP (Enterprise Resource planning) implementation based on the model of Besson (1999) drawing up two activity profiles for the management controller: “yesterday” and “tomorrow”. The results of the questionnaire survey conducted in a service multinational show an activity profile relatively close to "yesterday" model. According to the results of the interviews survey, the evolution of the management controller activity profile would be in stepwise with the implementation of business intelligence tools and a displayed willingness of the top management.
CHANGES IN CORPORATE EFFECTIVE TAX RATES OVER THE PAST TWENTY-FIVE YEARS
MAYDEW, EDWARD
DYRENG, SCOTT; HANLON, MICHELLE; THORNOCK, JAKE
Category: TX = Taxation
This paper investigates systematic changes in corporate effective tax rates over the past twenty-five years. We find that effective tax rates have decreased significantly. Contrary to conventional wisdom, we find that the decline in effective tax rates is not concentrated in multinational firms; effective tax rates have declined at approximately the same rate for both multinational and domestic firms. Moreover, we find that within multinational firms, both foreign and domestic effective rates have decreased. Finally, we find that changes in firm characteristics and declining foreign statutory tax rates explain little of the overall decrease in effective rates. The findings have broad implications for tax research, as well as for current policy debates about reforming the corporate income tax.
MANDATORY AUDIT FIRM ROTATION AND EFFECTS ON PRICING, QUALITY, AND AUDITOR INDUSTRY EXPERTISE IN ITALY
MAZZA, TATIANA
AZZALI, STEFANO; REICHELT, KENNETH; SIMONOV, ANDREY
Category: AU = Auditing
The European Parliament recently passed a mandate to require mandatory audit firm rotation (MAR) every 10 years with an added 10 years if mandatory tendering is in place. Italy has had a nine year MAR term since the early 1970s, which creates a unique setting for testing the effects of MAR on audit pricing and audit quality. Prior research indicates MAR is detrimental by ‘low-balling’ of audit fees, and higher abnormal accruals in the first year of the new auditor (Cameran et al. 2014). Our study extends this line of research by examining whether the industry specialist’s audit pricing and their client’s accrual quality is adversely affected by MAR in Italy. We find that in the first year of rotating to a new client, that some industry specialist auditors (joint national and city industry specialists) charge a lower audit fee discount than non-specialists. However, in the first year, their client’s abnormal accruals are of worse quality for city only industry specialists compared to abnormal accruals of non-specialist auditors. Our results are strongest for specific industries. These results imply that mandatory audit firm rotation incurs significant switching costs for clients engaging an industry specialist.
THE ROLE OF CULTURE AND CORRUPTION IN EXPLAINING GOODWILL DISCLOSURE LEVELS
MAZZI, FRANCESCO
SLACK, RICHARD; TSALAVOUTAS, IOANNIS
Category: FR = Financial Reporting
Motivated by prior studies examining the link between culture, corruption, and firms’ disclosure, this paper investigates the role of culture and corruption in explaining goodwill disclosure levels reported under IAS36 and IFRS3. Our analysis is based on a sample of firms listed in the Standard and Poor’s Europe 350 for the period 2008-2011. We first group the 16 countries in our sample through a cluster analysis and then test the effect of these clusters on the amount of disclosure reported by sampled firms. Second, we test the effect of culture and corruption country levels on disclosure. Results show that our country classification provides an explanation for the amount of goodwill disclosure released including national culture and levels of corruption. Results are robust to several sensitivity tests, employing various disclosure transformations, alternative measures of corruption and national culture, and different models’ specifications.
FAMILY OWNERS’ GOALS AND SELF-CONTROL AGENCY PROBLEMS IN PRIVATE FIRMS
MAZZOLA, PIETRO
DE MASSIS, ALFREDO ; KOTLAR, JOSIP ; MINOLA, TOMMASO ; SCIASCIA, SALVATORE
Category: GV = Accounting and Governance
Agency theory suggests that ownership concentration and owner-management reduce agency costs in private firms. However, this view overlooks the self-control agency problems that arise when owners have multiple and potentially competing preferences at one point in time. Self-control problems relate to allocation rather than appropriation issues and their understanding requires explicitly considering the sources of owners’ multiple preferences. Consistently, the findings from Italian private firms show that excessive financial slack can hurt firm profitability, but the ultimate consequences of financial slack allocation depend on the saliency of economic and non-economic goals to family owners. These results extend the scope of agency theory and suggest that ownership configurations are not as crucial as the owners' goals in shaping the agency costs of private firms.
ONE SIZE DOES NOT FIT ALL: CAPITAL INVESTMENT DECISIONS AND SHORT TERM FIRM PERFORMANCE
MBAGWU, CHIMA
CHU, LING; MATHIEU, ROBERT; ZHANG, PING
Category: FA = Financial Analysis
In this study, we investigate the relationship between firms’ capital investment decisions and their future operating performance. Prior studies have documented productivity declines after firms adopt a new technology or following acquisitions. However, these studies use pooled samples which do not take into account the nature of the investment decision. Our study contributes to the literature by providing evidence that the relationship between capital investment decisions and operating performance is dependent on whether the firm is investing or divesting. We also show that for investing firms, the negative relationship observed, increases with the size of the investment. However, by the second year, performance improves and reaches its level prior to the investment. For divesting firms, we show that there is an increase in operating performance so long as the divestment is below a threshold 10% which suggests selling unproductive assets. Our results, which apply to small and large firms, alleviate the concern that empire building is the cause of the observed relationship between a firm’s capital investment decisions and its operating performance. Furthermore, our results apply to low and high performing firms, mitigating the concern that losing return momentum after an investment is the cause of the negative relationship.
THE MARKET REACTION TO BORROWING ANNOUNCEMENTS: UK EVIDENCE SURROUNDING THE GLOBAL FINANCIAL CRISIS
MCCANN, LAURA
MARSHALL, ANDREW ; MCCOLGAN, PATRICK
Category: FA = Financial Analysis
We examine the stock market response to announcements of public, bank and non-bank private debt in a UK context. We find positive announcement returns surrounding bank loan announcements, but find no evidence of a market response to public or non-bank private debt issuance. Our findings show that it is syndicated bank loans rather than the more traditional bilateral bank loans that drive the positive abnormal returns to bank loans. We also find evidence of negative abnormal returns surrounding bank loan announcements during the recent financial crisis; posing the question of whether bank loans are still special.
UNDERSTANDING THE EFFECTS OF THE IFRS MANDATE: FURTHER CONSIDERATION OF ECONOMIC SIGNIFICANCE AND STATISTICAL SIGNIFICANCE
MCLEAY, STUART J.
BARONE, ELISABETTA
Category: FR = Financial Reporting
This paper reviews models that have been estimated in policy-related accounting research, with a view to better understanding how economic impact may be inferred. The paper reconsiders the inferences that may be drawn from evidence published in more than 100 journal articles, and more specifically on those cross-national studies that provide sufficiently detailed statistical information, covering metrics that mainly concern the quality of financial reporting, the functioning of capital markets, and the change in the information environment. Outcomes are documented for the average firm, and some initial inferences are drawn about economic magnitudes for samples as a whole. The paper makes an added contribution by generalizing the interpretational method to allow for the logistic, Poisson, probit and binomial link functions that are incorporated in the predictors reported in many quantitative research studies. A number of methodological issues are explored. In particular, in nearly all research papers published to date on IFRS, it is difficult to fully understand the expected relationship between firm size and the estimated regulatory impact, with the latter generally modeled as a single fixed effect, compounded by the fact that firm-specific and other fixed effects seem generally to be under-reported.
PARTNERSHIP LAW AND ITS SPAWN: DID LLP DELIVER ON ITS PROMISES?
MCMEEKING, KEVIN
BASKERVILLE, RACHEL; SIM, DALICE
Category: AU = Auditing
Institutional theory focuses upon how organizations enhance their survival by converging around socially legitimated forms. This study contributes to this literature by identifying and increasing our understanding of structural variations and strategic choices among mid-tier and large accounting firms. Registration as a limited liability partnership (LLP) was first permitted for UK accounting firms from 2000. However, firms in the UK Top 50 organize their operations in various legal entities including partnerships, franchises, limited companies and associations. Using accounting firm revenue stream data provided by Accountancy Age this study analyses the benefits for client firms of different forms of legal entity. The results of this study show that the change in percentage of income from audit activities/ total revenues was different for the partnership and LLP firms over the period 2005 - 2013. Inflation (CPI) adjusted revenues (fees per partner) for the full sample of firms had not increased by any statistically significant amount from 2005 to 2013. We also asked what can we determine about strategic choices and firm profitability when there is a shift to LLP? A spread of offices, specialisation and the degree of hierarchy lead to efficiencies of operations and wealth enhancement (through changes in Revenues (Fees) per partner) but ‘LLP choice’ per se does not necessarily increase fees.
THE ACCESS TO MEDICINE INDEX: AUTHORISING KNOWLEDGE AND THE WORK OF REGULATORY CAPITALISM ANALYSTS
MEHRPOUYA, AFSHIN
SAMIOLO, RITA
Category: GV = Accounting and Governance
In this paper, through a detailed study of the analysis process involved in the production of the Access to Medicine Index, we aim to address this gap. The Index, whose outcome is a ranking of the largest global pharmaceutical companies, is expected to help address the social problem of drug accessibility in the global south by means of stakeholder consultation, transparency and competition. This paper follows the mechanics of the performance measurement leading to the creation of the Index, and traces the epistemic values at play in the work of analysts and other experts involved in the production of the Index. The study shows how the goals of deliberation and stakeholder inclusion, the need to project scientificity, and the Index’s underlying ideal of governance through competition shape the epistemic values and practices at play in its production, leading to specific techniques of knowledge validation and eliciting a particular form of self-discipline in the analysts’ work.
THE EFFECTS OF INFORMATION AGGREGATION AND VISUALIZATION ON DECISION QUALITY FOR COMPLEX MULTIATTRIBUTE JUDGMENT TASKS IN PERFORMANCE EVALUATION
MEIER, CHRISTIAN
JAKOB, TAMARA; OBERMAIER, ROBERT
Category: MA = Management Accounting
Performance evaluation is one of the most prominent multiple criteria decision-making applications. Cognitive limitations of bounded rational decision makers increase the risk of adversely evaluating performance which can have severe consequences. Therefore, it is necessary to facilitate judgments in performance evaluation. Empirical studies have found presentation format and information aggregation to increase judgment quality when implemented properly. However, the interplay of information aggregation and presentation format has not been analyzed so far. Hence, this study examines the interplay of information aggregation and presentation format on judgment quality for a complex multiattribute judgment task in performance evaluation. Cognitive fit theory and information processing theory are employed to derive the hypotheses. An experiment is conducted where both information aggregation and presentation format are varied between-subjects.
ANALYST FOLLOWING, FINANCIAL DEVELOPMENT AND IMPRESSION MANAGEMENT IN GRAPHICAL REPORTING
MELIS, ANDREA
ARESU, SIMONE
Category: FR = Financial Reporting
This paper has investigated whether incentives that derives from the demand for information at a ‘macro’ country-level and at a ‘micro’ firm-level have affected the use and potential ‘abuse’ of key performance indicators graphs in the annual reports of the largest European non-financial firms during the period 2006-2009. Our findings show that the use of KPI graphs is positively influenced by the financial development of the country where a firm is headquartered and, at a ‘micro’ firm-level, by the financial analysts following the firm. This paper also finds that impression management practices in graphical reporting are stronger in highly financially developed countries and/or when firms are followed by a larger financial analysts’ community. This paper contributes to the impression management and voluntary disclosure literatures by showing that financial development and financial analysts seem to increase the amount of information in graphical reporting but to decrease its quality. Graph’s usage and impression management practices are more likely when a stronger external pressure over managers to perform occur. As a practical implication, we suggest annual report’s readers and, in particular, financial analysts, to read and interpret graphical reporting being aware that managers are likely to provide a self-serving view of the firm’s performance. Caution is needed, in particular, in those institutional contexts where the pressure over managers to perform is higher.
THE SUSTAINABILITY MANAGEMENT DISCLOSURE IN THE INTEGRATED REPORTING
MELLONI, GAIA
LAI , ALESSANDRO ; STACCHEZZINI, RICCARDO
Category: SE = Social and Environmental Accounting
Several concerns have been advanced on the ability of various sustainability reporting initiatives (e.g. Global Reporting Initiative) in reflecting the actual corporate engagement with sustainability. According to the International Integrated Reporting Council, the Integrated Reporting (IR) should overcome this limit by favoring the communication of the information used internally by managers in their decision making process on sustainability. While some scholars argue that IR will bring transparency on sustainability management, others are more critical. The paper offers an empirical contribution to this debate analyzing how IR adopters communicate management aspects of sustainability: by mean of a content analysis of all the reports available on the IIRC website and a multivariate statistical analysis, we show that firms tend to supply more information on their sustainability management practices when their social and environmental performances are poor. This means that firms use IR opportunistically to advance their image rather than to provide a complete picture of the sustainability management process. By providing support of the use of IR as an impression management strategy, we reach pessimistic conclusions on the capability of this reporting process to act as a key element to integrate information on internal sustainability management into corporate external reporting.
DISCURSIVE STRUGGLES OVER ORGANISATIONAL RESTRUCTURING IN A PUBLIC-PRIVATE PARTNERSHIP: THE CASE OF LONDON UNDERGROUND
MERKL-DAVIES, DORIS
DOBBINS, TONY; HUGHES, EMMA
Category: PS = Public Sector Accounting
Our experience of the social world and our attitude towards socio-political and economic issues are influenced by linguistic constructions. It is therefore important to study how such issues, including organisational restructuring (e.g., privatisation, plant closures, and out-sourcing of services) are being constructed, legitimated, and resisted. We examine the discursive struggle between London Underground and RMT, the national union for Maritime, Rail and Transport Workers, over structural re-organisation resulting from the transformation of London Underground from a public sector organisation to a public-private partnership. The employment relationship and labour disputes are often portrayed by three competing discourses, namely, unitarism, pluralism and radicalism. When labour strikes occur, politicians, employers and the media have a tendency to advocate a unitarist perspective. They assume that all members of an organisation have one common goal and share the same interests. In contrast, trade unions support pluralism. They contend that conflict is inevitable, due to a diversity of interests, and the power imbalance between employers and employees. We examine which discourses are used by social actors involved in the recent London Underground strikes. For this purpose, we use Fairclough’s Dialectical Relational Approach to CDA to examine how language is used to partially fix, reproduce and structure meaning. We analyse press releases issued by London Underground and by RMT, supplemented by media articles, to examine how social actors use discursive strategies to shape perceptions of audiences and to legitimise their point of view.
EXPENSING PERFORMANCE-VESTED EXECUTIVE STOCK OPTIONS: IS THERE UNDERREPORTING UNDER IFRS 2?
MERZ, ALEXANDER
Category: FR = Financial Reporting
This study provides new empirical evidence on the issue of underreporting of executive stock options. It is the first to investigate the matter under a completely mandatory expense setting created by IFRS 2, which extends results from previous SFAS 123 studies with voluntary expensing. I use a hand-collected data sample from Germany where stock options have a long history of performance vesting, which allows me to analyze the added potential to manipulate values through the more complicated valuation. I find that not all companies disclose all required parameters and this is linked to incentives to hide remuneration, but also experience with preparing IFRS reports. Furthermore, I show that underreporting exists in Germany despite a new enforcement set up and is driven by incentives to hide higher values. This has implications for both investors who may want to institute stricter supervision and enforcement agencies who should pay more attention to the reporting of option-based compensation.
'FRAGILE PARTNERS': ON THE IDENTITY WORK OF MANAGEMENT ACCOUNTANTS
MESSNER, MARTIN
GORETZKI, LUKAS
Category: MA = Management Accounting
The paper contributes to the literature on the roles and identities of management accountants. Using data from an in-depth case study of a manufacturing firm, we examine how management accountants carry out identity work to position themselves as ‘business partners’ within their organization. Our particular interest is with the challenges that they thereby face. For notwithstanding the various efforts which accountants undertake to position themselves as ‘business partners’, we observe that such an aspirational identity remains difficult to stabilize. Compared to previous research, we thus emphasize the fragility of the business partner identity. We show how such fragility expresses itself with respect to three different but interrelated dimensions of identity, i.e. meaning, legitimacy, and power. What it means to be a business partner, whether such a role is normatively accepted and whether the accountants can mobilize resources to realize this role are matters of ongoing concern and struggle. The ‘business partner’ identity has to be continuously negotiated, earned, and made room for.
VOLUNTARY DISCLOSURES ON COLLABORATION MADE BY CORPORATIONS AND NGOS. EVIDENCE FROM A TRANSITION COUNTRY.
MICHALAK, JAN
WANIAK-MICHALAK, HALINA
Category: SE = Social and Environmental Accounting
Collaboration between NGOs and corporations is an expanding area of research area that brings up new questions. The paper seeks to establish the scope of information on philanthropic cooperation revealed by corporations and charitable organizations in a transition country (Poland) and its determinants, bearing in mind that the NGO sector in Poland is still in the early stage of development. The necessary input data were obtained from the websites of corporations and foundations and from the reports on corporate social responsibility (CSR). The content analysis focused on the disclosures made by 41 corporations and 82 foundations. A total of 131 collaboration reports available on the websites and 95 reports disclosed in relation to CSR were examined. Thereafter, an econometric model explaining the disclosures on collaboration between corporations and NGOs based on the website information and CSR reports was constructed. The research allowed the key factors determining the amount of information on philanthropic partnerships displayed by corporations and charities on their websites and in CSR reports to be identified. In the case of corporations, the NGO being a corporate foundation and the corporation being owned by a group of the NGO’s biggest donors are the most important factors. As far as NGOs are concerned, the major factors are the NGO being, or not, a corporate foundation and the amount of donations as a percentage of its total revenue.
THE RELATION BETWEEN SUSTAINABILITY ASSURANCE AND SUSTAINABILITY REPORT RESTATEMENTS: IS ASSURANCE IMPROVING THE CREDIBILITY OF REPORTING?
MICHELON, GIOVANNA
ROMI, ANDREA
Category: SE = Social and Environmental Accounting
Building on previous literature on the determinants of sustainability reporting assurance, the aim of this paper is to investigate the credibility that assurance brings to the information disclosed in stand-alone sustainability reports. While users continue to rely on the information in stand-alone sustainability reports, a significant portion of these reports is later restated. Unlike financial report restatements, there is no uniform restatement process, with public announcements or formal filings. Sustainability report restatements appear in various forms and are relatively difficult to detect. Using a sample of U.S. S&P 500 firms from 2010 – 2013, we find that the voluntary adoption of SRA is associated with an increased likelihood of sustainability report restatements. We argue that these findings indicate the developmental nature of the sustainability-reporting arena. As management further develops accounting systems to gather and report information, management and assurance providers better understand the intricacies of the information being reported, reporting guidelines are solidified, and assurance providers strengthen/calibrate the assurance practices, restatements of sustainability information actually indicate the increasing credibility of that information.
THE TRIUMPH OF THE HUMBLE CRO
MIKES, ANETTE
Category: MA = Management Accounting
This paper tracks the evolution of the role of two chief risk officers (CROs) and the tools and processes they have implemented in their companies. While the companies are in very different industries (one is a power company, the other is a toy manufacturer), they both embraced the concepts and tools of enterprise risk management. At both firms, risk management evolved over a number of years from a collection of off-the-shelf, acquired tools and practices into a tailored and seemingly inevitable control process. The paper investigates the CRO’s role in these transformations, which may have less to do with packaging risk-management tools and marketing them to business managers than with facilitating the creation and internalization of a specific type of risk talk as a legitimate, cross-functional language of business.
IS NATIONAL CULTURE DIRECTLY INFLUENCING CSR DISCLOSURE PRACTICES?: THE MEDIATING ROLE OF CORPORATE GOVERNANCE MECHANISMS
MIRAS RODRÍGUEZ, MARÍA DEL MAR
ESCOBAR, BERNABÉ
Category: SE = Social and Environmental Accounting
The aim of this paper is to examine whether the impact that national culture has on the CSR reporting practices could be explained by the differences on CG characteristics derived from the cultural divergences through a comparison of two countries: Brazil and Spain. To carry out our research, we are going to consider two different and complementary measures of the CSR reporting practices as well as the five relevant CG mechanisms pointed out in the literature. Considering the results, we can conclude that national culture has a strong influence on the CG mechanisms (Board size and Reference Shareholder) and that, at the same time partially explain the differences in the CSR reporting practices. Therefore, it can be concluded that an important part of the influence that national culture has on the CSR reporting practices is really determined by the CG structures of each country.
THE EFFECT OF MATERIAL INTERNAL CONTROL WEAKNESSES ON THE RELATIONSHIP BETWEEN MANAGERIAL STOCK OWNERSHIP AND AUDIT FEES
MITRA, SANTANU
AL-HAYALE, TALAL; HOSSAIN, MAHMUD; JAGGI, BIKKI
Category: AU = Auditing
The study finds that though audit fees and managerial stock ownership are negatively related to each other in the low managerial ownership firms, the negative relationship is significantly attenuated for the firms with material internal control weaknesses (ICW). The results indicate that audit fee decline in those firms is relatively smaller with an increase in managerial stock ownership as considerable audit risk continues to exist due to ineffective internal controls thus requiring auditors to maintain higher audit efforts to minimize such risk at an acceptable level. The relationship between audit fees and managerial ownership is, however, significantly positive for the ICW firms with high managerial ownership suggesting that as ownership increases, managers are more likely to purchase higher quality audits to minimize financial reporting risk and promote shareholder interest. The result is consistent with the incentive-alignment explanation for the high managerial ownership ICW firms. Additionally, we find that audit fee decline is relatively more gradual in the post- ICW remediation years for the low managerial ownership firms compared to the medium and high managerial ownership firms. The low managerial ownership firms continue to pay higher audit fees compared to their matched counter-parts in the remediation years suggesting that audit fees are more sticky for those firms due to persistence of higher agency problems than in medium and high ownership firms.
GOAL RIGIDITY AND PROCESS FLEXIBILITY: HOW TO USE PERFORMANCE MEASURES IN NEW PRODUCT DEVELOPMENT PROJECTS
MOELLER, KLAUS
KRUSE, NINA; VERBEETEN, FRANK
Category: MA = Management Accounting
This study investigates the effect of goal rigidity and process flexibility on adaptability and goal attainment in new product development (NPD) projects. Based on enabling formalisation (Adler and Borys, 1996), we analyse the use of resource and cost measures in NPD projects. We argue that having rigid performance goals and process flexibility when pursuing these goals support adaptability, which is vital to achieving goals. Furthermore, we examine the influence of internal and external factors, which are difficult to predict in NPD projects, on the project. We use a partial least squares approach to evaluate the data collected from a survey of 133 project managers. Our findings support the assumption that goal rigidity and process flexibility are beneficial to enabling work conditions as they have a positive effect on adaptability. In addition, adaptability mediates the effect of goal rigidity in respect of cost measures on goal attainment. This indicates the key role that rigid performance goals play in projects’ execution. Our results remain stable even when exposed to different internal and external influences that are likely to influence the project. We infer that goal rigidity and process flexibility help manage unpredictability in NPD projects.
WHAT ARE THE DRIVERS OF AUDIT QUALITY AFTER AN AUDITOR CHANGE? EUROPEAN EVIDENCE FROM VOLUNTARY AND MANDATORY AUDITOR SWITCHES
MOHRMANN, ULF
Category: AU = Auditing
While previous literature provides empirical evidence in favor of increasing discretionary accruals following auditor changes, the underlying causal mechanism of such an increase remains unclear. Potential reasons might go back to the loss of the auditor’s firm-specific knowledge or the firm’s opportunistic choice of a new auditor. Using the unique legal environment in the European Union, this study uses both voluntary and mandatory auditor changes to distinguish between these explanations. Thereby, the loss of firm-specific knowledge affects both types of auditor changes, whereas the incentive to strategically choose a new auditor is only present for voluntary switchers. Results of this study can be summarized as follows. I find evidence in favor of increased discretionary accruals following voluntary auditor changes, whereas the effect is non-significant for mandatory auditor changes. The difference between mandatory and voluntary auditor changes is highly significant even after controlling for self-selection. Thereby, the decrease in reporting quality can be traced back to the strategic decision to change the auditor rather than to the loss of firm-specific knowledge.
INVESTIGATING THE “FATE” OF INTELLECTUAL CAPITAL INDICATORS THROUGH SOCIOLOGY OF WORTH: A CASE STUDY
MONTEMARI, MARCO
CHIUCCHI, MARIA SERENA
Category: SE = Social and Environmental Accounting
Although several frameworks for measuring and reporting Intellectual Capital (IC) have been developed over the past two decades, their actual use in practice is still limited. This paper aims to answer the call to analyze IC practices from a critical and performative perspective by investigating how and why IC indicators may end up not being used. The paper presents a single case study of an Italian company which has been measuring its IC for several years but in which several times the indicators produced were not used. The theory of Sociology of Worth is used to disentangle the relationships among actors while engaging with IC indicators and thus, to understand the reasons why they ended up being not used. The case analysis shows that there was radical disagreement, among actors, over the values and beliefs supposed to be relevant to interpreting IC measures. The paper shows that the mindset actors use to understand and interpret IC measures (predominantly non-financial in nature), which leads to attribute these numbers a ‘technical function’ or other meanings (loyalty, belonging to a collectivity, etc.), can play a central role in hindering or enabling their use. The case also shows that scores have a role in using the indicators: the actors disputed the scores when they did not confirm their perception of reality and the indicators’ lack of objectivity was the reason put forward to justify the denial to accept and use these measures.
STRUGGLES FOR RECOGNITION: THE DISCOURSES, IDENTITY AND “DIRTY WORK” OF MANAGEMENT ACCOUNTANTS
MORALES, JEREMY
Category: MA = Management Accounting
This paper studies symbolic categorisations management accountants produce to speak about their work. A field study conducted by observation and interviews relates the words they use to a diversity of tasks and activities. Management accountants produce a highly standardised, coherent discourse on their occupation, its values, and the general orientation it should be given. Yet such homogeneity masks the diversity of situations, roles and power positions experienced by management accountants. Common categories with heterogeneous meanings are created to build an homogeneous discourse despite empirical diversity. The paper suggests that this categorization work constitutes a tactic for identity recognition. Assuming that management accountants want to be part of a unifying agenda to form an established occupational group, it advances the argument that they produce a common discourse to increase cohesion and produce a standardised, positive image of their occupation. They craft a stable occupational narrative to produce a feeling of consistency and identity. This is how they participate in the constitution of a unified occupational group.
PRESIDENT LETTER TEXTUAL CHARACTERISTICS: IMPRESSION IN DEPRESSION?
MORENO, ALONSO
Category: FR = Financial Reporting
Previous research has studied if corporate report textual characteristics, mainly based on the president letter and in countries as UK, USA and Australia, are related to performance. Most of it uses impression management as analytical frame where textual complexity is expected to be higher for bad performance companies to obfuscate negative outcomes. However, mixed results have been reported. This paper analyses if textual characteristics of president letters of companies indexed in the main Spanish stock market index differ between two highly positive/negative performance periods (2002-2007 and 2008-2012) which limits other possible variables affecting results. Textual characteristics are addressed from different dimensions, such as syntactical complexity, variability, length, tone and personal, quantitative and future references. The findings do not show consistent evidence for impression management by differences between good and bad performance period, excepting for future references. They may be explained by the external and well recognized causes of bad performance as contrast to previous research.
CAN ICT BE A TOOL FOR PUBLIC AUTHORITIES TO MANAGE PUBLIC RESOURCES MORE EFFICIENTLY?
MORENO ENGUIX, MARIA DEL ROCIO
LORENTE BAYONA, LAURA
Category: PS = Public Sector Accounting
Recent reports show that public efficiency matters more in a digital world. The purpose of the present study was to test the association between the impact of ICT on access to basic services and public efficiency, both for general government and for its functions. A key secondary finding is methodological. The methodological contribution consists of evaluating public efficiency by considering a multilevel decomposition. We have designed synthetic indicators to measure efficiency in the provision of public services, both for general government and for its functions. The empirical analysis was applied in 2012 for a single cross-section of 35 economies - the European Union’s 28 Member States, 2 EU candidate countries (Iceland and Turkey) and other key advanced economies, such as the United States, Japan, Switzerland, Norway and the Republic of Korea-. Statistical analysis included correlation and multiple linear regressions. A high impact of ICT on access to basic services was associated with a high level of public efficiency. Furthermore, the positive effect is higher in those states with more GDP pc or state of development.
ELITE INVESTMENT NETWORKS AND THE RISE OF SOCIAL IMPACT REPORTING IN UK SOCIAL PURPOSE ORGANISATIONS
MORLEY, JULIA
Category: SE = Social and Environmental Accounting
This study investigates the increasing use of social impact reporting by UK social enterprises and charities over the last decade. It finds that an elite network of social investment professionals influenced the shifting language of these social purpose organisations, resulting in the emergence of a the new practice of reporting "social impact". This shift in practice can be explained in terms of professionalisation (DiMaggio and Powell, 1983; Abbott, 1988; Hwang and Powell, 2009; Suddaby and Viale, 2011), but professionalisation in a related community. It identifies the social structure of the elite group of social investment professionals as a factor that enabled the emergence, in that community, of a strong norm of using social impact reporting by developing an affiliation network for that investment community (Granovetter, 1974; Padgett and Ansell, 1993; Watts and Strogatz, 1998, Strang and Soule, 1998; Padgett and Powell, 2013). Finally, through an analysis of the websites of 89 social purpose organisations combined with interview data, the study finds that investment flows constitute a conduit for knowledge transfer between this group of social investors and the community of social purpose organisations.
THE IMPACT OF THE REVISED WHISTLEBLOWING REGULATION UNDER THE DODD-FRANK-ACT
MOSER, HENRIK
FRANKE, BENEDIKT; SIMONS, DIRK
Category: GV = Accounting and Governance
In this paper, we provide an analytical framework to examine the effects of monetary rewards on corporate whistleblowing. Following the new legislation under the Dodd-Frank-Act of 2010, the Securities and Exchange Commission (SEC) provides a reporting channel for corporate whistleblowers that offers monetary rewards if their information lead to monetary sanctions against their company. These extrinsic incentives go beyond the regulation introduced under the Sarbanes-Oxley Act of 2002 that mandates the creation of mainly internal whistleblowing systems without monetary rewards. We use a sequential single-period setting and model the incentives of managers and potential whistleblowers. An analysis of the model shows that external rewards are capable of increasing the probability of whistleblowing as long as they compensate for the whistleblower’s expected retaliative charges and the uncertainty of the expected reward.
ADOPTION AND BENEFITS OF LIFE CYCLE COSTING IN GERMAN FIRMS
MÖSLANG, KATJA
KNAUER, THORSTEN
Category: MA = Management Accounting
This paper analyses the adoption and benefits of life cycle costing (LCC) in German firms. The purpose of LCC is to extend traditional cost accounting by a life cycle per-spective. Though LCC is well established in theory and practice, not much is known about the conditions of its adoption and its impact on the achievement of cost man-agement goals. We collect empirical data from a nationwide survey of German firms. Based on questionnaires from 120 firms, we predict and find that the extent of LCC adoption is positively associated with guarantee and voluntary sustainability costs. In addition, we show that the extent of LCC adoption is positively associated with the adoption of target costing. Conversely, the purchase of precursors and/or intermediates is negatively associated with the extent of LCC adoption. Concerning the benefits of LCC, we find that firms perceive the instrument to be beneficial regarding various cost management dimensions. The survey respondents ascribe the greatest benefit of LCC to the identification of cost drivers.
LEARNING ACCOUNTING THROUGH "SERIOUS GAMES": ATTRIBUTES AND MOTIVATION
MOYA, SOLEDAD
CALABOR, MARISOL; MORA, ARACELI
Category: ED = Accounting Education
Learning based on Serious Games (SGs) has become a relevant issue for teaching and research in Higher Education. We identify some gaps in the literature when analysing the effectiveness of SGs in general, and in the field of management and accounting in particular. The main goal of this study is to provide a better understanding of the potential of SGs as a successful learning tool. Using a multidimensional experimental approach, a sample of students and a course in management accounting, we conclude on the attributes that contribute to their effectiveness, as well as the intrinsic and extrinsic motivation that the game generates. Our results show three main attributes as key factors to be successful from the student´s perception perspective, implementation, game characteristics and usefulness. Consistent with previous studies our results also show that students perceive the game as intrinsically motivating as it improves their competences while extrinsic motivation proves also to be relevant. Our main contribution is to provide institutions, faculty and game players with a new approach to analyze the effectiveness of SGs in undergraduate studies, adding empirical support to the possibilities they offer, if properly designed, implemented and used.
WHY DO FIRMS GO GREY? EVIDENCE ON THE COSTS OF IFRS COMPLIANCE AND ENFORCEMENT
MUELLER-BLOCH, STEPHANIE
HITZ, JOERG-MARKUS
Category: FR = Financial Reporting
This paper investigates the relative role of costs associated with mandatory IFRS adoption and the pertinent enforcement activities. To that end, we exploit an exogenous shock to the cost-benefit tradeoffs associated with opting out of the EU-regulated market in Germany. We find that the cost of IFRS compliance and enforcement play a decisive role for firms’ decisions to migrate from the regulated market to unregulated segments. Market reactions to these announcements to ‘go grey’ suggest that shareholders share these considerations. Taken together, our findings shed light on the hitherto unexplored costs of mandatory IFRS adoption. They raise concerns about overly restrictive costs of applying and complying with IFRS, and suggest that self-selection issues need to be addressed when investigating IFRS-related benefits.
MULTIDIMENSIONAL COMPETITION AND CORPORATE DISCLOSURE
MUINO VAZQUEZ, MARIA FLORA
NUÑEZ-NICKEL, MANUEL
Category: FR = Financial Reporting
In this paper, we argue that the influence that product market competition exerts on disclosure is defined by the combined effect of the incentives and disincentives to disclose raised by the multiple competition dimensions. We distinguish between firm and industry level competition measures and we hypothesize that the former raises agency and proprietary costs, whereas the later creates incentives to disclose either to fulfill the owners’ need of information to monitor managers or to deter the entrance of new competitors in the industry. Our research design allows for non-monotonic relationships between competition and disclosure as well as for interactions between competition dimensions. Using a sample of U.S. manufacturing companies, we gather evidence that is consistent with our hypotheses. First, we find an inverted U-shape relationship between corporate disclosure and a firm’s abnormal profitability, which is suggestive of firms being reluctant to disclose when they are underperforming (outperforming) their rivals because of the fear of unveiling agency conflicts (raising proprietary costs). Second, we observe a U-shape relationship between corporate disclosure and industry profitability, though this U design evolves to approximate a rising function as the protection provided by entry barriers increases.
CEO’S POWER, PREFERENCE AND PERFORMANCE: LOOKING THROUGH THE PRISM OF BENFORD’S LAW
MUKHERJEE, SHIBASHISH
Category: FA = Financial Analysis
This paper studies the initial digits of executive compensation using the mathematical properties of Benford’s Law to assess the negotiating power and preferences of top executives of firms, especially the CEOs. Deviations of a compensation digit’s frequency from the Benford’s Law expectations is interpreted as an indicator of: (a.) negotiation power, and (b.) preference. Using this analytical framework, this study explores six key strands of literature: (i.) difference between directly and indirectly negotiated compensation variables (ii.) difference in negotiating power/preference between Chief Executive Officers (CEOs) versus other senior executives. (iii.) Differences in negotiating power/preference because of organizational and individual/personal authority vested in the following four attributes: ‘founder-as-CEO’, ‘CEO duality’, ‘Age’ or ‘Gender’. (iv.) Changes in negotiating power/preference post Sarbanes-Oxley Act regulatory regime. And, differences in negotiating power/preference due to (v.) firm size, and (vi.) firm performance. The analysis shows that Benford’s Law is useful in uncovering many aspects of negotiating power and preferences especially that all executives prefer to get paid in ‘round figures.’
DO PRIVATE FIRMS MANIPULATE THE DEFERRED TAX ACCOUNTS?
MURA, ALESSANDRO
Category: FR = Financial Reporting
In this paper, the cost/benefit framework predicting that private firms are more likely than public firms to adopt book-tax reporting conformity and engage in earnings management practice (Cloyd, Pratt & Stock, 1996; Mills & Newberrys, 2001) is combined with the view that the deferred tax expense account represents an ideal avenue to minimise the non-tax costs of an aggressive tax-avoidance strategy. Using a large sample of private firms over a nine year period in an institutional setting where tax minimisation and facilitating debt contracting are likely to dominate financial reporting objectives, the analysis shows that private firms use the deferred tax accounts to manage leverage indicators, smooth earnings and avoid earnings decrease. This practice appears sophisticated enough not to jeopardise the overall ability of the deferred tax accounts to forecast the firm’s future profitability. These findings withstand a battery of alternative tests and contrast the low level of deferred tax manipulation generally reported in the extant literature relating to public companies. Nonetheless this evidence accords with the lower level of law enforcement, the higher alignment between financial and tax accounting and the poorer system of corporate governance that characterise the setting in which private firms typically operate.
THE DETERMINANTS OF SOCIAL AND ENVIRONMENTAL DISCLOSURE PRACTICES: THE BRAZILIAN CASE
MURCIA, FERNANDO
CRUZ DE SOUZA MURCIA, FLÁVIA; ROVER, SULIANI
Category: SE = Social and Environmental Accounting
The objective of this paper is to identify the factors that explain voluntary social and environmental disclosure in the Brazilian Market. The underpinning theory for this study is the Discretionary-Based Disclosure. To analyze social and environmental disclosure, an index composed of 80 subcategories was used, based on prior studies. Information has been gathered from Financial Statements and Sustainability Reports for the years ended in 2008, 2009 and 2010 with the use of content analysis. Based on that, we developed a social and environmental disclosure index for information presented in Financial Statements and another one for information presented in Sustainability Reports. Sample is composed by the largest listed companies in the Bolsa de Valores de São Paulo (BOVESPA). In order to explain social and environmental disclosure, 14 hypotheses have been formulated, based on the existing literature. Exploratory analysis evidenced that the volume of information disclosed increased during the analyzed period; the information disclosed is mostly qualitative and are favorable to the company; and Sustainability reports provide much more information than Financial Statements. Our results, using a panel data approach, evidence that size, sector and origin of control are statistically significant at explaining social and environmental disclosure practices, both in Financial Statements and Sustainability Reports.
FINANCIAL EXPERTS AND THE IMPACT ON THE ROLE AND AUTHORITY OF AUDIT COMMITTEES IN RELATION TO AUDIT AND FINANCIAL REPORTING QUALITY, AN ANALYSIS OF THE US, UK AND GERMANY
MUSA, MOHAMED
RODGERS(PROF.), WAYMOND
Category: AU = Auditing
The worst financial crisis since the great depression captured global attention, affects the integrity of the auditing and accounting profession, led to the loss of investor’s confidence as well as legitimate questions relating to audit quality in major countries such as the US, UK and Germany. Many researchers have attributed the low quality of auditing and financial reporting to inadequate regulations, the lack of enforcement, negligence of duty of directors, auditors and deliberate actions as a result of self-interest. Deficiencies in auditing and the financial reporting quality as reported by the Public Company Accounting Oversight Board (PCAOB, 2010) were not only based on issues of lack of objectivity and enhanced scepticism, but also “in areas of questionable judgement.” In this paper, the Throughput Model (TP) is advanced to illustrate how auditing or the oversight of the financial reporting process may be influenced by conflict of interest, the level of competences and experiences of financial experts as well as legal settings. Hence, we argue that factors that can influence the auditing and financial reporting process on the basis of the appointment of an independent financial expert can be explained in three ethical positions: Self – interest strategic effect (Ethical egoism), Regulatory effect (Deontological view) and the Constitutive strategic effect (Ethics of care/ Stakeholder theory). We conclude that norms underlying agency theory can be inappropriate for interpreting ethicality of audit committee’s decision- making process, especially in the German organizational context. We also recognised that a team-work approach among accounting and non – accounting experts can ease ethical tensions and help achieve required goals.
SHOULD AUDITORS BE CONCERNED ABOUT PLEASING THE CLIENT? AN EXAMINATION OF AUDITOR CHANGES SUBSEQUENT TO EARNINGS REVISIONS
MYERS, LINDA
HAISLIP, JACOB; SCHOLZ, SUSAN ; SEIDEL, TIMOTHY
Category: AU = Auditing
In this paper, we investigate whether the likelihood of an auditor ‘losing the client’ is greater when earnings announced in the unaudited earnings release are subsequently revised so that earnings as reported in the company’s annual report are different from those previously announced. We suggest that earnings revisions which likely result from on-going year-end audit procedures can serve as a proxy for auditor independence and skepticism. We find that companies with earnings revisions that occur as a result of the year-end audit are more likely to dismiss their auditors in the subsequent year or two. We also find consistent results when limiting revision observations to those that reduce earnings or affect allowances and reserves, reduce earnings only, or reduce earnings per share only. In addition, these results hold when we exclude observations with contemporaneous restatement announcements. Our findings confirm that auditors who act independently and in ways that could be construed as displeasing the client risk losing future fee revenues, even in cases where going-concern issues and prior period misstatements do not exist.
IMPACT OF MEDIA ON EARNING MANAGEMENT: A STUDY DURING THE FINANCIAL CRISIS PERIOD
NANDY, MONOMITA
LODH, DR. SUMAN
Category: GV = Accounting and Governance
The purpose of this study is to examine how the earning management of top 503 companies listed in the London Stock Exchange was influenced by their media appearance during the financial crisis period of 2008 to 2010. Previous studies show the importance of real and accrual based earning management and how mangers trade-off between these strategies. Further studies has also been carried on voluntary disclosure incentives, earning management during financial crisis period. A number of previous studies focused on accounting policy with financially instable firms. Their sample firms confronts with financial difficulties but did not include financial crisis period. In our study, we have endeavoured to find out the relationship between earning management, media appearance and financial crisis. As to our knowledge no such study has been undertaken so far within the UK context. We provided evidence that companies which appear more frequently on various print and electronic media are more likely to engage in earning management activities especially in real earnings management. We found a negative and statistically significant relationship between media appearance and abnormal cash flow from operations during a crisis period.The findings of the study will be of interest and useful to the investors as well as regulatory authorities, company managers and academicians.
ACCOUNTING IS THE MESSAGE: AN UNDERMINING, OVERMINING AND DUOMINING CRITIQUE
NAPIER, CHRISTOPHER
PERSSON, MARTIN
Category: FR = Financial Reporting
Making use of McLuhan’s (e.g., McLuhan, 1964; McLuhan & Fiore, 1967; McLuhan & McLuhan, 1992) ideas on the laws and functioning of the media, this paper calls for a new approach to accounting research that considers both the components and relations of accounting phenomena. To illustrate how previous research has tended to reduce accounting phenomena either upward to its relations or downward to its components, we have drawn upon Harman’s (2011d; 2013b; 2013d) work on the metaphysics of objects: this is applied to the example of understandings of the emergence of double-entry bookkeeping (DEB). We examine three essentially reductive explanations for these accounting phenomena: DEB as a generic rhetorical device (Aho, 1985), DEB as a tool in the socialization of capital (Bryer, 1993) and DEB as a more specific rhetorical device situated within an institutional matrix (Thompson, 1991). Based on this critique, we stipulate three criteria for a new approach to accounting research that avoids the reduction of accounting phenomena. Employing McLuhan’s tetrad of media effects, we offer a blueprint for what such an approach might entail and outline a possible research program.
AGGREGATE ACCOUNTING DATA AND THE PREDICTION OF CREDIT RISK
NEGAKIS, CHRISTOS
KOUSENIDIS, DIMITRIOS; LADAS, ANESTIS
Category: FA = Financial Analysis
A recent area of accounting research concerns the ability of aggregate accounting data to predict macroeconomic fundamentals. In this context, aggregate accounting earnings have also been found to possess information about future cash flows, discount rates and corporate bond market returns (Patatoukas, 2014, Gkougkousi, 2014). The present study extends this line of inquiry and explores whether aggregate earnings also reflect sovereign credit risk. The results of the study indicate that aggregate earnings changes have predictive ability for sovereign credit risk and this result persists after controlling for liquidity and macroeconomic imbalance indicators. In addition, another earnings-related risk attribute, namely opacity, in some of the research settings examined is found to relate to sovereign credit risk. The implications of these results are also discussed in the present paper.
NOT CLAWING THE HAND THAT FEEDS YOU: THE CASE OF CO-OPTED BOARDS AND CLAWBACKS
NG, JEFFREY
HUANG, STERLING; LIM, CHEE YEOW
Category: GV = Accounting and Governance
Clawbacks can create significant tension between boards and management because the enforcement of clawbacks in the event of financial misreporting requires the boards to recover already paid compensation from management. In this study, we examine how board co-option, defined as the fraction of the board comprising of directors appointed after the CEO assumed office, affects clawback adoption. We find that more co-opted boards are less likely to adopt clawbacks. The evidence of an even stronger negative association when there is at least one-opted director in the remuneration committee provides further support for the role of co-option in driving clawback policies. Finally, we find that co-opted boards are even less likely to adopt clawbacks when the likelihood of having to enforce clawbacks is higher, specifically when the firm has a history of financial restatements or has material internal control weakness. Our paper contributes to better understanding of how board structure can influence the adoption of policies to punish management for financial misreporting.
MANAGERIAL ABILITY AND MANAGER’S EQUITY INCENTIVES ON EARNINGS MANAGEMENT
NGAN, SAI-CHUNG
CHEN, HSINYU; LI, SHUHSING
Category: GV = Accounting and Governance
This study examines the impact of manager’s equity incentives and managerial ability on earnings management ("EM") in Taiwanese firms. Consistent with the recent literature on EM, this study empirically divides EM into accrual-based EM and real EM. The results show that managerial ability is positively associated with accrual-based EM but negatively associated with real EM. The analyses suggest that employee profit-sharing stock bonus scheme in Taiwanese firms ("stock bonus scheme") creates manager’s equity incentives to use income-increasing accrual-based EM to obtain greater stock rewards. This is especially so for more able managers ("high-ability managers") they have more knowledge to apply complex accounting standards to boost up reported income. Conversely, due to retain manager’s job loyalty by offering stock bonus practice, the stock bonus scheme has been used as a mechanism to create manager’s equity incentives to avoid manager focusing on short-term earnings levels, thereby leading to less real EM. Specifically, high-ability managers are more concerned on the long-term implication of aggressive real EM than the less able managers when the firms adopt the stock bonus scheme. These findings thus suggests that manager’s equity incentives have moderation effect on the relation between managerial ability and EM. This study also contributes to the literature on EM from an international comparative perspective as most of the previous studies focused on U.S. firms.
THERE’S NO SMOKE WITHOUT FIRE: DOES THE CONTEXT OF EARNINGS MANAGEMENT CONTAIN INFORMATION ABOUT FUTURE STOCK RETURNS?
NGUYEN, NGUYET
IQBAL, ABDULLAH; SHIWAKOTI, RADHA
Category: FA = Financial Analysis
This paper constructs a signal-based index, namely ESCORE, which captures the context of earnings management. ESCORE is a composite index that aggregates 15 individual signals which have been shown in the extant literature to be related to earnings management behaviour. Empirical test using UK data shows that firms do manage earnings with larger magnitude and are more likely to be most aggressive, both in accruals and real earnings management, when ESCORE is higher. It is also shown that firms with low ESCORE outperform those with high ESCORE by 1.41% per month after controlling for risk loadings on the size, book-to-market and momentum factors in up to one year after portfolio formation. The relationship between the ESCORE and future returns is still significant, in both economic and statistical terms, after controlling for various other known ‘market anomalies’, including the size, value-glamour, seasoned equity offer, market irrational reaction to financial distress, balance sheet bloat, profitability and discretionary accruals.
IFRS ADOPTION AND ACQUIRER WEALTH GAINS
NIENHAUS, MARTIN
KAJÜTER, PETER; VOGELPOHL, MARTIN
Category: FR = Financial Reporting
This study contributes to extant literature on cross-border acquisitions and globally converging accounting standards by analysing the impact of target firms’ mandatory adoption of IFRS on acquirer wealth gains. Such gains are an indicator of value creation in mergers & acquisitions (M&A). Hence, an examination of acquirers’ abnormal returns in worldwide transactions helps to explore the dimension of M&A success with respect to mandatory IFRS implementation. We find a negative association between investing abroad and acquirer wealth gains during the 6th merger wave (2002-2007), while the widespread introduction of IFRS in 2005 amplifies this effect. In particular, this study presents evidence that acquisitions of IFRS-adopting firms yield on average wealth losses for acquirer shareholders relative to non-adopting targets even after controlling for cross-border effects. This may stem from IFRS-induced enhanced competition for potential targets as the technical comparability of financial statements is improved by a set of globally unified accounting standards. Moreover, we find that acquirers experience significantly higher gains in transactions of mandated IFRS targets from countries with strong enforcement mechanisms. One explanation is that a solid implementation of IFRS improves the national informational environment and, hence, valuation and bidding accuracy. Consequently, while competition for targets may increase, bidders bid more effectively and reduce overpayment.
TAX NONCOMPLIANCE, ETHICAL NORMS, AND INSIDER TRADING
NILSSON, HENRIK
KALLUNKI, JUHA-PEKKA; MIKKONEN, JENNI; SETTERBERG, HANNA
Category: FA = Financial Analysis
This paper explores whether insiders who do not comply with the tax rules make superior returns in their insider trades, if compared to other insiders. Relying on extensive research on tax compliance, we conjecture that insiders who do not comply with the tax rules apply low ethical norms in their economic decisions, including insider-trading decisions. Our empirical results from analyzing proprietary archival data of all insiders in Sweden show that insiders who do not comply with the tax rules sell their insider stocks more aggressively than other insiders, to avoid losses in their insider stock holdings. We also find some evidence that insiders who do not comply with the tax rules buy insider stocks more aggressively than other insiders, to make greater profits. Collectively, our results are also consistent with the disposition effect. Our results remain essentially similar after controlling for firm- and insider-specific factors, including insiders’ income, wealth, gender, age, and criminal records.
SOCIAL STIGMA AND EXECUTIVE REMUNERATION: THE COMPENSATION PREMIUM IN “SIN” INDUSTRIES
NOVAK, JIRI
BILINSKI, PAWEL
Category: GV = Accounting and Governance
We document that executives in alcohol, gambling, and tobacco industries (sin industries) earn a statistically and economically significant compensation premium. Compensation premium in sin industries cannot be attributed to (1) higher complexity of sin industries, which requires more skilled managers, (2) higher compensation risk, (3) higher executive entrenchment, or (4) higher likelihood of dismissal due to poor performance. Rather, the premium compensates for social stigma related to employment in sin industries. Consistent with this prediction, we document that (1) executive compensation in sin industries is higher in periods and in states with higher social aversion to sin and (2) sin firms executives hold less outside board seats, which indicates their lower social prestige. Together, our evidence suggests that executives at sin firms demand a compensation premium for bearing negative personal and professional costs of working in industries perceived negatively in light of prevailing social norms.
THE ECONOMIC CONSEQUENCES OF EXTENDING THE USE OF FAIR VALUE ACCOUNTING IN REGULATORY CAPITAL CALCULATIONS
NOVOTNY-FARKAS, ZOLTAN
CHIRCOP, JUSTIN
Category: FR = Financial Reporting
We investigate the economic consequences of the removal of the AOCI filter, that requires the inclusion of unrealized fair value gains and losses of available-for-sale securities in regulatory capital calculations, for a sample of US banks. Regulators argue that such an inclusion would result in greater bank regulatory discipline, while opponents contend that the regulatory costs of such regulatory tightening would exceed any possible benefits. Using a comprehensive sample of U.S. banks we provide three pieces of evidence. First, we find that inclusion of unrealized fair value gains and losses on AFS securities for the period 2009 to 2013 would have resulted in increased volatility of regulatory capital. Second, the increased likelihood of this rule to be implemented leads to negative market reactions. These market reactions are strongly positively related to the relative amount of unrealized gains and losses. Third, we find evidence that banks affected by the AOCI filter removal (i.e., advanced approaches banks) changed their investment portfolio management. Specifically, affected banks reduce the maturity of their investment portfolio and decrease the proportion of AFS securities more significantly than unaffected benchmark banks. Affected banks reduce the size of their illiquid AFS investments more than unaffected banks. We believe our results speak to the ex ante effects of fair value accounting on banks' risk taking behavior.
“LET HE WHO IS WITHOUT SIN, CAST THE FIRST STONE”- RIVALRY AS A REASON FOR VOLUNTARY DISCLOSURE FIRM’S CORRUPTION
NUNEZ-NICKEL, MANUEL
GAGO-RODRIGUEZ, SUSANA; MÁRQUEZ-ILLESCAS, GILBERTO
Category: SE = Social and Environmental Accounting
In this paper we analyze rivalry as a reason that motivates a firm’s voluntary disclosures to engage in corruption. First, we hypothesize that a firm may find reasons for release this information when it faces a high intensity of competition. Second, a firm may be inclined to reveal its corruption when it is an obstacle for firm’s business. Third, the political regime moderates, at some extend, the effect of rivalry on exposure of corruption. By analyzing data of disclosure of bribery collected by the World Bank (2010), we find support for these three hypotheses.
THE ROLE OF COGNITIVE FRAMES IN COMBINED DECISIONS ABOUT RISK LEVEL AND EFFORT EXERTION
OBLAK, KARLA
GODEC, MINA; SLAPNIČAR, SERGEJA
Category: MA = Management Accounting
Cognitive framing influences subjective valuation of monetary payoffs and individuals' willingness to exert effort and take risk. Whereas in a certain real life task decisions about effort exertion and risk taking are taken together, the streams of literature studying the determinants of risk taking and motivation (effort exertion) remain disintegrated. The aim of this paper is to understand how cognitive frames created by the incentive design and outcome fairness influence decisions about risk and effort level and which of two frames prevails in joint decisions. We set up a multi-period 2x2 experiment where we analyse the effects of cognitive frame manipulations (bonus vs. malus and fair vs. unfair incentives). We use a gamble task and a modified Sternberg task to measure risk taking and cognitive effort. We find that effort exertion is positively associated with both: the incentive scheme design and outcome fairness and that their interaction may reverse their main effects. Risk taking is associated only with the incentive scheme design. In joint decisions on effort and risk level outcome fairness plays a dominant role: it encourages subjects to undertake more difficult tasks in which they decide for high effort and risk level. Our results contribute to the advancement of management accounting literature by the integration of separate theories into a combined approach for a more comprehensive understanding of multiple facet decision-making.
THE STANDARD-SETTERS’ TOOLKIT: CAN PRINCIPLES PREVAIL OVER BRIGHT LINES?
O'BRIEN, PATRICIA C.
HENDERSON, DARREN
Category: FR = Financial Reporting
We study lease accounting in an international panel data set to examine how accounting outcomes vary with two features of accounting standards: the emphasis on using professional judgement to apply principles, and the presence or absence of 'bright-line' tests. We study four countries: Australia, Canada, the UK, and the US, and companies in two lease-intensive industries, retail and transportation. Our primary study period spans the time when Australia and the UK switched from domestic to international accounting standards, and in one test we also consider Canada’s transition to international standards. We find that neither an explicit requirement to apply a principle nor omitting bright-line tests materially increases the use of capital lease treatment. Overall, we conclude that financial reporting outcomes are relatively insensitive to these standard-setting tools.
PERFORMANCE MEASUREMENT ALIGNMENT AND HOLD-UP RISK IN SUPPLY CHAINS
O'CONNOR, NEALE
SRINIDHI, BIN
Category: MA = Management Accounting
This paper examines how the suppliers in a supply chain respond in changing their internal performance measurement systems in response to their major customer’s hold-up risk defined as the likelihood that the customer might opportunistically act adversely to the interest of the supplier. In developing the supplier strategy, this study considers both the (i) lower costs associated with lower customer hold-up risk, and the (ii) benefits of improved resource deployment in response to greater customer information sharing opportunism. Archival and survey data collected from face-to-face interviews with over 1,000 electronics component suppliers are used to study the performance measurement system (PMS) dimensions that suppliers develop with respect to the needs of their largest customer—an activity referred to here as PMS alignment. The five PMS categories—technology, cost, quality, delivery and service—that are used to different degrees in the customer’s purchase order allocation decision are identified and the choice to align these PMS dimensions is found to depend on greater benefits from resource deployment at the contracting stage and on lower customer hold-up costs at the post contracting stage.
UNDERSTANDING DIRECTOR ELECTIONS: DETERMINANTS AND CONSEQUENCES
OESCH, DAVID
ERTIMUR, YONCA; FERRI, FABRIZIO
Category: GV = Accounting and Governance
This paper examines determinants and consequences of the voting outcomes at uncontested director elections. As in prior studies, proxy advisors’ recommendations strongly predict shareholder votes. Based on novel hand-collected data from proxy advisors’ reports, we document the reasons behind negative recommendations and their association with shareholder votes. For example, board-level and committee-level issues trigger more negative votes than individual-level concerns. While high votes withheld rarely result in director turnover, firms often respond to shareholder dissatisfaction by addressing the underlying concern, with the rate of responsiveness increasing in voting dissent. Responsive and unresponsive firms do not differ in subsequent performance.
THE ROLE OF NATIONAL STANDARDS SETTER IN THE GLOBAL ERA: THE CASE OF THE JAPANESE SETTER FROM 2001 TO 2008
OGATA, KENSUKE
Category: FR = Financial Reporting
An aim of this paper is to explain that what kinds of behavioral pattern the Accounting Standards Board of Japan (ASBJ) changed before or after 2005, and why. As has been discussed in the past researches on standard-setting processes, our concern is to make sure that the ASBJ has which of the two characteristics: the pluralistic organization regarded as a mere political forum of some stakeholders related to accounting standards, or the autonomous organization regarded as an actor who behave with a will to achieve desirable policy purposes. To do so, we analyzed the activities of ASBJ from the viewpoint of the regulatory environment and the organizational structure. We can obtain the two results. The one is that, in the first four years, the ASBJ formed the organization which put business actors into core positions in order to get sufficient approval of these actors who were were weaker supporters for the Board rather than regulators, and developed the standards which had minor influences of changes in practices. The other is that, in the second four years, the ASBJ which attained the approval from business actors built up the accounting profession-centric organization in order to establish the standards preferred by users, and developed targeted standards. Our discussion suggests that standards-setting processes adopted in Japan were not consistent with mere notions of pluralism; rather, that those arrangements seemed closer to the forms of autonomous organization.
CONSOLIDATED TAX RETURN SYSTEM AND CORPORATE GOVERNANCE-A JAPANESE PERSPECTIVE-
OHNUMA, HIROSHI
Category: GV = Accounting and Governance
The objective of this study is to reveal the reason why only few firms have adopted the consolidated tax return (CTR) system despite its merits. Firms that adopt CTR need to establish 100% shareholding domestic subsidiaries regardless of direct or indirect holdings. They need to include all subsidiaries that fulfill the requirement of the adoption in the CTR group, except foreign located firms. Once firms engage in CTR, they are prohibited from withdrawing the adoption of CTR substantially. I find that the likelihood of firms engaging in CTR depends on the extent of the tax loss carryforward held by them, as prescribed by corporate tax law. Next, I find that firms that have more subsidiaries, higher leverage, and lower tax burden tend to choose the status of CTR, as reflected in the result. In addition, my result suggests that the complexity of corporate organization has an inverse effect on the incentives. Finally, I find that the firms that have a disciplined corporate governance structure have significantly lower effective book tax rates and lower cash effective tax rates. Therefore, these results highlight the role of corporate governance functions for tax avoidance strategies. Further, my results suggest that even within the new public accounting system, there are avenues for greater tax avoidance. Still, organizational change and strategy shift have an influence on this decision. These are the reason why there are few firms which adopt CTR.
WHAT TURNS THE TAXMAN ON? THE EFFECT OF TAX AGGRESSIVENESS AND VOLUNTARY AUDIT ON ADJUSTMENTS TO THE TAX RETURNS OF PRIVATE COMPANIES
OJALA, HANNU
COLLIS, JILL; KINNUNEN, JUHA; NIEMI, LASSE; TROBERG, PONTUS
Category: AU = Auditing
Using a large proprietary data set from the internal records of the Finnish Tax Administration for the fiscal year 2011, we examine the factors that attract the tax authority’s adjustments to taxable income reported by around 25,000 small private companies in their tax returns. Using that data, we develop a new, direct measure of tax aggressiveness and introduce the direct and indirect effects of external audit into the tax aggressiveness literature, whilst avoiding the classic endogeneity problem. We hypothesise and find for the first time in the literature that being tax aggressive increases the likelihood of the tax authority not accepting taxable income as reported, whereas having a voluntary audit with an unqualified audit opinion decreases it. We also find that an unqualified audit opinion moderates the positive effect of tax aggressiveness on the likelihood of tax authority’s adjustments. While these findings are statistically significant when company’s tax aggressiveness is measured with the book-tax difference (non-taxable revenues less non-tax deductible expenses) reported in the company’s tax return, they are insignificant when measured with the conventional metric of book-tax difference based on publicly available financial statement data. The main findings are insensitive to whether the full sample is used or the balanced sample based on propensity score pairing of tax-adjusted firms with their non-adjusted counterparts. Finally, we perform robustness tests.
THE RELATIONSHIP BETWEEN FINANCIALIZATION AND ACCOUNTING STANDARDS: A JAPANESE PERSPECTIVE
OKAMOTO, NORIAKI
Category: FR = Financial Reporting
This study considers global financialization in terms of the dynamics of corporate accounting standards. Accounting standards play a crucial role in financialization by measuring corporate financial performance. As the definition of “financialization” is still ambiguous, this interdisciplinary study can benefit future research. According to an ontological perspective of social institutions, changes to accounting standards can be understood to signify collective aspects of financialization. Taking the perspective of Ryuji Takeda, a legendary Japanese accounting researcher, this study identifies the transition from production-oriented accounting to finance-oriented accounting. This study also analyzes two recent changes to Japan’s accounting standards as an advance and a backlash against excessive finance-oriented accounting. Although this study is essentially conceptual, data are presented in support of its argument.This paper is structured as follows. Following the introduction, the second section reviews studies on financialization. The third section describes the relationship between the financialization and accounting regulation (particularly changes to formal accounting standards). The fourth section analyzes the upsurge of finance-oriented accounting in Japan and two recent developments in accounting standards are reexamined using Takeda’s theoretical framework.
BRINGING POWER, INTERESTS AND RULES TO OIE: A MODEL OF RULE-BASED ACTION
OLIVEIRA, JOAO PEDRO
NIXON, WILLIAM
Category: MA = Management Accounting
Old-Institutional Economics (OIE) models applied in management accounting research tend to neglect intra-organizational diversity and do not adequately address intra-organizational power and interests. In addition, routines are typically emphasised at the expense of neglecting rules, typically conceptualized in a narrow perspective of formal rules. This paper addresses these limitations and contributes towards current efforts of refining OIE, by proposing an OIE framework of rule-based action. The proposed framework is loosely inspired on Burns and Scapens (2000), but draws on Clegg (1989) and Actor-Network Theory to understand how power may flow through circuits of power within diversified organizations. The model depicts intra-organisational diversity in institutions and interests and proposes how diversified actors may attempt to relationally gain power by introducing rules and material conditions promoting their interests. The model adopts a wide conceptualisation of rules, including rules as internal structures orienting actors (rather than merely formal rules), and depicts processes of rules introduction, interpretation, acceptance and enactment. Finally, the model emphasises material conditions by considering technologically and organisationally embedded rules, enacted by both human and non-human actors.
GOOD GOVERNANCE PRACTICES AND INFORMATION DISCLOSURE IN PORTUGUESE PUBLIC ENTERPRISE ENTITY HOSPITALS
OLIVEIRA, LIDIA
GOMES, DELFINA ; SOARES, TERESA
Category: GV = Accounting and Governance
This study leads us through the evolution in New Public Management and Public Governance in order to frame the Portuguese adoption of good governance principles in State-owned entities. It lays down the different legislation issued by Portuguese governments regarding health rendering services and their governance practices. Through multiple case studies, ten hospitals’ annual reports are analysed regarding principles of good governance disclosure, in a timeline of six years (2006-2011), it aims at understanding the drivers of change in information disclosure behaviours in the National Health Service under the light of institutional theory combined with Oliver’s model (1991) of strategic responses to institutional pressures. The study demonstrates that the adoption of the disclosure requirements was progressive and that most of the entities seem to have adopted an avoidance strategy, pretending compliance with the legal requirements in the light of Oliver’s model instead of a full compliance. The strategic response adopted allows concluding that entities appear to be more concerned with apparently fulfilling legal demands than with actually meeting them in what can be described as a ceremonial compliance.
AGGRESSIVE INTERNATIONAL TAX AVOIDANCE AND PUBLIC DISCLOSURE OF FOREIGN SUBSIDIARIES
OLLIGS, PIA
HERBERT, TANJA; OVERESCH, MICHAEL
Category: TX = Taxation
We analyze the relationship between public disclosure of group structures in Exhibit 21 and tax aggressiveness of U.S. multinational firms. Besides considering well-established ETR measures we use a new measure for the aggressive part of international tax avoidance. Our results suggest that tax aggressiveness increases for firms deciding to disclose less foreign subsidiaries in their Exhibit 21. Moreover, our study reveals that aggressive international tax avoidance is associated with tax haven operations and profit shifting opportunities.
THE RELATIONSHIP BETWEEN LEARNING APPROACHES, MOTIVATION, TIME SPENT AND ACADEMIC PERFORMANCE.
OPDECAM, EVELIEN
EVERAERT, PATRICIA; LESCRAUWAET, SHANA; MAUSSEN, SOPHIE
Category: ED = Accounting Education
The purpose of this study is threefold. First, we study whether there is a relation between motivation (intrinsic and extrinsic goal oriented) and learning approaches. Secondly, we will explore the relationship between the learning approaches and academic performance, while controlling for gender and ability. The third objective is to investigate the effect of the learning approaches on time spent, while taking into account the gender and ability differences among students. Surveys were executed in a first-year undergraduate accounting class during the academic year 2013-2014. Results show that on average the accounting students have a surface approach and that there is a large group of students who score low on both learning approaches. Secondly, this study revealed that intrinsic goal orientation and extrinsic goal orientation lead to the deep approach, therefore, teachers should try to influence the motivation of their students. Third, we found that the deep learning approaches results in more time spent on accounting and higher academic performance. Even if we control for time spent on accounting, the deep learning approach adds value to the regression analysis. So the deep learning approach should be encouraged within an accounting setting. Several ways to influence the motivation of students and to induce the deep learning approach are stipulated.
SUSTAINABILITY REPORTING IN THE ARAB MIDDLE EAST COUNTRIES: THE CASE OF EGYPTIAN BANKING SECTOR
OSMAN, MOHAMED
Category: SE = Social and Environmental Accounting
There has been no comprehensive study in relation to sustainability reporting in Arab Middle East Countries (AMEC) in both mediums (annual reports and websites). This study attempts to fill in the gap in the literature by exploring and bringing insights into sustainability reporting practices in annual reports and websites of Egyptian banks listed in the central bank of Egypt (Islamic and conventional banks). A concern will be to explore whether web can play an enabling role in Egypt as one of the AMEC. The theoretical framework adopted in this research has been informed by the critical accounting school debates. The research attempts to extend the use of the critical accounting model by drawing on post-colonial thinking to highlight the needs from non-western cultural perspective (Arab Middle East).
TURNING CREATIVITY INTO INNOVATION: HOW PERFORMANCE EVALUATION FACILITATES INNOVATION
OSTERMAIER, ANDREAS
UHL, MATTHIAS
Category: MA = Management Accounting
We explore how performance evaluation facilitates innovation (i.e., the implementation of creative ideas). Specifically, we contrast the effects of performance evaluation by users and non-users of creative ideas on creativity. We predict and find that performance evaluation by users of ideas as opposed to non-users prompts the creation of ideas that are not only creative, but also useful and thus likely to be implemented. Creators of ideas anticipate their evaluators' incentives and preferences. We conduct a two-step laboratory experiment where, first, words are created from letters and, second, either bought and used to create texts or rated for creativity. We find that performance evaluation by users motivates the creation of words that are both useful and creative. Evaluation by jurors who do not use the words prompts the creation of words that are creative, but less useful. This suggests performance evaluation by users as a means of aligning the creation and implementation of ideas. We contribute to prior research by linking creativity and innovation; in particular, we show how performance evaluation facilitates the implementation of creative ideas and thus can help foster innovation. Failure to implement creative ideas is costly. Our findings argue for performance evaluation by users to turn creativity into innovation. They are consistent with recent organizational trends such as crowdsourcing and user innovation.
THE CONTENTS OF ASSURANCE STATEMENTS FOR SUSTAINABILITY REPORTS AND INFORMATION ASYMMETRY
OTT, CHRISTIAN
FUHRMANN, STEPHAN; GUENTHER, THOMAS; LOOKS, LISA
Category: AU = Auditing
Our paper provides empirical evidence about assurance processes and resulting assurance statements for voluntary sustainability reports under guidelines from the Global Reporting Initiative. Using hand-collected data from a content analysis, we analyze the relationship between such assurance statements and information asymmetry for a unique sample of STOXX Europe 600 companies. Our results indicate that only assurance statements with a low level of assurance risk are able to increase credibility and, thus, are negatively associated with information asymmetry. Tests of details of numerical data are inversely related to information asymmetry. Additionally, we provide evidence that descriptions of the assurance provider’s competencies and the sustainability assurance specific work steps become necessary in countries without regulations on sustainability reporting. This paper provides insight for standard setters in fostering effective assurance of voluntary reports, for voluntary report preparers in enhancing the reports’ credibility and for assurance providers in appropriately designing assurance processes and statements.
COLLUSION IN CAPITAL BUDGETING PROCESS
OUNLERT, NADHARATCH
BAY, DARLENE; COOK, GAIL; PACHARN, PARUNCHANA
Category: GV = Accounting and Governance
In response to the ever present concern about manager’s honest reporting and the need to control budgetary slack, a number of management control mechanisms have been proposed. We empirically test a Relative Performance contract under different organizational conditions. Our results indicate that managers report most honestly under a Slack contract with a guaranteed transfer of funds while the gain to the firm is greatest under a Trust contract in which managers receive funding equal to the costs reported. While managers take advantage of open communication to collude, other factors such as peer influence clearly has an impact on their behaviour. Our results raise important questions for firms attempting to design effective contract while addressing agency questions.
THEORY AND PRACTICE OF THE CONCEPTUAL FRAMEWORK: EVIDENCE FROM THE FIELD
OW YONG, KEVIN
LIM, CHU YEONG; TAN, PEARL
Category: FR = Financial Reporting
We provide survey evidence of practitioners’ perspectives on the changes to the conceptual framework as proposed by the International Accounting Standards Board. Our survey obtains practitioners’ views on the proposed changes in the definitions of assets and liabilities, recognition and additional guidance in these areas, as well as issues relating to other comprehensive income, business model based accounting and choice of measurement basis. Our field evidence suggests broad consensus with respect to most of the proposed changes. The areas that generate the most disagreement among practitioners relate to the removal of economic benefits in the proposed asset definition, the proposal to remove the minimum probability threshold from the asset definition, and the use of fair value as a measurement basis for certain difficult to measure assets. Overall, our results provide interesting insights regarding how practitioners view the proposed changes to the conceptual framework.
INTEGRATION OF QUARTERLY EARNINGS FOR ANNUAL-LOSS FIRMS VERSUS ANNUAL-PROFIT FIRMS
PAEK, WONSUN
JUN, SUNKYU
Category: FR = Financial Reporting
This study examines (i) market responses to integrated or segregated reporting pattern of quarterly earnings and (ii) different reporting patterns of quarterly earnings between annual loss and profit firms. Drawing from the prospect theory, which suggests a value-enhancing strategy of integration of losses and segregation of profits, we predict that stock returns are greater (smaller) when quarterly losses (profits) are integrated for annual loss (profit) firms and that quarterly earnings are more integrated in the fourth quarter for annual loss firms than annual profit firms. The empirical results generally support our expectation. Market participants reward the integration of quarterly earnings for annual loss firms and penalize the integration of quarterly earnings for annual profit firms. Quarterly earnings are reported in a more integrated manner in the fourth quarter for annual loss firms than for annual profit firms.
BOLD RECOMMENDATIONS THAT LEAD THE MARKET
PALMON, DAN
Category: FA = Financial Analysis
My paper provides a new way to understand analysts’ bold recommendations by dividing them into two categories: (a) Contra-bold recommendations (bold without followers) and (b) leading-bold recommendations (bold with followers). A comparison of market performance indicates that (1) leading-bold recommendations create higher market returns than contra-bold or non-bold recommendations both in reaction to the immediate announcement and also in terms of longer period price behavior; and (2) bold recommendations create higher market returns than non-bold recommendations. Cross-sectional analyses provide further information about which factor make analysts more likely to be market leaders. These results confirm the findings in the first part which show that analysts’ private information channels or personal expertise will be highly valued by other analysts and the market as well.
OVERLAPPING MEMBERSHIPS ON COMPENSATION COMMITTEE AND EXECUTIVE COMPENSATION
PAN, HUNGHUA
WANG, TAYCHANG
Category: GV = Accounting and Governance
This study investigates whether the presence of overlapping memberships on the compensation committee affects the structure of executive compensation. Firms with the compensation committee members on other firms’ compensation committees in the same industry (“external overlapping memberships”) and on the audit committees (“internal overlapping memberships”) may have different compensation structures than those without. Our results show that firms that have compensation committees with external overlapping memberships will give executive higher pay-for-performance sensitivity, while firms that have compensation committees with internal overlapping memberships will not. Second, we document that firms that have compensation committees with external overlapping memberships rely on stock-based more than accounting-based performance measures, while firms that have compensation committees with internal overlapping memberships rely on stock-based performance less. Third, we find weak results that both types of committees are aware of earnings management and adjust to put less weights on accounting-based performance in the compensation function to mitigate the problem. Fourth, we find that firms that have compensation committees with external overlapping memberships will use relative performance evaluation in executive compensation contracts. Overall, we find that these two kinds of overlapping membership result in different effects on executive compensation.
THE INTERACTION BETWEEN MANDATORY AND VOLUNTARY RISK DISCLOSURE: A COMPARATIVE STUDY
PAPA, MARCO
CORDAZZO, MICHELA; ROSSI, PAOLA
Category: FR = Financial Reporting
Recently, risk reporting has received considerable attention from regulators and empirical researchers. However the interaction between mandatory and voluntary disclosure has received limited attention to date, with no prior study investigating this relationship in relation to risk disclosure. The paper investigates the interaction between mandatory and voluntary risk disclosure by demonstrating if a complementary (substitution) effect of mandatory vs. voluntary disclosure exists in the annual reports of five countries characterised by different regulatory regimes (Germany, France, Italy, UK and US). Two conceptually distinct components of voluntary disclosure are considered: guidance-based voluntary disclosure and fully unregulated disclosure. The results show that a complementary effect is confirmed when there is the prominent presence of risk guidelines (risk rules) in France and UK (Germany, Italy and US), as indicated by the distinct components of rules- and guidelines-based disclosures. The results generally supports the influence of some firm-specific characteristics on the interaction between mandatory and voluntary disclosure, as proved by an association with size, leveraged firms, and performance-related variables.
COMPETITIVE HARM AND BUSINESS SEGMENT REPORTING UNDER IFRS 8: EVIDENCE FROM EUROPEAN UNION LISTED FIRMS
PARDAL, PEDRO
CURTO, JOSÉ DIAS; MORAIS, ANA ISABEL
Category: FR = Financial Reporting
Under IFRS 8, firms’ should provide financial segment disclosures that enable investors to assess the different sources of risk and income as management does. This sensitive information would also be available for competitors. The potential competitive harm may incentive firms to withhold segment information. However, the IASB believe that segment disclosure would improve. We aim to study the influence of competitive harm on the level of segment disclosures under IFRS 8 using a large sample of firms from EU. Empirical tests to our competitive harm model estimate the effect of three competitive harm proxies: abnormal profitability, industry concentration and labour power. The results showed a significant increase on the number of reportable business segments, but less significant for the number of key items. Estimation of the model, in pre and post period of IFRS 8 adoption, revealed that firms over performing their industry, operating in more concentrated industries and subject to higher labour power are still related to lower levels of segment disclosure on both periods. Furthermore, the results of the “change model2 showed that firms previously associated to abnormal profitability and labour power are statistically more related to the “no change” category than to the category representing firms that increased their disclosure. Overall the results seem to suggest that IFRS 8 had a low or a null effect in reducing non-disclosure due to proprietary costs motivations.
ACCOUNTING FOR OPERATING LEASES: IMPACT OF THE CAPITALIZATION ON SPANISH IBEX 35 COMPANIES
PARDO, FRANCISCA
CANCHO, RAQUEL; GINER, BEGOÑA
Category: FR = Financial Reporting
The current IASB and FASB proposals for new standards about leases aim at improving the quality of financial reporting and involve the recognition of assets and liabilities for all leases. Given the economic consequences that this new treatment could produce, this is a reform of particular importance; indeed the strong opposition of preparers is a good evidence of this fear. We perform an ex ante study to appreciate the possible impact of the new approach on the financial information of firms and do a value relevance study to appreciate the value of the off-balance liabilities. We consider the companies included in the Spanish IBEX 35, during the period 2010-2013, and analyze the effect of including the liabilities for operating leases and the related assets in the balance sheet of the lessees. After our simulation analysis, we conclude that there is a significant impact on the fundamental accounting figures; as for the ratios, the impact is significant not only for leverage but also for the economic profitability, giving both a worse picture of the firms. Notwithstanding the value relevance analysis suggests that investors do not pay attention to the liabilities resulting from the information in the notes, which supports the convenience to include them in the balance sheet as the current proposals establish.
SUSTAINABILITY MANAGEMENT CONTROL SYSTEMS AS A PACKAGE: A CASE STUDY ON THE OPERATIONALIZATION OF CONTROL PRACTICES IN THE OIL INDUSTRY
PARISI, CRISTIANA
Category: MA = Management Accounting
Little is known about the role of management control systems (MCS) in managing the strategic process that underpin sustainability. More specifically, the couplings among planning, cybernetic, reward and compensation, administrative and cultural controls and their relation with the company’s strategy remain largely unexplored by the managerial accounting and sustainability literature. In order to enhance the understanding of these phenomena, the present study employs Malmi and Brown’s (2008) management control as a package model to address decision making and control devices adopted by managers in order to direct employee behaviour towards sustainability. Based on an in-depth case study of company operating in the upstream oil sector, the present paper will investigate the characteristics of the sustainability management control system and provide insights into how the devices companies employ to design, implement and monitor their sustainability strategy. Moreover, this paper will show how management control supports the implementation of sustainability strategy by investigating a wide range of both formal and informal controls, thus contributing to the current understanding of corporate practices.
THE EFFECTS OF THE MANDATORY AUDIT PARTNER ROTATION ON AUDIT QUALITY IN KOREA : FOCUSED ON THE IMPACT OF REGULATORY CHANGE
PARK, YEON HEE
CHUNG, MOON KI
Category: AU = Auditing
This study explores the effects of the current mandatory audit partner rotation system on audit quality for the period right before rotation and right after rotation, respectively. Moreover, it tries to explore whether the regulatory changes in mandatory audit partner rotation have any impacts on its effectiveness, specifically recent introduction of 3 years cooling-off provision. It is also expected to be working because 3 years cooling-off could force rotation in substance. Because of difficulty in measuring audit quality directly, this study uses discretionary accruals (DA) as proxies. Results show that, in the year right before mandatory audit partner rotation, DA was significantly reduced, which is the evidence of higher audit quality. The rotated partners knew at their last audit for the period right before rotation that they would not be allowed to get involved in the next year audit. They could do their best to clean up any errors or misstatements for the period they are responsible to avoid those to be handed over to the next years they would not be involved. However, in the year right after rotation, no such phenomena are observed, which is not a surprise, because positive effects due to increased independence might be offset by negative effects due to lack of knowledge of new partner. This study has its implications both to regulatory bodies who consider enforcing partner rotation regulation in the future or those who put them in place at present.
AUDIT COMMITTEES IN ESTONIAN PUBLIC INTEREST ENTITIES: A PRELIMINARY ASSESSMENT
PÄRL, ÜLLE
VALTS, MARIS
Category: AU = Auditing
The purpose of this paper is to examine the effectiveness of audit committees (hereinafter ACs) of organizations in Estonia. The paper discusses 20 public interest entities in Estonia, covering the period 2004–2014. The results indicated that in the majority of the organizations, the perception is that ACs have helped to improve the efficiency of risk management, internal audits, and internal control, as well as to ensure compliance with regulations. In fewer organizations ACs have helped to improve the financial reporting quality and increased the independence of an auditor. The main characteristics that should contribute to AC effectiveness were found to be adequate, and ACs were primarily composed of sufficiently qualified members. However, room for improvement was identified in AC independence, and not all ACs fulfilled the responsibilities from the regulations. The main limitation of this study is related to survey methodology; the conclusions were drawn from a small number of responses, representing mainly evidence from public sector entities or companies. This sets limits on the possibility of generalizing the results. The practical contribution of this paper is that it indicates the AC effectiveness of organizations in Estonia and suggests possible improvements. The study filled the gap in research about AC effectiveness in Estonia.
AUDITOR LEADERSHIP IN JOINT AUDIT AND AUDIT QUALITY
PAUGAM, LUC
FILIP, ANDREI; JEANJEAN, THOMAS; LOBO, GERALD
Category: AU = Auditing
We investigate the effect of leadership among joint auditor pairs, measured as the percentage of audit fees received by auditors, on audit quality. Using a sample from France, where the law requires the use of two auditors, we show that auditor leadership is associated with higher audit quality. We document that firms that are audited by joint auditor pairs in which one auditor acts as a leader, i.e., receives most of the audit fees, exhibit lower discretionary accruals and lower income-increasing discretionary accruals, and report more conservatively. Our findings hold using other measures of financial reporting quality such as discretionary revenues (Stubben 2010). We also provide evidence that auditor pairs with a lead auditor do not charge higher total audit fees to their clients. Our results are consistent with lower coordination costs and a reduced probability of opinion shopping for clients with joint auditor pairs that have a lead auditor. Our study informs investors and firms in mandatory and voluntary joint audit regimes, as well as regulators who are considering requiring joint audit to enhance audit quality and decrease audit market concentration.
INSIDER TRADING AND EARNINGS MANAGEMENT IN BRAZILIAN CAPITAL MARKET
PAULO, EDILSON
COSTA, FÁBIO; GIRÃO, LUIZ FELIPE; MARTINS, ORLEANS
Category: FA = Financial Analysis
We examine the relationship between informed trading and earnings management on Brazilian capital market. The work was realized in public firms listed on BM&FBOVESPA exchange. Our sample is from 2008 to 2012 and it contains 127 companies and 581 observations in this period. Informed trading was proxied by Probability of Informed Trading - PIN (Easley, Hvidkjaer, & O’Hara, 2002, 2010) and earnings management by discretionary accruals (Pae, 2005). Our result evidences that earnings management is not significantly affected by informed trading. Furthermore, we cannot affirm that abnormal trades (buy and sell) have relationship with discretionary accruals, in opposition to evidences in others capital markets. Therefore, our result indicates that managers do not use earnings management to avoid lawsuit arising from private information trades in Brazilian capital market.
U.S. FUND ACCOUNTING THROUGH THE LENS OF HISTORY
PAVAN, ALDO
DESSALVI, BERNADETTE ; PAGLIETTI, PAOLA
Category: PS = Public Sector Accounting
Surprising correspondences emerge from the parallel investigation of fund accounting practices in the U.S. public sector and in Italian entities until the late nineteenth century. The analysis looks for similarities and differences between the GAAP for Governments and the early accounting routines, attempts to interpret them in light of dissimilar environmental features and wonders if the second could have some explanatory capability on the first. The research is based on a comparative design. Early Italian treatises by Angelo Pietra, Lodovico Flori and mainly Fabio Besta and contemporary U.S. public sector accounting standards are examined. The analysis is carried out by means of the identification and classification of relevant concepts and techniques. The identified concepts and techniques are close enough to be considered variants of the same idea. The “fund” concept, its use and content are strictly similar; they are founded on information needs for governance and internal control. Contemporary needs for democracy and transparency and opportunities coming from modern ICT tools bring the U.S. case to be accountable to the citizenry. The paper gives a contribution to the knowledge on the “fund accounting” current practice in the U.S. public sector; it has the intension of deepening the familiarity with the Italian accounting tradition, strongly rooted in historical inquiries.
MANAGEMENT ACCOUNTING PRACTICES BEFORE AND DURING ECONOMIC CRISIS: EVIDENCE FROM GREECE
PAVLATOS, ODYSSEAS
KOSTAKIS, XARA
Category: MA = Management Accounting
Economic crisis might affect management accounting and the use of its practices within the organizations. The purpose of this study is to investigate the impact of the Greek economic crisis in management accounting practices in the Greek industry and to examine shifts in trends in different accounting techniques' panels in usage and importance before (2008) and during (2013) the country's economic crisis. Empirical data were collected from 301 firms belonging to various Greek industries, which fully completed and returned a structured questionnaire regarding the perceived importance and actual usage of various MAP techniques for these two periods. 62 techniques were incorporated in the survey and were further subdivided into 5 panels: a) Cost Accounting b) Planning- Budgeting c) Decision-support systems d) Performance evaluation and e) Strategic analysis. Factor analysis waw employed to summarize and reduce the 62 variables into fewer factors for both surveys. The survey revealed that the importance and the usage of ABC systems, Planning, Strategy and SMA techniques increased during the crisis, while at the same time the level of importance and usage of traditional cost accounting techniques was decreased. Budgeting techniques are still widely used.
THE TIMING OF EARNINGS ANNOUNCEMENTS: THE INFLUENCE OF INDUSTRY LEADERS
PAYNE, JEFF
BRATTER, BRIAN; THOMAS, WAYNE
Category: FR = Financial Reporting
Prior research provides evidence that investors respond to the information released by other firms in the same industry (intra-industry information transfers). Our study provides an important extension to this literature. We investigate how the prior information provided by industry leaders affects followers earnings announcement timing decisions. Prior literature investigating when managers choose to disclose bad news provides inconsistent results. Our results indicate that bad (good) news is reported sooner (later) when the leader reports earnings that miss the analysts forecast and the followers earnings miss (easily meet) their analysts’ forecasts.
PRACTICES OF STANDARD-SETTING – AN ANALYSIS OF THE IASB AND FASB’S PROCESS OF IDENTIFYING THE OBJECTIVE OF FINANCIAL REPORTING
PELGER, CHRISTOPH
Category: FR = Financial Reporting
In their revised conceptual frameworks, the IASB and FASB pronounce that in their view valuation usefulness is the single objective of financial reporting. The present paper addresses the question how this decision was made by the boards and why stewardship was not stated as a separate objective. Relying on Foucault’s concept of governmentality, the paper analyses the practices and discourses of standard-setting for the specific case of the framework revision. The qualitative empirical study is based on the material which is publicly available from the due process of the IASB and FASB and also builds on interviews with board members, staff members and constituents. This paper finds that the decision usefulness programme, developed in the US in the 1970s and based on the neoliberal government rationality, was the body of knowledge which primarily shaped and limited the debates during the framework revision. While decision usefulness was taken for granted by all participants, even by those who were arguing for a separate stewardship objective, no alternative rationality or programme associated with stewardship was discussed in the standard-setting arena. The paper also shows that the “mundane” organisational structure puts the staff in a crucial position to influence board debates and sheds light on how disciplinary and self-disciplinary technologies affected board members’ decision-making.
BLAME GAME OR DIALOGUE! FINANCIAL, PROFESSIONAL AND DEMOCRATIC ACCOUNTABILITIES IN A COMPLEX HEALTH CARE SETTING
PELLINEN, JUKKA
MÄTTÖ, TONI; RAUTIAINEN, ANTTI; SIPPOLA, KARI
Category: PS = Public Sector Accounting
This paper questions how health care professionals make sense of conflicting accountabilities in a joined-up government setting and thereby seeks to contribute to the literature on accountability in the contexts of complex governance setting and strong clinical profession. We conducted a rich case study of a regional health centre in Finland that is offering public services in basic health care. The co-operative arrangement with the city and three municipalities that forms the case organization is politically fragile. The city is imposing economic austerity policy on the health centre making it difficult for the health care professionals to meet the minimum requirements of statutory patient act. In this context, the administrative accountability in budgeting has very limited means to promote improvements in organisational performance. Conversely, we found dialogic accountability practices through which the health profession aimed to reconcile the confliciting accountabilities. Thus, it seems that budget responsibilities merely relate to blame game in the upper echelons of political organization while dialogic accountabilitity is crucial in operative management. We contribute to the few empirical studies on accountability in new public governance context by analyzing the organizational practices related to the difficult controversies of professional, financial and democratic accountabilities in joined-up governance context.
ADOPTION AND USE OF IFRS: EVIDENCE FROM BRAZIL
PELUCIO GRECCO, MARTA CRISTINA
GERON, CECILIA MORAES SANTOSTASO; GRECCO, GERSON BEGAS
Category: FR = Financial Reporting
We present in this article a research, using a questionnaire survey based on DOI - Diffusion of Innovation Theory, made with preparers and users in order to verify the adoption and use of IFRS in Brazil. Both recognize the improvement in the quality of the accounting information after the Brazilian convergence to IFRS. There is preference in relation to Full IFRS when compared to IFRS for SME by external users. This may suggest that the Full IFRS adoption contributes to improving the company image, representing relative advantage of accounting and of the preparers, when they are most valued in the market. The analysts trust more in the audited and published statements, though great part of the preparers in general only do it when obligatory. The preparers that work in micro enterprises and small sized companies recognize more the IFRS benefits than the ones that work in larger companies, stating that such benefits overcome the involved costs. In the respondents’ perception, there is a greater demand in the financial statements from the banks of smaller companies. The financial statements performed in compliance with IFRS are also utilized for making internal decisions, especially by micro enterprises and by small sized companies. The complexity of the norms is determinant for the choice of the applicable norms set, mostly for smaller companies. The analysts highlight that they still have difficulties in understanding the financial statements in the light of IFRS.
CONDITIONALLY CONSERVATIVE FAIR VALUE MEASUREMENTS
PENALVA, FERNANDO
BADIA, MARC; DURO, MIGUEL; RYAN, STEPHEN
Category: FR = Financial Reporting
We investigate whether firms’ measurements of the fair values of financial instruments based on (Level 2 or 3) inputs other than active market prices for those instruments exhibit conditional conservatism (i.e., timelier recognition of unrealized losses than gains). We estimate conditional conservatism using an expansion of Basu’s (1997) reverse regression model that decomposes the dependent variable comprehensive income into the parts attributable to fair value measurements versus other measurement bases and that interacts the returns-related explanatory variables with the proportions of assets that are financial instruments with fair values measured using Level 2 or 3 versus Level 1 inputs. We find firms with more Level 2 and 3, but not Level 1, measurements exhibit more conditionally conservative comprehensive income attributable to fair value measurements but not to other measurement bases. We further find that this increase is larger for firms with poorer information environments and for years following rather than during the financial crisis and following rather than preceding the effective date of SFAS 157. To explore the generalizability of these findings to non-financial assets, we conduct similar analysis on oil and gas firms’ measurements of the fair value of their reserves, obtaining consistent results. Overall, our results indicate that firms report conditionally conservative fair value measurements when market imperfections enable them to exercise discretion over those measurements, consistent with them attempting to attain the well-documented contracting and other benefits of conditional conservatism (e.g., Watts 2003).
HOW DOES CEO DECISION HORIZON INFLUENCE R&D INVESTMENT?
PENG, CHIH-WEI
Category: MA = Management Accounting
This study investigates the effect of top managers’ myopia on R&D investment decisions and devises a measure of expected CEO tenure and CEO age as a proxy of the length of CEO decision horizon. Unlike prior studies, which focus on increasing R&D spending, this study examines the issue of R&D efficiency. In other words, this study computes the optimal level of spending on R&D, with any over- and under-investment being R&D inefficiency. The sample of CEOs for this study was drawn from US manufacturing companies (SIC 2, 3) during the period from 2003 to 2012, based on CEO characteristics and the availability of financial data. The results are consistent with the notion that a firm’s under-investment in R&D is positively associated with both the age and the tenure of its CEO. This thus implies that the CEO decision horizon problem is indicative of preference for an unusually low level of R&D investments. In addition, this study also finds that the relationship between under-investment in R&D and the beginning of tenure is stronger when CEOs attempt to avoid reporting small negative earnings surprises. Therefore, when a CEO’s abilities are not well-known to the market at the beginning of their tenure, they are more likely to engage opportunistically in cutting R&D investment in order to avoid reporting small negative earnings.
CORPORATE INVESTMENT AND PUBLIC INFORMATION
PETER, CASPAR DAVID
Category: FA = Financial Analysis
This study examines whether the external information environment is associated with private firms’ investment behavior. I use the number of local news media (print and online) at the city-level in Italy to link the quality of the firm’s information environment with private firms’ investment behavior. I predict and find that a higher quality of the information environment reduces uncertainty about investments which leads to greater responsiveness of firms to their investment opportunities and higher investment efficiency. My results shed some light on the importance of news media as an information dissemination channel for decision relevant information. Moreover, my results bear policy implications since they emphasize the importance of communication infra-structures in ensuring efficient resource allocation in an economy.
COST CALCULATION IN HOSPITALS: DOES THE TDABC MODEL EFFECTIVELY COMBINE COMPLEXITY AND SIMPLICITY?
PETIT, NICOLAS
DUCROCQ, CHARLES
Category: MA = Management Accounting
This study develops an empirical model to determine the effect of using the Time-Driven Activity-Based Costing (TDABC) method on cost calculations of a hospital’s transport service. Through the implementation of the model, the authors highlight the benefits and limitations. The results obtained are described and the consequences for management of a hospital are discussed, including how the use of TDABC can answer some of the dilemmas of managing a complex activity with a tool that is simple to use: evaluation of the unused capacity, adaptability to complications, evaluation of opportunities, optimization of the organization, pooling between institutions, benchmarking, comparison with other cost calculation methods, lack of homogeneity in the tasks and the unit costs of resource groups, etc.
BIG DATA, FUTURE ORIENTATION AND TAXES – HOW TAX LAW INFLUENCES PERSONAL ATTITUDES AND SOCIETAL VALUES
PETUTSCHNIG, MATTHIAS
Category: TX = Taxation
Individuals have to cope with or are at least concerned with taxes almost every day. This paper evaluates whether this permanent exposure to different aspects of a country’s tax regime influences an individual’s fundamental values, attitudes and perceptions. Following the concept of future orientation as developed in sociological and cross-cultural literature these values and attitudes of individuals determine their predisposition towards business endeavours and entrepreneurial activities. Future orientation is a driver for economic success, innovativeness, happiness, confidence and competitiveness. The results of this paper suggest that taxes influence an individual’s degree of future orientation. Taxes thus affect individual’s basic attitudes, general perceptions and overall values and predetermine individual’s behaviour, investment and consumption decisions on a more basal level than previously addressed in scientific research. The paper provides three main results. First, it links online search activity and virtual behaviour to real world economic indicators and policy instruments. Second, it combines cross-cultural management and sociological literature with tax research and third, the paper identifies tax policy measures negatively affecting individuals’ attitudes and perceptions towards the future and may thus assist in designing a tax policy mix that encourages future orientation while preserving tax revenues.
DO CREDIT RATING AGENCIES INFLUENCE THE DECISION TO MANAGE EARNINGS BY IPO ISSUERS?
PHAM, HANG
GOUNOPOULOS, DIMITRIOS
Category: FA = Financial Analysis
We examine whether IPOs with credit ratings prior the offering behave differently from non rated newly listed firms in their financial reporting and if rated IPO firms deliver higher quality and more reliable financial information to investors. Analysing accrual-based and real earnings management, we reveal strong evidence that rated IPOs are less likely to manipulate accounting figures. They tend to manipulate real operating activities including sales, production (increasing trend) and discretionary expenses (reducing drift) to achieve greater reported earnings. The credit rating levels do not appear to explain the variation in earnings management around IPOs.
TAX INCENTIVES AND FINANCIAL REPORTING BEHAVIOR OF PUBLICLY LISTED FIRMS
PIERK, JOCHEN
KOHLHASE, SASKIA
Category: FR = Financial Reporting
This paper empirically investigates the effect of a limitation of tax-loss offsetting on financial reporting behavior of publicly listed firms. Limiting the possibility to offset tax loss carryforwards (TLCF) results in cash-flow disadvantages in years after the loss had occurred. Thus, losses become more costly as tax savings are postponed into the future. When firms adjust their tax accounting in response to the rule change, it is unclear whether there is an adjustment in financial accounting as well. Although there is no direct link between tax accounting and financial accounting, firms face the tradeoff between higher tax-book differences and adjusting financial accounting, which in turn could lead to increased information asymmetries. We hypothesize and find that firms smooth earnings more after the tax rule change to avoid losses. Furthermore, we find that firms that already face a loss avoid impairments after the rule change. We provide evidence that a limitation of tax loss offsetting can trigger unintended consequences by affecting financial reporting behavior even though there is no direct link between tax accounting and financial accounting.
MARKET MISVALUATION, SHORT-TERM PERFORMANCE AND FUTURE GROWTH: A PERSPECTIVE ON BRICS COUNTRIES
PIMENTEL, RENE COPPE
Category: FA = Financial Analysis
This paper empirically implements the RIV model in the five main emerging economies (BRICS countries) and decomposes the market value into short and long-term components. By collecting annual data of 2290 listed firms from 1995 to 2013, we document that earnings forecast and valuation accuracy vary significantly across countries. Differently from previous literature, we show that short-term earnings are not the main component in valuation (i.e. markets are not myopic) except for the Chinese case. Overall, the results suggest that the short-term stressed scenario in emerging economies seems to be offset by expectation of future growth and future market development. Finally, we reinforce the skepticism towards the Abarbanell and Bernard’s (2000) approach to test market myopia (short-termism).
CONVERGENCE OF ACCOUNTING REGULATION FROM THE VIEW OF LEGITIMACY THEORY
PITTROFF, ESTHER
Category: GV = Accounting and Governance
The paper discusses the convergence of accounting regulation from the view of legitimacy theory. It will be shown that legitimacy of converged accounting rules is hardly possible because of the path dependent development of corporate governance systems. The development of corporate governance system depends on the prevailing norms and beliefs of the society and all elements of the corporate governance system have to be consistent with these values. For this reason, convergence of accounting standards requires a convergence of the corporate governance systems. Since this development seems to be unlikely the paper presents an idea under which real convergence of accounting standards seems possible. The results of the paper are relevant for accounting research and regulators as well because it analyzes the influence factors of convergence and it helps to understand why real convergence of accounting regulation is hardly achievable.
A SURVIVAL ANALYSIS OF PRIVATISATION OF MUNICIPAL SOLID WASTE COLLECTION SERVICES. MODELING THE IMPACT OF THE GREAT RECESSION AND FISCAL STRESS
PLATA DÍAZ, ANA MARÍA
DE LA HIGUERA-MOLINA, EMILIO; GARRIDO-RODRÍGUEZ, JUAN CARLOS; LÓPEZ- HERNÁNDEZ, ANTONIO MANUEL; PÉREZ-LÓPEZ, GEMMA; ZAFRA-GÓMEZ, JOSÉ LUIS
Category: PS = Public Sector Accounting
According to the conventional theoretical framework, fiscal stress is an explanatory factor of privatisation. However, the empirical evidence in this respect is not convincing. This paper considers elements of financial condition in an evaluation of fiscal stress over an extended period of time, addressing, together with other socioeconomic and political factors, the effects of the current global financial crisis on the fiscal stress-privatisation relationship with respect to urban waste collection services. A discrete-time survival model was applied to the period 2000-2010, and the results obtained indicate that some elements of financial condition are decisive in the decision to privatise this service. We also highlight the major impact of the Great Recession of 2008-2010 and the consequent effect on the fiscal stress-privatisation relationship.
THE RELEVANCE OF COOPERATIVE NETWORKING FOR TOP ACCOUNTING RESEARCH
PLIETSCH, DANIELA
EULERICH, MARC; POTT, CHRISTIANE
Category: ED = Accounting Education
Transfer and exchange of knowledge are important aspects in the acquisition of knowledge. This article analyzes the cooperative behavior of accounting scientists in five leading English academic journals. The database contained 2,084 articles that were published between 2002 and 2012. We consider collaborations on the level of individuals and countries, with their structure invoking methods from network theory. In sum, the results characterize the scientific community in accounting research as a closely interwoven, well-concentrated, cooperating network. Moreover, we identify scientists who are of crucial importance for the transfer of knowledge separate from their individual scientific contributions. Finally, we suggest a strategy for building up an academic network that facilitates publication in top accounting journals.
MARKET DEFINED INNOVATION SUCCESS
PLÜSCHKE, BORIS D.
GROTTKE, MARKUS
Category: MA = Management Accounting
This paper examines an innovation’s success potential from a market perspective. Drawing on diffusion literature from the field of technology and innovation management research and, in addition, on sociological approaches we develop a new conceptual framework that allows for capturing the likelihood of market success enjoyed by innovations. We explore, first, the readiness of an innovation to be absorbed by a potential target market (the innovation’s hyperconnectivity) and, second, the perceived degree of the innovation’s novelty from a market actor’s viewpoint. New opportunities made available by our framework for the purpose of strategic decision making in practice and for its suitability in undertaking research on innovations are discussed subsequently.
THE IMPACT OF THE 2010 EU BANK STRESS-TEST RESULTS DISCLOSURE ON BANKS’ EARNINGS MANAGEMENT
PORUMB, VLAD ANDREI
ANGHEL, ION; ROBU, IOAN-BOGDAN
Category: FR = Financial Reporting
. In this paper we analyze the impact of the 2010 EU-wide stress test (ST) results’ disclosure on banks’ earnings management activities. The forward-looking regulatory disclosure is intended to express the riskiness of banks in various scenarios. Recent studies show that the opaqueness of banks decreases once the ST results are disclosed. Given that bank opaqueness is associated with opportunistic reporting, we study if banks reduce the level of earnings management subsequent to the ST results’ disclosure. We first assess if the banks reduce the level of income-increasing and income-decreasing discretionary loan loss provisions (DLLPs) subsequent to the ST results’ disclosure Further, we analyze the effect of the results disclosure on the tested banks’ level of income smoothing through DLLPs. We find that the level of DLLPs is reduced for the banks that participate in the ST relative to the non-participants. Also, we find a decrease in income smoothing through DLLPs for the tested banks. We contribute to the rising literature on banks’ ST as the only study to date assessing the importance of regulatory disclosures on banks’ opportunistic reporting.
STATE OWNERSHIP AND LABOR COST STICKINESS
PRABOWO, RONNY
HOOGHIEMSTRA, REGGY; VAN VEEN-DIRKS, PAULA
Category: GV = Accounting and Governance
This paper investigates the effect of state ownership on the stickiness of the labor costs of firms from 22 European countries. The literature on cost behaviour suggests that agency problems are instrumental in explaining cost stickiness (Anderson et al., 2003; Chen et al. 2012; Dierynck et al., 2012). Firms in which states own shares tend to incur higher agency costs because states may use their influence as owner to intervene in the firms’ activities for their socio-political purposes in ways which are potentially detrimental to the firms’ value-maximizing objectives (Shleifer and Vishny, 1994; Boycko et al., 1996; Shleifer, 1998). Moreover, multiple objectives of state-owned enterprises (SOEs) make it more difficult to control SOE managers’ behavior, leaving more room for managerial discretion and the pursuit of self-interest (Tirole, 1994; Sapienza, 2004). Based on data from 1993-2012, the results indicate that SOEs exhibit stickier labor costs than non-SOE (private) firms. Our robustness analyses also generate qualitatively similar results. Overall, this study contributes to the cost stickiness and state ownership/privatization literatures by highlighting the effect of state ownership on cost stickiness.
LOAN LOSS ACCOUNTING RULES AND BANK LENDING OVER THE CYCLE: EVIDENCE FROM A GLOBAL SAMPLE
PRAMOR, MARCUS
DOMIKOWSKY, CHRISTIAN; FOOS, DANIEL
Category: FR = Financial Reporting
This study empirically analyzes how the cross-country differences in loan loss accounting rules affect banks' lending behavior over the business cycle. Our findings deliver new insights for the ongoing debate on the procyclicality of loan loss provisions and the potential impact on bank lending. Based on a novel dataset comprising detailed information on local GAAP provisioning rules in a large number of countries across the globe, we develop several indices that reflect how far banks are enabled to take a forward-looking approach in the assessment of their credit risk reserves. These indices are used to explain the individual lending behavior of up to 4,575 banks in 52 countries. Consistent with the capital crunch hypothesis, we find that bank lending is more procyclical if banks are subject to more backward-looking loan loss accounting rules.
THE ROLE OF LABOR AND TRANSACTION COSTS IN THE SUCCESS OF MANUFACTURING OFFSHORE: EVIDENCE FROM MEXICO’S MAQUILADORA INDUSTRY
PRICE, RICHARD
ELDENBURG, LESLIE; ROMÁN, FRANCISCO
Category: MA = Management Accounting
The practice of shifting manufacturing activities to lower wage countries has thrived lately as firms attempt to reduce labor and other costs. However, success has been elusive for many of these firms. We investigate the determinants of offshoring success, with emphasis on the role of transaction costs in firms’ decisions to continue (or discontinue) manufacturing abroad. We hypothesize that labor constraints, supply chain frictions, and other transaction costs could impact production and potentially offset labor cost savings. We analyze labor costs and constraints and relevant transaction costs. We find that although successful plants pay a wage premium and more benefits to workers, their overall labor costs are relatively lower. These plants attract a more skilled and stable labor force, outsource non-manufacturing functions more often, and use fewer Mexican suppliers. Overall, our findings suggest that environmental frictions and transaction costs matter when shifting production offshore.
OWNERSHIP AND BOARD STRUCTURES AND FINANCIAL DISTRESS IN SPANISH FIRMS: EVIDENCE FROM THE GLOBAL FINANCIAL CRISIS
PRIEGO DE LA CRUZ, ALBA MARIA
MANGENA, MUSA ; MANZANEQUE LIZANO, MONTSERRAT
Category: GV = Accounting and Governance
The purpose of this paper is to analyze the impact of corporate governance mechanisms on the probability of financial distress in the Spanish listed firms. Using a matched-pairs research design, we examined 202financially distressed and non-financially distressed firms in the period of time from 2007 and 2012. Employing several conditional logistic models, we find that ownership structure and board structure can affect to financial distress situations. Our findings show evidence that non-institutional ownership concentration, inside equity ownership, gender diversity, board meeting and audit committees size are associated with financial distress likelihood. An interesting finding is that the proportion of proprietary directors increases the likelihood of financial distress in Spanish firms, suggesting that these directors are not effective monitors of management. Also a puzzling finding of this study is that the presence of female directors is associated with the likelihood of financial distress. Nevertheless, our results have important corporate governance policy implications in Spain.
EFFICIENCY, QUALITY AND COMPETITIVENESS IN THE AUDIT INDUSTRY. NO COUNTRY FOR OLD MEN?
PRIOR JIMENEZ, DIEGO
SUNDGREN, STEFAN
Category: AU = Auditing
We use a Cobb-Douglas production function to study factors associated with efficiency of 404 Swedish non-Big 4 audit firms. The estimates of the model using a balanced panel covering the 2007 to 2011 period indicates decreasing returns to scale in the non-Big 4 segment of the audit firm market. This result holds when controlling for the quality of the outputs, using discretionary accruals as the measure, and a possible explanation is that incentive and co-ordination problems in larger firms reduce efficiency. A further finding is that efficiency increase with the average experience of the auditors but only to a certain point. The maximum efficiency is attained at around 22 years of experience and after that efficiency starts to decay. A possible explanation is that it takes time to become acknowledged and build up a client base and / or that experience improves the efficiency of the production of the services. A reason to the decay after a certain point is incentive or disengagement effects.
THE BENEFITS OF STRUCTURED DATA ACROSS THE INFORMATION SUPPLY CHAIN: INITIAL EVIDENCE ON XBRL ADOPTION AND LOAN CONTRACTING OF PRIVATE FIRMS
PRONOBIS, PAUL
KAYA, DEVRIMI
Category: FR = Financial Reporting
A growing body of literature documents how different parties benefit from structured data across the information supply chain. The purpose of this study is to examine the effect of voluntary adoption of the eXtensible Business Reporting Language (XBRL) on price and non-price terms of loan contracting. Using a sample of Belgian private firms, the analyses provide evidence that banks charge lower interest rate spreads to voluntary adopters as compared to non-adopters. The results also show that loan sizes are larger in comparison for voluntary adopters of XBRL. Further, the effect of XBRL adoption is stronger for opaque firms. The results are robust to using different estimation approaches (OLS, fixed and random effects models) as well as additional tests. The findings are in line with the view that lower costs of information processing by banks are reflected in lower interest rate spreads and higher loan approvals for XBRL adopters, and contribute to our understanding of the economic consequences of new technologies with respect to financial reporting – an implication that may be of interest to regulators and other parties interested in the benefits of structured data across the information supply chain.
SCIENTIFIC AUDITORS
PROTT, MARTIN
ERNSTBERGER, JUERGEN; KOCH, CHRISTOPHER
Category: AU = Auditing
We examine how auditors who composed scientific publications in journals or books (“scientific auditors”) influence the audit quality and audit fees of their engagements. Using data from individual German auditors, we find that relative to their peers scientific auditors provide a higher audit quality measured by the level of abnormal accruals and the probability of enforcement errors. Furthermore, scientific auditors command higher audit fees. Additional tests including attribute-based matching, split samples, and change models suggest that these results are due to treatment effects rather than selection effects of these auditors to specific clients. We contribute to the literature by introducing the notion of scientific auditors and by showing the advantages of bridging the gap between academia and audit practice which is currently discussed by the AAA and the AICPA.
DODGING REPATRIATION TAX - EVIDENCE FROM THE M&A MARKET
RABIER, MARYJANE
MARTIN, XIUMIN ; ZUR, EMANUEL
Category: TX = Taxation
U.S. multinational companies are required to pay additional corporate taxes upon repatriation of foreign earnings. These tax laws constitute legal frictions limiting multinational firms’ options to use foreign earnings. In this study, we investigate whether U.S. multinational firms facing higher repatriation tax costs are more likely to engage in acquisitions of both U.S. targets and foreign targets. While acquisitions of foreign targets are a legal way to consume foreign trapped cash, U.S. parents can also strategically structure acquisitions of domestic firms to avoid repatriation tax costs (e.g., using “Killer B” or “Deadly D” strategies). We find that U.S. multinational firms with higher levels of repatriation tax costs are more likely to engage in M&A activities involving both domestic and foreign targets. Furthermore, repatriation tax costs are positively associated with cash deals for foreign acquisitions and stock deals for domestic acquisitions. Finally, we find that both foreign and domestic acquisitions result in future decreases in foreign trapped cash. These results suggest that MNCs strategically structure M&A deals to avoid repatriation tax costs and that domestic acquisitions are an important way for these firms to consume cash trapped overseas.
THE BALANCE BETWEEEN USERS AND PREPARERS IN THE NEW EUROPEAN ACCOUNTING DIRECTIVE
RAMASSA, PAOLA
D'ALAURO, GABRIELE; QUAGLI, ALBERTO
Category: FR = Financial Reporting
This paper analyzes the complex panorama of opinions and expectation expressed by constituents of different classes and accounting systems on key regulatory issues with reference to the review of the European Accounting Directives, and explores the role of the users’ primacy principle in EU standard setting. The European Union (EU) project to modernize and simplify Accounting Directives, which led to a public consultation in 2009 and resulted in the new European Accounting Directive in 2013, offers a unique opportunity to explore the under-researched but extremely relevant EU accounting standard setting. The results indicate significant differences in respondents’ views on choices related to reduction in mandatory information and to differential reporting. In particular, users, accounting professionals, and preparers express different orientations concerning possible reductions in mandatory information, while constituents from different accounting systems have differing views on differential reporting issues. The new Directive thus seems to be inspired by the primacy of users’ views with regard to reduction in mandatory information (in contrast to preparers’ expectations), but not with reference to differential reporting issues. This study adds to the literature by focusing on the European standard setting, which few studies have examined, by offering theoretical and public policy implications, and providing a basis for further research.
INCOME SMOOTHING DUE TO UNEMPLOYMENT CONCERNS
RANASINGHE, THARINDRA
NG, JEFFREY ; RANASINGHE, THARINDRA ; SHI, GUIFENG ; YANG, HOLLY
Category: FR = Financial Reporting
Economic theory predicts that top executives and lower-level employees have incentives to smooth income due to compensating wage differential costs and fear of job loss, respectively. Following Agrawal and Matsa (JFE, 2013) who rely on exogenous variations in unemployment insurance benefits to examine how unemployment concerns affect corporate leverage, we examine the link between such benefits and income smoothing. We find that when unemployment insurance benefits are higher and concerns about unemployment are hence lower, there is less income smoothing. This relation is stronger when employees face higher unemployment risk and weaker when the firms’ information and internal control environments are strong. Our study contributes to the literature by showing that labor market policies have a significant, likely unintended, positive externality on corporate financial reporting.
CONSERVATISM AND THE INFORMATION CONTENT OF EARNINGS
RAVAL, VIVEK
BARTH, MARY; LANDSMAN, WAYNE; WAYNE , SEAN
Category: FR = Financial Reporting
This study finds that more conservative earnings have lower information content in that higher conditional conservatism decreases the speed with which equity investor disagreement and uncertainty resolve at earnings announcements. We find that a measure of conditional conservatism that varies cross-sectionally and intertemporally is negatively related to the ratio of average daily equity trading volume (return volatility) during the annual earnings announcement window to average daily volume (volatility) during the post-announcement window. We also find positive returns subsequent to the earnings announcement for firms with higher conditional conservatism, which is consistent with investors being unable to adjust fully for the negative bias in conservative earnings. We find higher levels of insider purchases in the post-announcement window for firms with more conservative earnings, which is consistent with insiders taking advantage of the investor underreaction.
THE IMPACT OF TAX LOSS CARRY-FORWARDS ON FIRMS' INVESTMENT BEHAVIOR
RECHBAUER, MARTINA
Category: TX = Taxation
In this study, the impact of tax loss carry-forwards (TLCF) on investment in capital assets is examined. Unlike other studies in that area of empirical tax research, I determine firms' TLCF status based on tax information provided in firms' financial statement and hence, do not rely on probably imprecise database-driven identification methods. The study is based on a panel of parent companies of listed Italian firms between 2009 and 2012. Italian firms were able to claim a generous tax break - the so called Tremonti-ter provision - on new investments in certain types of plant and machinery made between 2009 and 2010. My setting thus allows me to examine the impact of TLCF on both, firm-level investment in eligible assets during the Tremonti-ter period and firms' reaction to the regulation's expiration. The results derived in this study are based on tobit regressions with firm-level investment in plant and machinery as the dependent and a dummy variable capturing firms' TLCF status as the main explanatory variable. I find that during the Tremonti-ter period, TLCF firms invested significantly less in eligible assets than non-TLCF firms. Moreover, firms with TLCF decreased investment significantly less than firms without TLCF as a response to the regulation's expiration. However, the magnitude of the effects derived tends to be rather small. My results thus suggest that it might not be necessary for legislators and empirical tax research to consider firms' TLCF status when deciding upon which tax policy to pursue or when empirically examining the impact of taxes on firms' investment behavior. The latter conclusion however is likely to be weakened by specification issues related to the dependent variable employed.
DO MANAGERS USE VOLUNTARY DISCLOSURE TO EXPLAIN ACCOUNTING CONSERVATISM? THE ROLE OF BUNDLED FORECASTS
REDIGOLO, GIULIA
D'AUGUSTA, CARLO
Category: FR = Financial Reporting
Abstract: Under conditional conservatism, the recognition of hard to verify gains is delayed until they meet higher verification standards. Such a lack of timeliness may cause investors to be inadequately informed about positive outcomes; however, recent findings show that conservatism is actually associated with improvements in the information environment. To explain this association, we hypothesize that managers combine the mandatory announcement of current earnings with the voluntary revelation of expected future profits, whose recognition has been postponed, so as to inform investors of conservatism's effect on the earnings time series. Consistently, we find that conservatism significantly increases the probability that a manager chooses to bundle a good news forecast with the earnings announcement rather than remain silent. We also find that bundled forecast news is more positive when conservatism is higher, and such effect is stronger if current earnings news is negative. Additional analyses reveal that bundled forecasts issued by conservative firms are not less reliable, but rather more accurate and less optimistically biased. Finally, conservative firms enjoy higher stock returns in the announcement days if they bundle a good news forecast than if they remain silent. This paper contributes to our understanding of the determinants and characteristics of bundled forecasts, as well as the consequences of conservative reporting.
THE IMPACT OF PCAOB AUDITING STANDARD NO. 5 AND THE GREAT RECESSION ON AUDIT FEES AND AUDIT QUALITY
REICHELT, KENNETH
JOHNSON, ELIZABETH; SOILEAU, JARED
Category: AU = Auditing
We investigate the effects of Audit Standard No 5 (AS5) and the Great Recession on audit fees and audit quality. AS5 supersedes Auditing Standard No. 2 (AS2), and became effective for audits for accelerated filers for fiscal years ending on or after November 15, 2007. At the same time the world experienced the great recession which started with the financial liquidity crisis in December 2007 and ended in June 2009. Using a large sample of accelerated filers subject to AS5, we find evidence of a slight decline in audit fees during the initial phase of the recession with a significant decrease occurring in fiscal year 2009 and continuing through the end of fiscal year 2011. More importantly, we also find that audit quality, as proxied by abnormal accruals, meeting or beating analyst earnings forecasts, and restatements, did not decrease in the periods of lower audit fees. In fact, there was not a significant difference in audit quality after the initial implementation of AS5; however after the recession there has been a significant increase in audit quality. We also find that for non-accelerated filers, who are not directly affected by AS5, audit fees increased with a concurrent increase in audit quality. In summary, our results lessen the concerns voiced by the Public Accounting Oversight Board (PCAOB), and Securities Exchange Commissions (SEC) about the decline in audit quality associated with the decline in audit fees for accelerated filers.
CARBON DISCLOSURE: A SYSTEMATIC REVIEW OF AN EMERGING FIELD OF RESEARCH
REIMSBACH, DANIEL
HAHN, RÜDIGER; SCHIEMANN, FRANK
Category: SE = Social and Environmental Accounting
The debate surrounding climate change often centers on companies’ contributions to global warming, which has led to an increase in the importance of (corporate) carbon disclosure. We evaluate the current state of related research and identify its trends, coherences, and caveats via a systematic literature review. Socio-political theories of disclosure, economic theories of (voluntary) disclosure, and institutional theory serve as the main theoretical anchors for our exploration. The existing research emphasizes the determinants and, to a lesser extent, effects of carbon disclosure, as well as the associated regulatory issues (such as voluntary versus mandatory disclosure). Additionally, we discuss related issues, such as assurance and risks. We find that a large portion of scholarly work is not linked to theory, despite the fact that such links can be identified (e.g., from financial disclosure literature). Finally, we report on the established knowledge and examine the need for additional research.
THE PROCESS OF ACCOUNTING CHANGE IN A LOCAL GOVERNMENT: AN ANALYSIS FROM THE INSTITUTIONAL THEORY PERSPECTIVE
REIS, LUCIANO
LAVARDA, CARLOS EDUARDO FACIN
Category: PS = Public Sector Accounting
The purpose of this study is to investigate, from the perspective of Institutional Theory, the process of change in accounting systems structure in a local public organization. The research process was conducted through a longitudinal case study in a local government in Brazil, which has undergone a process of accounting change over the last ten years. The process of accounting change in a local government, object of this study, originated in a coercive isomorphism, that promoted the change of the department called "internal audit" to "controllership". This shift, in the early years, triggered the addition of some functions to the department, without a corresponding increase in structure. During the analyzed period new actions were implemented, which allowed the expansion of the number of employees and greater efficiency in work processes. However, all the functions initially planned weren't incorporated, and it was also detected that typical controllership activities are not developed in municipal administration, such as asset control. This paper presents a new way of analyzing the process of accounting change in the public sector, using the theoretical framework of institutional theory as the basis of a longitudinal study. The findings demonstrate the specifics of the accounting reform in a local government, highlighting the coercive aspects, as well as identifying some reasons why the process of change was not institutionalized, although it is subject to coercive forces
INCREASES IN ACCOUNTING REGULATION: IS ‘MORE’ ACTUALLY ‘LESS’?
RENDERS, ANNELIES
IMPINK, JOOST ; PAANANEN, MARI
Category: FR = Financial Reporting
Regulators and practitioners have expressed concerns that accounting regulation has become “too much” and “too complex” resulting in negative consequences for companies and investors. We investigate whether the introduction of more accounting regulation is associated with more effort to acquire and process this information. We create a disclosure index measuring the number of accounting standards and regulations adopted by companies. We show that a higher disclosure index is associated with longer 10-Ks, a longer reporting delay and a higher audit fee. Next, adopting more standards leads to fewer analysts following the firm, lower analyst accuracy and a higher dispersion. Finally, adopting more standards leads to more useful information, but only for companies with more sophisticated investors. In addition, adopting more accounting regulation leads to higher bid-ask spreads, but only for companies with less sophisticated investors. Our findings suggest that by introducing more accounting regulation, regulators have ‘unlevelled the playing field’.
PERFORMING SOCIE-TIES: EXPLORING THE PERVASIVENESS OF THE INTERACTIONS BETWEEN ACCOUNTING AND INNOVATION
REVELLINO, SILVANA
MOURITSEN, JAN
Category: MA = Management Accounting
This study offers an account on the pervasive role of calculative instruments in performing pervasive innovation. The notion of pervasiveness (from Latin pervadere, derived from vadere ‘to go’, and per ‘through’) as going through pays attention to how social ties are extended, negotiated and mediated. Calculative instruments, by performing innovation, help to extend ties among technology, organization, market and society at large. In this process of extending ties among different domains, calculative instruments perform an innovation which not only supports business and adds profitability to the organization but which also distributes values to society. The paper offers two key findings. First, it shows that “social” is the concept needed to account for the ways an innovation may create and distribute values to business and society interchangeably because performing innovation always means performing socie-ties. Second, it also shows that the distributions of values are unintended, emergent, and slow: the search for profit and permanence sometime leads to more sustainable purposes which produce effects for society at large and vice-versa. Actions originated within more “social” purposes also impact organizational and business outcomes.
EQUITY METHOD ON JOINT VENTURES CONSOLIDATION: IFRS INADEQUATE SOLUTION? PROSPECTIVE EVIDENCE FROM THE CANADIAN CASE
RIBEIRO, MARIA CEU
MOREIRA, JOSÉ ANTÓNIO
Category: FR = Financial Reporting
A critical and controversial issue that has been debated over several decades is whether joint ventures should be consolidated by the equity method or proportionally jointly with the fully controlled interests. Responding to comparability concerns, the IASB has recently issued a new standard that eliminates the choice between the equity method and proportional consolidation, requiring only the equity method with expanded disclosures. In order to anticipate the impact of such a decision, using a sample of Canadian co-venturer firms, this study investigates the potential impact on the relative value relevance of the net assets, net income and cash flows, following the adoption of the new rules in 2013, for those co-venturer firms that choose the proportional consolidation before the IASB’s change. We also investigate whether disaggregate cash flows of joint ventures are incrementally and overall value relevant. Therefore, our results have particular relevance for evaluating the IASB’s changes of the accounting rules and footnotes disclosures. The study finds that a positive impact is expected on the value relevance of the net assets and a negative impact on the cash flows from operations of the co-venturer firms. The study also reveals that failure to disclose operating and investing joint ventures cash flows in IFRS 12 masks incrementally relevant information for the investor.
VALUE CO-CREATION IN AUDITING: UNDERSTANDING THE IMPORTANCE OF INTERACTIONS WITHIN THE FINANCIAL REPORTING PROCESS
RICHARD, CHRYSTELLE
LAMBERT, DAMIEN; MEUWISSEN, ROGER; VANSTRAELEN, ANN
Category: AU = Auditing
This paper investigates the value of auditing from the perspective of end-users such as Audit Committee Members, CFOs, External Auditors and Internal Auditors. Building upon marketing literature on value co-creation and using interviews and an interpretative approach of interactions, this paper evidences three distinct stages of value creation in the context of auditing, ranging from limited value creation to value co-creation. This continuum seems to be driven by the intensity and direction of the interactions. Our paper suggests that multiplying interactions anywhere, any time with different categories would pave the way for co-creation experiences and ultimately to value co-creation. Shedding light on the mechanisms leading to value co-creation, our paper intends to contribute to the literature as well as to practitioners through answering McCracken et al. (2008)’s call for a better understanding of how auditors can turn the client-auditor relationship toward the expert advisor role.
CUSTOMER-SUPPLIER RELATIONSHIPS AND STRATEGIC DISCLOSURES OF LITIGATION LOSS CONTINGENCIES
RICHARDSON, GORDON
CEN, LING; CHEN, FENG; HOU, YU
Category: FR = Financial Reporting
In a customer-supplier relationship, when a third party sues the supplier, the resulting litigation loss contingency may trigger the principal customer’s concerns regarding supply chain risks. We find that customers are likely to hedge against such supply chain risks by weakening or terminating relationships with dependent suppliers who are being sued. Having established the existence and quantified the level of potential proprietary costs in this setting, we next show that dependent suppliers being sued make strategic disclosures regarding loss contingencies in their financial statements in order to avoid relationship disruption. Relative to firms with no principal customers, dependent suppliers tend to promptly reveal their good news and strategically withhold their bad news. This pattern is stronger when customers face lower switching costs. Our findings are useful to the SEC, which would like to see clearer disclosures of potential losses from litigation in financial statements.
ROLE EXPANSION OR SHIFT? CONTROLLER’S ROLES AS BUSINESS PARTNER AND BEAN COUNTER – AN EMPIRICAL STUDY ON TASKS, ROLES AND SELF-PERCEPTION OF GERMAN MANAGEMENT ACCOUNTANTS
RIEG, ROBERT
Category: MA = Management Accounting
Business Partner is the role management accountants and controllers advocate for more than a decade. Empirical studies underline the positive reception of business partners. Yet, it is not clear if the ‘business partner’ role is reality in the tasks controllers perform and in the way they interact with managers. We question if that is not only a hoped-for role or a self-serving perception. This paper provides empirical evidence on the different tasks and managerial interactions controllers take part. Different tasks and controller-manager interactions define different roles, so we would be able to understand what roles controllers actually fulfill. Additionally, we contrast these results with the self-perceived roles of controllers to understand the extent of self-serving perception. Our sample consists of 182 German controllers. Data were analyzed using path analysis and correlational differences. The first main result is that controllers’ work does not fit in only one clear role; they act in both roles. The second main result is that in both roles, bean counter and business partner, the self-attributed roles seem more or less the same which supports the hypothesis that controllers want to see themselves in a positive light.
SLACK AND PARTICIPATIVE BUDGETING – ALWAYS AN EVIL?
RIEGLER, CHRISTIAN
KOPEL, MICHAEL
Category: MA = Management Accounting
Participative budgeting is widely used in corporate practice despite empirical research finds only mixed evidence of its benefits. This may be due to neglected drivers in the theoretical grounding of related research. So far analytical models focus on the benefits and costs of participative budgeting within a firm. They find that participative budgeting may improve the knowledge of a superior or increase the motivation of subordinates. However, this often comes at the costs of padding budgets and slack building by subordinates. Most studies find that slack only drives the costs of participating budgeting decreasing its benefits. By additionally considering market effects caused by participative budgeting, we find that slack may also be beneficial for a firm. In an analytical model, we characterize the basic trade-off between slack building and the decisions of market participants outside the firm. The total effect may be positive or negative. Therefore, focusing only on aspects of budgeting within a firm may miss an important effect of participative budgeting. It seems fruitful to consider possible market effects in future empirical research.
MANAGERIAL OVERCONFIDENCE AND THE USE OF LEVEL 3 ESTIMATES:EVIDENCE FROM THE BANKING INDUSTRY
RIEPE, JAN
Category: FR = Financial Reporting
This project explores the link between managerial overconfidence and banks’ asset valuation behavior in the aftermath of the 2007 financial crisis. Thereby, it provides empirical evidence that banks with overconfident CFOs rely more heavily on valuation models designed for inactive markets only, known as Level 3 fair value estimates. External governance by the capital market and more experienced auditors mitigates the effect, pointing toward an inappropriate use of those models by overconfident managers. In line with the managerial job sharing, CEOs do not impact the valuation behavior. Furthermore, competing explanations regarding signaling or the use of private information do not drive the results. While the capital market perceives Level 3 estimates as equally overvalued, the paper provides another channel through which managerial overconfidence impacts firm value.
CHANGES IN MANAGEMENT ACCOUNTING RELATED ROLES OF SMALL BUSINESS CHIEF FINANCIAL OFFICERS
RIKHARDSSON, PALL
BATT, CATHERINE; KARLSSON, THORLAKUR
Category: MA = Management Accounting
The purpose of this study is to assess if changes in the role of Chief Financial Officers in small and medium sized enterprises (SME) is similar to CFO role changes in larger enterprises (LE). We focus mainly here on the roles related to the management accounting system including data registration, analysis, decision support, reporting and internal control. The results are based on comparisons of answers to a questionnaire survey of 184 Icelandic LEs and SMEs in 2008 and 191 LEs and SMEs in 2014 where we asked similar questions about roles, task focus, required knowledge and the background of the CFO. The results indicate that SME CFOs are a different breed than LE CFOs with longer work experience in the same company and shorter educations. They also indicate that the changes observed in the role of CFO LEs are also happening in SME but at a slower pace with more focus on traditional accounting tasks such as bookkeeping and accounting systems. There seems to be a lack of knowledge of newer management accounting methods in general and internal control frameworks in particular in both SMEs and LEs. All in all there is a risk of SME management accounting practices and related CFO roles not evolving given slower influx of new methods, new experiences and higher education.
BUSINESS MODEL COMMUNICATION IN INTEGRATED REPORTS
RIMMEL, GUNNAR
JONÄLL, KRISTINA
Category: SE = Social and Environmental Accounting
In 2010, the International Integrated Reporting Committee (IIRC) was founded with the aim of creating a global framework for integrated reporting. The corporate business model is one key element of an integrated report. However, at present the term business model lacks a generally accepted definition. The aim of this study is to examine how the transition to the IIRC's IR frameworks has changed companies' information about their business models. This study compares reporting of business model between British and South African companies. While integrating reporting for British corporations is done on a voluntary basis, South African companies have mandatory requirements. This study included British corporations and South African companies that are part of the IIRC's pilot programme. Data collection has been carried out from corporate annual reports that were available on corporate home pages. Through a self-constructed disclosure scoreboard, the annual report narratives were examined to generate data for further analysis and comparison. The results show that UK corporations’ information about their business model has not changed considerably as a result of implementation of the IIRC's guidelines. Further, the study also shows that South African corporations have implemented the IR framework's guidelines regarding the business model to a greater extent than the British corporations that participated in the IIRC pilot programme.
THE CAUSES OF PUBLIC PARTICIPATION IN THE CENTRAL GOVERNMENT BUDGET PROCESS
RÍOS-MARTÍNEZ, ANA MARÍA
BASTIDA, FRANCISCO; BENITO, BERNARDINO; GUILLAMÓN, MARÍA-DOLORES
Category: PS = Public Sector Accounting
This paper attempts to analyse the causes of public participation in the budget process in an international comparative approach. In particular, we investigate which socio-economic, institutional and political factors promote public engagement in the central government budget process. Using a sample of 100 countries, our results indicate that Internet penetration, education level, country population size, country financial situation and budget transparency determine opportunities for public engagement in the central government budget process. In addition, we show that not only budget transparency promotes public participation but also public participation is necessary to enhance budget transparency.
DIFFUSION, DECOUPLING, AND DISSEMINATION - CONTROLLING TOOL USAGE IN MAINLAND CHINESE ENTERPRISES
RITSERT, ROLF
RICKARDS, ROBERT C
Category: MA = Management Accounting
This article reports results from a study of the management accounting tools Chinese controllers currently use, the frequency with which they employ them, the importance they assign to them, and how satisfied they are with the results these instruments produce. These topics are important in light of China’s ongoing market reforms, the increasing competition confronting its enterprises, and its leaders’ aim to improve efficiency and quality, while moving up the value chain. The study made use of responses to a Mandarin-language survey questionnaire from 124 Chinese companies as well as personal interviews with ten CFOs to help interpret and extend the survey results. Among the main findings are: a Chinese controller’s “toolkit” does not yet exist; the most widespread, frequently used, and important instruments do not give managers the greatest satisfaction; and both diffusion and dissemination characterize the spread of modern management accounting techniques among Chinese enterprises.
AUDIT COMMITTEE CHARACTERISTICS AND BANK RISK MANAGEMENT IN EUROPE
RIZZOTTI, DAVIDE
TOMASELLO, STEFANO SALVATORE
Category: GV = Accounting and Governance
With this paper we study, by focusing on the European context, how banks’ audit committee structure affects risk taking and risk management effectiveness. Sun and Liu (2014) propose the same research question and make their analysis on the US context. Whit our study we want to understand whether the differences that characterizes the European context may affect the results and, in particular, whether, notwithstanding the relevant differences among European countries, it is possible to find audit committee characteristics which show, in all Europe, a clear impact on bank risk taking and risk management. Furthermore, the European context allows us to test the effect of the Audit Committee independence, which was not considered by Sun and Liu. We analyzed data from 1/1/2008 to 31/12/2013 of a sample of European commercial banks listed in the STOXX EUROPE 600 BANKS (ticker SX7P) and we found clear evidence on the weakening of bank risk management caused by audit committees whose members are busy. We observed, in fact, an increase of bank risk taking and a decrease of performance of riskier banks caused by the above mentioned audit committee characteristic. AC independence, although not affecting bank risk taking, clearly allows banks to select those risks that drive higher performance. Other interesting results are found for audit committee members’ tenure, expertise and gender.
STIRRING RESPONSE TO CLIMATE CHANGE: THE IMPACT OF A RESPONSIBLE INVESTMENT INDEX
RODIONOVA, TATIANA
MACKENZIE, CRAIG; REES, BILL; RODIONOVA, TATIANA
Category: GV = Accounting and Governance
This study examines the effect of a responsible investment index (FTSE4Good) on companies’ compliance with climate change criteria. The results show that the index is able to stimulate compliance and the dialogue appears to contribute more than the exclusion threat. We also find that the likelihood of the company adopting the required practices is negatively associated with concentrated ownership and with strong internal governance. Finally, the results offer some evidence that compliance is related to subsequent reduction in greenhouse gas emissions. The study contributes to the understanding as to how practices mitigating climate change are promoted or discouraged by the managers and the owners, and how the institutional environment influences this. The results are consistent with engagement via a responsible investment index being an effective means of large-scale collective monitoring by institutional investors. The findings are also relevant for policy makers who wish to promote active ownership.
INTERNAL AUDIT: IS THE GOVERNANCE ‘THIRD LINE OF DEFENSE’ EFFECTIVE? AN EXPLORATORY STUDY OF CAES’ IMPRESSION MANAGEMENT TECHNIQUES
RODRIGUE, MICHELLE
ROUSSY, MÉLANIE
Category: AU = Auditing
Our exploratory study considers whether the internal audit function constitutes an efficient risk management and control "third line of defense", as prescribed by governance regulatory bodies. To that end, we examine if (and how) chief audit executives (CAE) of Quebec public organizations manage the impressions of audit committee members’ in the annual accountability process. We analyze an exclusive dataset composed of the main documents guiding the work of internal auditors, along with interviews with 13 CAEs. Our analysis highlights several impression management techniques implemented to make both internal auditors and management look good. We conclude that the CAEs team up with managers, instead of monitoring them. Our findings cast doubts on the conceptualization of internal audit as the independent third line of defense, envisioned as a keystone of governance oversight. We contribute to an emerging stream of research questioning internal auditing effectiveness as a governance mechanism. We also contribute to the impression management literature by offering an insider’s look at the work of internal auditors to expose impression management occurring through a private reporting channel – the accountability process of the internal audit function to the audit committee. The presence of impression management for the team composed of internal auditors and managers raises significant concerns about the quality of the accountability duty performed by the former.
ARE POLITICAL FACTOR INFLUENCING ON SUSTAINABILITY OF LOCAL GOVERNMENTS?. AN EMPIRICAL STUDY
RODRÍGUEZ BOLÍVAR, MANUEL PEDRO
ALCAIDE MUÑOZ, LAURA; LÓPEZ SUBIRÉS, MARÍA DESEADA; NAVARRO GALERA, ANDRÉS
Category: PS = Public Sector Accounting
Governmental financial crisis has put emphasis on the debate of financial sustainability of governments. Due to the influence of political factors on the management model of public entities, the objective of this paper is to analyse the influence of political variables on financial sustainability of public administrations, aiming at generating useful information for voters to make decisions regarding their policy options. Our findings indicate some variables that could be identified as risk factors for financial sustainability of local governments (mayors’ gender, profile studies in economics, political strength, political fragmentation, and conservative political ideology) whereas other political variables could be identified as promoters of financial sustainability in local governments (majority governments, coincidence ideology between local and regional government, and the number of years that the ruling party is in power).
THE IMPACT OF INFORMATION LOAD AND CREATIVITY ON ESCALATION OF COMMITMENT
ROETZEL, PETER G.
Category: IS = Accounting and Information Systems
This experimental study analyzes how two key factors, information load and creativity, influence decision making in escalation situations in which decision makers reinvest further resources in a losing course of action even when information indicates that the IT project is performing poorly and should be discontinued. Whereas previous studies focus on the complexity of information, this study investigates how different quantities of information influence escalation of commitment and how information load interacts with a decision maker’s interpretation of negative feedback regarding earlier decisions. In situations in which escalation of commitment can occur, information load is relevant for decision making for two reasons. First, in escalation situations in which decision makers face negative feedback, information load exacerbates the tendency to escalate commitment. Second, when an escalation tendency is absent, information load can lead to a decision to continue a losing course of action, which can be mistaken for escalation of commitment. Furthermore, decision makers with a higher level of creativity tend to invest more than decision makers with a lower level of creativity. Surprisingly, creative decision makers do not change their behavior when facing negative consequences while less creative decision makers show an escalation of commitment tendency.
WHAT DO POLITICIANS THINK OF THE COMMON CONSOLIDATED CORPORATE TAX BASE? A BELGIAN CASE STUDY.
ROGGEMAN, ANNELIES
COPPENS, CARINE ; VAN CAUWENBERGE, PHILIPPE; VERLEYEN, ISABELLE
Category: TX = Taxation
Since the launch of the EC’s proposal on CCCTB in 2011, some remarkable developments took place at the political level. However, in-depth studies examining these political developments in one country are lacking. Applying case study methodology, this paper contributes to this emerging area of research by describing and discussing the views of Belgian politicians on CCCTB in the Belgian Parliament, the European Parliament and the Council. Moreover, it is investigated to what extent and how Belgian politicians used macro-economic, legal or ideological arguments to found their opinion. In general, the findings show that a big majority of the Belgian politicians were proponents of CCCTB. During the discussions in each of the political institutions, the politicians referred to the macro-economic impact of CCCTB, the legal certainty of CCCTB as well as the party’s view to underpin their opinion. Besides several similarities, the implications of harmonization and the optionality of CCCTB involved clear differences in view between left and right parties. As Belgium is a likely candidate for introducing CCCTB, the findings of this research are valuable to other EU-countries.
WHO BENEFITS? THE IASB'S CONSTRUCTION OF THE USER.
RØSOK, KJELL OVE
Category: FR = Financial Reporting
The present paper explores the IASB’s construction of the users of financial statements. The IASB’s due process includes an analysis of the effects of its pronouncements, and it has called for contributions towards the development of a framework to support such an effects analysis. Prior research agrees that the needs of capital providers must be considered in standard setters’ effects analyses, but there is less agreement on the emphasis to be given to other users. A clear description of user needs would facilitate an effects analysis. The standard setters’ own conception of the users may contribute to, or obscure, such clearness. The present paper studies the IASB’s conception of the users by exploring how the IASB portrays the users. It draws on Fairclough’s social theory of discourse and conducts discourse analysis of the texts of the IASB’s Conceptual Framework, IFRSs and their respective Bases for Conclusions. The analysis finds that the IASB presupposes a rational and cash flow focused user, but this construct is both wider and narrower than the primary user defined by the IASB in its Conceptual Framework.
INTERNATIONAL DIFFERENCES IN IFRS POLICY CHOICE AND THE PERSISTENCE OF ACCOUNTING CLASSIFICATION: THE CASE OF CHINA
ROSSETTI, SILVIA
VERONA, ROBERTO
Category: FR = Financial Reporting
This paper focuses on the application of IFRS standards in China. The research is mainly conducted on the basis of Kvall and Nobes’ studies (2010) regarding the different ways various countries apply IFRS, and Nobes’s IFRS accounting classification system (2011). The compulsory implementation of IFRSs in China lasted only until the 2006 ASBE reform, for companies that issued shares buyable by foreign investors (B shares). The present study covers the IFRS overt options (Nobes, C.W., 2010; 2011) in the attempt to: 1) review the choices made by Chinese companies in order to find out – in the light of the applicable PRC GAAP requirement of that time – whether they were more or less likely to choose either option than the other countries analysed by Nobes (2010); 2) rank China’s place within Nobes’ s International accounting classification (2011), assuming it is closer to the Continental European area as a creditor and tax-oriented country (Nobes, C.W., 1998). 3) finally, a test was made to see if China belongs to a new cluster, based on a recent paper (Lourenco, I. et al., 2014) regarding the classification of three BRICS countries in Nobes’s IFRS accounting classification system (2011), which have adopted the IFRSs (Brazil, Russia and South Africa) and have been renominated an “Emerging Cluster”. The results of pair wise binomial analysis also confirm Nobes’s findings for China (2010), i.e. companies’ tendency to implement as far as possible the methods that were already widely used in their own country and that were based on national accounting principles. On the other hand, principal component analysis, multidimensional scaling and cluster analysis confirm China as belonging to the Continental European area, at least compared with the other BRICS countries, thus confirming –even in the way it implemented IFRSs – its nature as a tax and credit-oriented country (Nobes, C.W., 1998).
AUDIT ERROR, MANAGERIAL INCENTIVES, AND INFORMATION SHARING
ROTHENBERG, NAOMI
Category: MA = Management Accounting
This paper studies the effect of losses due to audit error on audit quality when the auditor’s report of earnings is used for managerial compensation and the auditor can learn about the firm’s productivity environment by observing the manager’s effort. If the auditor observes the manager’s effort, he can tailor the audit quality perfectly to the productivity state. However whether the audit quality, and thus compensation, increases or decreases relative to when the auditor is uninformed, depends on whether the losses due to legal liability are more or less than auditor’s loss of audit fees due to client or reputational loss. The increase or decrease in audit quality affects the manager’s marginal productivity, which affects his compensation. Overall, the principal prefers the auditor to observe the manager’s effort when the losses due to legal liability are more significant than the loss of audit fees due to client loss and the incentive problem is less significant, or when losses due to legal liability are less significant and the incentive problem is more significant.
INTERNAL AUDIT QUALITY: A POLYSEMOUS NOTION? THE CONTRASTED VIEWPOINTS OF EXTERNAL AUDITORS, AUDIT COMMITTEE MEMBERS, INTERNAL AUDITORS AND THE INSTITUTE OF INTERNAL AUDITORS
ROUSSY, MELANIE
BRIVOT, MARION
Category: AU = Auditing
The purpose of this study is to characterize how those who perform (internal auditors), mandate (audit committee members), use (audit committee members and external auditors) and normalize (the Institute of Internal Auditors) internal audit work respectively make sense of the notion of “internal audit quality”. We collected rarely researched qualitative data, including 56 interviews with internal auditors and audit committee members of public or para-public sector organizations in Canada and archival documents published by the Institute of Internal Auditors (IIA) and analyzed in the light of framing theory (Benford and Snow 2000; Snow and Benford 1988). We delineate four interpretative schemes (or frames), called “manager”, “éminence grise”, “professional”, and “watchdog”. Each suggests radically different perspectives on the nature of internal auditors’ work – a detached professional endeavor or an engaged managerial activity? – and its quality – signaled by the careful selection of the “right” work inputs to warrant independence and competence throughout the audit, by the perceived usefulness of the audit report in helping the top manager make informed decisions or by the audit process’ compliance with professional standards and norms. Our findings have important implications for the types of quality controls deemed suitable to internal audit work, from input controls to throughput, output and/or disciplinary controls.
THE INFLUENCE BU MANAGERS ALLOW THEIR CONTROLLERS: AN EMPIRICAL INVESTIGATION IN THE NETHERLANDS
ROUWELAAR, HANS
REBEL, FREEK
Category: MA = Management Accounting
Business unit (BU) managers and BU controllers work together to achieve the goals of their BU. However, the amount of influence BU controllers get from their BU managers differs in practice. We investigate the amount of influence BU controllers get from their BU managers to help them in making decisions and under what circumstances. For this study, 123 BU managers completed a questionnaire about their perceptions of co-operating with their controllers. Data analyses show that BU managers allow their controllers to advise them in three types of decisions: (1) strategic, (2) operational, and (3) performance measurement (PMS) decisions. For strategic decisions, BU managers often work in a bigger organization with enough decision authorities. Our findings show that they need controllers with good communication skills and low adaptation skills, and base their strategic decisions on traditional instruments. For operational decisions, BU managers need controllers with good technical skills, who can help them with making operational decisions in a more uncertain environment. These good technical skills of controllers are also positively linked to PMS decisions, which are based on new accounting techniques, because for PMS new (non-financial) measures, like Balanced Scorecards and technical measurement skills are important nowadays.
THE INFLUENCE OF INFORMATION AND SOCIAL-AFFECTIVE FACTORS ON DECISION IN ACCOUNTING ENVIRONMENT
ROUX CESAR, ANA MARIA
PEREZ, GILBERTO
Category: MA = Management Accounting
The process of decision making has been studied with interdisciplinary approaches, specially joining subjects of Cognitive Psychology, Cognitive Neuroscience, Economy, Accountancy, among others. Under this approach, this study has the specific goal: Understand the decision behavior adopted by managers when deciding on budgetary targets. The study’s approach was quantitative. An instrument of research was outlined with 30 assertions (a ten point frequency scale) that aimed to capture how the decision maker selected the information, how he behaved under possible social-affective influences and what type of decision he adopted while deciding about budget levels. A total of 303 professionals of Brazilian organizations of medium and large companies composed the sample and the data were analyzed using descriptive statistics and structural equation modelling. The search for information feeds the rational decision and, with decreased intensity, the decision based on professional experience; the decision maker suffers the group decisions effect; he/she analyses the reflex of his decisions on his professional future and on the group of which he takes part or leads; he/she considers the incident risks of different scenarios and uses availability and representativeness heuristics. According to the predicted model, the decisions do not strictly follow what is called controlled decision or rational decision.
FOREIGN OWNERSHIP EFFECTS OF INTRODUCING A CROSS-BORDER GROUP TAXATION SYSTEM - EMPIRICAL EVIDENCE FROM AUSTRIA
RÜNGER, SILKE
Category: TX = Taxation
Starting in 2005, Austria has implemented a new group taxation system, which allows for foreign subsidiaries to be included into a tax group and current tax losses of foreign group to be ffset against tax pro?ts of other domestic group members. In this paper, foreign ownership effects resulting from Austrian group taxation are empirically analyzed for the ?rst time. Results obtained from the analysis of 37,423 Austrian companies over a period of 10 years show that, despite an increase in foreign ownership among Austrian companies, the increase cannot be attributed to group taxation. Additionally, I can show that foreign ownership among Austrian holding companies has signi?cantly increased after the introduction of the group taxation. Group taxation has not changed foreign ownership on a widespread basis, but advantages of group taxation have been recognized by foreign multinational companies and empirical evidence for tax-efficient group restructuring can be shown.
FOREIGN OWNERSHIP AND FINANCIAL REPORTING QUALITY: EVIDENCE FROM SPANISH SUBSIDIARIES
RUSANESCU, SIMONA
GILL DE ALBORNOZ NOGUER, BELEN
Category: GV = Accounting and Governance
We provide empirical evidence on the relation between foreign shareholding and financial reporting quality in a sample of large private Spanish subsidiaries. We find that, compared to local groups’ subsidiaries, foreign controlled firms have higher magnitude of discretionary accruals and higher probability of receiving an unclean audit report. Additionally, we observe that both the magnitude of discretionary accruals and the probability of receiving a modified audit report significantly decrease with the local controlling shareholder’s tenure. In contrast, financial reporting quality of foreign groups’ subsidiaries does not change with the tenure of the controlling shareholder. Moreover, the accruals quality of subsidiaries that during the sample period have both a local and a foreign parent company is lower (higher) in the years with foreign (local) control. Overall, results suggest that the informational disadvantage of foreign shareholders prevents them from playing an effective governance role in the setting analyzed.
TEXTUAL CLASSIFICATION OF SEC COMMENT LETTERS
RYANS, JAMES
Category: FR = Financial Reporting
SEC Comment letters appear to be under-utilized by investors because these largely text-based disclosures are more difficult to access and interpret than other common disclosures. Using a naive Bayesian textual analysis procedure, I classify important SEC comment letters where the signal of importance is significantly negative abnormal returns following comment letter disclosure. Text analysis alone can identify important letters between 10% and 40% better than chance. The text analysis signal provides additional power to identify important comment letters over other signals such as insider sales and the presence of revenue recognition related comments. The incorporation of comment letter information into security prices is more pronounced for comment letters known to have been accessed by investors, using the SEC's EDGAR download logs, providing evidence of investor inattention to important comment letters.
RECOGNITION AND CONTROL OF PROFESSIONAL SKEPTICISM IN BIG 4 AND NON-BIG 4 AUDIT FIRMS
S. SOFLA, AMIN
SVANSTRÖM, TOBIAS
Category: AU = Auditing
This study examines the role of audit firms in valuing and controlling professional skepticism. We survey lead auditors and link their responses on professional skepticism to their compensation and reporting. We propose that professional skepticism is considered normatively desirable trait mainly in Big 4 audit firms so these firms value and also seek to control it. Our findings suggest that the level of professional skepticism is positively associated with auditors’ income in Big 4 audit firms while no such association is found for non-Big 4 auditors. This result provides an indication that when lead auditors’ skeptical values match the values of their audit firms, these individuals receives higher level of compensation. Furthermore, we observe that skepticism is associated with auditor’s reporting only in non-Big 4 auditors. In other words, due to normalization process inside Big 4 audit firms, audit partner’s ability to affect audit quality does not necessarily reflect her (his) skeptical trait.
RANKING PERFORMANCE MEASURES WHEN CONTRACTS ARE RENEGOTIATED
SABAC, FLORIN
Category: MA = Management Accounting
This paper employs a dynamic LEN agency model with renegotiation. First, I pro- vide sufficient conditions in terms of the likelihood ratios of the performance measures for ranking information systems, both for implementing exogenously given actions and on the equilibrium path. Second, I characterize sufficient conditions so there are no losses from contract renegotiation; in particular, I show that conditional controllability of second-period performance with respect to first period effort is necessary for losses from renegotiation to occur. Third, I characterize a renegotiation sufficient statistic condition that is necessary and sufficient for additional information to have no value.
DO ACCOUNTING STRATEGY CHOICES INFLUENCE COMPANIES’ RESULTS? “THE THEORETICAL AND EMPIRICAL CASE OF ALGERIAN FIRMS”
SACI, FATEH
BENSABEUR-SLIMANE, ASMA
Category: GV = Accounting and Governance
This paper is devoted to the theoretical and empirical study seeking to explain the choice of accounting strategies made by the Algerian companies in the framework of positive accounting theory (Watts and Zimmerman, 1978) and the institutional theory (DiMaggio and Powell, 1983). The empirical analysis, using multinomial logistic regression with some specification tests as Wald Test and Ramsey RESET Test, of 50 public and private Algerian companies on the data for year 2010, suggests that accounting strategy is determined by the company’ size, the system of managers’ compensation and legal status.
ANALYSIS OF GREENHOUSE GASES EMISSIONS DISCLOSURES BY RUSSIAN CORPORATIONS
SAGITOVA, ROZA
HASLAM, JIM; PATERSON, AUDREY; YONEKURA, AKIRA
Category: SE = Social and Environmental Accounting
This paper aims to examine and discuss greenhouse gas (GHG) emission disclosures by large corporations in Russia, additionally paying attention to climate change related disclosures. The approach involves analysis of carbon disclosures, through a critical interpretive and qualitative analysis of narrative disclosures by 25 Russian companies across different sectors. The phenomena are analysed and understood as having global impacts, whilst embedded in the Russian socio-economic, historical, and political context. Consistent with prior international studies, the analysis of disclosures yields disappointing results: less than half of the companies in the sample disclose GHG emission disclosures while the quality of those disclosures needs to be improved. Nevertheless, the context-specific findings may be utilised for future studies: it is suggested that regulators’ supplementary approach to climate change issues is reflected in companies’ perception of these problems and disclosure practice. The focus of the study is a group of large Russian companies, so the findings may not be generally applicable. Nevertheless, the results cast some light on a specifically under-researched area, indicating general challenges in public policy. The research goes beyond previous studies that explore carbon disclosures by giving serious attention to the context specificities in which such disclosure practices are embedded.
COMPLIANCE, DETERMINANTS AND VALUE RELEVANCE OF IFRS DISCLOSURES IN UNDERSTANDING DISCLOSURE OVERLOAD PROBLEM: AUSTRALIAN EVIDENCE
SAHA, AMITAV
Category: FR = Financial Reporting
Despite the positive effects of the adoption of IFRS noted in the literature, standard-setters have recently issued reports suggesting that the required disclosures in IFRS have become too burdensome and should be reduced. One such report, “Losing the Excess Baggage” (2011), was issued by professional accounting bodies from Scotland and New Zealand and classifies current IFRS disclosure requirements into three categories: retain; delete; and disclose only if the item is material. My paper examines whether items falling into the three disclosure categories were disclosed in the 2012 annual reports of 100 Australian companies listed on the ASX200. From each of the eight IFRS examined, three disclosure items were selected: one item Excess Baggage wants retained, one recommended for deletion, and one recommended for disclosure only if material. This study reviews whether the 24 items are disclosed differently across companies, whether this differential disclosure is linked to companies’ economic characteristics and whether the disclosures are value relevant. Significant non-compliance with IFRS disclosures exists; overall, 26.13% of the sample did not adhere to one or more mandatory disclosures. Items recommended for deletion are disclosed significantly less often. Disclosures recommended for retention are significantly positively associated with companies’ profitability and leverage in some models. Items recommended for deletion are not associated with company characteristics except for dispersed share ownership, which is only present in the best four disclosing standards. With one exception, all three categories of disclosure are not value relevant. My findings lend limited support to the Excess Baggage recommendations.
PRESSURES ON AUDIT PARTNER’S NEGOTIATION STRATEGY AND DECISION MAKING
SALTERIO, STEVEN
KOCH, CHRISTOPHER
Category: AU = Auditing
We examine pressures on auditors from client management and the audit firm’s management control systems (MCS) on the auditor’s willingness to accept an aggressive client management preferred accounting policy. We find that auditors generally react to more explicit client management pressure by lowering the likelihood of acceptance of an aggressive client management preferred policy and by increasing the size of the adjustment they require to bring the client’s accounting into conformity with GAAP. We find that auditors who focus relatively more on quality of client service are more likely to agree to such aggressive accounting. Further, the auditors focused on client service quality are more likely to adopt compromising and concessionary tactics as negotiation strategies whereas auditors who are dealing with more explicit client management pressure are less likely to adopt such tactics. These findings imply that client management, if subtle, can nudge auditors towards accepting the aggressive accounting management wants. Further, audit firms can act as enablers for such management pressure with practice management tools in their MCS that facilitate auditors being more focused on their commercial interests.
BOARD DIVERSITY AND ITS EFFECT ON FIRM FINANCIAL AND NONFINANCIAL PERFORMANCE
SAMI, HEIBATOLLAH
GUPTA, PARVEEN; LAM, KEVIN; ZHOU, HAIYAN
Category: GV = Accounting and Governance
The legislators and regulatory bodies across the globe are mandating public disclosure on diversity or initiating to impose quotas on board structure to enhance gender and ethnic diversity. In this research study, we attempt to fill the void in the literature by investigating the impact of gender and board diversity on long-term firm financial performance and nonfinancial performance which is not addressed in prior studies. Using observations from 2003-2012, we find that a more gender and ethnically diverse board may enhance a firm’s performance on social, environmental and governance dimensions but increasing board diversity does not necessarily result in better financial performance for the firm. Our findings are consistent with the arguments presented in the literature that boards with higher gender and ethnic diversity will be more sensitive to stakeholders other than just shareholders, hence enhancing a firm’s non-financial performance. These findings suggest that improvement in non-financial performance dimensions may bring benefits to the society, in general, and to the firm in longer term.
DISCURSIVE LEGITIMATION OF GLOBAL ACCOUNTING STANDARDS: PRINCIPLES-BASED AS DISCOURSE
SANADA, MASATSUGU
Category: FR = Financial Reporting
This paper analyses the roles of discourse in the legitimation process of institutions. In particular, it explains the theoretical significance of “principles-based” as discourse and describes how this discourse roles and functions in the global diffusion of International Financial Reporting Standards (IFRS). By applying the critical discourse analysis and the Latourian framework, I conduct qualitative analysis on the principles-based versus rules-based debate. My findings show two kinds of translation in the diffusion of IFRS: problematization of rules-based accounting standards and translational implementation of IFRS. Overall, this paper suggests that the principles-based discourse plays a critical role in the institutionalization of global accounting standards.
IFRS, INFORMATION ASYMMETRY, AND REAL ACTIVITIES MANIPULATION
SÁNCHEZ BALLESTA, JUAN PEDRO
ABAD, DAVID; CUTILLAS GOMARIZ, M.FUENSANTA; YAGÜE, JOSÉ
Category: FR = Financial Reporting
This study addresses several research questions regarding the economic consequences of the mandatory adoption of IFRS. Firstly, we examine the effects of IFRS adoption on the level of information asymmetry in the stock market by using an adverse selection index based on market microstructure proxies for information asymmetry. Subsequently, we analyze the information effects of real activities manipulation before and after IFRS. Thirdly, we study the use of real activities manipulation to beat zero earnings. For a sample of Spanish listed firms during 2001-2008, we find a reduction of information asymmetry after IFRS, but also that real earnings management practices are associated with increases in the level of information asymmetry after IFRS adoption. Finally, we show that firms that report small profits engage in real activities manipulation through higher production costs in the post IFRS period.
THE EFFECTS OF PERCEIVED FAIRNESS AND INTER-GROUP RELATIVE PERFORMANCE FEEDBACK ON WHISTLEBLOWING DECISIONS
SÁNCHEZ EXPÓSITO, MARÍA J.
MAAS, VICTOR; NARANJO-GIL, DAVID
Category: MA = Management Accounting
This study examines the effect of individuals’ fairness perception of the supervisor and inter-group RPF on whistleblowing decision even though individuals are not rewarded for doing so. When individuals are not rewarded for whistleblowing, economics theories predict that a wealth-maximizing individual never reports others. However, individuals can be also motivated by reciprocity and social comparisons. We conduct an experiment with 105 participants. Results show that there is an interactive effect of individuals’ fairness perception and inter-group RPF. These results suggest that the presence of an inter-group RPF affect negatively to peer reporting. And also, they suggest that when individuals perceive their supervisor as fair, they will be more likely to behave in a reciprocal way, by reporting peers’ overstatements, when inter-group RPF is absent rather than present.
THE EARLIEST TREATISE ON DOUBLE ENTRY BOOKKEEPING BY MARINO DE RAPHAELI
SANGSTER, ALAN
Category: ED = Accounting Education
From consideration of the available evidence, this paper suggests that in 1475 Marino de Raphaeli accepted a commission to teach Zuan de Domenego double entry bookkeeping. There were two elements to de Raphaeli’s commission. Firstly, he had to travel to Naples and make a copy of Benedetto Cotrugli’s manuscript, Libro de Larte dela Mercatura (The Book of the Art of Trade). Having done so, he then travelled with his copy to the Venetian Republic, where he proceeded to teach his pupil the art of double entry by dictation. Upon completion of his assignment, he presented de Domenego with his copy of Cotrugli’s text. De Domenego then placed his manuscript copy of de Raphaeli’s dictated bookkeeping manuscript – the earliest known example of instruction in double entry – at the back of the Cotrugli text, numbered the folios of both texts into one sequence, and then bound them together in one volume. This is how they have remained since 1476. At some point before 1747, the book arrived in Malta, where it is now kept in the National Library in Valletta under the title, Libr. XV. This paper analyses de Raphaeli’s bookkeeping text and considers its place in the history of accounting, accounting practice, and accounting education.
MATERIAL WEAKNESS DISCLOSURES AND RESTATEMENT ANNOUNCEMENTS
SARATH, BHARAT
HE, LI; WANS, NADER
Category: FR = Financial Reporting
We examine the joint pricing effects of restatement announcements and associated MW disclosures. First, we analyze whether a dual disclosure of both a MW and restatement is viewed more adversely by the market at the time of restatement. We show that firms that announce both a restatement and an associated MW, either before, concurrent with, or after the restatement experience significantly more negative returns and a higher increase of implied volatility than do firms whose restatements were not associated with an MW disclosure. We also find that the joint disclosure of a MW and restatement triggers more class action lawsuits than does a single disclosure of a MW. Second, we examine the PCAOB’s premise that MW disclosures are warnings of potential financial misstatements by examining the market reaction to restatements conditional on prior MW disclosures. Our evidence suggests that the market reacts more negatively to restatements that are preceded by a MW disclosure compared to restatements that went unwarned. Overall, our study provides new insights on how capital market participants incorporate information about internal control quality into their perceptions about financial reporting quality.
FROM THE GLOBAL TO THE LOCAL: THE IMPACT OF AUSTRALIA’S RESEARCH EVALUATION EXERCISE ON A UNIVERSITY’S CONTROL SYSTEM
SARDESAI, ANN
GUTHRIE, JAMES; IRVINE, HELEN; TOOLEY, STUART
Category: MA = Management Accounting
This paper investigates the impact of the Australian Government’s research assessment, Excellence in Research for Australia (ERA), on the Performance Management Systems (PMS) of a university. It is a theorized case study, drawing on data from publicly available documents, interviews with senior management. The findings reveal that an assessment of research was anticipated by the university, with the appointment of new leadership, the development of a new vision and strategic direction, university-wide restructuring, and a research-focused PMS to manage research. The extent of these changes points to the need for further research on the impact of ERA or other research evaluation systems on individual academics.
RESPONSIBILITY ACCOUNTING SYSTEM AS A BELIEF SYSTEM
SAWABE, NORIO
USHIO, SUMITAKA
Category: MA = Management Accounting
This paper explores how core values affect the design and the use of a responsibility accounting system in an organisation, and how the responsibility accounting system creates dynamic tensions that facilitate/force organisational members to attain pre-set goals in changing environments. Informed by Simons (1995, 2000) levers of control framework, we investigate using a case study method how management control systems shape challenges that operational managers face to fulfil their responsibility by delivering financial results while at the same time being faithful to the core values of the organisation. The core values of the case organisation are found to be constituted with competing values, which are reflected in the design and the use of the responsibility accounting system. While it is found that the responsibility accounting system is used as a diagnostic control system to monitor performances relative to pre-set plans, the responsibility accounting system communicates the competing core values as a part of the belief system. It is found that the dynamic tensions emerge not only between the different levers of controls, but also within the belief system. The findings illustrate how the responsibility accounting system that are used both as a diagnostic control system and a belief system enables fast and creative (re)actions to changing environments at the lower management level. This paper contributes to the literature on the levers of control framework firstly by demonstrating how core values affects the design and the use of a responsibility accounting system, secondly by illuminating the role of a belief system as a source of dynamic tensions, and thirdly by illustrating a more nuanced understandings of dynamic tensions that affect the way lower management operates both efficiently and flexibly.
GENDER DIFFERENCES IN RISK AVERSION: EVIDENCE FROM A MULTIPLE CHOICE EXAM OF ACCOUNTING STUDENTS
SCAPIN, MARIANO PABLO
GARCÍA LARA, JUAN MANUEL; SANTAMARIA SÁNCHEZ, LLUÍS
Category: ED = Accounting Education
We examine gender differences in risk aversion using a natural experiment. In particular, we study the results of a multiple choice exam, compulsorily taken by 1st year undergraduate students of a large Spanish university. The exam, from the course “Introduction to Accounting”, is exactly the same across several different degrees and wrong answers are penalized, while blanks are not. Our results show that female students leave more blank questions than their male counterparts. However, gender differences disappear when we focus on the best students (those with high marks in their University entry exams, and with high marks in the multiple choice test). One conclusion of our results is that gender differences are more prominent among the less prepared individuals.
THE IMPACT OF EXTERNAL AND INTERNAL CORPORATE GOVERNANCE MECHANISMS ON AGENCY COSTS
SCHAEUBLE, JONAS
KRAUSS, PATRICK; PRONOBIS, PAUL
Category: GV = Accounting and Governance
The current study applies statistical frontier analysis, a relatively new approach to es-timate agency costs, and examines its association with internal and external corporate governance mechanisms. The results indicate that an industry specialized audit firm, the presence of a large audit firm, abnormal audit fees, management ownership, and variable management compensation are significantly negatively associated with the level of a firm’s agency costs. In contrast, this seems not be true for the existence of an audit committee for which our empirical evidence documents a non-significant associ-ation. In conclusion, we are able to contribute to the literature by documenting that quality-differentiated audits are an effective external corporate governance mechanism which reduces agency problems beyond internal corporate governance mechanisms, and thus, serve an important economic function.
MANDATORY DEFERRED COMPENSATION AND THE STEWARDSHIP PERSPECTIVE OF FINANCIAL ACCOUNTING
SCHÄFER, ULRICH
PELGER, CHRISTOPH
Category: FR = Financial Reporting
In light of the recent financial crisis and corresponding debates on the pay and incentives of managers, especially in the financial sector, regulators aim at strengthening the sustainability of managerial activities by prescribing deferred compensation for executive contracts. While such deferred compensation can take on multiple forms, we focus on one specific variant which relates post-retirement pay to an accounting performance measure. In a dynamic agency model we analyze analytically how a mandatory deferred compensation regime interacts with characteristics of an accounting system. Our results reveal that mandatory deferred compensation is no panacea for solving incentive problems as it does not increase shareholder value in every scenario. However, deferred compensation is helpful in promoting long-term incentives and potentially mitigates negative effects arising from earnings management, while its interaction with the timeliness of the accounting system needs to be considered.
THE INTRODUCTION OF PUBLIC SECTOR CONSOLIDATED FINANCIAL STATEMENTS IN AUSTRIA
SCHALLMEINER, BARBARA
Category: PS = Public Sector Accounting
In the last decades a trend towards outsourcing activities of public sector entities to private organisations was observable. If the outsourced entities remain under the control of the public entity, they are part of the public economic entity but their assets and liabilities as well as their revenues and expenditures are not included in the financial statement of the public entity. Thus, the overview of the financial position of the public economic entity decreases. Therefore, public sector consolidated financial statements which include the outsourced entities under the control of the public entity are necessary. Only some countries require their public entities at different levels of government to present consolidated financial statements. But even across these countries, there is no uniformity, since each country establishes its own criteria for the elaboration of consolidated financial statements. In Austria there is currently no obligation for public entities at any level to present consolidated financial statements that include controlled outsourced entities. The intention of this project is to conduct a study which identifies the different approaches for the definition of the reporting entity and the scope of consolidation in literature and in UGB, IFRS and IPSAS. The aim is to identify the key similarities and differences in these standards and identify the approaches which can be appropriately transferred to the public sector in Austria.
IS EV/EBITDA MORE ACCURATE THAN P/E AND P/B?
SCHATT, ALAIN
KANG, JIAN; SCHATT, ALAIN; STARICA, CATALIN
Category: FA = Financial Analysis
We compare the accuracy of firm valuation based on EV/EBITDA, a multiple that gained in popularity with the practitioners during the last decade, with that of two traditional multiples, P/E and P/B. Insofar as the EBITDA is less sensitive to earnings management and closer to the cash flow from operations than the net income, EV/EBITDA could lead to more accurate valuation than P/E. However, our analysis of a broad sample of US companies over a period of 45 years shows the contrary. Valuations based on EV/EBITDA are significantly less accurate than those using P/E or P/B. This result is robust to the implementation of the valuation method (characteristics and number of peers, aggregation of peer multiples), the type of data in the construction of the multiple (historical numbers or forecasts), the period (recent years or not), the industry type (capital intensive industry or not), the financing of the company (high leverage or not). Overall, we conclude that the more systematic use of EV/EBITDA by the practitioners cannot be explained by a gain in valuation accuracy over traditional multiples like P/E and P/B.
EXAMINING ANNUAL REPORT USER RESPONSES TO QUALITATIVE, NARRATIVE AND ASSURANCE DISCLOSURES RELATED TO WATER REPORTING
SCHIEMANN, FRANK
HAZELTON, JAMES; HELLMANN, ANDREAS
Category: SE = Social and Environmental Accounting
Corporate water disclosures have attracted increased interest from the investment community. However, our understanding of what interpretation users make of various components of water disclosures, such as the quantitative and qualitative dimensions, is rudimentary. Further, the role of assurance in the context of sustainability reporting in general and water accounting in particular is also poorly understood. The aims of this paper are (1) to provide an enhanced understanding of which factors users consider most important in evaluating the quality of corporate water stewardship and (2) to provide an enhanced understanding of the relative contribution of an independent assurance opinion. Using an experimental research design, results show that specific numerical items such water use efficiency drive the investment decision of non-professional investors. Furthermore, an independent auditor’s report has no significant effect on the investment decisions.
INCOME SHIFTING UNDER LOSSES
SCHINDLER, DIRK
HOPLAND, ARNT OVE; LISOWSKY, PETRO; MARDAN, MOHAMMED
Category: TX = Taxation
This paper examines the flexibility of multinational firms to use income-shifting strategies within a tax year to react to operating losses. First, we develop an analytical model that considers how affiliate losses can be adjusted by using the transfer prices of tangible and intangible assets, as well as internal debt shifting, either by ex-post (i.e., by the end of the tax year) or ex-ante income shifting (i.e, before the current tax year). Our model predicts that, due to income shifting, multinational firms report lower profits when running profits, and lower losses when running losses, compared to domestic firms. It also suggests that under ex-post income shifting, loss affiliates have lower transfer prices and internal leverage than profitable affiliates, whereas under ex-ante income shifting, affiliates feature the same transfer prices and internal capital structure, regardless of making losses. Second, using data on direct transfer payments and internal debt of Norwegian affiliates, we find empirical evidence that, under losses, transfer pricing gives substantial flexibility to adjust income shifting ex post. In contrast, we do not find evidence for flexibility in the use of internal debt to shift income ex post. We contribute to the literature that neglecting the precautionary income-shifting behavior of potential loss affiliates underestimates the sensitivity of tax rates to transfer payments and to internal debt, whenever some ex-ante income shifting is present.
CORPORATE TAX SYSTEMS AND DISTRIBUTION POLICY IN THE EUROPEAN UNION
SCHLAPP, CHRISTOPH
SCHANZ, DEBORAH
Category: TX = Taxation
This paper empirically analyzes the influence of the tax preferences of individual and corporate shareholders for dividends or capital gains. The paper covers corporate distributions in Europe from 1990 to 2012. We find opposing tax preferences especially in the first years of the observation period––individual shareholders prefer capital gains and corporate shareholders prefer dividends. To account for these differences we derive firm-specific tax preferences. Our empirical analysis reveals that the firm-specific tax preferences affect dividend payments of our sample corporations from 14 member states of the European Union. In contrast to our detailed study, simplified approaches only considering the country-specific tax preferences of individual shareholders overestimate the influence of taxation on dividends. We find that tax preferences converge with the tendency to equal tax treatment of dividends and capital gains for both shareholder groups against the background of common European regulation. In line with this development, we are not able to provide evidence for the influence of taxes on distribution policy in the last years of the observation period.
WHAT DETERS MANAGERS FROM COMMITTING ACCOUNTING FRAUD? - AN EXPERIMENTAL INVESTIGATION
SCHLEICHER, MIRIAM
EIERLE, BRIGITTE
Category: GV = Accounting and Governance
Due to increased cases of accounting fraud, the efficiency of financial reporting enforcement systems has increasingly influenced the investment decisions of capital market participants. While event studies provided evidence that enforcement activities led to several capital-market reactions, other studies have shown that enforcement activities can affect management behaviour in regard to earnings. This experimental study adds to the literature, investigating the efficiency of financial reporting mechanisms by analysing the effect of two different audit rules (random audit rule and an endogenous audit selection rule) together with two different sanction mechanisms (fine and criminal prosecution) on individual managerial accounting behaviour. Results show that endogenous audit rules are under some circumstances less efficient than random audit rules in detecting managerial fraud. Additionally, it is shown that an informal reaction due to social norms has an additional deterrent effect on managers. Our results, therefore, imply that endogenous audit rules are less effective than shown in previous literature and that reputational considerations caused by social norms may represent another sanction mechanism for enforcement institutions.
IT’S CLOSING TIME: A LONGITUDINAL STUDY OF REPORTING LAGS OF GERMAN STOCK-LISTED COMPANIES
SCHLUNSKY, JOHANNES
RIEG, ROBERT
Category: FR = Financial Reporting
Financial reporting is one of the main instruments for informing investors. Timely and fast reports are seen as a sign of quality and efficiency creating a positive impression and promising good prospects of firms. Given several recent changes in the accounting environment, i.e. transition to IFRS, fast and timely reporting is harder to achieve today. We do not have a lot of evidence on how firms cope with that. It surprises that there isn´t much evidence on reporting lags available after the year 2000. Additionally, extant evidence on reporting behaviour often neglects the hierarchical nature of its data and falls prey to an ecological fallacy. Prior longitudinal studies do not consider the different levels of years nested in firms. This paper presents results on firm-related factors on timeliness reporting over a period of ten years (2003-2012). We analysed our hypotheses with multilevel regression due to the hierarchical nature of data. The main factors affecting the average reporting lag of a firm are as hypothesized: size, peer group, index and institutional investors. We found a small positive effect for the average gearing ratio. We find a strong autocorrelation of reporting lags from year to year. This leads us to believe that managerial discretion is lower than expected. The connection between good news and timeliness, suggested by numerous studies, is therefore questionable. Our findings show that the adoption of IFRS leads to a slowdown in reporting lag reduction.
THE EFFECT OF LABOUR INCOME TAXATION ON CEO COMPENSATION
SCHMIDER, JULIA
RUF, MARTIN
Category: TX = Taxation
Tax increases - especially for top earners - are frequently proposed in the course of policy debates and election campaigns. However, the economic adjustments and responses to changing tax rates are rarely taken into account. We empirically assess the question who - top managers or corporation - carries the costs of changes in the top marginal tax rate. The dataset comprises of individual CEO compensation data of 3,083 publicly-traded firms across 29 countries from 2003 to 2013. We find significant evidence for an increase of the level of CEO compensation when top marginal tax rates increase. Therefore, the economic costs of tax increases are shared between corporation and executive managers, while is in contrast to previous research.
OFFSETTING MISSTATEMENTS: THE EFFECT OF CLIENT PRESSURE AND MATERIALITY ON AUDITORS’ JUDGMENTS
SCHMIDT, MARTIN
MESSIER, WILLIAM
Category: AU = Auditing
This study examines the effect of client pressure and materiality on auditors’ judgments of misstatements detected during an audit that have offsetting effects on the client’s financial statements, especially income. Given the ambiguity in auditing standards and firm guidance, it is possible that under certain circumstances auditors may waive adjusting material offsetting misstatements in order to satisfy client preferences, leading to lower quality financial statements. One hundred and twenty-two German audit managers and partners from three major and three mid-tier public accounting firms completed a case that varied two types of offsetting misstatements (offsetting misstatements within the same account or offsetting misstatements between two different accounts) and three levels of client pressure (one condition without client pressure and two conditions with client pressure that differ in terms of the materiality of the two misstatements). The results show that misstatements are more likely to be corrected if contained in different accounts. Client pressure lowers the proportion of auditors who fully adjust both misstatements when the misstatements are contained in different accounts, but not when contained in the same account. Auditors are more likely to require a correction of the misstatements, and the proportion of auditors who allow the client to meet the bonus benchmark is lower when more material misstatements are contained in different accounts.
THE RELATIONSHIP OF STRUCTURAL AUTONOMY AND MANAGEMENT CONTROL SYSTEM IN HIGHER EDUCATION
SCHMIDT, ULRIKE
GÜNTHER, THOMAS; JOHN, SEBASTIAN
Category: MA = Management Accounting
We contribute to research on management accounting in the public sector by investigating structural autonomy as one determinant of management control systems (MCS) and its effects on research performance in higher education (HE) institutions. Using survey data on 176 chancellors of HE institutions in Germany, Austria, and Switzerland, we apply structural equation modeling to determine (1) the relationship of the extent of structural autonomy granted to academic units with MCS use and design, (2) the interplay of the different management controls, and (3) the relationship between structural autonomy and research performance as mediated by the MCS of the HE institution. Our results indicate that structural autonomy is positively associated with the use and design of a MCS. Furthermore, the results show that structural autonomy is positively and directly associated with research performance and that a HE institution’s MCS indirectly mediates this relationship. Finally, a well-designed MCS with an emphasis on interactive communication between management and academic professionals in HE institutions leads to enhanced research performance.
MANDATORY DISCLOSURE, GENERATION OF DECISION-RELEVANT INFORMATION AND MARKET ENTRY
SCHNEIDER, GEORG
SCHOLZE, ANDREAS
Category: FR = Financial Reporting
We investigate the interaction of mandatory disclosure and the gathering of decision-relevant information in a setting in which a competitor may enter the market. Gathering detailed information allows for an efficient allocation of resources but eventually attracts competition by revealing beneficial information to competitors. In contrast, refraining from generating detailed information implies inefficient decisions but eventually prevents competitors from entering the market. Our results show that an incentive not to generate internal information arises for two reasons: If the incumbent's cost advantage is sufficiently large, disclosing aggregated information can be an instrument to avoid competition by reducing the likelihood of market entry. If the incumbent's cost advantage is small, disclosing aggregated information attracts competition by increasing the likelihood of market entry. In this case, imprecise cost information serves as a commitment device to reduce the intensity of competition by forcing the competitor to take into account his efficiency disadvantage in making his production decision.
GOAL CONGRUENCE AND PREFERENCE SIMILARITY BETWEEN PRINCIPAL AND AGENT WITH DIFFERING TIME HORIZONS – SETTING INCENTIVES UNDER RISK
SCHOSSER, JOSEF
GROTTKE, MARKUS
Category: MA = Management Accounting
We analyse in a parsimonious static model how goal congruence or preference similarity can be obtained when principal and agent are risk averse and when a setting is prevailing in which the agent has a shorter time horizon than the principal while intertemporal dependencies in risky cash flows are to be taken into account. Our results are as follows. First, we identify preferences that allow for preserving the unique properties of the residual income measure when agent and principal are risk averse. Second, we are able to demonstrate that, in addition to the identified preferences, constant absolute risk aversion provides for reconciling the agent’s and the principal’s risk attitude. Finally, in building on preceding results of Rogerson (1997, J. Political Econom. 105(4) 770-795) and Reichelstein (1997, Rev. Accounting Stud. 2(2) 157-180), we find a new relative risk allocation schedule for this setting. It allows for both, goal congruence and preference similarity when cash flows are normally distributed. The information requirements of this procedure are exposed.
CAN ANALYSTS PREDICT STOCK RETURNS? THE IMPLIED COST OF CAPITAL IN INTERNATIONAL CAPITAL MARKETS
SCHROEDER, DAVID
ESTERER, FLORIAN
Category: FA = Financial Analysis
This paper examines international differences in the ability of the firms' implied cost of capital (ICC) to predict the cross-section of stock returns. We analyze whether the predictive power of the ICC is systematically related to cross-country differences in the degree of market efficiency and the quality of analyst forecasts. Our results support the conclusion that higher levels of market efficiency and better analyst forecasts improve the ability of the ICC to explain the cross-section of stock returns. Consistent with the view that low transaction costs are an important condition for market efficiency, we also find that the explanatory power of the ICC is higher in countries with low transaction costs.
THE IMPACT OF THIN-CAPITALIZATION AND EARNINGS STRIPPING RULES IN THE EU-15 ON THE TAX SHIELD
SCHULER, CAROLIN
BACHMANN, CARMEN; LAHMANN, ALEXANDER
Category: TX = Taxation
Several countries within the EU-15 group limit the tax deductibility of interest payments for intragroup financing by thin-capitalization rules or following a recent trend by earnings stripping rules that limit the deductibility on a broader basis. This paper aims at deriving a tax shield valuation framework considering a possible limitation of the tax deductibility of interest imposed by the tax code. We compare the obtained pricing equations and their impact on the tax shield value. Finally, we show that the inclusion of interest limitation rules imply a remarkable reduction of the tax shield value especially for highly indebted companies.
HOW MULTIPLE-BASED VALUATIONS OUTPERFORM FUNDAMENTAL VALUATIONS – THE CASE OF SWISS FAIRNESS OPINIONS
SCHULZ, JAN-FREDERIC
BERNDT, THOMAS; DEGLMANN, FLORIAN
Category: FA = Financial Analysis
We empirically investigate the quality of fundamental, trading and transaction multiple valuations published in fairness opinion reports relating to Swiss public company takeovers. As expected, we find that the presented trading multiple valuations explain unaffected pre-takeover market prices reasonably well. Transaction multiple valuations perform equally strong relative to takeover offers. However, contrary to intuition, standalone fundamental valuations (such as DCFs on standalone business plans) are significantly higher than unaffected pre-takeover market prices and much more in line with takeover offers. We observe that in order for a shareholder to extract value consistent with a full fundamental valuation, a company would need to be subject to a takeover offer. Assuming fundamental valuations are generally accurate, our findings also imply that shareholders of a target company will usually not get compensated for any synergies of the acquirer. In addition, we argue that trading and transaction multiples appear to be precise valuation concepts: They represent unaffected standalone and transaction valuations well, justifying their popularity among practitioners. This suggests an even more prominent role in fairness opinions might be indicated.
AUDIT FIRMS AS A NETWORK OF OFFICES
SEAVEY, SCOTT
IMHOF, MICHAEL; WESTFALL, TIFFANY
Category: AU = Auditing
Recognizing the interdependencies among individual audit offices of the same firm, we define audit firms as knowledge-based intracorporate networks and examine whether differences in office-level network autonomy are associated with variation in audit quality and auditor independence. To do so we introduce a novel method of analysis that captures the effects of both the individual office and the firm-wide network in which the office operates. We find audit quality is lower when offices are less connected to their respective network, suggesting that degree to which the expertise of other offices is shared is lower for these firms. We also find that more autonomous offices are less likely to issue going concern opinions, suggesting that other offices in the firm network are less able to effectively monitor these offices. Our findings are important because research examining the relationship between audit firm and audit quality increasingly focuses on the office-level as the unit of analysis, potentially omitting important firm-level effects. Our research suggests an individual audit office’s ability to provide high quality audit will partially depend on how it relates to the network of offices in which it operates.
DESIGN AND USE OF MANAGEMENT CONTROL SYSTEMS FOCUSED ON THE CUSTOMER: A STUDY OF BRAZILIAN COMPANIES FROM THE PERSPECTIVE OF CONTINGENCY THEORY
SEGURA, LILIANE CRISTINA
ABREU, RUTE; FORMIGONI, HENRIQUE; MANTOVANI, FLAVIO ROBERTO
Category: MA = Management Accounting
The turbulent changes in the business environment and the trend in new technologies for the management of customer bases signal the way for administrators to manage and maximize the value of a company’s customer base. Thus, this study seeks to understand the Brazilian business environment and the influence of external and internal customer-focused contingency factors in the design and use of management control systems (MCSs) from the perspective of contingency theory. Data from a sample consisting of 83 Brazilian companies were collected through survey-type research. For data analysis, we adopted the technique of structural equation modelling using the partial least squares (PLS) estimation method. The results confirm all the research hypotheses. We conclude that the characteristics of the environment play a considerable part in decisions involving the internal configuration of these contingency factors and the design of customer-focused MCSs. The design of a customer-focused MCS serves as a diagnostic tool in monitoring and controlling targets, making adjustments to the budget and reviewing goals. Furthermore, through critical review, MCSs make it possible to identify threats and opportunities, turning unprofitable customers into profitable customers.as well as providing elements for the appropriate allocation of resources to obtain and retain loyalty.
ATTRIBUTES OF CARBON REPORTING OF US FIRMS: HOW ARE THEY RELATED TO FINANCIAL REPORTING QUALITY?
SENKL, DANIELA
SCHIEMANN, FRANK
Category: SE = Social and Environmental Accounting
Political debates of global warming raise the awareness of corporate carbon disclosure among investors and other stakeholders. Consequently, the number of firms reporting their carbon emissions increases. Different ways to measure and report carbon information provides considerable discretion for firms. Even though the claim for quality characteristics is apparent in the literature, reporting quality is not yet in the focus of environmental disclosure research. In accounting research, earnings quality is a central issue in terms of transparent reporting behavior. We aim to transfer the construct of earnings quality to carbon disclosure and analyze associations between both constructs to draw conclusions of how carbon reporting quality can be appraised from a general reporting perspective. Building on a sample of 109 listed US-firms over the years 2007 to 2012, we calculate different time series measures of carbon reporting quality and find a positive relation to earnings quality. Hence, firms which provide high quality financial reports also provide high quality carbon reports. We conclude from our preliminary results, that firms consistently apply their notion of transparency to financial and carbon reporting.
ACCOUNTING REGULATION: SOCIALLY CONSTRUCTING THE 'PUBLIC INTEREST'
SERVALLI, STEFANIA
ALEXANDER, DAVID
Category: GV = Accounting and Governance
Mainstream and even critical research has tended to assume a simplistic unidirectional relationship between accounting and the public interest. In this sense, a call for research exploring how various public interests impact various aspects of accounting has been addressed (Neu and Graham, 2005, p. 589). Embedded in this research area, the paper intends to explore the criticalities involved in the complex relation between accounting and the public interest, within the context of accounting regulation. In this regard, our theoretical analysis is underpinned by the work of Searle “The Construction of Social Reality” (1995). Building on this approach, the paper outlines how the socially constructed nature of economic and social facts leaves room for broad areas of flexibility which are the object of accounting regulators’ actions, leading to a prevalence of the politics of interest - as conceived by Cochran (1974, p. 328) -, which we have specifically addressed taking the European Union and the IASB standard setter as illustrative examples. The multiplicity of communities involved is also highlighted. The analysis has been extended by linking the public interest and the accounting regulation social constructions together, in the context of motives of self-legitimation, or of achieving one’s objectives in a manner which can be claimed as legitimate. The paper concludes suggesting practical implications and further possible theoretical issues for future development.
IFRS ADOPTION AND ANALYSTS' EARNINGS ADJUSTMENTS
SETTERBERG, HANNA
ECKER, FRANK; HJELSTRÖM, TOMAS; OLSSON, PER
Category: FA = Financial Analysis
We examine the extent of analysts’ adjustments to reported earnings before and after the transition to International Financial Reporting Standards (IFRS) in the European Union and the European Economic Area. We use the magnitude of these earnings adjustments as an inverse indicator of analysts’ perceived quality of domestic GAAP earnings in the pre-adoption period and IFRS earnings in the post-adoption period, respectively. We find that earnings adjustments decrease markedly after the IFRS transition. This is true both for mandatory adopters (in 2005) and voluntary early adopters (in varying prior years). We further find that the IFRS transition effect is larger for firms with prior poor domestic earnings quality and smaller for firms whose analysts had international coverage before the IFRS transition. On the country-level, we find evidence that the IFRS transition effect is larger for firms from countries with stronger legal enforcement. Finally, results indicate that the IFRS transition effect on analysts’ earnings adjustments is due to better perceived overall quality of IFRS earnings rather than increased comparability following from a common set of accounting standards after 2005.
THE POLITICAL ECONOMY OF FAIR VALUE ACCOUNTING: POLITICIANS' POSITIONING DURING THE FINANCIAL CRISIS
SEXTROH, CHRISTOPH
Category: FR = Financial Reporting
This paper explores the environment of accounting standard setting by investigating the determinants and economic factors behind political intervention in accounting regulation. Based on a comprehensive hand-collected dataset of individual politicians' positioning on fair value accounting during the financial crisis of 2008-2009, I examine the determinants of political intervention as well as the underlying economic incentives of politically connected financial institutions. Consistent with anecdotal evidence from the news media and critical observers, results suggest that the political dimension of the fair value debate is associated with political lobbying from the financial service industry. In addition, findings also indicate that banks' lobbying activity was primarily motivated by a demand for accounting discretion and not necessarily by fundamental concerns related to the impact of fair value accounting on banks' regulatory capital. Overall, the study documents how a demand for increased accounting discretion can translate into severe political pressure towards accounting standard setting.
THE ROLE OF FINANCIAL ANALYSTS IN STOCK MARKET EFFICIENCY WITH RESPECT TO ANNUAL EARNINGS AND ITS CASH AND ACCRUAL COMPONENTS
SHANE, PHILIP
HOLLIE, DANA; ZHAO, QIUHONG
Category: FA = Financial Analysis
This paper examines biases in stock prices and financial analysts’ earnings forecasts with respect to persistence characteristics of operating income and its free cash flow and accrual components. These biases take the form of systematic overreaction or underreaction. Our evidence suggests that stock prices overreact to the persistence of net operating income and its components; whereas, financial analysts underreact to the same information. Analysts’ forecasting bias attenuates what would otherwise appear as more pronounced stock price overreaction. On the other hand, we find little evidence that the bias in stock prices attenuates analyst underreaction. Overall, we find that, left to their own devices, analysts’ earnings forecasts underreact to the persistence characteristics of annual earnings, and stock prices would overreact, but biased analysts’ forecasts largely mitigate this market overreaction tendency. This paper brings a new perspective to the literature regarding the disciplining role of financial analysts in capital markets.
CAPITAL RAISING AND DEMAND FOR AUDITING IN PRIVATE AND PUBLIC FIRMS
SHARPE, WEN HUA
CAREY, PETER; ZHANG, JOHN
Category: AU = Auditing
This paper examines the influence of audit quality (proxied by Big 4 auditors) on corporate financing decisions using a sample of UK public and private firms. We find that audit quality is positively associated with new equity issues for public firms. In contrast, there is no difference in the level of equity issued by private firms that engage Big 4 or non-Big 4 auditors. With regard to the raising of additional debt, we find that there is no difference in the level of debt issued by public firms that audited by the Big 4 as opposed to firms audited by the non-Big 4. Whereas audit quality is positively associated with new debt raising in private firms. These results highlight the role of audit quality in mitigating information risk. Overall, we provide new evidence that high-quality (Big N) audited financial statements are informative but influence firms’ financing decisions quite differently for public and private firms.
EARNINGS RESPONSE COEFFICIENT IN THE MENA REGION
SHEHATA, NERMEEN
FAROOQ, OMAR
Category: FA = Financial Analysis
This paper aims to document the extent to which stock returns are related to reported earnings by estimating earnings response coefficient (ERC) for non-financial firms listed in the MENA region during the period between 2003 and 2013. Results show significantly positive ERC for the sample firms. Results are robust across different countries, different industries, and different years. Results also show that ERC increases with increase in measurement interval. This finding indicates that more information gets incorporated in prices as the measurement interval increases. Consequently, it has been argued that significance of reported earnings is higher for long-term investors in the MENA region.
VALUE-RELEVANCE OF INVESTMENT FORECASTS AND RELIABILITY OF FORECAST INFORMATION
SHIMADA, YOSHINORI
Category: FA = Financial Analysis
This paper examines the value-relevance of investment forecasts, which are frequently disclosed in a variety of qualitative and quantitative fashions (e.g. annual report, medium-term management plan). In it, I investigate whether capital investment forecasts and research and development (R&D) investment forecasts provide value-relevant information for investors. I do so by using Japanese firms because investment forecasts in Japan are regularly released through particular venues. Furthermore, I explore whether investors more highly value investment forecasts based on their reliability. In testing, I regress contemporary securities prices on the future incremental amounts of investment forecasts and reliability involving forecast information. As is consistent with my expectations, I find that both capital and R&D investment forecasts are value-relevant. In addition, it is revealed that the value-relevance of capital investment forecasts is related to high levels of past forecast precision and growth opportunities, and to lower volatility in past forecasts and managerial discretionary expenses. I find that R&D investment forecasts are recognised as providing more value-relevant information if firms have more precise and unbiased forecasting experience in past periods, as well as more cash holdings and growth opportunities. These results are consistent with the relation between value-relevance and the reliability of investment forecasts.
MANAGERIAL CONTROL, CASH FLOW RIGHTS, AND ANALYSTS’ USE OF PUBLIC AND PRIVATE INFORMATION
SHIN, YONG-CHUL
PARK, KOEUN; TINAIKAR, SURJIT
Category: FA = Financial Analysis
This study examines the association of voting rights and cash flow rights on a firm’s information environment. We extend prior literature in this area to examine how specific attributes of a firm’s ownership structure, i.e., votes and cash flow rights impact analysts’ use of public and private information while formulating their forecasts. By employing dual-class share firms that break the link between control and cash flow rights, we are better able to understand how insiders’ voting control and cash flow rights impact the precision of public and private information as manifested in analysts’ forecasts. We generally find that analysts’ use of private information in their forecasts tends to decline with greater insider control rights. We interpret this result to be consistent with the explanation that control rights tend to be concentrated in firms with significant proprietary information. We also find evidence that the greater control divergence in firms effects the precision of public information in analysts’ forecasts but only at very high levels of control divergence.
THE EFFECT OF ACQUIRING FIRM’S GROWTH OPPORTUNITY ON THE VALUE RELEVANCE OF GOODWILL
SHIRABE, YUJI
Category: GV = Accounting and Governance
In recent years, mergers and acquisitions (M&A) have become increasingly important for Japanese firms to achieve growth. Although M&A deals in Japan are not common historically, Japanese enterprises now acquire firms more aggressively for growth in the face of the shrinking domestic market and expansion in emerging markets. In this situation, how does the stock market recognize and evaluate the goodwill generated as a consequence of M&A? Given that Japanese companies have increasingly used M&A as for a tool for growth, we can say that the growth opportunity of the acquiring firms is an important factor that affects valuation of goodwill in the stock market. However, there are few studies that examine whether the growth opportunity of acquiring firms affects the market valuation of its purchased goodwill. In this study, we investigate the link between growth opportunity and the value of goodwill in the stock market. The results of our study show that the market valuation of newly acquired goodwill is positively influenced by the growth opportunities of acquiring firms in Japan. In other words, investors tend to attach higher value to the goodwill of firms with more growth opportunity than to the goodwill of those with less growth opportunity. Therefore, this study implies that M&A works better when it is done to utilize internal growth opportunity rather than to incorporate external growth opportunities into the firm.
SELF-FULFILLING EFFECTS OF LIQUIDITY RISK ON TAKEOVERS
SHYU, HAWFENG
Category: FA = Financial Analysis
This paper identifies a strong effect of liquidity risk on takeover likelihood during market downward. Liquidity risk is defined as the innovation of market liquidity on risk premium. In addition, using mutual fund outflows and analyst coverage as instruments for the liquidity beta, this paper separates the self-fulfilling effects from observed liquidity beta and identify the true association between liquidity risk and takeover vulnerability. %Instrument address the fact that liquidity risk are endogenous and increase in anticipation of liquidity risk triggering takeovers. The results illustrate the impact of liquidity risk channel on takeovers and imply that financial markets have the self-fulfilling Effects related to liquidity risk and takeover threats.
EARNINGS USEFULNESS AROUND MANDATORY IFRS ADOPTION AND SIMULTANEOUS CHANGES IN PRESS RELEASE DISCLOSURE
SICILIANO, GIANFRANCO
ANDREI, PAOLO; KIM , PUREUM; MARCHINI, PIERLUIGI
Category: FR = Financial Reporting
Recent empirical research suggests that the observed capital market effects documented around mandatory International Financial Reporting Standards (IFRS) adoption may not be attributable to IFRS per se and highlights the role of concurrent changes in other institutional arrangements that might also explain such effects. In this study, we use a unique setting where mandatory IFRS adoption occurs along with the enactment of securities regulation aimed at enhancing disclosure practices in firms’ public announcements to explore two competing arguments for the finding of Landsman et al. (2012) that the usefulness of earnings announcements increases following IFRS adoption. Using a sample of 149 firms listed on the Milan Stock Exchange between 2001 and 2008, we confirm that absolute market responses to annual earnings announcements increase after IFRS adoption. Next, we find that the absolute amount of unexpected earnings and the investors’ earnings response coefficient do not provide an explanation for the increased usefulness of annual earnings announcements following IFRS adoption. Instead, we provide evidence that the increase in absolute market responses to annual earnings announcements is attributable to the increase in concurrently released information in annual earnings announcements following the enactment of the securities regulation.
IMPACT OF EXTERNAL AND INTERNAL AUDIT ON THE VALUE RELEVANCE OF FAIR VALUES
SIEKKINEN, JIMI
Category: GV = Accounting and Governance
This paper examines whether external and internal audit is associated with the value relevance of fair values as stipulated by IFRS 13. More specific whether external audit such as the size of the local audit office and size of non-audit fees, and internal audit such as audit committee independence, size, and frequency of meetings affect the value relevance of fair values. IFRS 13 requires firms to disclose a fair value hierarchy containing three levels: Level 1 (quoted prices in active markets), level 2 (inputs other than quoted prices that are observable either directly or indirectly) and level 3 (unobservable inputs generated by entities). First, by analyzing financial firms from 28 European countries, this study finds evidence that all fair value assets and liabilities, irrespective of the level in the fair value hierarchy, are value relevant for investors. Second, the results indicate that audit committee independence, audit office size, and non-audit fees have a positive association with the value relevance of level 3 fair value assets. Audit committee size and frequency of meetings does not affect the value relevance of fair values. The findings indicate that firms with high audit committee independence, firms with auditors from larger local offices and firms with higher non-audit fees seem to disclose fair value estimates with the highest value relevance.
THE RELATION BETWEEN DIVIDENDS AND INSIDER OWNERSHIP IN A STAKEHOLDER CIVIL LAW FINANCIAL SYSTEM: THE ROLE OF MANDATORY DIVIDEND PAYMENT
SIKALIDIS, ALEXANDROS
LEVENTIS, STERGIOS
Category: FA = Financial Analysis
We investigate the substitutability of dividends and insider corporate ownership as corporate governance mechanisms in a stakeholder Civil Law legal system where dividends are mandatory for profitable firms. Due to the different characteristics of Anglo-Saxon tradition financial systems and the nature of agency conflicts in firms from those countries, the relation between dividend policies and ownership by insiders should be distinct between the two sets of companies (Farinha and Foronda, 2009). Focusing on the insider financial system of Greece, where insider ownership is very high and there is minimum dividend requirement (MDR) by company law, which can be circumvented only with significant voting power, we find that insider ownership has a U-shaped relationship with dividend payouts similar to Anglo-Saxon tradition countries and contrary to Farinha and Foronda’s (2009) prediction for civil law countries. Thus, we provide evidence supporting entrenchment hypothesis. Moreover, we show that insider ownership type does not significantly affect the decision to waive MDR while the level of insider corporate ownership increases the likelihood of a dividend payment. This is the case since the waiver of the MDR and the zero dividend payment for firms with positive earnings are decisions which are mainly driven by 1) capital maintenance considerations and by 2) considerations regarding growth opportunities which will lead to higher future returns.
EFFECTS OF VALUE-BASED MANAGEMENT ON THE SUCCESS OF M&A ACTIVITY
SILGE, LISA
KNAUER, THORSTEN; SOMMER, FRIEDRICH
Category: MA = Management Accounting
The concept of value-based management is an instrument to align the interests of managers and shareholders and thereby increase shareholder value. In the context of merger and acquisition (M&A) activity, the divergent interests of shareholders and managers are particularly important. This paper analyzes the effectiveness of value-based management systems by examining the success of M&A activity. Using event study methodology, we exploit a sample of 236 M&A announcements of German listed companies between 2003 and 2012. The empirical tests show that market reactions to the acquisition announcements of value-oriented companies are significantly more positive than those to the acquisition announcements of non–value-oriented companies. Regarding divestments, the use of value-based management systems is not associated with a more positive market reaction. Moreover, our analysis reveals that tying compensation to value-based performance metrics does not positively affect market reactions to M&A transactions. Overall, our results suggest that companies can increase the probability of transaction success by implementing a value-based management system.
THE ROLE OF HETEROGLOSSIC DIALOGUE IN PERFORMANCE EVALUATION: A CASE STUDY OF A NON-GOVERNMENT ORGANIZATION
SMITH, DAVID
O'LEARY, SUSAN
Category: MA = Management Accounting
Prior research has indicated the tendency for accounting systems to take a monologic focus, that is, to reduce accounting information to a single focus, or meaning (see for example, McIntosh and Baker, 2002). To overcome this singular focus, a dialogic approach to accounting information has been proposed (Brown, 2009). The focus of this study is to shed light on the key characteristics and dimensions of accounting information that allow a dialogic appreciation and understanding of performance and impact. In order to investigate these characteristics in detail, we adapt the notion of heteroglossia from Bakhtin (1986a; 1986b, 1986c, 1986d; 1992), and apply it to build knowledge of the processes through which understanding is derived from accounting information. In a case study of a welfare non-governmental organization, we focus on Bakhtin’s three dimensions of heteroglossic dialogue, and examine how these inform understanding of performance evaluation information.
THE DIRECTOR REPUTATION HYPOTHESIS AND THE CREDIBILITY AND USEFULNESS OF LEADERSHIP STRUCTURE JUSTIFICATIONS IN PROXY STATEMENTS: A CONTENT ANALYSIS
SMITH, DAVID
CHENG, XIAOYAN ; TANYI, PAUL
Category: GV = Accounting and Governance
SEC rules require firms to disclose board leadership structure justifications in proxy statements. Many of the SEC rules’ comment letters support the disclosure, while others say that firms may justify these structures as providing effective monitoring when they do not. Our analysis focuses on firms that justify combined CEO-Chairman of the Board positions (CEO duality). We investigate whether the content of these justifications provides credible and useful information. Relying on the director reputation hypothesis (Fama and Jensen 1983), we use content analysis (Kothari et al. 2009) to investigate whether firms report credibly. We find that higher disclosure intensity is related to board and firm characteristics linked to an effective CEO duality board leadership. We also find that higher disclosure intensity is related to higher reporting quality. We conclude these firms’ disclosures are credible because they are related to characteristics shown by past research as linked to more effective board leadership. Additionally, we find that the disclosure intensity negatively relates to the size of equity bid-ask spreads’ changes. Our findings suggest that the intensity of justification disclosures is associated with important information that research has shown to be consistent with overcoming information asymmetry and with greater liquidity (characteristics of firms with more capable leadership). So we conclude the disclosure is useful to investors as well as credible.
THE INCREMENTAL ABILITY OF ACCRUALS TO PREDICT FUTURE ANNUAL RETURNS IN THE UK: THE EFFECTS OF SIGN OF EARNINGS AND BARRIERS TO ARBITRAGE
SOARES, NUNO
STARK, ANDREW
Category: FA = Financial Analysis
In this paper we explore the incremental ability of accruals to predict future annual returns in the UK stock market, and the extent to which the sign of earnings, the size of the firm, the market upon which a firm is listed, the degree to which shares in firms are closely held, and the extent to which it is followed, has an impact on this ability. We present evidence of incremental returns predictability for firms that report profits and that are either not well followed by investors or are relatively small, or are not listed on the UK Main Market. This result then appears to be further confined to profitable firms which are relatively closely held and either relatively small or not listed on the UK Main Market. These results provide support to the idea that accruals do not incrementally predict future returns in the UK generally but, instead, this effect is confined to firms with high barriers to arbitrage.
WHERE INSTITUTIONAL LOGICS OF CORPORATE GOVERNANCE COLLIDE: THE TALE OF OVERSTATEMENT OF COMPLIANCE WITH A CORPORATE GOVERNANCE GUIDELINE IN A DEVELOPING COUNTRY, BANGLADESH.
SOBHAN, MD ABDUS
Category: GV = Accounting and Governance
This study seeks to understand whether publicly listed companies in Bangladesh overstate compliance with the Bangladesh Corporate Governance Guidelines-2006 (the BCGG-2006) in annual reports. The overstatement of compliance is conceptualised by the difference between the compliance with the BCGG-2006 as reported in annual reports and the compliance with the BCGG-2006 as stated in a confidential survey addressed to company secretaries. This study finds that there is a significant level of overstatement of compliance with the BCGG-2006 in annual reports, particularly with respect to less observable provisions. Moreover, the overstatement is positively associated with sponsor family control and negatively associated with presence of an institutional investor director on board. The adoption of an Anglo-American-based CG model in a developing country creates legitimacy contentions which motivate firms to overstate compliance with the CG guideline in annual reports. The dynamics that motivate firms to overstate compliance with CG guideline in annual reports are consistent with institutional competing logics. The findings of this study also question prior research on CG in the context of developing countries that uses compliance reported in annual reports to measure CG variables. This study also offers insights to international financial institutions and domestic regulatory agencies in developing countries that advocate for adoption of an Anglo-American model.
IMPORTANCE OF STAKEHOLDER THINKING IN FINANCIAL ACCOUNTING AND REPORTING –ANALYSIS OF THE REASONS OF SHORTCOMINGS IN THIS RELATIONSHIP
SOLTANI, BAHRAM
Category: FR = Financial Reporting
This paper examines the importance of stakeholder thinking in financial accounting and reporting by analyzing the theoretical literature, the statements of basic accounting theory, as well as the conceptual framework, principles and standards which serve as the basis of accounting practices. By formulating three research questions, we have mapped out the central issues that undermine the importance of stakeholder thinking in financial accounting, both in theory and practice. The study sets out to highlight the conceptual confusion and a number of shortcomings that have continued to limit the well-shaped relationship between accountants and the potential users of accounting information. This paper contributes to the academic literature as it attempts to refocus and re-centre the discussion around certain key issues regarding accounting-stakeholder interaction. In outlining the key sources of concerns, both from stakeholder thinking and accounting perspectives, the study also seeks to promote the debate on the expectation gap in accounting.
EARNINGS MANAGEMENT BY NON-PROFIT ORGANIZATIONS: EVIDENCE FROM UK CHARITIES
SOOBAROYEN, TEEROOVEN
NGUYEN, TAM
Category: PS = Public Sector Accounting
Informed by stakeholder theory and resource dependence theory, this paper investigates for the first time whether UK charities are engaged in earnings management (EM) practices. The study relies on data from a large sample of 1414 charities over a five year period (2008-2012), selected on a stratified basis in relation to size (total incoming resources) and classified in eleven different sectors of activity . The results firstly suggest that UK charities use discretionary accruals in order to drive their financial results toward a zero surplus/deficit; this result also demonstrates that the distribution of reported earnings around zero is a preferable result of UK charities. Secondly, the empirical results reveal a negative association between leverage and EM behaviour engaged by charities, specifically, charities with high level of leverage tend to manage earnings downward. Thirdly, the results show a significant difference among sectors in managing earnings. Some sectors (Law, Advocacy and Politics, and International organizations) are more aggressively involved in EM than others. The findings have important implications for standard-setters, policy-makers and users of accounting information in the charitable sector.
MEASURING READABILITY IN FINANCIAL DISCLOSURES USING 10-K DOCUMENT FILE SIZE
STADLER, CHRISTIAN
NOBES, CHRISTOPHER
Category: FR = Financial Reporting
This paper extends the study of Loughran and McDonald on ‘Measuring Readability in Financial Disclosures’ (Journal of Finance, 2014, Vol. 69, No. 4, pp.1643–1671). First, it evaluates the implicit conclusion of the paper that large annual reports are negative. It concludes that it is insufficient to focus solely on report length, because the transactions and economic circumstances of firms necessarily vary and need to be adequately disclosed in their annual reports. Second, it provides evidence on the reasons for variations in 10-K file sizes. It shows that non-economic factors are important determinants of variations, e.g. whether or not the 10-K contains HTML or XBRL code. However, there is not much influence of certain factors expected to affect readability/file size, e.g. whether or not a firm has a pension plan. Third, assuming that researchers are interested in using 10-K file size to measure readability of annual reports, we analyse the effect of 10-K file size on analyst forecast errors and analyst forecast dispersion using three alternative measures: 10-K file size, abnormal 10-K file size and scaled 10-K file size. The results suggest that abnormal 10-K file size is better specified than the other two measures.
WHY DO POLITICIANS AND MANAGERS USE PERFORMANCE INFORMATION IN RATIONAL OR SYMBOLIC WAYS? DOES THIS MATTER FOR PERFORMANCE?
STECCOLINI, ILEANA
SALITERER, IRIS; SICILIA, MARIAFRANCESCA
Category: PS = Public Sector Accounting
Most quantitative studies on performance management in the public sector assume a rational and instrumental use of performance information. This view is challenged by qualitative evidence on the symbolic uses of performance measurement systems. However, there is a lack of quantitative studies that jointly consider rational and symbolic uses of performance measurement systems. The present paper fills this gap by surveying local government managers’ and politicians’ perceptions to assess the extent of rational and symbolic uses of performance information in local governments, their possible explanatory factors, as well as their association with performance. We show that according to both politicians and managers rational uses exceeds symbolic uses and that only the former has a positive association with governmental performance. We also show that in the views of politicians and managers different contextual variables explain rational and symbolic uses of performance measurement systems, whereas the models of the two actors are partially aligned with reference to organizational and individual explanatory factors.
LIQUIDITY AND MARK-TO-MODEL ACCOUNTING
STECHER, JACK
LUNAWAT, RADHIKA; PRONIN, KIRA; ZHANG, GAOQING
Category: FR = Financial Reporting
This paper studies the use of fair value accounting for idiosyncratic assets, where there is no active market for comparable assets. For such assets, firms estimate fair values using financial models ("mark-to-model" accounting). We show that this practice leads to aggressive reporting. Consequently, reports reveal an upper bound on asset values, protecting investors against information rents. However, reports cannot reveal a private lower bound. This reduces bids and thereby creates illiquidity. We demonstrate these effects in a laboratory experiment, and relate our results to the pattern in the 2007-2009 crisis.
THE DETERMINANTS OF AUDITORS’ LENGTH OF STAY IN THEIR INITIAL AUDIT FIRM: AN EMPIRICAL STUDY FOR THE BELGIAN AUDIT PROFESSION
STEENACKERS, KELLY
BREESCH, DIANE
Category: AU = Auditing
Studies on voluntary turnover in the audit profession have become increasingly important due to the high costs associated with turnover. This study aims to determine the extent to which the subjective evaluation of job characteristics, personal characteristics and reasons for entering the audit profession explain variation in the tenure in the initial audit firm. Unlike many previous studies that use a dichotomous variable for turnover or that use the turnover intention as a proxy for actual turnover, this study focusses on the actual tenure within the audit firm. We believe that it is not only important to know whether or not the auditor leaves the firm, but even more important to know when this departure will occur. Based on the data collected from an online survey in Belgium, a linear regression analysis was performed. Our results indicate that Baby boomers and Generation X tend to have a longer tenure in their audit firm than the youngest Generation Y. Contrary to expectations the auditors’ tenure in the initial audit firm is positively related to the number of children the auditors had while they were employed in the audit firm. Our data also support the view that the auditors’ perceived level of organizational support for alternative work arrangements and the auditors’ level of career satisfaction are associated with a longer tenure in the audit firm. Implications on retention strategies of audit firms are also discussed in this paper.
ACCOUNTING MEASUREMENT AND CORPORATE INVESTMENT
STIER, CHRISTIAN
SELLHORN, THORSTEN
Category: FR = Financial Reporting
This study examines the effect of distinct accounting measurement bases, i.e., fair value and amortized cost, on investment efficiency. Specifically, we investigate whether European real estate firms, which switch from recognition of investment property at amortized cost under domestic accounting standards (without voluntary provision of fair values) to the provision of investment property fair values under mandatory IFRS adoption, experience a change in investment efficiency. Using as a control group real estate firms domiciled in the UK and Denmark, which already provided investment property fair values under domestic accounting standards prior to mandatory IFRS adoption, allows for the application of a difference-in-differences research design. Preliminary tests span a sample period of 2002 to 2008 and indicate a decrease in investment efficiency for both the treatment and the control group, without a significant difference between the two groups. Additional analyses, excluding the year 2008 as the peak of the financial crisis, provide modest support for the treatment group, i.e., firms providing fair values only after mandatory IFRS adoption, experiencing a significantly greater decrease in investment efficiency than the control group. This evidence sheds light on an important economic consequence of accounting measurement.
ONE SIZE FITS ALL – BUT NOT ALL THE TIME: AN EXPERIMENT ON THE EFFECTIVENESS OF CODES OF CONDUCT IN DECISION DILEMMAS
STÖBER, THOMAS
KOTZIAN, PETER; WEIßENBERGER, BARBARA E.
Category: GV = Accounting and Governance
Codes of conduct are used by firms to ensure compliance and ethical behavior of employees, but their practical application raises questions: about a code’s effectiveness as behavioral guidance, how codes increase ethical awareness, how codes are trained, and affect the firm’s working climate. Existing theoretical reasoning and empirical evidence on the consequences of codes of conduct is divergent, notably regarding effects of code features. The paper studies the effects of codes of conduct using decision-making in experimentally manipulated settings. Our results indicate that codes of conduct induce desired behavior, even more so when behavior is visible and there is no personal benefit at stake. Also, top management’s signature makes codes of conduct more effective. Regarding the issue of training employees with a code of conduct, we observe a trade-off between making a code of conduct easy to learn vs. making it effective. Regarding the effects of codes on the working climate, we find that a code’s features affect perceptions of the firm and the working climate. Finally, we find no evidence that codes of conduct work differently for different persons, i.e. no evidence for a need to tailor a code of conduct to individuals. Our paper contributes to the usage of codes of conduct by assessing their effectiveness as a management control instrument empirically, thereby providing additional insights on how to write, design and implement codes of conduct in practice.
WELCOME BACK? ECONOMIC CONSEQUENCES OF CEO REAPPOINTMENTS
STOLOWY, HERVE
ERKENS, MICHAEL; GAN, YING
Category: GV = Accounting and Governance
We analyze reappointments of former CEOs of U.S. listed firms over the period 1992 – 2013. For a sample of 117 CEO reappointments, we find that shareholders of these firms experience statistically significant negative stock valuation consequences. Our findings are robust to multiple return measurement windows and alternative definitions of abnormal returns. We also document that market reactions depend on certain executive-specific attributes, such as whether she is the founder of the firm or whether she is also appointed as chairman of the board of directors. Finally, we show that firm performance deteriorates after a former CEO is appointed relative to appointing a non-former CEO. Our results provide evidence that the market considers reappointed CEOs as “leaders of last resort” and highlights the importance of CEO succession planning.
STRATEGIC MANOEUVRES AND IMPRESSION MANAGEMENT: COMMUNICATION APPROACHES IN THE CASE OF A CRISIS EVENT
STONER, GREG
DE LANGE, PAUL ; O'CONNELL, BRENDAN ; SANGSTER, ALAN
Category: GV = Accounting and Governance
Abstract This historical case study adopts an archival approach to support utilisation of Oliver’s (1991) framework of strategic responses to institutional processes along with impression management, legitimisation, and institutional theories in order to provide insights into the history and actions of a company faced with a potentially ruinous corporate scandal. The company involved is the former Australian asbestos extractor, manufacturer, and distributor, the James Hardie Group. The paper documents and considers rising levels of disclosures by the Group during the first decade of the 21st century, as media attention towards the organisation increased, along with an apparent move by the Group’s management’s to recognise greater accountability towards a wider section of the business’s stakeholders. A changing response strategy is identified over a seven-year period and classified in the context of Oliver’s framework. The findings support Oliver’s (1991) propositions, highlighting some issues and elements for future research and presenting lessons in how firms may confront such exposure in future, and in how claimants and other stakeholders may adjust their strategies in order to achieve a more advantageous outcome than those who suffered from the asbestos-related issues of the current study.
ACCOUNTING, SHAREHOLDER VALUE CREATION AND INTER-FIRM DYNAMICS – A CASE STUDY OF THE ERICSSON-VODAFONE RELATIONSHIP
STRÖMSTEN, TORKEL
KRAUS, KALLE
Category: MA = Management Accounting
This paper analyses how an overarching ideology of corporate governance, shareholder value creation, affected Vodafone’s relationship with a main supplier (Ericsson). Our results add to the accounting literature critical of the pursuit of shareholder value creation (e.g., Ezzamel et al., 2008; Roberts et al., 2006). However, this work’s narrow perspective on the firm’s environment has deflected attention from the complex dynamics surrounding inter-firm controls when a company becomes increasingly shareholder-value oriented. Vodafone’s shareholder-value orientation was gradually and subtly transmitted into Ericsson through changes in inter-firm technocratic and socio-ideological controls. Our study also extends research on inter-firm control, especially that focusing on interdependencies of intra- and inter-firm controls (e.g., Coad and Cullen, 2006) that found control is detached from the companies’ broader governance logic and changes in intra- or inter-firm controls ‘start’ a chain of events. In contrast, our case analysis concludes that intra-inter dynamics are attributable to changes in overarching ideas of corporate governance.
GREEN DISCLOSURES? SOCIAL MEDIA AND PROSOCIAL BEHAVIOR
SU, BARBARA
LU, HAI
Category: FR = Financial Reporting
Motivated by the continuous debate in economics and policy research on whether firms should maximize the value of shareholders or other stakeholders, our study investigates how social media reveals individuals’ demand for the disclosure of corporate prosocial behavior and whether the disclosures benefit the firms involved in such behavior (green firms). We find that green firms are more likely to join twitter early and have more tweets about their prosocial behavior. Accordingly, green firms attract more followers on Twitter and experience a significant increase in individual investor holdings after joining Twitter. However, the significant increase of liquidity for green firms after the adoption of Twitter is accompanied by the increase in stock return volatility. The findings suggest that disclosures of prosocial behavior on social media generate unexpected costs to the firms due to the unique profile of social media followers.
CULTURAL INFLUENCE ON ACCOUNTANT’S JUDGMENT FOR SMES ACCOUNTING
SUGAHARA, SATOSHI
TSUNOGAYA, NORIYUKI
Category: FR = Financial Reporting
The present study investigates on the role of cultural factors in providing comparative global financial reporting by the SMEs. Accountant’s professional judgment is examined especially regarding the choice of SMEs accounting standards in the setting of the society with specific cultural aspects. We selected Japan as our research target, and the focus of this study was set on the unique tendency that the SMEs in Japan are willing to apply the domestic SMEs accounting standards that avoid the impact of IFRS. This paper provides a brief overview of literature related with this topic and outlines opportunities for future research. Specifically this research highlight the need to develop a conceptual and theoretical framework to better understand the association between cultural factors and tax accountants’ judgment for SMEs. With reflecting these literature review and theory development, this study also attempts to design the research hypothesis that can be applied for future empirical analysis using experimental research setting.
HOW VALUE-RELEVANT ARE FAIR VALUE CHANGES DURING AN ECONOMIC DOWNTURN? EVIDENCE FROM EUROPEAN REAL ESTATE COMPANIES
SUNDGREN, STEFAN
MÄKI, JUHA; SOMOZA LÓPEZ, ANTONIO
Category: FR = Financial Reporting
We hypothesize and test that fair values of investment properties are less value relevant during an economic downturn using a sample with 306 firm-years for 69 publicly traded real estate companies. The study is focused on European countries and the period studied is 2006-2011. Given that IAS 40 allows using fair value or historical cost, we selected those firms that used the first option. Our hypotheses are tested using price- and return regressions. Our results indicate that book values of investment properties are higher compared to share-prices during times of recessions. One explanation of this result is that fair values are more likely to be over-valued during recessions. Furthermore, the results in the return regressions show that the association between changes in fair values and stock returns is insignificant during an economic downturn, but significant during normal economic conditions.
MATTER-ING PERFORMANCE: ONTOLOGY IN ACCOUNTING PRACTICES IN A THEATER BOARDROOM
SUNDSTRÖM, ANDREAS
Category: MA = Management Accounting
The paper discusses accounting representation as a practical matter of ontological production rather than reflective technology. Loosening the singular assumptions of ontology that follows from the traditional representational claims of accounting, accounting problems of measurement and disclosure become matters of onto-epistemology rather than just epistemological concerns. Examples from an explorative study of board work provide observations of how the ontology of organizational performance are practical achievements. Practices of accounting representation do not occur in isolation from the continuous drawing of boundaries that constitute the objects to be accounted for (as well as it constitutes the subject that achieves knowledge by means of accounts), and the paper illustrates how accounting practices are part of the ontological production – and not only the knowledge ‘mediation’ – of organizational performance.
TAX-INDUCED FISCAL YEAR EXTENSION AND EARNINGS MANAGEMENT
SUNDVIK, DENNIS
Category: TX = Taxation
This study investigates private firms deciding to change their fiscal year-end around a national corporate tax rate cut for tax saving reasons. The Finnish 2005 tax reform is analyzed since its transition rules allowed firms to take advantage of a lowered tax rate prematurely by extending their fiscal years. One part of the sample is observed to seize this window of opportunity and the expected tax savings are noted as important in this decision. Firms that did not act accordingly are found to engage in tax-induced earnings management instead. Here, the earnings management direction is found to depend on the firm’s distributable funds. Contributions are made to the literature on tax reforms, earnings management and reasons for fiscal year-end changes.
TIME PRESSURE, TRAINING ACTIVITIES AND DYSFUNCTIONAL AUDITOR BEHAVIOUR: EVIDENCE FROM SMALL AUDIT FIRMS
SVANSTRÖM, TOBIAS
Category: AU = Auditing
This study tests the association between time pressure, training activities and dysfunctional auditor behaviour. Survey responses from 235 certified auditors working in small audit firms in Sweden show that perceived time pressure is positively associated with dysfunctional auditor behaviour while the level of participation in training activities such as workshops and seminars is negatively associated with dysfunctional auditor behaviour. These findings suggest that audit quality is at risk when auditors experience severe time constraints but also that auditors taking actively part in various training activities to a lesser extent engage in dysfunctional auditor behaviour.
IAS 36 IMPAIRMENT OF ASSETS: ECONOMIC RELEVANCE OF VALUE IN USE
SWAGERMAN, DIRK
DE GRAAFF, GIJS
Category: FR = Financial Reporting
Abstract: This article discusses the background of the concept of Value in Use and investigates the rationale behind the rules in the accounting standard IAS 36. The standard is tested for its value for business decisions and the extent to which it contributes to useful and comparable financial statements. The analysis has resulted in a number of conclusions and recommendations with respect to the standard’s general application. The outcome of the Value in Use-calculation is meant to form a basis with real economic substance for sell versus hold decisions by rational managements. We recommend modifying IAS 36 to the extent that it is more closely aligned with this objective. The IASB should remove the requirement to calculate Value in Use using pre-tax cash flows and pre-tax discount rates. We argue that this requirement leads to practical problems, erodes the usefulness of disclosures to the users of financial statements and confuses and even misguides regulators. Possible inconsistencies with IAS 12 could be avoided by requiring the exclusion from the impairment test of any recognized deferred tax assets or future tax credits that do not meet the recognition requirements of this standard.
THE EFFECT OF MONITORING INTENSITIES ON MANAGERS’ PROJECT EVALUATION DECISIONS
SYARIFUDDIN, IMRAN
NAHARTYO, ERTAMBANG; SHOLIHIN, MAHFUD
Category: MA = Management Accounting
This study investigates whether different monitoring intensities affect managers’ project evaluation decisions. This study argues that the increase in monitoring intensities will be effective in constraining project managers’ tendency to escalate their commitment to a poorly performing project under the presence of agency problems. To test the hypothesis, we conduct an experiment. Consistent with the expectations, the results indicate that the increase in monitoring intensities is found to significantly constrain project managers from the escalation bias. Under the presence of agency problem, a continuous monitoring regime shows to be a more effective de-escalation strategy than a periodic monitoring. Implications of the research findings to theory and practice are discussed.
THE DEVELOPMENT OF THE AUDITOR MANAGERIAL ETHICAL PROFILE SCALE
SYLVANDER, JOHANNA
Category: AU = Auditing
This article develops a multidimensional scale that measures to what extent different moral philosophical dimensions are important in auditors’ decision-making process in their managerial role. An additional aim was to explore if auditors perceive differences in the ethical decision-making process as managers and as auditors. The scale was developed based on eight ethical dimensions from a priori theory. The scale was converted into a web-based questionnaire and sent to Swedish authorised auditors. Exploratory factor analysis (EFA) was used to test the scale, since it is a suitable method for scale development and early stages of research. The EFA indicates a five-dimensional scale; however, the eight-dimensional scale is to some extent supported, since two of the five dimensions, both connected to duties, are multidimensional in themselves. Hence, the study implies that the concept of duty is a wider concept in the auditing context than in moral philosophical theory, which could be explained by the nature of the profession and that auditors do not perceive a difference between the managerial and auditing role. However, since the study is limited to the Swedish auditing context, the scale needs to be tested in other geographical and cultural contexts. Other implications and suggestions for further research are also presented.
IMPLEMENTING A NEW BUDGETING PRACTISE IN A PUBLIC SECTOR ORGANIZATION
SYRJÄ, PASI
KESÄNEN, VILMA; PÄTÄRI, SATU; SJÖGRÉN, HELENA
Category: MA = Management Accounting
New public management (NPM) has been seen to be one path for public sector organizations to increase efficiency, and to fight against to problems of unbalanced public sector economy. The key purpose of NPM is to renew public sector by bringing the private sector practises to the public sector. Budgets have a dominating role in public sector organisations. Under the NPM development public sector organisations have started to implement more broadly management accounting practices. Budgeting has been seen one effective tool for management to control organisations at the operational and strategic level. They are at the centre of resource allocation and use, and represent the outcome of deliberations by the different constituencies within public sector organisations. The purpose of our study is to investigate how a new budgeting practice is implemented, and how does this institutionalised practice, such as budgeting change in our case organisation. We approach our research questions through a case study of one public sector organisation. Our data comprise 12 interviews with managers of our case. Our findings suggest that our case organisation turns towards more business oriented thinking when its power to manage and control to generate surplus increases. Though the case organisation is a municipal organisation and funded mostly with tax revenues, within the organisation business oriented thinking where seen more positively than negatively.
19TH CENTURY FACTORY ACCOUNTING IN THE LIGHT OF POLISH ACCOUNTING MANUALS
SZYCHTA, ANNA
Category: ED = Accounting Education
The aim of this paper is to provide an overview of the content of 13 handbooks on factory accounting published in Polish in the 19th century to determine the scope and methods of record-keeping and cost calculation in manufacturing enterprises of that time, as described and recommended by the authors of these handbooks. The reason for performing the analysis and interpretation of these books is that there is very little research into factory accounting practices on Polish territories in the 19th century and insufficient knowledge of contemporary literature on this subject. Although it was a very difficult period for the Polish nation because Polish territory was partitioned and annexed by Russia, Prussia and Austria, industry was developing with gradual progress of factory accounting, which entailed the development of accounting education as well as Polish language literature on accounting theory and practice in industrial environment. The paper provides overview of accountancy development on Polish territories under partition in the 19th century, general presentation of Polish language publications on the subject of accounting in the 19th century, characteristics of 19th century factory accounting in the light of accounting manuals published on Polish territory and concluding remarks.
CORPORATE GOVERNANCE INFLUENCING COMPLIANCE WITH THE SWEDISH CODE OF CORPORATE GOVERNA