Financial crisis,GDP variation and earnings management in Europe

The purpose of this study is to examine the consequences of the financial crisis on the European companies’ in conjunction with earnings management practice. It focuses on financially distressed companies that audited by a big 4 auditor during recession years. The study makes use of discretionary accruals as a proxy for earnings management and studies the influence of big 4 auditor, in order to shed more light on possible causes for shifting earnings. The findings of the study provide evidence that financially distressed companies that audited by a big 4 auditor exhibit lower discretionary accruals. The results reveal that Greek and Spanish companies reduce earnings management manipulation during recession. In contrast, Portuguese, Irish and Italian companies show mixed results. They tend to reduce earnings management practices, but there are reasons that influence managers’ behavior to increase earnings management. The findings of this study can be useful for both investors and standard setting authorities.     

The role of institutional investors in propagating the 2007 financial crisis in Southern Europe

The 2007 financial crisis has affected Southern European companies (Spanish, Portuguese, Italian and Greek) more than others. From a Minskyan bubble-burst cycle perspective (Minsky, 1986), we study the relation between institutional ownership structure and corporate risk-taking for a sample of non-financial listed companies from Spain, Portugal, Italy and Greece for the period 2001–2014. Our results suggest that the financial deregulation process, that lead to the financialization of the world economy before the 2007 financial crisis and the favourable macroeconomic scenario encouraged corporate risk-taking in those countries. We also find that the lack of effective control mechanisms provided an incentive for investment funds to assume a proactive role, encouraging companies to overinvest in risky projects.     

FAS 133: What Is Accounting Truth?

FAS 133, the rule that governs accounting for derivatives, has been controversial since its inception. Besides being expensive to implement and maintain, the rules often cause accounting treatment to diverge markedly from economic reality, making financial statements less transparent and less useful. For example, by marking to market only one side of what are in fact two‐sided (hedged) positions, FAS 133 often introduces artificial volatility into earnings and, in so doing, discourages companies from hedging. How should companies tackle financial disclosure and balance the economic and accounting effects of hedging? This article recommends that companies make economically sensible hedging decisions and then present two sets of earnings numbers to the investment community: (1) the first prepared and audited in strict accordance with GAAP; and (2) a supplemental calculation showing what earnings would have been had the firm qualified for hedge accounting treatment. This kind of supplemental disclosure should be viewed by companies as an opportunity to explain to their investors, creditors, and counterparties how they conceptualize, measure, and manage risk.     

盈余持续性、审计师类型对盈余持续性的影响及资本市场反应

以我国2002~2008年期间A股上市公司为研究对象,延续Sloan的方法,利用mishkin检验来考察公司盈余持续性、审计师类型对盈余持续性的影响及股票市场反应。发现公司盈余中应计成分持续性低于现金流量成分;四大审计客户的盈余持续性要高于非四大审计的客户;与公司盈余中现金流量成分相比,四大审计师更显著提高公司盈余中应计成分的持续性;股票价格中所包含的公司盈余预期不能反映公司盈余中应计成分和现金流量成分持续性的差别;股票价格中包含的盈余预期可以总体上反映四大与非四大审计师对公司盈余持续性影响的差异,但股票价格中包含的盈余预期不能反映四大与非四大审计师对公司盈余中应计成分和现金流量成分持续性影响的不同,市场符合＂幼稚投资者＂假说。     

Audit quality,accruals quality and the cost of equity in an emerging market: Evidence from Vietnam

This study explores the relationship between audit quality, accruals quality, and the cost of equity in the context of Vietnam. Particularly, we examine the impact of auditor size and accruals quality on the industry-adjusted earnings – price ratio. Using a sample of Vietnamese listed companies, the study shows that firms audited by a Big Four auditor are associated with a lower cost of equity than firms with a non-Big Four auditor. The results indicate that the auditors' information role is more relevant than the insurance role in a civil law context with a relatively low auditor litigation risk. In addition, the findings show that companies with better accruals quality are associated with a lower cost of equity. The study has implications for managers and regulators. The findings highlight the importance of ensuring sound auditing practices and maintaining high-quality financial reporting for corporations.     

自愿中报审计能减少盈余管理吗?——基于自选择模型的实证分析

中国上市公司除特殊情况外可以自愿选择是否进行中报审计。本文使用2001—2005年自愿选择进行中报审计的445家 A 股上市公司和其配对样本公司的数据,研究了公司进行中期报告审计的决定因素和中报审计对盈余管理的影响。我们发现,公司的 ROE、财务杠杆以及会计师事务所是否前十大对中报审计的购买有显著影响。考虑到中报审计可能是上市公司自选择的结果,我们进一步采用 Heckman 的两阶段模型方法来控制中报审计决定的内生性。研究发现,尽管自愿审计公司的中报显示更低的非正常应计利润,但没有证据表明这是由于审计造成的,模型估计结果表明,具有较高盈余质量的公司更倾向于进行中报审计。     

Accounting for financial instruments: An analysis of the determinants of disclosure in the Portuguese stock exchange

This paper studies the determinants of disclosure level in the accounting for financial instruments of Portuguese listed companies. An index of disclosure based on IAS 32 and IAS 39 requirements is computed for each company. The analysis includes variables that capture intrinsic features of Portuguese companies and institutional regulatory context, such as capital structure and characteristics of the corporate governance structure, within contingency theory. We could not find any significant influence of corporate governance structure or of financing structure. We conclude that the disclosure degree is significantly related to size, type of auditor, listing status and economic sector. This research reveals areas for improvement of Portuguese companies' reporting practices and suggests areas for intervention of the Portuguese capital markets regulator in the context of mandatory IAS after 2005.     

The impact of IFRS on accounting quality: Evidence from Greece

This paper examines the impact of IFRS adoption on the quality of accounting information within the Greek accounting setting. Using a sample of 101 firms listed in the Athens Stock Exchange (ASE) for a period of eight years (2001–2008) we find convincing evidence that the implementation of IFRS contributed to less earnings management, more timely loss recognition and greater value relevance of accounting figures, compared to the local accounting standards. Also, our findings document that audit quality further complements the beneficial impact of IFRS since those companies that are audited by Big-5 audit firms exhibit higher levels of accounting quality. Our findings are robust in regard to different model specifications and after controlling for firm-specific effects like size, risk, profitability and growth opportunities.     

The perceived credibility of forward-looking performance disclosures

We investigate the credibility of forward-looking performance disclosures (FLPDs) in the narrative sections of annual reports, as perceived by investors. Our proxy for these disclosures is an index of statements about future performance. We find that companies issue more FLPDs when raising debt or conveying bad news in the financial statements. In the presence of these managerial incentives, investor reliance on FLPDs increases with the quality of earnings reported in the audited financial statements. Our results suggest that firms derive a benefit in terms of higher credibility for their narrative disclosures from having a reputation for high quality earnings.     

利润操纵行为影响会计稳健性吗?——基于季度盈余不同汇总方法的经验证据

本文使用季度盈余的方法研究会计稳健性。以往文献主要使用会计年度(即公历年度)盈余分析我国上市公司的会计稳健性,相对无法有效地分离或控制利润操纵行为对会计稳健性的影响。本文使用不同的方法对季度盈余进行汇总,得到会计年度盈余及其他三种受利润操纵行为影响较弱的年度盈余。研究发现,我国上市公司的会计年度盈余和其他三种年度盈余都表现出了稳健性特征。这一经验证据表明,我国上市公司的报告盈余具有实质意义上的稳健性,利润操纵行为并未影响会计盈余的稳健性。     

事务所审计任期会影响审计质量吗?——来自发布补充更正公告的上市公司的经验证据

本文以中国A股市场上针对2003年至2009年年报发布过补充更正公告的上市公司为研究样本,对事务所任期与审计质量之间的关系进行了重新讨论。与现有文献不同,我们在讨论中引入了审计风险的概念。我们发现,虽然从整体上看,事务所任期越长,审计质量越差。但是,进一步的分析发现,这一现象仅仅存在于涉及到的审计风险相对较低的上市公司中,而对于补充更正内容涉及到的审计风险相对较高的上市公司来说,事务所审计任期对审计质量并没有产生显著影响。我们的分析结果表明,事务所任期对审计质量的影响是有限的。在较高的审计风险水平下,事务所不会因为任期较长而丧失审计独立性。     

Book Reviews

This paper examines factors affecting the owner-manager's voluntary decision to hire an auditor in small firms. Using a random sample of 412 small private companies in Finland responding to an Internet survey, we first probe the institutional boundaries of a prior UK study [Collis, J., Jarvis, R., and Skerratt, L., 2004. The demand for the audit in small companies in the UK. Accounting and business research, 34 (2), 87–100] and conclude that its main findings can be generalised to a different regulatory setting (Finland) typical of many Continental European countries. Second, we broaden the prior research by testing new hypotheses regarding the drivers of an audit among small companies. We hypothesise and find evidence that outsourcing of critical accounting functions creates information asymmetry between the owner-manager and the external accountant, which may arouse the need for monitoring the external accountant through a voluntary audit. In addition, we find, as hypothesised, that tax advisory services provided by the external accountant reduce the likelihood of a voluntary audit. Moreover, we hypothesise that receiving a qualified opinion from the auditor reduces the likelihood of hiring an auditor voluntarily, whereas firms experiencing financial distress would be more willing to have their financial statements audited. We find evidence consistent with these hypotheses.     

Earnings management induced by tax planning: The case of Portuguese private firms

In Portugal, a concept of taxable income associated closely with reported accounting income is used to determine the tax liability of firms. Recently, the Portuguese government legislated to introduce a system of “special payment on account” (SPA). Firms were required to pay an amount of income tax in advance that varied between a promulgated minimum and maximum. Although such a tax is unique to Portugal, other countries have tax arrangements that are similar in intent. Thus, Portugal's experience with the introduction of a SPA regime is likely to be instructive in fiscal policy deliberations in other settings.We assess the extent to which the SPA tax policy measure encouraged private Portuguese companies to manipulate earnings. We find that earnings manipulation appears to have been motivated by desire to minimize SPA. Firms whose estimate of SPA liability fell within the range of minimum and maximum limits of the SPA had higher levels of discretionary accruals than firms whose estimate was (equal to or) above the ceiling imposed by the new legislation. Firms with higher rates of income tax were found to reduce earnings to near zero. Firms with higher average income tax rates were more likely to manipulate their earnings than other firms.Our results reinforce the importance for auditors, stakeholders, and tax policy advisors to be alert to the close association between tax planning considerations and reported earnings in their monitoring, analysis, and policy advising activities.     

Financial reporting consequences of natural disasters: Evidence from the impact of resource constraints at audit offices on non-affected clients

Disaster-affected clients demand significant additional effort from their audit office, and hence strain the audit office’s resources available to other non-disaster-affected clients. We consider audit offices with disaster-affected clients to be strained offices and find that, compared with clients audited by non-strained audit offices, non-disaster-affected clients audited by strained audit offices are more likely to have their financial statements restated. This result suggests the financial reporting quality of companies not directly exposed to disasters could also be negatively affected by the disasters, due to their auditors’ strained-resource issue. We further find such a negative effect is more pronounced when the degree of resource constraints is greater and when the audit office lacks client experience or industry expertise. We offer novel evidence of financial reporting consequences of natural disasters, focusing on the externality of disasters on companies not directly affected by disasters. The findings have important implications for regulators in making disaster-related policies, for auditors in managing their client portfolios, and for companies in making auditor choice decisions.     

The Small Company Audit Qualification: A Preliminary Investigation

In recent years there has been much debate in the UK regarding the value and feasibility of the small company audit. The lack of formal internal control systems and the application of universal auditing standards has given rise to the use of a special ‘Small Company (Example 6) Audit Qualification’. However, doubts concerning the uniformity of practice between auditors has created difficulties for users in interpreting its meaning. This paper examines the extent to which a number of financial, organisational and auditor variables are able to explain the receipt of a ‘Small Company Audit Qualification’. The main empirical findings, using multivariate logistic analysis on a sample of 540 small company reports, are that companies audited by large audit practices, companies which had a prior year qualification, a secured loan, declining earnings, large audit lags and few non-director shareholders were more likely to receive an audit qualification than other companies.     

Equity accounting adoption in regulated and unregulated settings: an empirical study

This article examines equity accounting adoption by Australian companies before and after standard AAS 14 (1984), the first standard on equity accounting in Australia. To bypass a legal constraint, AAS 14 and its successor ASRB 1016 (1989) required that equity accounting of associates appear in supplementary disclosures (third-column or footnote) and not in consolidated accounts. Before AAS 14, extensive voluntary adoption of equity accounting occurred in consolidated accounts. Equity accounting adopters from 1971 to 1989 were matched in their adoption years with companies that could have used equity accounting but did not. Throughout, equity accounting adopters' EPS tended to be declining and equity accounting adoption tended to increase reported earnings. After AAS 14, adopters showed equity accounting via a third column if it increased reported earnings but in footnote disclosures if it reduced reported earnings. Leverage is associated with adoption before but not after AAS 14, perhaps because the standards required equity accounting in supplementary disclosures which had no impact on borrowing constraints, while no such restriction on equity accounting existed before regulation. Pre-AAS14 adopters tended not to be audited by large audit firms. Adopters after AAS 14 had higher ratios of investments in associates to total tangible assets; before AAS 14 they did not. The results are consistent with equity accounting being adopted opportunistically; there is limited evidence to support contractual efficiency motives.     

Earnings Management in Chapter 11 Bankruptcy

We study the impact of earnings management prior to bankruptcy filing on the passage of firms through Chapter 11. Using data on public US firms, we construct three measures of earnings management: a real activities manipulation measure (abnormal operating cash flows) and two accounting manipulation measures (discretionary accruals and abnormal working capital accruals). We find that, controlling for the impact of factors known to influence earnings management and firm survival in bankruptcy, earnings management prior to bankruptcy significantly reduces the likelihood of Chapter 11 plan confirmation and emergence from Chapter 11. The results are driven primarily by extreme values of earnings management, characterized by one or two standard deviations above or below the mean. The findings are consistent with creditors reacting positively to unduly conservative earnings reports and negatively to overly optimistic earnings reports. We also find that the presence of a Big 4 auditor is associated with a higher incidence of confirmation and switching to a Big 4 auditor before filing increases the incidence of emergence.     

Intangible assets and value relevance: Evidence from the Portuguese stock exchange

We assess the value relevance of the amounts for identifiable intangible assets and goodwill reported in the financial statements of all non-finance companies listed on the main market of the Portuguese Stock Exchange from 1998 to 2008. Additionally, we use panel data to explore the impact on value relevance of Portugal’s formal adoption of International Accounting Standards [IAS] and International Financial Reporting Standards [IFRS] in 2005. A distinctive feature of the accounting by our sample companies is that when they adopted IAS 38 and IFRS 3 in 2005, they were no longer required to recognise some intangible assets (such as start-up costs and research expenditures) and were no longer required to amortise goodwill.We find that net earnings, reported goodwill and other intangible assets are highly significantly associated with stock price. However, whereas earnings are related positively to stock prices when Portuguese Generally Accepted Accounting Principles (GAAP) were applied prior to 2005, the value relevance of earnings appears to have declined after the adoption of IAS/IFRS in 2005. Although the change to IAS/IFRS had no impact on the value relevance of identifiable intangibles as a whole, the evidence suggests that there was a positive effect on the value relevance of goodwill. When the subclasses of identifiable intangible assets are considered, we found evidence of an increase in value relevance of goodwill, other intangible assets, and research and development expenditures.     

The dynamic of financial crises and its non-monotonic effects on earnings quality

Despite the wealth of research examining earnings quality and earnings management, we still have much to learn about the effects of macroeconomic factors on accounting discretion’s decisions; the recent financial crises may be one of such factors. Nevertheless, the extant literature is inconclusive about the direction of the relationship between earnings quality and economic downturn. In this study, we focus on the extent to which organizational survival may be an objective of earnings management. In this manner, we add to research considering earnings target as an objective of earnings manipulation. Furthermore, our results suggest that these objectives likely change as crisis becomes worse. Consequently, we argue that the relationship between financial crises and earnings management is non-monotonic. Earnings management decreases when the intensity of the crisis is low, while it increases when the crisis is acute.     

Accruals and ‘accounting numbers management’ in UK executive agencies

Public sector reforms have implemented business techniques, including management by results, cost management and accrual accounting, to make public entities more efficient and accountable. As a consequence, ‘accounting numbers management’ has become a way for managers in the public sector to adapt accounting figures to their interests. This study focuses on ‘earnings management’ (manipulation of earnings) in government agencies. The authors provide evidence of earnings management in which agencies try to keep net operating costs to around zero. The authors' findings question the effectiveness of financial targets associated with accrual-based measures.