Douglasian cultural dialogues and the Financial Reporting Council complexity project

There has been near-universal reliance upon Hofstede's cultural dimensions as the theory base for culturally related accounting research. Given the criticisms that have been raised in respect of Hofstede this paper proposes Mary Douglas's cultural theory as a more appropriate theory base for future research. Central to Douglasian cultural theory is the notion of cultural dialogues which proposes that within any community four solidarities will be present and in constant competition. The paper identifies cultural dialogues through an analysis of comments letters submitted to the Financial Reporting Council (FRC) in response to their ‘complexity of corporate reporting’ discussion paper. To understand how a particular solution has been arrived at when an accounting or auditing issue is reviewed, the debates that precede the outcome need unscrambling by reference to cultural dialogues and the analysis of the comments letters reveals the voices of the different solidarities as they seek to persuade others of the validity of their way of life. The paper proposes a clumsy solutions approach is appropriate for resolving debates on accounting and auditing issues. This approach recognises that, because the solutions offered up by each culture have limitations, all four voices need to be heard in any debate.     

Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality

A widely held assumption in policy making and empirical research is that increasing the strength of public enforcement improves financial reporting quality and audit quality. This paper provides a more nuanced view. In a model with a manager who can manage earnings, a strategic auditor, and an enforcement institution, we show that enforcement and auditing are complements in a weak enforcement regime but can be substitutes in a strong regime. Although stronger enforcement always mitigates earnings management, the effects of different instruments of strengthening enforcement are ambiguous. We show that they can improve or impair financial reporting quality and audit quality, depending on production risk, accounting system characteristics, and the scope of auditing relative to enforcement.     

Consequences of local social norms: A review of the literature in accounting,finance, and corporate governance

We synthesise the empirical archival research on the consequences of local social norms on accounting, finance, and corporate governance outcomes in an international setting. The literature reviewed is premised on the theory that corporations do not make decisions, but managers do, and managers are likely to be influenced by the socioeconomic environment of the region in which they operate and/or by the people with whom they interact. To provide a structure to our review, we identify social capital, religiosity, gambling norms, and corruption culture, as four constructs of local social norms and link these with financial reporting and external auditing, financial, investment, and dividend decisions, capital market consequences and finally, corporate governance and corporate social responsibility behaviour of firms. We highlight some limitations of the existing research and offer some suggestions for future research.     

The role of international auditing in the improvement of international financial reporting

In this paper, we describe the convergence of several forces that underscore the significance of independent auditors as key enablers of the improvement of international financial reporting. This paper is not an empirical research study but is intended to survey the landscape of international auditing. Based on our experience as auditing practitioners and academics, we describe and provide discussions of key conceptual issues surrounding international auditing harmonization and its relation to the implementation of international accounting standards. A matrix framework is presented at the conclusion of the paper to summarize the principal point of the paper that the regulations and control of the quality of audits is the critical factor in achieving high quality financial reporting. The next critical phase of the process is to improve the quality of the individual audits that take place around the world through government regulation, profession self-regulation, and quality assurance in international firms. IFAC has taken significant steps in strengthening its role as the global self-regulatory body for the profession, including improvements in standards and compliance. The establishment of a public oversight board with authority to discipline rather than persuade is a critical component for effective international auditing standards.     

Information Quality of Interim Financial Statements

Expressing concern about the Canadian capital market environment, Boritz (2006) suggested that the accounting and auditing profession may be paying limited attention to quarterly reports. This study investigates whether fourth‐quarter adjustments are significantly different from the previous three, thereby limiting the reliability or faithful representation of the firms' results for each quarter. This study includes four years (2003–2006) of quarterly financial information of 353 Canadian public companies. Our results indicate that the volatility of net income in each of the first three quarters is considerably lower than in the final quarter. While lower volatility can improve predictability, the resulting relevance may be limited. The low volatility of reported earnings in the first three quarters suggests that either earnings management is taking place or that management may not be exercising sufficient care at the end of each of the first three quarters on the measurements that generally accepted accounting principles call for and readers of financial statements expect. This could result in quarterly financial statements that do not faithfully represent the underlying resources and obligations of the reporting firms at the end of the quarter, or the firm's performance during the quarter. Our findings support Boritz's proposition for increased audit requirements for interim reports and changes in the approach to the annual audit to integrate it more closely with interim financial reporting.     

Auditors as modern pharmakoi: Legitimacy paradoxes and the production of economic order

Despite a continuous flow of audit failure episodes the auditing profession keeps on being seen as technically and morally legitimate. This paper seeks to better understand how the paradox that surrounds the legitimacy of financial auditing develops. Relying on René Girard's theoretical developments on scapegoating, sacrificial rituals and mythification, we argue that auditors are often (but not always) selected as sacrificial victims in the wake of major corporate scandals. Rationalized mythologies are mobilized in the process by which auditors are morally and/or legally condemned, in a way which maintains or strengthens the legitimacy of the financial audit function. Fundamentally speaking, we contend that financial auditors can be conceived of as modern pharmakoi, constituting a reservoir of victims to sacrifice whenever fraudulent financial statements surfacing in the public arena threaten to severely disrupt the credibility and smooth-functioning of capital markets. We confront our theoretical translation of Girardian theory to the empirical domain through an analysis of the breakdown of accounting firm Arthur Andersen, in which we examine how the legitimacy paradox surrounding the financial audit function is produced and reproduced. One of our key conclusions is as follows: despite claims which commonly celebrate the rationality of capital markets, the latter's functioning and the sustaining of economic order are predicated on the production and reproduction of mythologies.     

Determinants and consequences of tournament incentives: A survey of the literature in accounting and finance

This paper synthesizes the theoretical underpinnings of tournament models, reviews the extant empirical literature on the determinants and consequences of tournament incentives, critiques the findings and offers suggestions for future research. We synthesize findings from 63 empirical papers and find that several firm-level fundamental and corporate governance variables affect the structure of corporate tournaments. Our review of the consequences of tournament structure reveals that tournaments affect financial reporting and auditing as well as firm-level operational and capital market-based outcomes. This review reveals that the existing accounting and finance literature lacks a strong justification for why one theory rather than another is favored. Moreover, based on potential problems that may exist in empirical models, this review also offers some methodological implications for empirical tournament studies.     

Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally

Research has shown that accounting follows different patterns in different parts of the world. There have been claims that national systems are determined by environmental factors. In this context, cultural factors have not been fully considered. This paper proposes four hypotheses on the relationship between identified cultural characteristics and the development of accounting systems, the regulation of the accounting profession and attitudes towards financial management and disclosure. The hypotheses are not operationalized, and empirical tests have not been carried out. They are proposed here as a first step in the development of a theory of cultural influence on the development of accounting systems.     

The political economy of financial harmonization: The East Asian financial crisis and the rise of international accounting standards

In the aftermath of the East Asian financial crisis, western nations established a new international financial architecture that relied upon enhanced financial transparency and international financial standards, including international financial reporting and auditing standards, to govern an expanding and crisis-prone international financial system. This paper examines the West’s response to financial crisis in the late 1990s and its implications for the rise and diffusion of international accounting standards from a theoretical perspective that blends institutional analysis and political economy. The aim is to understand how the history of accounting has both shaped and been shaped by transformations in the late 20th century international political economy where financial capital and the power of the financial sector play an increasingly central role in the process of accumulation.     

Risikoberichterstattung von Versicherungsunternehmen — Analyse der Risikoberichte im Zeitablauf

This paper presents the findings of an empirical study of the development of risk reports of German insurance companies from 1999 until 2003. The empirical study is based on formal aspects and a detailed content analysis of risk reports which companies have to publish by German Commercial Law (HGB). The analysis is based on generally accepted accounting principles for management reports in annual financial statements and GAS 5-20. The goal is to collect formal and qualitative information about changes in risk reports and their performance in terms of fulfilling industry-specific supervisory risk regulations over time. The sample shows a significant continuous improvement of risk reports from 1999 until 2003. The results of the paper lead to further implications regarding the specification of Solvency II: Improvements have to be made especially in terms of specifying and quantifying company risk. Finally the paper offers suggestions for improvements in risk reporting which should be considered in the development of european standards.     

审计质量保障的权利配置研究视角

现行审计质量问题是审计委托权配置失范的外部性表现.提高审计质量的有效措施是对现行会计流程控制权配置范式进行变迁,改变目前企业管理当局集会计政策选择权、会计人员聘任权及审计委托权于一身的状况,使会计信息供应脱离管理当局的直接控制而由财务报告委员会及其所属的独立会计机构全程负责,此时高质量审计服务成为信息生产者、信息使用者、企业管理当局及注册会计师的共同需求,审计质量有了保障.     

Batten Down The Hatches! U. S. Accounting Scandals and Lessons for Australia

This paper warns the Australian accounting profession about the threat of fallout similar to that experienced in the US following major accounting scandals. This US fallout has included a significant loss of public faith in the accounting profession, reduced autonomy for auditors with the formation of the Public Companies Accounting Oversight Board, and the stringent Sarbanes-Oxley Act. The Australian accounting profession must maintain high-quality auditing and corporate financial reporting or risk greater regulatory intrusions and additional threats to its relatively high levels of autonomy.     

The double entry structural constraint on the econometric estimation of accounting variables

ABSTRACT

This paper develops a structural system for estimating accounting variables, within which the deterministic relationships inherent in financial statement articulation are clearly defined in the econometric model. The key proposition of the paper lies in the treatment of the financial statements as a matrix of codetermined information constrained by double entry, where the expected value of each of the individual items that comprise the financial statements will be mirrored elsewhere in the system with a different sign. Given that the change in net operating assets shares the same variation as the change in net financial claims, it is shown, by formally identifying the articulation, that empirical application will yield increased precision and improved efficiency by comparison to the more traditional methods that fail to specify the structural double entry property.     

Polish Public Sector Accounting in Transition: Evidence From the Mid 1990s

The Polish public sector is still under transition that began at the turn of 1989/1990. In the mid-1990s a new significant development in public sector accounting took place. A substantial differentiation of the accounting system was introduced. New elements and relationships appeared, along with general domination of the Accounting Act, tax regulations and the Budgetary Law. The system of basic regulation of accounting and reporting has also changed. There were also some changes in the auditing system. The enactment in 1994 of the Accounting Act has brought to light the political character and political importance of financial information in Poland. This paper presents the current mode of public sector accounting regulation and its relationship with the overall system of Polish accounting regulations. Much attention has been devoted to specific principles of public sector accounting and financial reporting in the public sector, and to government accounting. Some political contaminations and consequences of the current accounting system have been pointed out.     

A Framework for Identifying (and Avoiding) Fraudulent Financial Reporting*

This commentary analyzes the relationship of fraud risk assessments to other risk assessments by auditors. The Public Company Accounting Oversight Board notes that this is a problem area of current practice. Effective detection of fraudulent financial reporting requires an integrative accounting/auditing conceptual framework. As a result, this paper is as much about accounting theory as it is about auditing. To simplify the development of such an integrated framework, this paper uses an expanded risk model. This effectively results in a risk perspective on fraudulent financial reporting. There are many potential implications but the major findings are as follows. First, the study identifies the crucial role of benchmarks based on acceptable levels of risk to help differentiate between intentional and unintentional misstatements. Such differentiation is critical to successfully implementing the American Institute of Certified Public Accountants' Statement on Auditing Standards (SAS) No. 99 and international standards ISA Nos. 240, 540, and 700. Second, the paper shows the importance of not allowing the major categories of risks identified here from getting too high. This paper explains the need to set acceptable levels of these risks, either by standard‐setters as a matter of broad policy, or by individual practitioners as part of the terms of specific engagements. I propose that a major factor in the concept of “present fairly” be the acceptable levels of accounting risks that are defined here, especially the risks due to intentional forecast errors. Third, this paper clarifies how the fraud risk of SAS No. 99, and similar international standards, relates to the current audit risk model framework.     

Financial reporting by charities: a matched case study analysis from four countries

This paper analyses financial reporting requirements applicable to charities in four jurisdictions—Australia; England; Ireland; New Zealand—using case study analysis which compares the actual financial statements of four charities operating in the same field and with similar levels of total income. The authors highlight common issues and implications in terms of the concepts underpinning not-for-profit organization (NPO) financial reporting and argue the case for harmonized international NPO accounting standards.     

Government financial statistics and accounting in Europe: is ESA 2010 improving convergence?

This paper provides an empirical analysis of the impact of ESA 2010 on EU member states, looking at countries both individually and as a whole and analysing the global impact of the adjustments and the partial impacts of each category. Changing the system of national accounts has introduced conceptual and methodological changes, but there has not been any significant variation in the convergence/divergence between government financial statistics and budgetary accounting in reporting deficits. The effect on the deficits reported by individual member states was quite marked however.     

Application of Accrual Accounting in the Australian Public Sector – Rhetoric or Reality

This paper presents a contextual. historical analysis of recent accrual accounting developments in the Australian Public Sector (APS). It takes a critical stance in that it questions the accrual accounting developments on a number of grounds. The paper examines changes in public sector financial management and accountability in four distinct settings, being: accrual financial reporting, accrual management systems, whole of government reporting, and accrual based budgeting. The findings show that already in Australia accrual accounting has made significant encroachments into some areas of annual financial and budget reporting. This influx has meant that terms such as 'deficit', 'debt', 'liabilities', 'operating results', 'assets', etc. have begun to change in meaning, which it is argued has important implications for the current process of transformation of aspects of the APS.     

Accounting Introspection

In 1994 a working party commissioned by the Australian accounting bodies produced a report titled A Research Study on Financial Reporting and Auditing - Bridging the Expectation Gap. The study was the result of concerns about the differing perceptions of the financial reporting and auditing roles. This paper asserts that the research study suffers from shortcomings including a failure to explore some important issues and a consequent failure to correct prevailing misconceptions in the minds of those compiling financial reports and others using them.     

Bank Runs and the Accounting for Illiquid Assets in Financial Institutions

Abstract

Financial services are an increasingly important sector in modern economies, yet many accounting and auditing texts focus on manufacturing and retailing. This teaching note describes the role of financial institutions in transforming long-term, difficult-to-sell assets into short-term bank accounts. This is referred to as liquidity transformation. The social benefits and risks of liquidity transformation are described. The social benefit occurs due to the increased liquidity provided by the bank to depositors. The risk comes in the form of a bank run, wherein difficult-to-sell assets cannot be redeemed in time to cover the rapid and unexpected withdrawals of depositors. The financial statements of a financial institution are presented and the issue of valuation is discussed. Finally, practical relevance for accounting students is enhanced by including discussions of historical precedents and of implications for financial reporting and auditing.