Comparing the Strength of Auditing and Reporting Standards and Investigating their Predictors in Europe and Asia

The World Economic Forum conducted an opinion survey to determine the strength of auditing and reporting standards (SARS) in 133 countries. It then assigned a score for SARS to each country as one of its global competitive indices. This is a unique dataset on SARS at country level. Using this dataset, this paper compares SARS scores for 72 countries (41 European and 31 Asian). A multi‐phase regression analysis is employed to empirically investigate the predictors of SARS using five sub‐models. Findings from the study support existing theory and add new findings to the auditing and reporting literature at a regional level. It suggests that there are nine predictors of SARS which are similar for both Europe and Asia but with different magnitude. In Asia the efficiency of the legal framework and the size of the foreign export market are also significant predictors of SARS compared to Europe.     

The Effect of Auditor Style on Reporting Quality: Evidence from Germany

This paper examines whether the ‘style’ of individual auditors influences financial reporting quality in Germany. Audit quality in Germany should be uniformly high, because of strong reputational needs, strict controls on operating procedures, and quality enforcement mechanisms. An audit partner's style should not affect this quality level. However, our results do not support this expectation. Exploiting a unique dataset comprising the names of the audit engagement and review partners of listed German companies, we find that audit engagement partners in Germany have a significant influence on audit quality, beyond firm‐ and office‐level factors. In contrast, audit review partners do not have a consistent significant influence on audit quality. We measure audit quality by the level of a firm's abnormal accruals and its propensity to meet or beat an earnings target. We also find that the 2005 adoption of a new audit quality enforcement system that includes ‘naming and shaming’ does not reduce the influence of audit partner style on financial reporting quality.     

Internal Audit Outsourcing: A Literature Synthesis and Future Directions

The internal audit function (IAF), which has traditionally been an in‐house function, is increasingly being outsourced to outside consultants, in line with global trends for other services. This study synthesises research on the outsourcing and co‐sourcing of internal audit services over the last three decades, and suggests directions for future research. It draws from professional and academic literature to highlight the nature of organisations that outsource the IAF, and the main reasons behind the outsourcing decision. The study further examines the financial impact of outsourcing, as well as its impact on financial reporting, internal audit quality and auditors’ independence. The study shows widespread adoption of outsourcing of internal auditing services, largely due to the perceived cost benefits as well as perceived improved access to specialised internal auditing resources. There are mixed findings on the impact of outsourcing of internal auditing services on quality, cost, independence and availability of resources. This study contributes to internal and external audit, corporate governance and outsourcing literature in general, by synthesising the existing research and providing a roadmap with which to understand the origins, development, present state and impact of outsourcing of internal auditing.     

Determinants of CSR Reporting and Assurance: An Analysis of Top Cooperative and Mutual Organisations

Corporate social responsibility (CSR) has greatly influenced business communication. CSR reporting has become the main tool through which organisations worldwide communicate their economic, social and environmental performance. Just as this practice is consolidated, the need for credible information in this area is critical. As a result, some companies subject their CSR reports to an assurance process. Several studies have analysed CSR reporting and assurance among stock companies, but few authors have developed a non‐stock firm perspective. Given the shortage of prior research, we analyse these practices, focusing on cooperative and mutual organisations because, as social enterprises, they have a special link with CSR, and they represent another kind of firm with different transaction costs. By combining statistical and content analysis methods, we aim to identify the determinants that influence the adoption of CSR reporting and assurance, the choice of assuror and the quality of assurance statements. The findings reveal that size is positively but non‐linearly related to reporting, while country and sector significantly affect the adoption of reporting and assurance. Assurance statements substantially differ across providers and their quality depends on size, sector and assuror, exhibiting interactions between size and assuror and between sector and assuror.     

Auditing standards,increased accounting disclosure,and information asymmetry: Evidence from an emerging market

The interest in accounting disclosure and audit quality by academics, practitioners, and regulators heightened following the various financial reporting scandals, and subsequent legislative and professional response to these scandals. An important question is whether the implementation of stricter auditing standards such as those mandated by the US Sarbanes-Oxley Act would improve the information environment of firms whose shares are publicly traded. In this paper, I investigate the link between information asymmetry, measured by bid-ask spread, and increased accounting disclosures following the adoption of new auditing standards in China—an environment in which disclosure hitherto was relatively low. I report the following primary results of the statistical analyses. First, information asymmetry cost is substantial in the Chinese order-driven emerging markets. Second, the firms in the sample experienced significant reductions in their bid-ask spreads subsequent to the adoption of the new auditing standards. Third, the reductions in the bid-ask spreads were abrupt and permanent. However, no significant result is found for firms in the control group with foreign ownership, whose financial statements were prepared in accordance with international accounting standards and were audited with international auditing standards. The results have implications for policy makers and regulators in general, and those in emerging markets in particular.     

The influence of corporate governance mechanisms on the quality of financial reporting and auditing: Perceptions of auditors and directors in Singapore

This study uses two hypothetical cases to examine the perceptions of auditors and directors in Singapore about corporate governance practices relating to the quality of financial reporting and auditing. In the first case, the strength of the audit committee, the existence of an internal audit function and the strength of a corporate code of conduct were manipulated. All three variables were perceived to have some influence on financial reporting and audit quality. However, some interesting differences were found between the perceptions of auditors and directors. Auditors place more weight on the internal audit function, possibly due to their familiarity with the role that internal audit can play in reducing audit risk and enhancing controls. Directors have more confidence in board enforcement of a strong code of conduct, possibly reflecting the view that this encourages staff to adhere to higher ethical standards. In the second case, audit partner rotation, outsourcing of internal audit services and whether the audit firm audited all companies within a group were manipulated. Auditors believed that their ability to resist management pressure was enhanced when they audited all companies within the group. No significant differences were found for the other variables, suggesting that neither group believes that these practices impair audit independence.     

THE IMPACT OF BOARD COMPOSITION AND OWNERSHIP ON AUDIT QUALITY: EVIDENCE FROM LARGE UK COMPANIES

This paper examines the impact of board composition and ownership structure on audit quality in the UK prior to the adoption of the recommendations of the Committee on the Financial Aspects of Corporate Governance ([5]). In this study I use audit fees as a proxy for audit quality and seek to investigate whether the proportion of non-executives, the extent of managerial ownership or ownership by large blockholders influences the extent of auditing, and consequently, the audit fee. Utilizing data from a sample of 402 quoted companies I find that the proportion of non-executive directors has a significant positive impact on audit fees. I also find that audit fees are negatively related to the proportion of equity owned by executive directors. I find no evidence that ownership by large blockholders (institutional or otherwise) or CEO/chairman duality has a significant impact on audit fees. Overall, the findings suggest that non-executive directors encourage more intensive audits as a complement to their own monitoring role while the reduction in agency costs expected through significant managerial ownership results in a reduced need for intensive auditing.     

The effect of voluntary clawback adoption on non-GAAP reporting

We examine the effect of voluntary adoption of clawback provisions on non-GAAP earnings disclosures. Prior literature documents that voluntary clawback adoption improves financial reporting quality by increasing the costs of misstating GAAP earnings. However, managers may respond to perceptions of reduced discretion over GAAP reporting by increasing their reliance on non-GAAP earnings disclosures. Using a propensity score matched sample, we find that non-GAAP earnings disclosure frequency increases and non-GAAP exclusion quality decreases after clawback adoption, consistent with a more opportunistic use of non-GAAP reporting. Additional cross-sectional tests help support this interpretation.     

Firm‐ and Individual‐Level Determinants of Balanced Scorecard Usage*/DÉTERMINANTS DE L'USAGE DU TABLEAU DE BORD ÉQUILIBRÉ AU DOUBLE ÉCHELON ORGANISATIONNEL ET INDIVIDUEL

The factors influencing the organizational as well as the individual decision to utilize the balanced scorecard (BSC) approach have not been widely researched. In the first part of this paper, we study BSC adoption at the organizational level while utilizing a multifaceted perspective of socio‐psychological, economic, and resource‐based influences; specifically, we investigate the perceptions of desirability, urgency, and feasibility of BSC adoption. Our findings show that customer norms, competitor norms, and organizational resources are significant predictors of BSC adoption. In the second part of the paper, we discuss individual‐level aspects of utilization decisions. Here, we explore the impact of perceived ease of use, perceived usefulness, and awareness on the intentions to use the BSC approach. Our findings show that both awareness of BSC capabilities and perceived ease of use are significantly related to perceived usefulness. However, only perceived usefulness is significantly related to intentions to use the BSC. Implications for research and practice are discussed.     

The effects of International Financial Reporting Standards,auditing and legal enforcement on tax evasion: Evidence from 37 African countries

This study examines the significance of International Financial Reporting Standards (IFRS), audting and legal enforcement on tax evasion for a group of 37 African countries for the period 2008–2017. These countries were subsequently regrouped into subsamples of four clusters. Three-stage least square regression was used for the analysis. The results indicate that there is a negative and significant relationship between IFRS and tax evasion in some clusters (i.e., early IFRS adopters and strong legal enforcers). The other clusters (late IFRS adopters and weak legal enforcers) have a similar sign of coefficient though statistically insignificant. Moreover, evidence suggests that adoption and application of IFRS lead to improved financial reporting quality and lessen tax evasion in some African jurisdictions. Additionally, legal enforcement is found to be statistically significant in relation to tax evasion in two clusters (i.e., early IFRS adopters and strong legal enforcers). Some African countries are slow or ineffective in adopting and implementing IFRS, which by itself cannot improve tax compliance. IFRS can only achieve its objective when there is strong legal enforcement (e.g., control of corruption, rule of law, effective regulatory framework, voice and accountability, strong monitoring, and auditing to promote transparency). More evidently, in contrast to weak legal enforcers, countries with strong legal enforcement have high IFRS compliance, which can strengthen auditing and reporting standards and hence, improve tax compliance.     

Firm incentives,institutional complexity and the quality of “harmonized” accounting numbers

In this paper, we investigate how firm reporting incentives and institutional factors affect accounting quality in firms from 26 countries. We exploit a unique multicountry setting where firms are required to comply with the same set of international reporting standards. We develop an approach of cross-country comparisons allowing for differences between firms within a country and we investigate the relative importance of country- versus firm-specific factors in explaining accounting quality. We find that financial reporting quality increases in the presence of strong monitoring mechanisms by means of ownership concentration, analyst scrutiny, effective auditing, external financing needs, and leverage. Instability of business operations, existence of losses, and lack of transparent disclosure negatively affect the quality of accounting information. At the country level, we observe better accounting quality for firms from regulatory environments with stronger institutions, higher levels of economic development, greater business sophistication, and more globalized markets. More importantly, we find that firm-specific incentives play a greater role in explaining accounting quality than countrywide factors. This evidence suggests that institutional factors shape the firm's specific incentives that influence reporting quality. Our findings support the view that the global adoption of a single set of accounting standards in isolation is not likely to lead to more comparable and transparent financial statements unless the institutional conditions and the firm-specific reporting incentives also change.     

Earnings Quality and Market Values of Indonesian Listed Firms

We find that earnings quality (EQ) is reliably negatively correlated with the market values of equity of firms listed on the Jakarta Stock Exchange (IDX). The financial reporting process produces earnings viewed as increasingly ‘incomplete’ for valuation purposes by the capital market despite moves towards high‐quality financial reporting standards (IFRS) during the sample period 1995–2015. Time‐series analyses reveal that EQ decreases rather than increases through time. The role of earnings in valuation is replaced by other attributes, most notably net dividends. Firms that pay out dividends are valued significantly higher, and firms that issue equity are valued lower. These results are robust regardless of other accounting, market and governance controls. Large and closely held firms are valued higher than smaller firms, consistent with some aspects of the political cost hypothesis. Shares with higher idiosyncratic risk are valued higher, consistent with option value, as are shares where the volume of shares traded is more volatile. Collectively, the results indicate that the mere adoption of high‐quality accounting standards (IFRS) and other nominal changes in capital market regulations do not automatically increase the quality of the financial reporting process.     

Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy

In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards. The use of a common set of standards such as International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of the public company auditors’ working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country‐level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country‐level measures that focus on the degree of enforcement of financial reporting practices.     

XBRL for Financial Reporting: Evidence on Italian GAAP versus IFRS

The systematic adoption of the eXtensible Business Reporting Language (XBRL) for financial reporting represents a great challenge. Worldwide, a large number of regulators are making an effort to promote the adoption of this standard to simplify and enhance the communication of financial information. This requires the definition of well‐structured taxonomies that can standardize and accommodate the content of financial reports prepared by firms. This study aims to analyze the regulator‐led adoption of XBRL for financial reporting. It examines the XBRL taxonomies used by Italian firms to reflect their financial reporting under rule‐based Italian GAAP and principles‐based International Financial Reporting Standards (IFRS). We compare the alignment of the Italian GAAP taxonomy and the IFRS taxonomy with Italian companies' financial statements and find two different levels of fit. The results offer useful insights for regulators and policy makers in prescribing or establishing appropriate taxonomies. We illustrate the potential impacts of the different taxonomies on the quality of financial reporting in terms of comparability and potential loss of information.     

An Analysis of Submissions on Proposed Regulations for Audit and Assurance in New Zealand

After numerous collapses of finance companies in New Zealand, and widespread losses by investors, self‐regulation of the auditing profession was no longer considered adequate or acceptable internationally. The New Zealand Government sought to restore public perceptions of audit quality and investor confidence in the financial markets with proposals to change existing accounting standards and audit and assurance requirements. The proposals included a review engagement for some entities, and imposing the force of law on auditing standards. We analyse the public submissions on the auditing and assurance aspects of these proposals. Many respondents object to the proposal, requiring small public sector and not‐for‐profit entities to obtain review engagements, and to give auditing standards the force of law.     

What Drives TBL Reporting: Good Governance or Threat to Legitimacy?

This paper provides two complementary explanations for the adoption of triple bottom line (TBL) reporting by Australian companies. The first explanation is that companies adopt TBL reporting to legitimise their relationship with society because of adverse publicity from the media. The second explanation is that TBL reporting is adopted because of the company's desire to achieve high‐quality reporting and transparency inferred by strong corporate governance. Companies with TBL reporting had significantly more adverse media coverage before implementing TBL reporting than non‐TBL companies. TBL reporting is also significantly and positively related to the existence of an environmental or sustainable development committee and the frequency of meetings of the audit committee.     

The Influence of Country‐ and Firm‐level Governance on Financial Reporting Quality: Revisiting the Evidence

This paper examines how firm‐level governance and country‐level governance interplay in shaping financial reporting quality. Using IFRS adoption as a source of variation in firms’ reporting discretion, and a large sample of European firms that mandatorily switch to the new set of standards, we find that in countries with low enforcement and weak oversight over financial reporting, only firms with strong board‐level corporate governance mechanisms experience an increase in financial reporting quality, consistent with firm‐ and country‐level governance mechanisms being substitutes. However, in countries with high enforcement and strict oversight over financial reporting, firms with either strong or weak board‐level governance mechanisms experience an increase in financial reporting quality, even if the increase is larger for the former group. Overall, our findings indicate that in the debate about the effects of governance on the quality of financial reporting, it is important to consider both country‐ and firm‐level corporate governance mechanisms.     

A review of the IFRS adoption literature

This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.     

Discussion of ‘The antecedents of the use of continuous auditing in the internal auditing context’

Gonzalez et al. (2012) apply the Unified Theory of Acceptance and Use of Technology (UTAUT, Venkatesh et al., 2003) to the issue of adoption of continuous auditing (CA) by internal auditors. The authors make a very convincing case for the slow evolution of CA and propose that this can be explained by the four factors contained in the UTAUT as well as annual sales and voluntariness of use. They find, in their revised model, that effort expectancy and social influence directly impact intentions to use the technology, while performance expectancy is moderated by annual sales and social influence is moderated by voluntariness of use. Interestingly, the authors also identify geographical differences in these influences. I offer commentary on these findings and suggest avenues for future research in the domain of technology adoption and use in accounting.     

The effect of mandatory IFRS adoption on real and accrual-based earnings management activities

This study examines the effect of mandatory adoption of International Financial Reporting Standards (IFRS) on both accrual-based and real earnings management. While prior literature has mainly examined the effects of IFRS adoption on accrual-based earnings management, no study to date has focused on the impact of IFRS adoption on real earnings management. Using a sample of 15,206 observations from 22 European countries between 2000 and 2010, this study employs a control sample of voluntary adopters and applies a differences-in-differences design to control for confounding concurrent events. The results suggest that mandatory IFRS adoption had no significant impact on either real or accrual-based earnings management practices. Additional analysis on a sub-sample of firms with relatively strong earnings management incentives supports a dominant role for firm-level reporting incentives over accounting standards in shaping financial reporting quality.