Institutional theory and accounting rule choice: an analysis of four US state governments' decisions to adopt generally accepted accounting principles

In this study, we use institutional theory to explore how institutional pressures exerted on four state governments (New York, Michigan, Ohio, Delaware) influenced the decision of these governments to adopt or resist the use of generally accepted accounting principles (GAAP) for external financial reporting. We identify resource dependence as a potent form of coercive institutional pressure that was associated with early GAAP adoption. We identify three factors that may lead to initial resistance to institutional pressures for change. First, if accounting bureaucrats are not active in professional associations that promote GAAP adoption, they may miss the educational process that we believe is important to early adoption of GAAP. Second, organizational printing may impede GAAP adoption. Third, powerful interests may impede GAAP if the proposed GAAP legislation is expected to alter the existing power relationships. We found that key accounting bureaucrats in New York and Michigan used “compromise” as an initial strategic response to institutional pressures to adopt GAAP, Ohio's key accounting bureaucrat adopted a “defy” strategy, although the political leadership endorsed an “acquiesce” strategy. While Delaware initially employed a “manipulate”strategy with some success. Delaware did not adopt GAAP for external reporting until a political entrepreneur for GAAP emerged in the early 1990s. Our study suggests that all strategic responses to resist institutional pressures for GAAP adoption will ultimately fail because of the potency of the institutional pressures that result from the well organized professional accounting and governmental institutional fields.     

Measuring the impact of international reporting standards on market performance of publicly traded companies

The decision whether to require publicly traded companies to adopt International Financial Reporting Standards (IFRS) remains in flux. In 2008, the US Securities and Exchange Commission proposed a roadmap leading to complete acceptance of IFRS in the US. With the potential replacement of US GAAP with IFRS in the near future, understanding the impact of IFRS on corporate financial reporting is more important than ever. This study examines two factors which are critical considerations in the decision to accept or not to accept IFRS in the US: How different is financial statement information derived under IFRS from information derived under US generally accepted accounting principles (GAAP); and how much incremental information value, if any, is provided by IFRS over US GAAP? The present study extends prior research by examining concurrently both differences and their impact on market performance. Findings of this study support the view that differences on financial statement results between IFRS and US GAAP are not significant, thus, supporting proponents of adoption of IFRS in the US, after which all US publicly traded companies would use IFRS and not US GAAP.     

Impact of IFRS in New Zealand on Accounts and Earnings Quality

The impact of the adoption of International Financial Reporting Standards (IFRS) on the accounts and the quality of earnings of New Zealand firms is examined. Our analysis of IFRS adjustments for the last period under pre‐IFRS NZ Generally Accepted Accounting Principles (GAAP) reveals that total assets, total liabilities and net profit were significantly higher under IFRS than under pre‐IFRS GAAP. Profit and equity under IFRS were increased by adjustments for goodwill and other intangibles and investment property, and decreased by adjustments for employee benefits and share‐based payments. Using data for 2002–2009, we find that absolute discretionary accruals were significantly higher under IFRS than under pre‐IFRS NZ GAAP, suggesting lower earnings quality under IFRS than under pre‐IFRS NZ GAAP. However, we find no significant differences in signed discretionary accruals and the ability of earnings to predict one‐year‐ahead cash flows between pre‐IFRS NZ GAAP and IFRS. These results are consistent across alternative measures of accruals quality, sample selection and whether firms elected to adopt IFRS in 2005 rather than comply with them in 2007.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

A Comparative International Analysis of the Impact of Accounting Principles on Profits: The USA versus the UK,Sweden and The Netherlands

This paper explores the extent to which there are material quantitative differences in profits reported under US GAAP compared to profits reported in accordance with generally accepted accounting principles in the UK, Sweden and the Netherlands. From an analysis of Form 20-F reports filed with the SEC in the USA, there is support for the hypothesis that UK GAAP are significantly less conservative than US GAAP. On the basis of a case study approach, it seems that Swedish GAAP tend to be more conservative than US GAAP, particularly when the transfers to reserves are analysed, but there is insufficient evidence to establish a systematic pattern. In the Netherlands, on the other hand, there is evidence to suggest that Dutch GAAP are at the less conservative end of the spectrum of financial reporting measurement practices, in a position relatively similar to that of UK GAAP, although again the evidence is insufficient to establish a systematic pattern.     

International financial reporting standards and experts' perceptions of disclosure quality

From 2005, over 7,000 listed firms in the European Union and many more around the world are required to adopt International Financial Reporting Standards (IFRS). The introduction of a uniform accounting regime is expected to ensure greater comparability and transparency of financial reporting around the world. However, recent research has questioned the quality of financial statements prepared under IFRS standards, particularly in the presence of weak enforcement mechanisms and adverse reporting incentives ( Ball et al. , 2003 ). In this paper, we assess the quality of the financial statements of Austrian, German and Swiss firms which have already adopted internationally recognized standards (IFRS or U.S. GAAP). The study makes use of available disclosure quality scores extracted from detailed analyses of annual reports by reputed accounting scholars ('experts'). This work complements other contemporary research on the quality of IFRS financial statements where the properties of earnings are used as an evaluation metric ( Barth et al. , 2005 ). Our evidence shows that disclosure quality has increased significantly under IFRS in the three European countries we analyse. This result holds not only for firms which have voluntarily adopted IFRS or U.S. GAAP, but also for firms which mandatorily adopted such standards in response to the requirements of specific stock market segments. Although we cannot establish direct causality due to the inherent self-selection issues for most of our sample firms, the evidence shows that the quality of financial reports has increased significantly with the adoption of IFRS.     

IAS Versus U.S. GAAP: Information Asymmetry–Based Evidence from Germany's New Market

Motivated by the debate about globally uniform accounting standards, this study investigates whether firms using U.S. generally accepted accounting principles (GAAP) vis‐à‐vis international accounting standards (IAS) exhibit differences in several proxies for information asymmetry. It exploits a unique setting in which the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and U.S. GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing requirements, market microstructure, and standards enforcement are held constant. In this setting, differences in the bid‐ask spread and share turnover between IAS and U.S. GAAP firms are statistically insignificant and economically small. Subsequent analyses of analysts' forecast dispersion, initial public offering underpricing, and firms' standard choices corroborate these findings. Thus, at least for New Market firms, the choice between IAS and U.S. GAAP appears to be of little consequence for information asymmetry and market liquidity. These findings do not support widespread claims that U.S. GAAP produce financial statements of higher informational quality than IAS.     

Product Costing and Inventory Accounting: A New Approach to an Old Problem

Traditional methods of accounting—including full-absorption accounting, labor and cost standards, overhead allocations, and variance analysis–can stand in the way of attempts by managers and others to improve their company's overall performance and the ability to compete globally. Many companies have recognized the need to shift the role of accounting toward higher-value, more strategic tasks, such as financial and operational analysis, tactical decision support, and even process improvement and reengineering. But the accounting tools at their disposal often prove inadequate. In fact, there is a core conflict between the need to provide accurate and consistent financial reports for external consumption–reports that comply in all respects with GAAP, Sarbanes-Oxley, SEC requirements, and the like–and the need for value-relevant and informative reports for internal management purposes.
The author proposes using multiple sets of financial reports, all deriving from a single, common database, to meet external reporting requirements while addressing the distortions and limitations of GAAP for internal purposes. In particular, he has developed a new approach called Value Added Accounting that eliminates the distortions of full-absorption accounting but that uses GAAP financial statements as its starting point. The article describes the key adjustments, presents a case study, and discusses how VAA aligns with Lean Manufacturing, Quick Response Manufacturing, Just-In-Time, and other common process improvement initiatives.     

Due Process and the Adoption of IFRS IN New Zealand

This paper reviews the decision to adopt IFRS in New Zealand and the subsequent decisions made on implementation of adoption. The emphasis of the review is on due process. The paper outlines the current regulatory structure for financial reporting in New Zealand, describes how the decision to adopt IFRS was made, and evaluates the due process followed in making the decision to adopt IFRS and in implementation of the decision. We conclude that the limited due process followed in making the decision to move to IFRS and in developing each New Zealand standard was adequate. However, the method adopted for converting international standards to New Zealand standards did not go through sufficient due process.     

Implications of the mandatory transition from national GAAP to IFRS — Empirical evidence from Germany

This paper analyses the differences between German GAAP and IFRS by quantifying the effects of the first-time adoption of IFRS of German companies in their reporting practices. Due to the IAS Regulation EC No.1606/2002, all publicly traded European companies (including those in Germany) are required to prepare their consolidated financial statements in accordance with IFRS for accounting periods beginning on or after January 1, 2005. This paper measures the effect of the transition from German GAAP to IFRS by using indices of comparability that were developed by Gray (1980). Therefore, the impact on equity and net income is quantified by examining the reconciliations of 103 German companies which had to adopt IFRS for their consolidated financial statements in 2005. On average a significant increase in stockholders' equity and in net income could be observed. The increase in stockholders' equity is primarily due to the adoption of IAS 11, IAS 16, IAS 37, IAS 38 and IFRS 3. Concerning net income, the increase especially results from the adoption of IFRS 3.     

The Impact of the FMA Guidelines on Non‐GAAP Earnings Disclosures

In 2012 the New Zealand Financial Markets Authority (FMA) introduced guidelines for the disclosure of non‐GAAP financial information. This study investigates the effect of those guidelines on New Zealand listed companies. The findings show that, despite not being mandatory, these guidelines are modifying corporate disclosure behaviour. Companies have improved the way in which they disclose non‐GAAP earnings information and there has been a reduction in the emphasis given to non‐GAAP earnings compared with the emphasis given to audited statutory profit. However, the study also highlights areas for improvement, including the depth of explanation of non‐GAAP earnings calculations and adjustments, and concern about multiple adjusted earnings figures to explain performance.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

Public mandates, market monitoring, and nonprofit financial disclosures

Public officials have recently sought increased regulation of financial disclosures from not-for-profit organizations as a means of improving accountability with the public. One objective of this study is to examine whether not-for-profit entities already subject to audit requirements submit financial reports in compliance with GAAP. Further, since the majority of not-for-profit organizations are not subject to public audit mandates, this study also ascertains whether other market actors such as donors monitor and demand accrual-based financial information. The empirical analyses indicate that not-for-profit organizations subject to public audit mandates are largely in compliance with GAAP, although a significant minority of organizations subject to state requirements is not; further analyses suggest that external oversight significantly influence the use of accrual reporting. Models are also tested on a subsample of not-for-profits that switched from cash to accrual reporting, with the results suggesting that increasing public and market oversight have a significant effect on the decision to switch methods. The overall results suggest that public and market actors demand accrual-based financial reporting from not-for-profit organizations.     

Changing from German GAAP to IFRS or US GAAP: A Survey of German Companies

Since 1993 an increasing number of listed German companies have been publishing their consolidated financial statements in accordance with either IFRS or US GAAP. In 1998 this was approved as a substitute for the consolidated German GAAP financial statements of listed companies (§292a HGB). Our study surveys the motives that led these companies to opt for international reporting systems (IFRS or US GAAP) rather than German GAAP and considers whether these objectives have been achieved. Rather surprisingly, we find that even though companies state that their overall expectations have been met to a satisfactory degree, a detailed analysis shows that several of the ex-ante objectives have not been achieved from an ex-post point of view. Additionally, we use logistic regression analysis to show that companies choosing IFRS rather than US GAAP and vice versa differ distinctly in the objectives they pursue with their choice of international GAAP.     

Disincentives to exchange customized local GAAP for IFRS

The global adoption of International Financial Reporting Standards (IFRS) resulted in the loss of local Generally Accepted Accounting Principles (GAAP). Some local GAAPs were tailored to capture the adopting jurisdictions' economic nuances, which IFRS may not address. One example is our setting, where, unlike IFRS, Canadian GAAP allowed the recognition of regulatory claims (i.e., assets and liabilities). Given this disparity, Canadian regulators granted rate-regulated entities the choice to opt out of Canada’s mandatory adoption of IFRS. Leveraging this unique setting, we test whether the loss of allowances under local GAAP is costly enough to deter companies from adopting IFRS. We find evidence that utilities with a history of capitalizing regulatory assets under Canadian GAAP are significantly less likely to adopt IFRS. This relation is more pronounced when a company has higher regulatory assets recognized under local GAAP, engages with the US capital markets, and has a high perceived cost of raising future capital. However, we find that the future cost of capital is lower for entities that adopt IFRS after historically capitalizing regulatory assets. Our results identify a new cost of adopting IFRS largely unexplored in the literature: the cost of losing jurisdictionally tailored accounting standards not included within IFRS.     

The Impact of Media Attention on the Use of Alternative Earnings Measures

The practice of reporting earnings measures that deviate from generally accepted accounting principles (non‐GAAP measures) has received negative attention in the media. In a period of increased regulatory concern for these reporting practices, we explore whether there has been a shift away from the use of non‐GAAP metrics. This study focuses on the Dutch situation, where regulators responded conservatively (‘light’) to the accounting scandals. This contrasts with the U.S., where regulators intervened with a radical (‘heavy’) reform of regulation. We analyse a sample of earnings press releases published in the period 2000–05 from companies listed at Euronext Amsterdam. Our findings indicate that Dutch companies report non‐GAAP measures frequently and prominently. However, companies' reporting behaviour changes after a peak in negative media attention for non‐GAAP reporting. The magnitude of the adjustments to GAAP earnings becomes smaller and companies seem to have different reasons to report non‐GAAP measures. The effect of the media attention is stronger when companies have been criticized for their non‐GAAP reporting in the press. Investors seem to have become more hesitant towards the use of non‐GAAP measures for their decision‐making after negative media attention. Together, these findings suggest that the negative media attention for non‐GAAP measures has influenced the decisions of investors and managers.     

The Information Contained in Reconciliations to Earnings Based on US Accounting Principles By Non-US Companies

To improve comparability of financial statements across countries, the US Securities and Exchange Commission (SEC) requires non-US registrants to either issue financial statements based on US Generally Accepted Accounting Principles (GAAP) or provide in their footnotes a reconciliation of their foreign accounts to their US GAAP counterparts. The New York Stock Exchange has requested the elimination of this requirement on the basis that it serves as a barrier to non-US companies that desire to enter the US market. The SEC maintains that the reconciliations provide important information to investors when assessing the value of a company's stock. This study investigates the information content claim made by the SEC. An event study methodology is utilised that measures the stock price reaction within a short window surrounding the SEC filing date of the firm's 20-F (analogous to the 10-K for US firms). A significantly positive correlation is documented between the stock price reaction and the change in the aggregate reconciliation. This result implies that US GAAP disclosures provide information to the market when the 20-F arrives at the SEC.     

An investigation of SEC “Speech GAAP”

This study investigates the financial reporting regulation effects of the Securities and Exchange Commission (SEC) staff comments made during the American Institute of Certified Public Accountants (AICPA) Annual Current SEC & Public Company Oversight Board (PCAOB) Developments Conference in Washington, D.C. (SEC Conference). At this conference, the SEC staff communicates its preferences about areas where it believes companies are misapplying GAAP (Generally Accepted Accounting Principles). We call this communication SEC Speech GAAP. One outcome of the SEC Conference may be that companies re-evaluate their previous financial reporting by restating their financial statements. We find, first, that firms with restatement issues similar to those covered at the SEC Conference experience a decrease in the association between earnings and future cash flows after the restatement. Second, we find little market reaction to the disclosure of restatements related to SEC Conference issues, but the disclosure of non-conference related restatement issues has a significantly negative affect on investors’ valuation decisions. Our findings suggest that SEC Speech GAAP is associated with financial statements that are less informative to investors and investors find the valuation consequences of restatements prompted by SEC Speech GAAP to be less important than the valuation consequences for restatements prompted for other reasons.     

Do accounting standards matter to financial analysts? An empirical analysis of the effect of cross-listing from different accounting standards regimes on analyst following and forecast error

This paper explores whether the effects of cross-listing on analyst following and forecast error differ among firms with different accounting standards. The results reveal a higher increase in the number of analysts for cross-listed firms that follow their home country's GAAP prior to cross-listing and reconcile or switch to IAS/US GAAP or UK GAAP after cross-listing, compared to those that adopt IAS or US GAAP prior to cross-listing. We find that firms that switch to IAS/US GAAP have a higher increase in analyst following after cross-listing compared to firms that reconcile to IAS/US GAAP. In addition, we find a higher increase in analyst following after cross-listing for firms from low-level accounting standards environments compared to firms from high-level accounting standards environments. Our results show evidence of an increase in the magnitude of analysts’ forecast error after cross-listing for firms that follow their home country's GAAP pre-cross-listing but reconcile post-cross-listing to IAS/US GAAP or UK GAAP. On the other hand, we report a decrease in forecast error for firms that switch to IAS/US GAAP.     

Attribute differences between U.S. GAAP and IFRS earnings: An exploratory study

In this study we explore attribute differences between U.S. GAAP and IFRS earnings. Our study is motivated by the ongoing harmonization process in accounting standard setting as well as by recent convergence projects by the FASB and the IASB. We test two market-based earnings attributes, i.e., value relevance and timeliness, as well as two accounting-based earnings attributes, i.e., predictability and accrual quality. These attributes are tested for German New Market firms as they are allowed to choose between IFRS and U.S. GAAP for financial reporting purposes. Overall, we find that U.S. GAAP and IFRS only differ with regard to predictive ability. The fact that U.S. GAAP accounting information outperforms IFRS also holds after controlling for differences in firm characteristics, such as size, leverage and the audit firm. However, our results also seem to suggest that these differences are not fully valued by investors, as we do not observe significant and consistent differences for the value-relevance attribute.