A CRITIQUE ON THE CLASSIFICATION OF CONTEMPORARY ACCOUNTING: TOWARDS A POLITICAL ECONOMY OF CLASSIFICATION—THE SEARCH FOR OWNERSHIP

This paper is a critique on contemporary accounting¹classification studies. It suggests that such studies have thus far provided an inadequate assessment of and explanation for extant international contemporary accounting diversity. This paper locates the discussion within a neo Marxian political economy, and explores how notions of structure and hierarchy central to the institutional traditions of economic liberalism and the social priorities of capital have increasingly invaded the classification and understanding of contemporary accounting diversity. It contends that such classification studies are a product of capitalist desires to import and assimilate increasingly distant realms of business life into the capital@8alabour value relation/contemporary accounting@8icapital relation. Furthermore, this paper suggests that such classification studies fail to recognise the impact of such social, political and economic arrangements as they are increasingly reupholstered and redistributed by the changing priorities of capital, resulting in a limited appreciation of the constitutive power of capital and its influence on contemporary accounting.     

CRITICAL COMMENTARYCHANGED RULES THEORY AND THE EVOLUTION OF ACCOUNTANCY — A COMMENT

In a recent article Birkin @9pet al. @2p(1997) proposed that Changed Rules Theory should provide the appropriate inner logic to drive accounting, in lieu of Social Darwinism. In this comment I take issue with the dichotomy between Darwinism and Changed Rules Theory. I show that both of Changed Rules Theory and Darwinism, when correctly presented, lead to the perspectives the authors recommend.     

AN INVESTIGATION OF AUSTRALIAN AUDITORS’ USE OF THE MANAGEMENT REPRESENTATION LETTER

Auditors’ use of the management representation letter has assumed renewed significance because Australian, UK, US and International auditing guidelines recommending that auditors obtain appropriate representations from management have now been adopted as standards. Results from this exploratory survey confirmed that auditors’ use of the representation letter to obtain audit evidence was generally consistent with the professional guidance, but two anomalies were noted. First, one-third of respondent auditors did not use the letter to provide sole audit evidence. Comments from some auditors indicated doubt about the legal acceptability of such evidence. While past litigation might justify such caution, auditors should consider whether it is efficient to neglect the use of the management representation letter to provide primary audit evidence. Second, there was evidence that some auditors use management representations as sole audit evidence when other appropriate audit evidence is available. This suggests the need to inform these auditors about the danger of over-reliance on management representations. Finally, results showed that most auditors use the representation letter to inform management of their responsibilities. This informative use is consistent with professional guidance and with the corporate governance literature that recommends clarifying management’s understanding of their responsibilities and enhancing management’s sense of accountability. This informative use is most important to auditors belonging to smaller audit firms, and suggests that these firms’ clients have greater information needs.     

CAPITAL AND FINANCIAL ACCOUNTING: A COMMENTARY ON BRYER'S “A MARXIST CRITIQUE OF THE FASB'S CONCEPTUAL FRAMEWORK”1

Bryer (1999) reiterates criticisms of the “balance-sheet” approach underlying the FASB's conceptual framework as failing either to explain or guide the development of financial accounting practice, and aims to demonstrate how operational and objective principles of financial accounting can be derived from Marx's labour theory of “surplus-value”. However, the potentially conflicting objectives of “Marxist” accountings remain unresolved, and Bryer's attempted derivation of accounting rules for individual business enterprises appears to misunderstand the rationale of Marx's detailed examination of the circuits of capital in Parts One and Two of Volume II of @9pCapital@2p and to offer no critical foundation for Praxis. It is argued here that the focus of a critical Marxist accounting would more appropriately shift to recognising the extraction of surplus-value from labour and its addition to the value of inventory during the process of production (rather than reporting profit as the result of sale). However, the practical application of such a principle would still require the use of convention-based allocations at least as arbitrary as those of conventional financial accounting and, more fundamentally, such a change of accounting principle could not in itself be sufficient to “force the secret of profit making” under the capitalist mode of production. The accounting would still be consistent with both Marxist and neoclassical economic theories of the nature of capitalism. Bryer's approach to deriving Marxist accounting rules cannot help us to understand the problematic nature of the power of modern financial accounting.     

EARNINGS NEWS AND MARKET RISK: IS THE MAGNITUDE OF THE POSTEARNINGS ANNOUNCEMENT DRIFT UNDERESTIMATED?

Postearnings announcement drift is the tendency for cumulative abnormal returns to drift in the direction of earnings surprise after the earnings news is released. I show that a standard approach to measuring abnormal returns by using preannouncement estimates of market risk (betas) causes the magnitude of this phenomenon to be significantly underestimated. I find that stock beta tends to rise (fall) following the release of bad (good) earnings news. In addition, I find that by not taking into account postannouncement shifts in betas, prior studies are likely to have underestimated the magnitude of the drift. My results are robust to different model specifications, as well as to different earnings surprise measures.     

THE ASSOCIATION BETWEEN ANALYSTS’ FORECAST REVISIONS AND EARNINGS COMPONENTS: THE EVIDENCE OF FRS 3

This study examines whether the earnings components as required by FRS 3 help UK analysts to predict firms’ earnings changes by investigating the statistical association between analysts’ forecast revisions and firms’ unexpected earnings components. I find that analysts’ forecast revisions made in different time horizons are consistently associated with unexpected earnings components as required by FRS 3. UK analysts are able to incorporate current-year unexpected earnings components into their current and future earnings forecasts even before firms officially release this information. However, empirical results also show that current-year unexpected earnings components are not fully incorporated into analysts’ forecasts of future earnings. Analysts appear to wait for more information releases regarding firms’ future earnings and delay their revisions of future earnings forecasts. This is consistent with the evidence that the cumulative revisions of current earnings forecasts are generally associated with prior-year unexpected earnings components, and the association appears to be stronger as time progresses. Overall, this study provides evidence suggesting that the earnings components as required by FRS 3 help UK analysts to identify firms’ permanent and transitory earnings changes over different forecast horizons. This study also provides strong evidence supporting the informativeness of earnings components for analysts’ forecasts and the information set perspective of FRS 3 that highlights the importance of earnings components in predicting a reporting entity’s future performance.     

CRITICAL COMMENTARY: A RESPONSE TO COMMENTS MADE REGARDING “CHANGED RULES THEORY AND THE EVOLUTION OF ACCOUNTANCY”

Birkin @9pet al@2p. (1997) applied new arguments about the evolution of life on this planet to the evolution of accountancy and derived prospects from these new arguments. The arguments were based on discoveries made in the Burgess Shale as reported and explicated by Gould (1991). In particular, the Birkin @9pet al@2p. (1997) paper indicated that the use made of Social Darwinism within accountancy was incorrect according to these new arguments about evolution. The comments made regarding this paper claimed that Social Darwinism and the new arguments about evolution were not incompatible, that several errors of attribution were made and that the Birkin @9pet al@2p. (1997) paper failed to show that Darwin's theory of natural selection was incorrect. This response reveals how those comments were based on a misreading of the Birkin @9pet al@2p. (1997) paper and a misinterpretation of the fossil evidence of the Burgess Shale.     

THE EMERGENCE OF DISCOUNTED CASH FLOW ANALYSIS IN THE TYNESIDE COAL INDUSTRY c.1700–1820

The paper examines the origins of discounted cash flow analysis (DCF) in the Tyneside coal industry and explains its sudden adoption around 1801. It finds that a complex series of circumstances were involved, but that in terms of the catalysts, the prime motivation was economic. DCF was a specific wealth-maximization response to the economic conditions of the day. Second, there is the question of the utility of accounting in the British Industrial Revolution which has been variously denigrated or rehabilitated by researchers. The adoption of DCF is a clear case of accounting and engineering technologies combining to facilitate the exploitation of deep coal reserves, where accounting acted as a determinant of industrial expansion. Finally, the paper finds that the DCF valuation method of the early viewers (mining engineers/managers) was still being applied in the British coal industry in the modern era, suggesting that for one major industry at least, the absorption of DCF within the domain of modern accounting practice was primarily a question of tradition and not just an educational innovation of the 1960s.     

DOES PRIVATIZATION FOSTER CHANGES IN THE QUALITY OF LEGAL INSTITUTIONS?

We analyze the effect of privatization on the quality of legal institutions of governance. Our findings suggest that large-scale privatization (in terms of progress and volume) increases the risk of corruption in developing countries but has no effect on the legal institutions of governance (i.e., law and order and investor protection). The method of privatization (public share issues versus private sales) helps curb corruption and improve the quality of law enforcement and of investor protection. In developed countries, the progress and volume of privatization reduce the risk of corruption, and the method of privatization enhances the quality of law enforcement.     

THE FUTURE OF STATE INSURANCE REGULATION: CAN IT SURVIVE?

Abstract: As Congress continues to debate the future of financial services affiliations, state insurance regulators are faced with blurred lines of regulatory authority and the opportunity of federal banking regulators to preempt their decisions and their enforcement of consumer protection statutes. This article attempts to remind readers of the history and significance of state insurance regulation and provide clear evidence of its continued importance in the future of the conglomerated financial services marketplace.     

WHAT HAPPENED TO THE WILLINGNESS OF COMPANIES TO INVEST AFTER THE FINANCIAL CRISIS? EVIDENCE FROM LATIN AMERICAN COUNTRIES

In this article we investigate the changes in corporate investment dynamics in the aftermath of the global financial crisis. Using firm-level data from six Latin American countries from 2002 to 2015, we show that firms are less constrained and have greater ability to invest after the crisis. However, the willingness of firms to invest optimally is reduced. This is supported by strong evidence that during the postcrisis period investment–cash flow sensitivity disappears, investment-q sensitivity increases, and the estimated speeds of adjustment for target investment decrease. Moreover, after the crisis, firms notably increase their efforts to attain optimal cash and leverage levels. Our analysis implies that firms may not always be willing to invest optimally. The willingness to invest optimally appears to be time variant and moves together with the dynamics of cash and leverage policies, albeit in opposite directions.     

DOES SPEED MATTER? THE ROLE OF HIGH-FREQUENCY TRADING FOR ORDER BOOK RESILIENCY

We analyze limit order book resiliency following liquidity shocks initiated by large market orders. Based on a unique data set, we investigate whether high-frequency traders are involved in replenishing the order book. Therefore, we relate the net liquidity provision of high-frequency traders, algorithmic traders, and human traders around these market impact events to order book resiliency. Although all groups of traders react, our results show that only high-frequency traders reduce the spread within the first seconds after the market impact event. Order book depth replenishment, however, takes significantly longer and is mainly accomplished by human traders’ liquidity provision.     

THE INTRA-INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.     

Family firm research——A review

This article reviews family firm studies in the finance and accounting literature,primarily those conducted using data from the United States and China. Family owners have unique features such as concentrated ownership, long investment horizon, and reputation concerns. Given the distinguishing features of family ownership and control, family firms face unique agency conflicts. We discuss the agency problems in family firms and review the findings of recent family firm studies. We call for more research to understand the unique family effects and encourage more research on Chinese family firms.Part I of the article discusses the fundaments of family firms: the prevalence of and the agency conflicts within family firms. Part II summarizes the findings of recent U.S. family firm studies. It reviews the evidence on the family firm premium(how, which, and when family firms are associated with a valuation premium), the manifestation of the agency conflict between majority and minority shareholders in family firms, earnings quality and corporate disclosure, and the determinants of family ownership and control. Part III discusses the prevalence and characteristics of Chinese family firms and reviews the findings of related studies. The article concludes with some suggestions for future research.     

AUDITORS’ RECOGNITION AND DISCLOSURE MATERIALITY THRESHOLDS: THEIR MAGNITUDE AND THE EFFECTS OF INDUSTRY

Materiality thresholds are the dividing line between material and immaterial information. Recognition materiality thresholds are the dividing line between what is recorded and what is not recorded in the accounts. Disclosure materiality thresholds are the dividing line between what is separately disclosed in the financial statements and what is not separately disclosed. Auditors materiality thresholds are important because they have a significant influence on what information is recorded in the accounts and disclosed in financial statements and hence available for decision making by external parties. However, there are no research findings about recognition thresholds, and those in relation to disclosure thresholds show a lack of consensus. Hence the motivation for this research. The objective of the research is to study auditors’ recognition and disclosure thresholds within the context of industry, which is divided into the industry of the firm and the industry specialization (experience) of the auditor. The results of the study show that: (1) Recognition thresholds are significantly lower than disclosure thresholds. (2) The mean thresholds are 5·7% (recognition) and 8·7% (disclosure). These are in the 5% to 10% guideline provided by Australian accounting standards. (3) The thresholds appear to vary with industry market risk. (4) Auditors appear to use the thresholds from the industry in which they specialize, in an industry in which they do not specialize. The paper discusses the implications of these findings.     

THE CHINESE NATIONAL WHO SURFS THE SEA OF FINANCE IN ASIA——The Cover Personage incarnates the elegant Chinese national as the first Ranking Vice President of the ADB,famous economist and Financier active in the international financial arena

Lin Zexu,a patriot,thinker and national hero,who served as Governor for Hu Guang and Governor for Liang Guang and in other positions in Qing Dynasty,composed a couplet for self-motivation."Vast is the sea which embraces flows from millions of rivers;and upright is the precipice which rises single-mindedly to the zenith."He encouraged himself by this couplet to be magnanimous,receptive,and upright and to be a man of unbending principle.This is a motto which Jin Liqun has followed the first day he took office in Asian Development Bank (ADB),to guide his work and the way he conducts himself in this community.He practices in accordance with this principle as he carries out the mandate of this multilateral financial institution.Jin Liqun has won the accolade that he is