CEO pay ratios and financial reporting quality

We address the Dodd Frank Act controversy about the usefulness of the CEO pay ratio to investors by investigating the relationship between that ratio and financial quality, measured by the level of discretionary accruals and the likelihood of restating previously issued financial statements. We test two conflicting explanations of pay disparity: (1) competition for CEO talent and (2) managerial rent-seeking. Though we find that the unconditional relationship between the CEO pay ratio and financial quality is negative, the sign of this relationship is sensitive to CEO power and competence. Our findings suggest that the pay ratio does shed light on the fairness of compensation structures.     

CFO gender and financial reporting transparency in banks

We investigate the effect of CFO gender on the timeliness of loan loss provision (LLP) reporting using a large sample of US banks from 2007 to 2016. Our findings show that women CFOs are associated with timelier forward-looking provisioning than men counterparts, suggesting that they follow a more transparent approach to financial reporting policies. Our results hold under different model specifications, including the use of bank and CEO fixed effects. We further address endogeneity concerns by showing that the timeliness of LLP reporting improves significantly for banks experiencing a man-followed-by-woman CFO transition. Overall, our study supports the notion that women CFOs are associated with higher financial reporting transparency and provides further insights into how CFO gender affects risk-aversion and ethics in banks, with wider implications about the importance of women’s representation in the finance-based industry.     

Derivative accounting and financial reporting quality: A review of the literature

The financial crisis of 2008 increased the call for standard setters and financial regulators to review the effectiveness of derivative regulation in improving financial reporting quality. Prior literature defines financial reporting quality as the extent to which financial statements provide information that is useful to investors and creditors in their investment decisions (Schipper, 2003; Schipper & Vincent, 2003). This review summarizes the empirical evidence regarding the effectiveness of derivative regulation in achieving its stated objective. Extant literature shows that although derivative regulations have improved information provided to investors, there is still room for improvement. Recommendations from this stream of literature suggest that the Financial Accounting Standards Board (FASB) require managers to provide more complete, transparent, and forward-looking disclosures surrounding their derivative positions (Campbell, 2015; Franco-Wong, 2000). This review may be useful to standard setters, practitioners, and accounting academics by providing a synthesis of extant academic literature on the effectiveness of current derivative regulation. As the FASB and International Accounting Standards Board (IASB) continue to expand derivative accounting rules, this review may also be useful in identifying areas for future academic research.     

The effect of financial reporting quality on CEO compensation structure: Evidence from accounting comparability

This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.     

Directors skill and financial reporting quality

Motivated by theoretical models in economics which show that there is matching between CEO skill and firm size, we introduce a new measure of director skill which is based on the aggregate size of firms on which the director serves as an independent director. We validate our measure by showing that it is positively associated with director experience, financial expertise, industry expertise and managerial experience. We then examine whether our average measure of skill across board members is positively associated with monitoring quality. Controlling for the endogenous relationships between board composition and financial reporting quality, we find a positive association between our board measure for skill and monitoring quality, and we show that directors have a causal impact on monitoring effort and outcomes. Furthermore, consistent with the enhanced monitoring provided by skilled directors, we document a positive association between the level of and changes in our measure and firm value.     

徐和谊:CEO与CFO相处之道

翻遍管理教科书,都无法找到标准的CEO与CFO成功相处之道。的确,没有可套用的模式,因为,这是一门艺术。熟悉中国汽车行业的人,无人不知徐和谊这个名字。徐和谊现任北京汽车集团有限公司(以下简称"北汽     

IAS/IFRS and financial reporting quality: Lessons from the European experience

This paper discusses the effects of the adoption of IAS/IFRS in Europe on the quality of financial reporting. In doing so, it adopts the perspective of stock market investors and focuses on value-relevance research. The adoption of IAS/IFRS in Europe is an example of accounting standardization among countries with different institutional frameworks and enforcement rules. This allows investigating whether, and to what extent, accounting regulation per se can affect the quality of financial reporting and leads to convergence in financial reporting. This is a key issue for standard setting purposes as IAS/IFRS have been adopted in very diverse countries all over the world, and many others are likely to adopt them in the near future.     

Innovation,financial reporting quality,and audit quality

We examine the relation between innovation and financial reporting quality (FRQ) and the implications of audit quality for this relation. We first document a negative relation between innovation and FRQ. This result is consistent with greater earnings management at higher innovation firms, likely because of the more opaque information environment that gives managers the opportunity to act opportunistically. We then examine whether audit quality moderates the observed negative relation between innovation and FRQ because audit quality constrains managers’ opportunities to manage earnings. We find results consistent with the predicted moderating effect. Lastly, we verify that these findings hold in a difference-in-differences test designed around an exogenous event, state R&D tax credits.     

Risk reporting quality: implications of academic research for financial reporting policy

In this paper, I survey empirical research on the relevance of firms’ financial report information for the evaluation of their risk. I recommend that financial reporting policymakers require or encourage firms to enhance their risk reporting quality in four ways. First, firms should report comprehensive income statements that: (1) use fair value or a similarly information-rich accounting measurement attribute and (2) separate the components of comprehensive income that are primarily driven by variation in cash flows from those that are primarily driven by variation in costs of capital. Such comprehensive income statements would provide users of financial reports with the flexibility to calculate alternative summary accounting numbers and to perform different types of risk assessment analyses. Second, firms should conduct and disclose the results of back-tests of prior significant accrual estimates, indicating any identified trends in and drivers of revisions to those estimates, and describing the effects of those revisions on current or future summary accounting numbers. Third, firms should aggregate and present risk disclosures in tabular or other well-structured formats that promote the usability of the information. Identifying existing best disclosure practices and encouraging new best practices are the most natural way to do this. Fourth, for model-dependent risk disclosures, firms should disclose the primary historical and forward-looking attributes of the models and their implementation in practice, sensitivity of the model outputs, and benchmarking of the models to standard portfolios of exposures.     

Top executive gender diversity and financial reporting quality

We examine whether gender diversity of chief executive and chief financial officers (CEOs and CFOs) is associated with financial reporting quality. The CEOs and CFOs of publicly traded companies are both required to certify the appropriateness of their financial statements and annual disclosures. We argue that gender diverse dyads (groups) of executives can bring different perspectives and professional skepticism to financial reporting. Using a sample of different CEO/CFO gender dyads during 2006–2019, we postulate and find evidence of higher accruals quality among firms led by gender-diverse dyads compared to accruals quality reported by firms led by all-male CEO/CFO pairs. Additional analyses reveal that the auditors of firms with gender-diverse executive dyads issue audit reports later, charge higher audit fees, and are more likely to be one of the Big 4 firms. These findings support the view that top executive gender diversity enhances financial reporting quality, which has important implications for corporate governance mechanisms.     

Busy auditors,financial reporting timeliness and quality

We investigate whether audit partners with multiple clients are able to complete their audits in a timely fashion, an important but largely unexplored area of academic research. One view is that having multiple clients increases the knowledge and experience of the audit partner resulting in a more efficient and therefore, quicker audit. On the other hand, having multiple clients may over-burden an audit partner resulting in a slower audit process and longer completion times. We find that audit partners with multiple clients take longer to complete their annual audit. More importantly, we also find that companies with busy auditors who take longer to complete their audits also have poorer levels of financial reporting quality. Additionally, in terms of consequences for busy auditors, firms with lengthy audit report lag switched their auditors the next year suggesting that busy audit partners may lose clients if their workload is excessive and they are not able to maintain audit quality. Our results are robust to alternative measures for both audit report lag and audit partner busyness and a range of endogeneity tests. We also undertake simultaneous quantile regression to assess changes in audit report lag depending on the number of audit clients per partner where we find preliminary evidence of a knowledge spill-over effect. Consequently, our results have implications for companies, audit firms, regulators and other key stakeholders.     

CEO/CFO turnover and subsequent remediation of information technology material weaknesses

Adding to prior research on internal control material weaknesses (ICMW), our study investigates whether information technology material weaknesses (ITMWs) are associated with CEO/CFO turnover, and whether their turnover will promote subsequent remediation. We find that disclosures of ITMW are positively associated with CEO/CFO turnover; however, only CEO turnover promotes subsequent remediation. Our findings on ITMW are different from the prior findings on ICMW – aligned with prior research on ICMW, ITMWs are associated with CEO/CFO turnover; however, unlike prior research on ICMW suggests, dismissals of CFOs do not promote subsequent remediation of ITMW. Thus, future research should consider ICMW and ITMW separately in the examination of their consequences and remediation.     

Chief financial officer demographic characteristics and fraudulent financial reporting in China

We investigate whether management's cognitions, values and perceptions are associated with fraud for 18 863 firm‐years for Chinese listed firms from 2000 to 2014. Demographic characteristics of the chief financial officer (CFO) are used as proxies for management's cognitions, values and perceptions. We find that fraudulent financial reporting is higher when CFOs are younger, male, and have lower education backgrounds. An analysis of inflated earnings, fictitious assets, material omissions and other material misstatements provide similar results, with the exception that CFOs with higher education levels are associated with more inflated earnings.     

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.     

Overconfidence and tax avoidance: The role of CEO and CFO interaction

We investigate how overconfident CEOs and CFOs may interact to influence firms’ tax avoidance. We adopt an equity measure to capture overconfident CEOs and CFOs and utilize multiple measures to identify companies’ tax-avoidance activities. We document that CFOs, as CEOs’ business partners, play an important role in facilitating and executing overconfident CEOs’ decisions in regard to tax avoidance. Specifically, we find that companies are more likely to engage in tax-avoidance activities when they have both overconfident CEOs and overconfident CFOs, compared with companies that have other combinations of CEO/CFO overconfidence (e.g., an overconfident CEO with a non-overconfident CFO), which is consistent with the False Consensus Effect Theory. Our study helps investors, regulators, and policymakers understand companies’ decision-making processes with regard to tax avoidance.     

FRC intervention,financial reporting quality and due diligence

This study provides evidence of the relationship between government intervention, financial reporting quality and due diligence. Specifically, the authors examine the consequences of the disclosure of inspection reports by the Financial Reporting Council (FRC) for individual audit firms inspected in the UK. Using a difference-in-differences design, it is found that clients are more likely to receive qualified audit opinions during the post-disclosure period. This significant impact on reporting decisions is more concentrated among clients of small audit firms. Moreover, despite general efficiency during the sample period, clients affected by an FRC intervention experience longer delays in receiving their audit reports. Overall, this study contributes to literature on corporate governance and audit regulation, and has implications for policy making. FRC inspections are of greater concern to small audit firms than large firms, as the latter have already built a strong reputation. In general, the transparent inspection process may be beneficial in enhancing auditor oversight.     

CEO与CFO的矛盾探源

做好了进医院,做不好进法院,顶得住的站不住,站得住的顶不住,这类浅白却富有辩证色彩的语言道尽了职场中CFO的尴尬处境。也从一个侧面表现出企业CEO与CFO的矛盾境地。     

Non-audit services and financial reporting quality: evidence from 1978 to 1980

We provide evidence on the long-standing concern about the potential conflicts of interest of auditors that provide clients with non-audit services using rarely explored non-audit services fee data from 1978 to 1980. In this setting, we find evidence of improved earnings quality when auditors provide non-audit services, especially those related to information services. This is consistent with better audit quality resulting from knowledge spillovers in the joint offering of audit and consulting services. Events related to the 1982 repeal of mandatory non-audit services disclosures are associated with a small positive stock price reaction, suggesting that the disclosure repeal has no adverse economic consequences. Furthermore, following the repeal we find no change in the earnings quality of client firms. In sum, our data suggest that non-audit services offered by audit firms can be associated with improved audit and reporting quality in client firms via auditors’ reputational incentives, synergies, and knowledge transfers.     

Regulatory incentives and financial reporting quality in public healthcare organisations

English National Health Service Foundation Trusts are subject to a regulatory regime in which the level of monitoring and intervention is determined by performance against two key performance metrics: a ‘financial risk rating’, based on a number of performance metrics, such as the reported surplus margin and return on assets, and a ‘prudential borrowing limit’. In this paper, we investigate the variation in financial reporting quality, proxied by discretionary accruals, with the incentives introduced by this regime. We find: first, that discretionary accruals are managed to report small surpluses; second, that, consistent with the avoidance of regulatory intervention in both the short and medium term, discretionary accruals are more positive when pre-managed performance is below intervention triggering thresholds and more negative when well above threshold; third, that, despite a move away from financial breakeven as the primary performance objective, there remains an aversion to small loss reporting. We further find that the level of discretionary accruals is driven by two metrics of strategic significance: the surplus margin (a measure of retained earnings) and the prudential borrowing limit (a measure of borrowing capacity).     

Female tainted directors,financial reporting quality and audit fees

This paper examines the association between the presence of female tainted directors on corporate boards and audit committees and (1) financial reporting quality and (2) audit fees. Female tainted directors are defined as female directors who have been directors of the firms that have previously been involved in financial failures and integrity indiscretions. Using real earnings management and audit fees as proxies for effective governance and board reputation, we find that firms with female tainted directors have higher real earnings management and higher audit fees. However, since prior literature has demonstrated that audit fees are higher for firms with female directors because female directors demand better auditing, we corroborate a supply-side effect of auditors charging higher audit fees when female tainted directors exist. We demonstrate this by showing that while there is an association between audit fee and real earnings management, this association is higher for firms with female tainted directors. Arguably, the governance and reputational benefits of female directors on boards are negated if such directors have tarnished professional reputations.