An examination of anonymous and non-anonymous fraud reporting channels

Interest in the role of the reporting channel on whistleblowing has been fostered by the passage of the Sarbanes-Oxley Act of 2002, which requires that audit committees of public companies establish and oversee an anonymous reporting channel for questionable accounting or auditing matters. But only limited information exists as to the likely effectiveness of such a channel as compared to a non-anonymous channel. The purpose of our paper is to report the results of an experimental study examining participants' intentions to report fraud using anonymous and non-anonymous reporting channels given information about the outcomes from a previous non-anonymous whistleblowing incident. The experiment manipulates the outcomes to both the previous whistleblower and to the transgressor. We find that while negative outcomes from the perspective of a previous non-anonymous whistleblower (either the occurrence of retaliation against that person or no negative repercussions to the previous transgressor) lowered participants' non-anonymous reporting intentions, these negative outcomes did not decrease participants' anonymous reporting intentions. But when, no such negative outcomes from the previous whistleblower's perspective have occurred, our participants' reporting intentions did not differ between the anonymous and non-anonymous channels.     

The Impact of IFRS Adoption on an Agribusiness Company's Financial Statements

This fictional case is based on a Canadian public company that produces greenhouse vegetables. Focusing on the differences between International Financial Reporting Standards (IFRS) and Canadian Accounting Standards for Private Enterprises (ASPE), this case provides students an opportunity to (1) apply IFRS in a real world setting; (2) prepare and reconcile financial statements under ASPE and IFRS; (3) analyze the impact of IFRS adoption on key financial ratios; and (4) detect and explain differences in financial statements under ASPE and IFRS through common size analysis.     

Is Polaris a HOG? A Case Study*

The main usefulness of a general purpose financial statement centers on its comparability to the financials produced by an entity's competition. This case works for both undergraduate and graduate students because it offers comparisons between two well known recreation industry companies. Financial statement analysis is a lesson which serves as an appropriate capstone to financial accounting education. Analyzing the financial statements of competing entities explains “why” accountants must implement the intricate “how” which produces the statements and the resulting decision models such as ratios and common‐sized statements. Compared to previous generations, current students will be more responsible for managing their own retirement funds. This case can help students start to appreciate investment analysis by providing enough detail for any level student to conduct financial statement evaluations that make comparisons to find successful fundamental business strategies.     

The State of the Public Corporation: Not So Much an Eclipse as an Evolution

By some measures, the U.S. public corporation appears to be in the midst of a significant decline, as Michael Jensen predicted 25 years ago in a Harvard Business Review article called “The Eclipse of the Public Corporation.” Based on an analysis of ten industries during the 48‐year period from 1966 through the end of 2013, the author reports a 60% drop in the number of publicly traded U.S. companies, as measured from each of the industry peaks to the end of 2013. Mergers and acquisitions, together with the private‐equity transactions hailed by Jensen in his 1989 HBR article, have contributed significantly to this reduction in numbers. But so has the remarkable growth of “uncorporate” (or pass‐through) structures such as Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs), both of which address governance as well as tax problems faced by public C‐corporations. But along with this drop in numbers, the author's analysis of the performance of U.S. public companies—as measured both by operating returns on equity and Tobin's Q ratios—also shows a growing separation of the “best” from the “rest” over time. Intense global product market competition, the growing benefits (and urgency) of achieving efficient scope and scale, high U.S. corporate income tax rates, and a vigorous market for corporate control are all significantly “thinning the herd” of public corporations. The “winners” have been emerging as larger, more efficient, and more influential enterprises than ever before, as the rise of massive U.S. multinationals (and, in countries outside the U.S., state‐owned enterprises) over the past two decades has increasingly blurred the line between private business and government. Viewed in this light, the overall trends, both in the U.S. and abroad, suggest an evolution rather than an eclipse of the public corporation. Such trends also suggest that over the next 25 years, the success of the public corporation will increasingly depend on issues such as its ability to resolve conflicts between controlling shareholders (including sovereign governments) and minority shareholders, regulatory (in particular, antitrust) policy, and the role (and investment horizons) of activist shareholders.     

Know your industry: the implications of using static GICS classifications in financial research

Researchers commonly use industry classifications as a means of identifying peer companies to use as a performance benchmark. We describe the structure of commonly used sources of industry classification data available for Australian listed companies, both static and in time series. Next, we run a series of experiments matching firms according to GICS classification data presented in time series versus static data sources. Our results indicate that performance measures are better specified when matching on GICS data from a dynamic relative to a static source. The results of our power tests also underscore the importance of using dynamic industry data.     

Transparency,Value Creation,and Financial Crises

This article reports the findings of the authors' recent study of the impact of the level of corporate transparency on shareholder value creation during periods of financial crisis. Their sample consists of the companies comprising Spain's IBEX 35 stock index during the ten‐year period 2000–2010. The study uses three different measures of earnings management (EM) as inverse indicators of the quality of disclosure and carries out fixed effects regressions that adjust for firm and industry characteristics, two periods of financial crises, and the passage of time. The main findings of the study are that (1) companies with lower disclosure quality have generated less value for their shareholders over long time periods and that (2) the shareholders of companies that were more aggressive in managing their earnings experienced greater wealth destruction during the two financial crises of the last decade. Given the still unfolding impact of the recent global financial crisis, as reflected in the current debt crisis in Western European countries, the authors' study reinforces the importance of the current debate over the benefits and costs of increasing the regulation of financial markets, especially in the areas of transparency and disclosure requirements.     

Introducing XBRL through a financial statement analysis project

In this project, we introduce business and accounting students to the application of eXtensible Business Reporting Language (XBRL) through the use of interactive data. Students study the basic concepts and potential benefits of interactive data and XBRL. Students learn to extract the financial reports of two companies in the same industry. Then, using traditional financial analysis techniques (ratio analysis) students can compare the performance of these companies. Thus, the project accomplishes two important objectives: it introduces students to the benefits and features of XBRL-tagged financial reporting and interactive data, and it shows how this medium can be used to facilitate the analysis of financial statements. The project uses free, publicly available interactive data tools to accomplish these objectives.This project is appropriate for any level of financial accounting course in which students use public company financial statements to generate financial ratios and conduct analysis on them. We aim the project at MBA-type introductory accounting courses. In addition, we show how it can easily be expanded to be applied to higher level financial statement analysis courses, both at the undergraduate and graduate levels. The project provides some background into how XBRL-tagged financial reporting is generated, while the main focus is on application of interactive data and not the technology itself. Since XBRL is now mandated by the US Securities and Exchange Commission (SEC) for most reporting entities, it is critical for today’s business students to be familiar with this method of communicating financial information.     

Cross-border venture capital performance: Evidence from China

This paper investigates the determinants of cross-border venture capital (VC) performance in the Chinese VC market. We focus on the impact of foreign VC firms' (VCs') human capital and domestic entrepreneurs' experience on the performance of both VC investments and portfolio companies using logit and Cox hazard models. After controlling for portfolio company quality, domestic VC industry development, domestic exit conditions and a number of other factors, little correlation was evident between VC performance and foreign VCs' human capital, such as experience, networks and reputation. In contrast, the domestic entrepreneurs' experience is crucial to VC performance. In particular, if an entrepreneur has more general experience in terms of the number of companies previously worked for or more special experience in terms of the number of companies previously served as a CEO or top manager, a portfolio company is more likely to pull off a successful exit through IPO or M&A, and the VCs are also likely to shorten their investment duration in the portfolio company.     

Interactive data and retail investor decision‐making: an experimental study

The results of an experimental study of retail investors' use of eXtensible Business Reporting Language tagged (interactive) data and PDF format for making investment decisions are reported. The main finding is that data format made no difference to participants' ability to locate and integrate information from statement footnotes to improve investment decisions. Interactive data were perceived by participants as quick and ‘accurate’, but it failed to facilitate the identification of the adjustment needed to make the ratios accurate for comparison. An important implication is that regulators and software designers should work to reduce user reliance on the comparability of ratios generated automatically using interactive data.     

A Preliminary Analysis of SASB Reporting: Disclosure Topics,Financial Relevance,and the Financial Intensity of ESG Materiality

At the end of 2018, the Sustainability Accounting Standards Board (SASB) released its corporate reporting standards for material environment, social, and governance (ESG) issues. These SASB standards are analogous to FASB's but deal with ESG activities that help the companies create value over the long term and have been endorsed by large asset management firms such as BlackRock. The authors analyze the quality of ESG reporting by the 91 companies that adopted SASB's framework. While the number of such companies is still small, their results are encouraging, an indication of better things to come. Using three measures of effectiveness, Disclosure Topic Compliance Index (DTCI), Financial Relevance Compliance Index (FRCI), and Financial Intensity Compliance Index (FICI), the authors found that most companies are doing a good to very good job of reporting and companies tend to focus on measures with the highest financial relevance. Scores on these three measures were similar across industry sectors except for a few cases where the DTCI score is low. They presented cases of three SASB standard companies: 1) Sunrun, a residential solar panel company that uses some hazardous materials, 2) Suncor, an integrated oil and gas company, and 3) Target, a retail company in a highly competitive industry needing to keep costs low while also managing an extensive supply chain responsibly. These 91 companies have demonstrated that reporting according to SASB standards can be done well. This success should encourage other companies to follow and the authors offer a seven‐step process to adopt SASB standards.     

INSOLVENCY PREDICTION IN THE PRESENCE OF DATA INCONSISTENCIES

In this paper we use data inconsistencies as an indicator of financial distress. Traditional models for insolvency prediction normally ignore inconsistent data, either by removing or replacing it. Instead of removing that information, we propose a new variable to capture it; using it together with traditional accounting variables (based on financial ratios) for the purpose of insolvency prediction. Computational tests use three datasets based on the financial results of 2033 Brazilian Health Maintenance Organizations over 7 years (2001 to 2007). Sixteen classification methods were used to evaluate whether or not the new variable impacted solvency prediction. Tests show a statistically significant improvement in classification accuracy – average results improve 1.3 (p = 0.003) and 1.8 (p = 0.006) percentage points, for 10‐fold and leave‐one‐out cross‐validations respectively. In addition, the analysis of false positives and false negatives shows that the new variable reduces the potentially harmful misclassification of false negatives (i.e. financially distressed companies being classified as financially healthy) and also reduces the estimated overall error rate. Regarding the extensibility of the results, even though this work uses data from Brazilian companies only, the calculation of the financial ratios variables, as well as the inconsistencies, could be extended to most companies worldwide subject to governmental accounting regulations aligned with the International Financial Reporting Standards. Copyright © 2014 John Wiley & Sons, Ltd.     

Artisan Flowers Inc.: A Framework‐Based Approach to IFRS Leasing Standards

Artisan Flowers Inc.'s (AFI) business is centered on importing and selling cut flowers. The company has entered into a number of lease transactions that have the president of AFI perplexed with their accounting treatment and implications. Now, the audit firm needs to explain to AFI's president the appropriate treatment and implications of these lease transactions using current IFRS (IAS 17) and (optionally) the 2013 Lease Exposure Draft. The purpose of this case is for students to gain an understanding and appreciation of the intricacies of IAS 17 as well as the proposed Lease Exposure Draft and the implication of these standards on debt covenants. Students are asked for an explanation of the conceptual basis for the standards and for an analysis of the impact of the standards on AFI's statement of financial position.     

Noteworthy diversity efforts and financial performance: Evidence from DiversityInc's top 50

This study provides evidence that diversity efforts are associated with improved organizational performance. We explore the benefits of diversity by analyzing long-term shareholder value (Tobin's q) and short-term performance (return on assets) of companies cited for being leaders in the area of diversity. Tobin's q is significantly higher for companies included on the DiversityInc Top 50 list than other companies, implying that diversity efforts increase long-term shareholder value. Companies on a DiversityInc list also have significantly better short-term financial performance, return on assets, than similar companies in their industry. We also conduct a Granger causation analysis, and the results are consistent with our interpretation that appearance on the DiversityInc list increases Tobin's q. Our study contributes to the literature by comparing companies notably recognized for diversity efforts to companies not recognized, and examining the long-term benefits of those efforts.     

Measuring What Matters: Industry Specificity Helps Companies and Investors Gain Traction on Sustainability

Financial analysts interpret the performance of companies and their securities through an industry lens. Just as an industry approach is critical in financial analysis, it's also critical in helping investors evaluate sustainability performance, since sustainability issues differ from one industry to the next—in large because of differences in how companies use natural and other social resources when bringing their goods and services to market, and how they impact society and the environment in the process. The Sustainability Accounting Standards Board (SASB) was created in 2012 to deliver a full set of sustainability accounting standards that can be used to guide industry‐specific corporate sustainability disclosure to the capital markets. SASB has now issued provisional standards for 79 industries, thereby enabling companies and investors for the first time to identify patterns of sustainability risks and opportunities both across and within industries. Although high‐level issues such as climate change, product safety, and resource intensity and scarcity have material impacts across a variety of sectors, those impacts often vary greatly from one industry to the next. Thus, although the risk may be ubiquitous, it is also differentiated to the point that each industry has its own distinct sustainability profile. Understanding these unique profiles can help companies better manage the issues that are most likely to present material risks to their industries.     

Depreciation in the Canadian Airline Industry

This case is designed to help students enhance their analytical skills and link accounting policy choices with corporate strategy. Written initially for MBA students and senior analysts attending executive education sessions, it provides participants with 1) industry background for the Canadian airline sector, and 2) historical and selected financial and non‐financial information from the annual reports and initial public offering documents of three players in this industry. Participants are invited to reflect on the theoretical and practical reasons underlying the choice of a depreciation method by airline companies, to find ways to quantitatively compare companies that use different depreciation methods, and to link these policy choices to possible strategic considerations. This case is based on a unique situation prevailing in 2009 where financial information was available for all three airlines which were using different approaches for aircraft depreciation.     

Capital Structure Instability

This article summarizes the evidence from the authors’ recent study published in the Journal of Finance that documented the extent of the variation in the capital structures of individual public companies over long time horizons. It also reports the results of an exploratory investigation into the sources of variation over time in leverage ratios—an investigation that included case analyses of leverage instability at 24 U.S. companies that were included in the Dow Jones Industrial Average at some point in their histories. The main finding of the authors’ study is that substantial instability in leverage has been the norm at publicly held nonfinancial companies. “Episodic” cases of leverage stability were observed from time to time, but they were the exception, not the rule. Such cases almost always involved companies with low leverage ratios, and they invariably proved to be short‐lived, rarely exceeding a decade or two. Leverage was found to be “sticky” during periods lasting just a few years, but a company's currently high (or low) leverage became an increasingly poor predictor of whether its future leverage would be high (or low) as the amount of time between leverage observations lengthened. When attempting to explain companyspecific changes in leverage after extended periods of stability, the authors found a strong connection with company expansion and investment. At the same time, they found no systematic relations between company‐specific leverage changes and changes in industry leverage, company profitability, or other determinants of leverage that have been emphasized in previous academic studies. The authors' case analyses reinforced their finding that capital structure changes were often linked to the funding of company expansions, but such changes were also sometimes designed to support established payout policies while preserving financing flexibility.     

An efficient graph-based peer selection method for financial statements

Comparing companies can be useful for various purposes. Despite the widespread use of industry classification systems as a peer selection standard, these have been criticized for various reasons. Financial statements, however, offer a promising alternative to such classification systems. They are standardized, widely available, and offer deep insights into the nature of the company. In this paper, we present a graph distance metric for financial statements using the earth mover's distance. When using the distance metric on real-world tasks such as peer identification and industry classification, it shows promising results in terms of accuracy and computational efficiency.     

Competition and Cooperation among Exchanges: Effects on Corporate Cross‐Listing Decisions and Listing Standards

In recent years, many European companies have listed on the New York Stock Exchange (NYSE), and companies from emerging market countries such as Israel, China, and India have listed not only on the NYSE, but on various other American and European exchanges such as the Nasdaq and the London Stock Exchange (LSE). At the same time, growing competition among exchanges has led to consolidation of the industry through mergers and alliances. In this article, the authors explore the main factors in corporate listing decisions as well as the expected effects on listing standards of both the growing competition and the recent wave of alliances and mergers among exchanges. When choosing an exchange, corporate issuers are likely to consider the listing requirements and reputations of the exchanges, as well as the sophistication of investors who trade on those exchanges and the extent of their knowledge of the firm's industry and business. As a general rule, value‐maximizing companies can be expected to list on the most reputable exchange they can, but may also choose listings (in some cases, dual or multiple listings) on less reputable (typically local) exchanges with more investors who are familiar with the issuer's industry or products. When setting their listing standards, publicly traded exchanges devote considerable attention to finding the optimal listing and disclosure standards, and may consider adjusting them to changes in circumstances. The setting and enforcement of the appropriate listing standards are the main determinant of an exchange's reputation, which in turn determines the kinds of companies that will choose to list on it. Exchanges with the highest listing standards and reputations are likely to work hard to maintain them, while exchanges with lesser reputations will seek to carve out niches by making opportunistic use of lower (though not too low) listing standards while possibly seeking alliances or mergers. But if less reputable exchanges use their lower listing standards (and fees) as a means of competing for listings with other exchanges, this will not necessarily lead to a “race to the bottom” in listing standards. Moreover, a merger between two exchanges is likely to result in a higher listing standard for the combined exchange than for (at least one of) the pre‐merger exchanges.     

Ultimate ownership and control in Russia

I investigate ultimate control and ownership patterns in Russian publicly traded companies. I show that these companies are controlled either by the state or by anonymous private owners. Federal and regional governments’ control is exercised through extensive use of pyramids. Private owners widely exploit legal loopholes that allow them to mask their holdings and identities through nominee and foreign offshore arrangements. The comparison of formal and informal ownership disclosure reveals that the typical anonymous owners are insiders and that in virtually all cases the market participants “know” who the real owners are. Collectively, the evidence suggests that the legal weaknesses in disclosure requirements are important determinants of country-specific ownership and control structures.     

Evidence from German Companies of Effects of Corporate Risk Management on Capital Structure Decisions

The author investigates the interaction between risk management and capital structure among publicly listed German companies. By surveying executives at these companies, she computes a risk management score for each company indicating the extent of risk management practices. The scores reflect not only the companies' use of derivatives and “at‐risk” ratios, but also the respondents' assessments of how well risk management has been integrated into existing corporate processes. Some results, though not all, are consistent with finance theory. Most important, companies with more extensive risk management activities have higher debt ratios and lower interest coverage ratios. At the same time, such companies also exhibit lower volatility of cash flow, sales, EBIT, and net income, which helps explain their ability to service more debt. And, finally, companies with more extensive—and, according to their responding executives, more effective—risk management also tend to be larger, have longer debt maturities, lower average costs of debt, and have more tangible assets.