Balance sheet conservatism and audit reporting conservatism

Financial reports are prepared on a going‐concern (GC) basis rather than a liquidation basis even when companies are highly distressed. This allows distressed companies to report book values of assets that greatly exceed their liquidation values, implying a lack of conservatism in the balance sheet. We argue that auditors issue going‐concern opinions in order to warn investors about this lack of balance sheet conservatism. This argument leads to two testable hypotheses. First, for companies that are at risk of bankruptcy, auditors are more likely to issue GC opinions when the book values of assets under the GC assumption are high relative to the expected liquidation values of assets (i.e., when the GC assumption causes the balance sheet to lack conservatism). Second, for companies that enter bankruptcy, the issuance of a prior GC opinion has predictive information content with respect to the wedge between the book values of assets and the future liquidation values of those same assets. Our results strongly support both hypotheses. The findings are important because they indicate that conservative audit reporting helps to compensate for a lack of conservatism in the balance sheet, which arises because the GC assumption permits the book values of assets to exceed their liquidation values.     

Regulating Audit beyond the Crisis: A Critical Discussion of the EU Green Paper

With the European Commission making global leadership claims in the field of audit regulation, the content of its 2010 Green Paper on ‘Audit Policy: Lessons from the Crisis’ warrants careful scrutiny. Important issues raised in the Green Paper include regulatory oversight, competition in the audit market, the dangers of having very few firms with the capacity to audit global transnational corporations, professional judgement, innovative audit practices and, last but not least, social responsibility. This article analyses the principal perspectives and assumptions underpinning the construction of the Green Paper. The aims are threefold: to enhance understanding of the contemporary regulatory mindset of the European Commission, contribute to policy debate and inspire future research.     

The adoption of blockchain technology in the financial sector during the era of fourth industrial revolution: a moderated mediated model

Quality & Quantity - Blockchain technology is considered a core technology in the financial sector with promising prospects like economic development, financial innovation, and internet...     

Estimation risk and auditor conservatism

Estimation risk occurs when individuals form beliefs about parameters that are unknown. We examine how auditors respond to the estimation risk that arises when they form beliefs about the likelihood of client bankruptcy. We argue that auditors are likely to become more conservative when facing higher estimation risk because they are risk-averse. We find that estimation risk is of first-order importance in explaining auditor behavior. In particular, auditors are more likely to issue going-concern opinions, are more likely to resign, and charge higher audit fees when the standard errors surrounding the point estimates of bankruptcy are larger. To our knowledge, this is the first study to quantify estimation risk using the variance-covariance matrix of coefficient estimates taken from a statistical prediction model.     

Overconfidence and Corporate Tax Policy

Review of Accounting Studies - Using a sample of firms experiencing exogenous CEO departures, we investigate whether firms with overconfident CEOs avoid more tax. We find robust evidence of a...     

Bank accounting conservatism and bank loan pricing

This paper studies the effects of bank accounting conservatism on the pricing of syndicated bank loans. We provide evidence that banks timelier in loss recognition charge higher spreads. We go onto consider what happens to the relationship between spreads and timeliness in loss recognition during the financial crisis. During the crisis, banks timelier in loss recognition increase their spreads to a lesser extent than banks less timely in loss recognition. These findings are broadly consistent with the argument that conditional accounting conservatism serves a governance role. The policy implication is that banks timelier in loss recognition exhibit more prudent and less pro-cyclical loan pricing behaviour.     

Negative accounting earnings and gross domestic product

Review of Accounting Studies - Konchitchki and Patatoukas Journal of Accounting and Economics 57 (1-2), 76–88, (2014a) show that aggregate accounting earnings growth predicts future nominal...     

Heritage Tourism in Rural Areas: Challenges for Improving Socio-economic Impacts

Many developing countries seek to utilize cultural heritage sites as resources for socio-economic development through heritage tourism. When rural area is the context of heritage tourism, effort is needed to establish linkages between tourism and the local economy by addressing the following issues: lack of skilled human resources, capital, access to credits, and other assistance; leakages; and dominance of urban players. This paper examines the impacts of heritage tourism on rural livelihoods using Borobudur in Central Java, Indonesia, as the case study. Further, it proposes rural industry promotion as one of the ways to establishing better linkages to tourism.     

Managing heritage tourism in Toraja: strengthening local values and improving tourists’ experiences

Toraja, South Sulawesi, Indonesia, is a tourist destination known best for its ethnicity and was one of the main tourist destinations in Indonesia during the 1990s. Since 2011, the government has again designated Toraja a priority strategic tourism area in its national tourism development plan. This case study describes opportunities for, and issues associated with, heritage tourism in Toraja and explores community perspectives on tourism. The fieldwork data and secondary data were used in preparing the detailed plan for the National Tourism Strategic Area of Toraja (KSPN Toraja). The opportunities for heritage tourism in Toraja include, among others, an emerging Asian market, better transport access to the region, and central government resources and programs to complement those of the local government. The core issues of local community concern include the need to conserve Torajan heritage and to strengthen local values; develop and nurture culture alongside tourism; balance heritage conservation with tourism; and the need for better interpretation to convey local wisdom to enhance the visitor experience.