International Journal of Accounting, Auditing and Performance Evaluation (16 papers in press)
Do covenant violations affect audit report timeliness?
by Zane Swanson, Yinghong Zhang
Abstract: We investigate the impact of covenant violations on audit report timeliness. We argue that the existence of covenant violations might motivate clients or banks to seek waivers or renegotiations of current lending contracts. Otherwise, auditors might perform more audit tests before issuing audit opinions. Ultimately, auditors will increase the number of days to complete the audit. Our major findings are consistent with our prediction. In addition, we find that the presence of early covenant violations further increases audit delays. Our findings identify another factor affecting the audit report timeliness and one economic consequence of covenant violations.
Keywords: audit report timeliness; audit delay; audit report lag; covenant violation; technical default; private lending agreements.
Organisational cultures impact on management accounting and control practices in the United Arab Emirates
by Walaa ElKelish, Robert Rickards
Abstract: This paper investigates the impact of organisational culture on Management Accounting and Control (MAC) practices in the United Arab Emirates (UAE). Data were collected using a self-administered survey of companies, and multiple regression analysis (ordinary least squares) was employed to test the studys hypotheses. Empirical results show that internal organisational cultures characterised by high levels of adhocracy (adaptability) or low levels of hierarchy appear to be more conducive to the adoption of MAC practices. On the other hand, organisations with a more market-oriented culture seem to be less reliant on budgeting as a means for exerting management control. In addition, the service industry displays significant differences in its MAC practices relative to other sectors behaviour. This investigation thus yields new insights into the influences affecting implementation of MAC practices in the UAE, which may prove useful for researchers, corporate managers, and other stakeholders.
Keywords: management accounting; organisational culture; United Arab Emirates.
Earnings quality of Indonesian firms surrounding initial public offerings
by Yanthi Hutagaol-Martowidjojo, Felita Widyanto
Abstract: This research aims to examine the changes in earnings quality of Indonesian firms transitioning from private to public companies by examining accounting-based attributes of earnings; accrual quality, earnings persistence, and earnings predictability, before and after IPO. Accrual quality is assessed using the abnormal accrual model and the Dechow and Dichev (DD) model; earnings persistence and predictability are assessed through net income autoregressive model. Using 103 Indonesian non-finance IPO firms, this research concludes that earnings quality of IPO firms changed along with the alteration of their status from private to public firms. Post-IPO (after becoming public firms), the sample shows a higher quality of earnings in terms of accrual quality and earnings persistence increases after IPO. However, this research could not reject the hypothesis of decreasing post-IPO earnings predictability due to the nature of IPO firms.
Keywords: earnings quality; initial public offerings; accrual quality; earnings persistence; earnings predictability.
Agency costs, ownership structure and corporate governance mechanisms in Ghana
by Andrews Owusu, Charlie Weir
Abstract: This paper analyses the relationship between agency costs, ownership structure and corporate governance mechanisms in Ghana for the study period 2000-2009. Our results show that smaller board size and the presence of audit and remuneration committees decrease agency costs. We also find that higher managerial and institutional ownership reduces agency costs. However, duality and the proportion of non-executive directors on the board have no effect on agency costs, suggesting that not all board structure governance mechanisms are effective in mitigating agency costs. Interestingly, the non-board structure code recommendations, such as improved shareholder voting rights, the adoption of International Financial Reporting Standards and auditor quality, have also reduced agency costs. Overall, we find that the introduction of the Ghanaian Code played significant role in reducing agency costs.
Keywords: agency costs; corporate governance; ownership structure; Ghana.
An analysis of the firms-specific determinants influencing the voluntary IFRS adoption: evidence from Italian private firms
by Sonja Pichler, Michela Cordazzo, Paola Rossi
Abstract: The EU Regulation 1606/2002 enhances the financial statement comparability by requiring the IFRS mandatory application. In Italy, the implementation of EU regulation states that listed firms are required to prepare their financial statements in accordance with IFRS, then it is extended to private firms on a voluntary basis. The study aims to examine the influence of some firm-specific characteristics on voluntary IFRS adoption by analysing a selected sample of Italian private firms over 2006-2010. The results show that firms are more likely to adopt IFRS in their separate financial statements if there is the presence of ownership diffusion and a Big-4 along with greater profitability. Such adoption is not influenced by whether firms register a high level of capital intensity and leverage, and neither does it increase with the firm size or level of foreign sales. Our findings may also represent a primary approach to investigate whether IFRS adoption could be beneficial for SMEs, as a large proportion of sampled firms may be classified according to the EU definition of SME.
Keywords: voluntary IFRS adoption; firm-specific determinants; accounting choices; private firms; Italy.
The impact of equity share class on the information content of earnings and cash flows: Evidence from Mexico
by Jose Miranda-Lopez, Isho Tama-Sweet
Abstract: We investigate the relative and incremental information content of earnings and cash flows in Mexico. Mexico provides a unique setting to test this relation because firms are allowed to issue different classes of equity shares which appeal to different investors. Share classes differentiate between investors based on nation of origin (domestic vs. foreign), voting rights, and cash flow rights. We find that, for the market as a whole, both earnings and cash flows provide incremental information and earnings provide greater relative information. We also test these relations for each share class individually, and find that cash flows provide the greatest amount of information when investors are at the greatest risk of expropriation.
Keywords: information content; share class; cash flows; earnings; leverage; firm size; growth; Mexico.
Impact of IFRS adoption on firm efficiency: the case of Indian IT firms
by Sandhya Bhatia, Arindam Tripathy
Abstract: This study examines the impact of the transition from Generally Accepted Accounting Principles of Indian jurisdiction (IGAAP) to International Financial Reporting Standards (IFRS) on IT firms reported performance efficiencies that are measured through different types of efficiency of firms with the application of window analysis based on Data Envelopment Analysis (DEA). We find that IT firms, in general, are found to operate on increasing returns to scale (IRS) indicating thereby cost diaspora in their advantage while raising the scale of production. Such a situation favours Indian IT firms to compete vigorously in the global market. Our statistical analysis also provides enough evidence that relative gross, technical and scale efficiencies of the firms remain relatively unchanged with a switching of accounting standards from IGAAP to IFRS. The findings of the study add to our understanding of transition issue from Indian jurisdiction that is exclusive in many aspects from various developed and developing economies of the world. The semblance of impact on the reported relative performance efficiencies of the competing firms indicates the resemblances of accounting procedures that are being used under both standards in measuring the accounting amounts. It implies that firms would face fewer transitory hurdles whenever mandatory adoption of IFRS is imposed.
Keywords: International Financial Reporting Standards; Indian Generally Accepted Accounting Standards; data envelopment analysis; gross efficiency; technical and scale efficiencies.
Excess audit committee compensation and audit pricing
by Rachana Kalelkar, Sarfraz Khan, Sung-Jin Park
Abstract: In this study, we explore audit pricing decisions in the presence of excess audit committee compensation. Specifically, we examine whether excess compensation of audit committee members is related to audit fees. We find that excess compensation is positively associated with audit fees. We further examine whether the excess compensation affects auditors pricing of earnings manipulation, and find evidence suggesting that auditors perceive earnings manipulation risk relatively low when the audit committee members are paid excess compensation. Overall, our results support the notion that audit committee excess compensation represents greater monitoring over a firms financial reporting process, which affects auditors' risk assessment.
Keywords: audit committee; compensation; audit fees.
A review of the concept and measures of audit quality across three decades of research
by Tânia Menezes Montenegro, Filomena Brás
Abstract: This study provides a comprehensive literature review of audit quality and it explores three decades of audit research (1980 to 2010). The DeFond and Zhang (2014) framework is used to present and discuss several perspectives on the concept and measures of audit quality, its inherent limitations and main strengths, adding a USA versus international studies comparative approach. The study is of interest to students, academic researchers, practitioners, standard setters/regulators and all those interested in understanding audit quality, from a USA versus international perspective.
Keywords: audit quality; audit quality definition; audit quality dimensions; audit quality proxies; audit quality indicators.
Unintended consequences of Big 4 auditor office-Level industry specialisation
by Sharad Asthana, Rachana Kalelkar, K.K. Raman
Abstract: The Big 4 audit firms currently dominate the US audit market. We investigate whether the extent of a Big 4 local offices dependence on industry specialist clients impacts audit effort/earnings quality for the offices specialist as well as non-specialist clients. Our findings suggest that greater dependence on specialist clients is associated with higher audit effort/earnings quality for specialist clients and also lower audit effort/earnings quality for the offices non-specialist clients. Notably, litigation risk is not a confounding explanation for our findings, i.e., our results are not the outcome of the local office purposefully managing its specialist/non-specialist client portfolio as its dependence on specialist clients increases. Our results hold when we propensity-match specialist and non-specialist clients to control for client characteristics as a possible confounding explanation. Collectively, our findings suggest that greaterrndependence on specialist clients is associated with greater audit effort/quality for specialist clients but also relative neglect of the local offices non-specialist clients. Our study is important because it (1) contributes to prior research that is largely silent on whether cross-sectional variations in reputation for industry-expertise are associated with variations in audit quality (DeFond and Zhang 2014), and (2) suggests that it would be appropriate for PCAOB inspectors to focus on non-specialist clients at audit offices with greater dependence on specialist clients as an area representing higher risk of lower audit effort/quality.
Keywords: Big 4; industry specialisation; non-specialist clients; PCAOB risk-based inspections; audit effort; earnings quality.
The value of a voluntary audit in debt financing: evidence from small privately held companies
by Sanna Tervo, Annukka Jokipii
Abstract: This study examines the effects of voluntary audits on the quality of financial information and the cost of debt in small privately held companies using a sample of 5254 observations spanning 20072012. Prior studies (see Blackwell et al., 1998; Minnis, 2011; Kim et al., 2011) suggest that audited firms have a significantly lower cost of debt. In contrast to prior studies, our archival evidence shows that firms opting for a voluntary audit pay a slightly higher interest rate on their debt than do the unaudited firms among the set examined. This result is however supported by Niemi et al. (2012) who found that having a voluntary audit is positively associated with financial distress, and by Dedman et al. (2014) who found that riskier companies are more likely to purchase voluntary audits.
Keywords: audit quality; voluntary audit; cost of debt; financial distress; financial statement; discretionary accruals; financial information; reliability; privately held companies; Finland.
Chief audit executives' perceptions of drivers of moral courage: Tunisian evidence
by Imen Khalil, Khaled Hussainey, Hedi Noubbigh
Abstract: A string of accounting-related scandals has revealed key shortcomings in internal auditor truthfulness. These scandals have led researchers, professional organisations and institutions to question causes of internal auditor silence and the failure of ethical guidelines. This study responds to these questions by revealing moral courage as the missing ingredient in internal auditor ethical instruction and as the tool needed for internal auditors to preserve their integrity and overcome their fears. Building on what is currently known of internal auditors and moral courage, this study sheds light on professional and ethical requirements placed on internal auditors to tell the truth, and it emphasises the role of moral courage in guiding their ethical behaviour. It also considers what must be known about the development of moral courage among internal auditors and seeks to identify the factors that promote internal auditors moral courage through 30 structured interviews with chief audit executives.
Keywords: internal auditor; management fraud; fear; silence; moral courage; ethical behaviour; telling the truth; Tunisia.
Public perception of the role of accounting in a transition economy: the case of Russia
by Galina Preobragenskaya, Robert McGee, Iliya Komarev
Abstract: This paper explores the perceived role of accounting in Russia, a country transitioning from a post-socialist to a market economy. A survey was conducted to examine the public views on (1) the main functions of accounting, (2) the primary role of users of financial statements, (3) the level of demand for financial information, (4) the perceived financial statements reliability, and (5) the importance of reliable financial information. Our results show that the Russian accounting system can be classified as macro-user oriented. Although accounting is perceived to serve chiefly management needs, the main purposes of financial reporting are perceived to be tax calculation and compliance with government reporting requirements, and the primary users of financial statements are supposed to be business owners and government. The public feels that financial statements lack reliability, and companies manage earnings downwards. The study identifies potential reasons for misreporting. The financial reporting reliability is perceived to have greater impact on the countrys economy than on the person.
Keywords: financial reporting; Russia; transition economy; opinion survey; performance evaluation; people perceptions; society; accounting.
Value relevance of earnings and book value in India: significance of accounting regulation reforms and intangible-intensity in an emerging market
by Pooja Kumari, Chandra Sekhar Mishra
Abstract: The study investigates the value relevance of earnings and book value on the Bombay stock exchange over 21 years of accounting regulation reforms in India from 1995 to 2015. In developed markets, accounting information has lost its relevance owing to the shift in economies from tangible to intangible intensity. However, the relevance of accounting information in emerging market increases with the improvements in accounting regulation and market environment. Thus, we also examined the effects of both accounting regulation reforms and intangible intensity on the relevance of earnings and book value in an emerging market. Results indicate that the relevance of the combined and incremental value of both earning and book value is increased with the improvements in accounting regulation reforms in India. Furthermore, the intangible intensity is positively (negatively) significant to explain the change in the incremental explanatory power of earnings (book value).
Keywords: accounting information; value relevance; emerging market; accounting regulation reforms; intangible intensity.
The impacts of multiple large ownership structure on board independence
by Ismail Adelopo, Olumuyiwa Yinusa
Abstract: The determinants of the composition of corporate boards remain inconclusive. This study investigates the impacts of multiple large ownership structure on board independence for a sample of UK listed companies. Using multiple regression analyses, and controlling for endogeneity, the study shows that the larger the difference in shareholding between the first and second largest owners, the less independent is the board. Monitoring efficiency is enhanced the higher the ratio of the shareholding of the second largest shareholder relative to the shareholding of the first largest shareholder. These findings have significant implications for board monitoring and corporate governance regulations.
Keywords: multiple large ownership structure; corporate governance; board independence.
Effect of aggregate, mandatory, and voluntary disclosure on firm performance in developing markets: the case of Kuwait
by Issa Dawd, Lanouar Charfeddine
Abstract: This paper examines the relationship between corporate disclosure and firm performance for the case of listed companies in the Kuwait stock exchanges (KSE). Our sample contains 51 non-financial firms that represent 42% of the total number of listed companies in Kuwait. The empirical results show that, while the linear relationship between aggregate, mandatory, and voluntary disclosure and firm performance is not significant, we found strong evidence for a nonlinear relationship between the disclosure types and firm performance proxies. Specifically, we found strong evidence of a U-shaped relationship between corporate disclosure and firm performance. Moreover, we found that the relationship between disclosure and firm performance is not governed by the firm-size variable.
Keywords: mandatory disclosure; voluntary disclosure; firm performance; Kuwait; disclosure index; regression analysis.