International Journal of Accounting, Auditing and Performance Evaluation (22 papers in press)
Do managers increase tax disclosure when corporate tax avoidance is high?
by Victor Barros, João Neves
Abstract: This paper aims to assess whether firms increase tax disclosure when the level of tax avoidance is higher. The paper proposes a new index based on hand-collected data from annual reports of firms listed on eight European stock exchanges, which made it possible to distinguish between mandatory and voluntary tax disclosures. The empirical results show that firms engaged in greater tax avoidance disclose more mandatory information regarding income tax, while they do not disclose voluntary tax-related information when corporate tax avoidance increases. Our results also highlight that IAS 12 does not inhibit firms from following different disclosure practices as significant variability among countries was found. Stricter lookup tables may shape the variability in tax disclosures and may also limit tax avoidance practices to influence disclosure of mandatory information regarding income tax.
Keywords: corporate tax avoidance; disclosure; voluntary disclosures; corporate transparency.
An analysis of corporate social responsibility within the Big Four accountancy firms in the UK: has there been continuous improvement?
by Emma Lister, Kieran James, Abeer Hassan
Abstract: This article explores the current Corporate Social Responsibility (CSR) strategies and disclosures by each of the Big Four accountancy firms in the UK. It investigates four main themes (diversity and equal opportunity, social impact, education, environment and wellbeing). The study introduces the new perspectives of legitimacy theory (symbolic vs substantive). Content analysis was used to categorise and analyse trends in the firms CSR programmes implemented and disclosed from 2014-2016. Information from the firms CSR activities was obtained through annual reports, transparency/impact reports, sustainability reports, and webpages collectively. The results show an improvement in disclosure for one particular area, where influencers were identified as needing legitimacy, with external events considered as a potential factor. Recommendations are made, including potential solutions to the current issues associated with CSR reporting by the four firms. Our results support the substantive form of legitimacy theory.
Keywords: accounting industry; Big Four; corporate social responsibility; CSR disclosure; disclosure policies; legitimacy theory.
A digital divide and its determinants: leaders and laggards in the digitalisation of Finnish accounting firms
by Kati Pajunen, Jani Saastamoinen, Helen Reijonen, Helena Sjögrén, Pasi Syrjä
Abstract: This study explores factors that influence the adoption of digital accounting. The literature suggests that perceived benefits, organisational readiness and external pressures promote the adoption of technical innovations. Using a mixed-methods approach, we combine interviews and a survey to test this theory. Exploratory factor analysis of a survey of Finnish accounting firms results in five factors. These are (1) attitudes and perceived benefits representing the thoughts that digitalisation improves working efficiency and opens up new business opportunities to accounting firms, (2) lack of competence indicating a perception that a firm lacks required competence, (3) investment in operations development, which relates to a firms development of new services, (4) lack of customer pressure, which indicates that customers do not demand digital accounting services, and (5) keeping up with digitalisation, which relates to a perceived importance of digitalisation.
Keywords: digital accounting; innovation; perceived benefits; organizational readiness; external pressures; attitudes.
Do financial analysts care about FCPA violations?
by Apostolos Ballas, Efthimios Demirakos
Abstract: In this paper, we examine 12,954 equity research reports for 24 firms that are subject to enforcement actions by the US Securities and Exchange Commission (SEC) for violations of the Foreign Corrupt Practices Act (FCPA). We search the text of the equity research reports for a number of FCPA-related keywords and identify 1079 reports in which an analyst considers the SEC investigation an important issue. Our multivariate empirical analysis shows that financial analysts are more likely to be interested in incidents of FCPA violations if the fines imposed on the firms by the SEC, DOJ (Department of Justice), and other US agencies represent substantial components of their revenues, operating income, and market capitalisation. We also find that the interest of financial analysts in these cases increases when the subject firms are relatively small with poor profitability. We offer illustrative examples of how financial analysts actually refer to the FCPA violations in their equity research reports. We believe that this study contributes to the relevant literature by highlighting the importance and implications of the FCPA statute for capital market participants.
Keywords: Foreign Corrupt Practices Act; Securities and Exchange Commission; bribery; financial analysts; equity research reports.
Who is responsible for developing the non-core skills of entry-level public sector trainee auditors? The case of the Auditor-General South Africa
by Fortunate Mashabela, Barry Ackers
Abstract: Within the context of rising levels of corruption, financial mismanagement, fraud, and irregular, fruitless and wasteful expenditure in the South African public sector, as well as high profile audit failures, this paper investigates the employment readiness of recent auditing graduates, with particular emphasis on their non-core skill proficiency. The observations are based on a survey of respondents involved in appointing and training aspiring chartered accountants at the Auditor-General South Africa. Aspirant auditors graduating from the South African Institute of Chartered Accountants (SAICA) accredited universities lacked the necessary non-core skills of entry-level trainee auditors at expected levels of proficiency, necessitating additional training interventions. However, universities should not be solely responsible for developing all the skills of competent public sector auditors. Instead, an integrated and collaborative effort by the key stakeholders in the auditing profession is required. These parties include universities, audit firms and professional bodies and the students themselves, as well as other parties such as regulators. Despite extant studies examining the employment readiness of auditing graduates, this is one of the first that specifically focuses on the phenomenon within the public sector.
Keywords: Auditor-General South Africa; chartered accountant; entry-level trainee auditor; non-core skills; pervasive skills; public sector.
Accrual accounting earnings around zero in Greek municipalities: the relevance of political factors
by Sandra Cohen, Ioanna Malkogianni
Abstract: This paper provides empirical evidence that Greek municipalities report small surpluses or zero earnings and that there is a statistically significant political effect related to this attitude. The analysis is based on the annual financial data of Greek municipalities for the period 2011-2017. The final sample includes 1417 annual observations. Based on the public choice theory, it is attempted to associate earnings management behaviour with political incentives and to uncover possible reasons that may induce it. By using the method of bootstrap kernel density estimation (bKDE) the hypothesis that municipalities tend to report earnings close to zero is supported. The findings suggest that core political factors, such as the oppositions strength and the mayors re-election, exert an effect on the appearance of discontinuities around zero reported earnings, contributing to the knowledge regarding earnings management. Sensitivity analysis confirms this political effect.
Keywords: bootstrap kernel density estimation; earnings management; Greek municipalities; opposition; re-elected mayors.
Disclosure of forward-looking information: does overlapping audit committee membership matter?
by Hidaya Al Lawati, Khaled Hussainey
Abstract: We examine whether overlapping audit committee (AC) membership affects the forward-looking content of the chairman reports. We use content analysis to measure levels of forward-looking disclosure (FLD) for 48 bank-year observations from eight banks listed on Muscat Securities Market in Oman for the period 2014-2019. Our regression analysis shows that overlapping AC membership positively affects FLD. The evidence from this study suggests that a consideration of AC directors attributes (e.g. overcommitted AC members) is needed to understand their role in the boardroom or in the subcommittees. An implication of the result is that the Omani corporate governance code should provide guidelines on the type and proportion of the overlapping AC membership. Furthermore, the code could encourage AC members to be overlapped across different committees as this could have a positive impact on corporate disclosure practice. Our study has demonstrated, for the first time, that overlapped AC members enhance the forward-looking content of chairman reports.
Keywords: overlapping audit committee membership; forward-looking disclosure; chairman reports; content analysis; Oman.
Changes in the value relevance of energy industries accounting information: the impact of the shale revolution
by Gee Jung Kwon
Abstract: This study investigates the value-relevant factors of companies in the global energy industry from the point of view of accounting information, and investigates how the value relevance of accounting factors is changing as a result of the shale revolution that began in 2012. The empirical analysis of this study shows that the value relevance of R&D expenditures has declined dramatically since 2012, when shale gas extraction began in the USA. It also shows that in the energy industry, operating cash flow and company size are not important value-related factors in increasing corporate value. Conversely, operating income is the most important value-relevant variable for corporate value since 2010. The results also suggest that accounting information from the energy equipment and services industry group are more useful than information about firms in the oil gas consumable fuel industry. This study shows that there is a change in the value relevance of firm value variables in the energy industry after the shale revolution. The study are expected to be useful for investors and stakeholders in making investment decisions in the global energy industry.
Keywords: shale revolution; value relevance; accounting information; energy industry.
The impact of ownership structure and corporate governance on capital structure decisions in the UAE
by Mohammed Elgammal, Basil Al-Najjar
Abstract: This paper expands the capital structure literature by investigating how ownership shareholdings and corporate governance influence the capital structure decisions within an emerging market context, namely the United Arab Emirates (UAE). Our sample includes firms listed in both Abu Dhabi and Dubai Stock Exchanges for the period from 2008 to 2019. The UAE market is interesting because of the scarcity of research on the capital structure choices within this context. We employ panel models as well as the Two Stages Least Squares (2SLS) technique. Our results show that board structure has a negative effect on capital structure decisions. We also detect a positive impact of institutional ownership and managerial ownership on capital structure, while government ownership is inversely related to capital structure. Finally, we report that profitability negatively affects capital structure. Thus, we argue that the main determinants of capital structure reported in the developed markets literature do hold in the UAE settings. Accordingly, this study contributes to previous studies in the capital structure context and adds to its puzzle by introducing new insights into the capital structure choice in a free tax environment.
Keywords: capital structure; ownership structure; corporate governance; panel data; UAE.
The challenges of implementing enterprise risk management: a study of manufacturing companies in the Tehran Stock Exchange
by Soghra Fasihi, Seyed Ali Hosseini, Nelson Waweru, Ali Rahmani
Abstract: Implementing enterprise risk management (ERM) is one of the important solutions in reducing the uncertainty and survival of companies. The ERM is very important owing to the varying conditions of Iran's business environment as well as the role of manufacturing companies in its prosperity and economic growth. Therefore, the present study aims to explore the challenges of implementing ERM in the manufacturing companies listed in the Tehran Stock Exchange. In the present study, semi-structured interviews with the experts in the field of ERM among selected Iranian manufacturing companies and other ERM experts in the pharmaceutical, automotive, and petrochemical industries are used. The identified challenges related to implementing ERM include intra-organisational and extra-organisational challenges. Intra-organisational challenges include risk governance, risk culture, enterprise risk management process, and infrastructures. Besides, extra-organisational challenges include the role of government and policymakers, political and economic conditions, international restrictions, and the lack of a competitive environment (exclusiveness).
Keywords: enterprise risk management; Iranian manufacturing companies; contingency theory; risk governance; risk culture; institutional shareholder; international restrictions.
The causes of profitability: a panel study of the Indian IT and consulting sector
by Rohit Bansal, Sanjay Kar, Saroj Mishra
Abstract: The paper uses several methods of profit to examine the factors of profitability for the Indian IT and consulting sector. This reading aims to detect the association between the activity ratio or turnover ratio and the profitability of the Indian IT and consulting sector over the seven years from April 2012 to March 2018. Profitability was used as a dependent variable characterised by Profit Margin (PM); Debtors Turnover Ratio (DTR), Working Capital Turnover (WCT) and Assets Turnover Ratio (ATR) were used as independent variables. Financial statements and income statements of all listed IT and consulting companies on the Bombay stock exchange were gathered from companies websites. The data were then analysed with a descriptive research technique of panel data regression and verified with Hausmans measurement, which is a widely used technique for selecting the panel effect. Working capital turnover was found to be statistically positively significant against the profitability of the Indian IT and consulting sector. However, assets turnover ratio and debtor turnover ratio were found statistically insignificant with the profit margin of the Indian IT and consulting sector from 2012 to 2018. The findings of this research will support companies' internal management, auditors, policy-makers, financial executives, and investors in making investment decisions.
Keywords: profitability determinants; profit margin; assets; debtor turnover; working capital; India; consulting industry; fixed effect panel; radom effect panel; panel regression.
The effectiveness of government internal auditor: evidence from Indonesia
by Sutaryo Sutaryo, Arifudin Tri Anto
Abstract: We analyse the effectiveness of the internal audit of the governments in Indonesia. As independent variables, we examine the role of professional proficiency of internal auditors, quality of audit work, organisational independence, auditor career and advancement, and support from the leaders of internal audit entity, by geography, gender, education level and functional position of auditor as control variables. This study uses a structured questionnaire, distributed to 385 functional auditors as our respondents that came from the State Development Audit Agency (BPKP). The results show that professional proficiency of internal auditors, quality of audit work, organisational independence, career path and development, and the support from the internal audit entity leadership have positive influence on governments internal audit effectiveness in Indonesia. Nevertheless, all of the variables are still possible to develop appropriate additional test results. Internal audit entity requires internal auditors who have the professional proficiency, independence, and quality of the audit work results. Internal audit entity should also implement the career policy for auditors and give full support to the implementation of the audit. The findings are discussed in terms of how they can assist in enhancing internal audit effectiveness and provide added value to the auditee.
Keywords: effectiveness of the internal audit; professional proficiency of internal auditors; organisational independence; support from internal audit entity leadership.
Government Investments Commitment to Internal Audit requirements
The case of Jordan
by Mohammad Aladwan, Omar Alhwatmeh
Abstract: The study aims to examine the commitment of government companies to international internal auditing standards. The study employs both qualitative and quantitative research methods in addressing the problem. To achieve the study objective, the researchers distributed a questionnaire to 627 employees of 156 Jordanian companies that have government contribution, 582 (92%) of the questionnaires were returned. As a mean for analysing the study data; the researchers used the mean, standard deviation, percentages, and T-test. The general findings revealed that Jordanian companies with government contributions do not apply international internal auditing standards; instead they commit to practices that are enacted by government regulations but, unfortunately, these practices are found not fully similar to international internal auditing standards. Therefore, the results showed weak commitment from the sampled companies to such necessary standards. In the light of the study results, the researchers give a number of recommendations that are necessary to achieve effective internal auditing standards.
Keywords: internal audit; internal audit standards; owned companies and government contributions; Jordan.
Social capital, external regulations and financial reporting quality: evidence from community banks
by Ziyun Yang, Xiaobo Dong, Wei-Chih Chang
Abstract: Using a large sample of US community banks, we study how social capital affects bank managers opportunistic reporting behaviour. We argue that high social capital reduces information asymmetry between managers and stakeholders and increases the cost of opportunistic reporting for managers. Supporting this argument, we find that social capital is negatively associated with discretionary loan loss provisions. We further find that the negative relation between social capital and opportunistic reporting behaviour is weaker when in banks subject to stronger regulations, which suggests that strong regulations act as a substitute for high social capital in constraining banks opportunistic reporting behaviour. Our findings provide policy implications to regulators with regard to how to counteract the effect of declining social capital on financial reporting quality.
Keywords: social capital; community banks; earnings management; financial reporting quality; discretionary loan loss provision; external regulations.
Corporate governance information disclosure on the websites
by Dhouha Khrifech, Walid Khoufi
Abstract: The purpose of this study is to explain the relationship between company-specific characteristics and the extent of enterprise government (GC) information disclosed on the websites of 91 SBF 120 companies. The empirical results show that, for the French context, the size of enterprises, profitability and board size are the most important factors influencing corporate governance disclosure through their websites.
Keywords: corporate governance disclosure; corporate websites; firm characteristics; French listed companies.
Special Issue on: Earnings Management New Insights
Are Tunisian firms managing their earnings through asset sales following the 2011 uprising?
by Sarra Elleuch
Abstract: This paper aims to provide evidence of the use of asset sales tool by Tunisian managers as a way of real earnings management during the critical period following the 2011 uprising. For this purpose, we have expanded the models developed by Roychowdhury (2006) and Gunny (2010) by adding the cash holdings ratio as an explanatory variable of the model since firms tend to engage more in asset sales activities to improve their liquidity in a crisis period. Our findings reveal that following the 2011 uprising, Tunisian firms continue to manage their earnings by selling fixed assets. They are more oriented to use the investment sales tool in order to increase both earnings and cash at the same time. This study is the first that analyses the impact of the Tunisian revolution on earnings management through asset sales. The findings of our study will help investors to identify new earnings management tools that were used less frequently before the economic crisis. These findings also have important implications for regulators who need to understand the earnings management behaviour of managers before developing monitoring and supporting mechanisms during the economic crisis.
Keywords: Tunisian 2011 uprising; real earnings management; fixed asset sales; investment asset sales.
The effectiveness of board of directors and family ownership: interaction and impact on the discretionary accruals
by Anas Ghazalat
Abstract: Firms can curb managerial opportunistic behaviours through applying corporate governance mechanisms effectively. Using a sample of 114 Jordanian firms listed on ASE and operated in the service and industrial sector for the period from 2009 until 2015, this study investigates the combined effect of the board of directors and family ownership on the discretionary accruals (i.e., whether family ownership moderates the monitoring role of the board of directors). The study adopted discretionary accruals proxies using the Kothari et al. 2005 model by applying the cross-sectional method to determine model parameters for each industry in each year. The effectiveness of the board of directors computed as a bundle through creating a score of board characteristics (i.e., independence, size, meeting frequency, CEO duality, audit and nominations-compensations committees, directors financial expertise, tenures and multiple directorship). The results show that the higher effectiveness of board of directors plays higher monitoring role to minimise discretionary accruals practices as one of the opportunistic behaviours. Firms with more effective board of directors are engaged with high quality of financial reporting. Results also show that the monitoring role of the board of directors is moderated in firms with family ownership. This proves that board of directors as a bundle in firms with family ownership is unlikely to be effective. The findings indicate that the corporate governance plays a pivotal role in mitigating the opportunistic behaviours and minimises the divergence gap under the traditional agency problem while it has become as legal fiction when the central agency problem existed.
Keywords: discretionary accruals (earnings management proxy); effectiveness of board of directors; family ownership; Amman stock exchange.
The trade-off between accrual-based and real earnings management: evidence from Jordan
by Mohammad Azzam, Alaa Al Qudah, Lara Al-Haddad, Ayman Abu Haija
Abstract: This study examines the extent of accrual-based and real earnings management surrounding three important turning points in the Jordanian business environment: the issuance of new listing requirements in 2004, the promulgation of a corporate governance code in 2009, and the Arab Spring era which started in 2012. Using a sample of 1748 firm-year observations between 2002 and 2016, the results show that firms have a great tendency towards using discretionary accruals to alter their reported earnings for the whole study period compared with real manipulation. Indeed, the magnitude of accrual-based earnings manipulation is increased significantly in the aftermath of the issuance of listing requirements. No significant difference, however, is found pertaining to real earnings management. Interestingly, accrual-based and real earnings management is decreased significantly with the passage of the corporate governance code. In relation to the Arab Spring era, no clear evidence appears that firms are engaged in earnings management to embellish their financial reports. The overall results suggest that the ability of managers to exercise their discretion over earnings as well as the trade-off between accrual-based and real earnings management depends on firms attributes, such as the quality of the governance system, regulatory requirements and the surrounding business and political environment.
Keywords: accrual-based earnings management; real earnings management; corporate governance; listing requirements; Arab Spring.
Political connections, government ownership, and earnings management: evidence from Jordan
by Mohammed Alhadab, Modar Abdullatif, Ahmed H. Ahmed, Yasean Tahat, Israa Mansour
Abstract: This study examines the impact of political connections and government ownership on accrual and real earnings management. Based on a Jordanian sample of 310 firm-year observations, the study finds evidence that politically-connected firms exhibit a higher level of real earnings management, compared to non-politically-connected firms. This evidence suggests that politically-connected firms in Jordan opportunistically manipulate reported income to obtain a private gain through the use of real activities-based manipulation, at the expense of other minority shareholders. This may be caused by real earnings management activities being less subject to the risk of detection and monitoring. Further, the study finds evidence that government-connected firms engage in a lower level of accrual and real earnings management compared to non-government-connected firms, suggesting a positive effect for government ownership on the quality of financial reporting.
Keywords: accrual earnings management; real earnings management; political connections; government ownership; financial reporting quality; Jordan.
The effects of R&D expenditure and earnings management on stock options: evidence from market competition
by Yi-Mien Lin, Tzu-Wen Lee
Abstract: This paper examines the effects of R&D expenditures and earnings management on executive stock options and the effects of the competitiveness of a firm in the industry on R&D and executive stock options under controlling for managerial incentive and corporate governance. The findings are that as R&D of a firm increases, managers are more likely to manipulate earnings to enhance the firm value, thus creating a higher value for stock options. Being more competitive in the industry motivates the firm to broaden business territory, thus it will invest more in R&D to obtain a larger market share. The stronger competitiveness of a firm and the better performance are, the more stock options that will be granted to managers.
Keywords: market competition; R&D expenditures; executive stock options; corporate governance; managerial incentive.
The impact of corporate governance and accruals flexibility on the interaction between earnings management strategies
by Bubaker Khaled, Zakaria Aribi
Abstract: This study examines the impact of corporate governance mechanisms and accruals flexibility on the interaction between accruals earnings management (AEM) and real earnings management (REM) using a large sample of Indian firms for the period from 2007 to 2015. The results show a significant impact of board effectiveness, audit committee effectiveness, high auditors quality and accruals flexibility on the level of AEM, and also we find significant relations between the levels of REM and AEM, suggesting that managers may switch from AEM to REM when they find constraints on AEM. Additional analysis of firms with relatively strong earnings management incentives confirms the trade-off between AEM and REM. Our findings are also robust to the alternative measure of earnings management.
Keywords: accruals earnings management; real earning management; corporate governance mechanisms; India.
Earnings management, corporate social responsibility and governance structure: further evidence from Egypt
by Tarek Abdelfattah, Mostafa Elfeky
Abstract: This study investigates the relationship between earnings management and corporate social responsibility disclosure. In addition, it investigates whether the joint effect of corporate governance and corporate social responsibility disclosure impacts earnings management practices in an emerging capital market, Egypt. Using a sample of non-financial firms listed in the Egyptian stock exchange for the period 2012-2017, we find evidence of the opportunistic hypothesis of corporate social responsibility. Firms use corporate social responsibility reporting to mask earnings management. Our findings show a significant role of board independence in constraining earnings management. Moreover, board independence moderates the positive relationship between corporate social responsibility disclosure and earnings management. However, other governance factors do not alleviate earnings management. Furthermore, we find that institutional ownership is positively related to discretionary accruals supporting the notion of the passive role of institutional investors in developing countries.
Keywords: earnings management; corporate social responsibility; corporate governance; Egypt.