International Journal of Accounting, Auditing and Performance Evaluation (19 papers in press)
International financial reporting system in India and China: past, present and IFRS?
by Sakshi Bathla, Anil K. Sharma
Abstract: The globalisation of both the markets and businesses has created an inevitable demand for international convergence in financial reporting, which has brought sweeping changes in the accounting practices all over the world. This paper illustrates a brief episode of history of financial reporting in India and China, its current trends and progression in both countries with exclusive focus on the implementation of IFRS adoption, and its accrued benefits and the perceived impediments to the users and preparers of the financial statements in the two economies. By exploring these avenues, we aim to investigate the transformative phases of financial reporting practices in these economies and the road ahead. The rationale is to probe the extent to which IFRS is expected to help or pose challenges to these nations in scaling up globally.
Keywords: financial reporting; IFRS; benefits and challenges; emerging economies.
Do IFRS-based and US GAAP-based ratios render equivalent information?
by Thomas Zeller, John Kostolansky, Michail Bozoudis
Abstract: This study examines the extent to which financial ratio attributes (factors) based on International Financial Reporting Standards (IFRS) are comparable to those based on US Generally Accepted Accounting Principles (GAAP). Using principal component analysis, we empirically identify and test the stability of the financial attributes under each reporting framework for the period 2011 to 2015. Next, we use congruency analysis to identify the comparable financial measures found in each reporting framework. We find seven attributes are comparable within the two frameworks: asset relationship, capital structure, fixed asset usage, liquidity, profit margin, return performance and turnover. The findings provide an empirical basis to formulate testable hypotheses regarding the value relevance, predictability, and descriptive utility of financial ratios drawn from IFRS-based and US GAAP-based financial statements. Given that IFRS predominate in the financial reporting world, it seems essential to empirically establish and validate the comparability of IFRS-based and GAAP-based financial attributes.
Keywords: ratio analysis; IFRS; US GAAP; comparability; factor analysis; financial attributes; standard setting.
Productivity spillovers in supply chain networks
by Dhinu Srinivasan
Abstract: This study examines the productivity spillovers that occur along supply chains. Our DEA-based analyses, using publicly available data for the period 19952006, indicate that the productivity gains flow from the customers to the suppliers in a supply chain, and moreover, such spillovers are affected by the strength of the relationship (economic bond) between the customer and the supplier. We also find that the customers productivity has a positive impact on the profitability of the suppliers. Our results demonstrate an additional means of enhancing firm productivity through strategic supply chain partnerships. If such productivity enhancements can accrue to the entire economy, it will be of interest to policy-makers. This study complements and extends existing literature, which focuses on specific settings, to a more generalised and broader cross-section of the economy.
Keywords: productivity spillovers; supply chains; DEA; profitability.
The association between corporate governance reform and earnings management: empirical evidence from a unique regulatory environment
by Mohammad Azzam
Abstract: This study takes advantage of a natural experiment to detect the existence of earnings management and identify some of the regulatory and institutional factors that might contribute to it. A panel dataset of 1,322 firm-year observations of non-financial firms listed at the Amman Stock Exchange is investigated. The results suggest that the capital market regulations of Jordanian firms have spurred managers to use adjusted earnings to remain trading in the first market, as well as convert from the second to the first market. It also finds that the level of discretionary accruals is reduced significantly with the passage of the corporate governance code. This study supports positive accounting theory by adding new evidence to the ongoing debate about how governmental regulations may create an incentive for firms to manipulate their earnings. It also corroborates the assumptions of agency theory and extends its application to some developing capital markets.
Keywords: earnings management; corporate governance; board of directors; listing requirements.
An empirical evaluation of financial reporting quality of the Indian GAAP and Indian accounting standards
by Faozi A. Almaqtari, Najib H. Farhan, Eissa A. Al-Homaidi, Nandita Mishra
Abstract: The present study investigates the financial reporting quality (FRQ) of Indian GAAP and Indian accounting standards (Ind. AS). The study uses data of 450 companies listed on the Bombay Stock Exchange (BSE) over the period from 2011 to 2016. This study is motivated by the adoption of Ind. AS by listed companies that have net worth of 500 crores or more, which was implemented in 2016. It examines FRQ pre- and post-conversion to Ind. AS. Descriptive statistics, correlation, and regression models are used to estimate the results. Further, paired sample T-test of residual values of regression models is used to evaluate FRQ of Indian GAAP and Ind. AS. The results indicate a significant difference of FRQ between Indian GAAP and Ind. AS. The findings reveal that adoption of Ind. AS has improved the FRQ of financial statements. The study contributes to Ind. AS literature by establishing empirical evidence of the FRQ of accounting standards, which has not been provided and investigated by prior studies.
Keywords: financial reporting quality; Indian GAAP; Indian accounting standards; Ind. AS.
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.
Convergence to IFRS: a comparative analysis of accounting standards in India
by Vincent Tawiah
Abstract: This study has employed summative content analysis to measure de-jure harmonisation between the Indian converged IFRS (Ind.AS) and IFRS under the headings Definition Terms (DT), Measurement and Recognition (M/R), and Presentation and Disclosures (P/D). The study has also introduced the convergence index, which was used to investigate differences that the convergences process has removed between the existing GAAP (AS) and IFRS. There are significant differences between Ind.AS and IFRS in M/R and P/D. The convergence index shows that Ind.AS has removed about 86% of the difference between the existing local GAAP (AS) and IFRS. The most interesting difference between Ind.AS and IFRS is that Ind.AS provides options where IFRS does not, while IFRS also provides options where Ind.AS does not. Users of financial statements should understand that, although India has converged to IFRS, there are significant differences between M/R and P/D of some major transactions. However, most of the differences between IFRS and Ind.AS are time-specific and transaction-specific likely to be undertaken by large companies; hence, it may not reflect in financial statements of small and medium enterprises. The study makes a methodological contribution by introducing a convergence index, which measures how a country has bridged the gap between local GAAP and IFRS
Keywords: IFRS; Ind.AS; convergence index; adoption; India.
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.
The impact of internal control weaknesses on pension assumptions manipulation
by Seokyoun Hwang, Bharat Sarath
Abstract: This study examines the effect of internal control weaknesses (ICWs) on managers choices of pension assumptions, using data disclosed under Sarbanes-Oxley Act Section 404 from 2004 to 2012. We hypothesise that firms with ICWs are better able to opportunistically set pension assumptions, such as the expected rate of return (ERR) and the discount rate (DR), which in turn helps to report higher earnings or healthier balance sheets. First, we find that firms with ICWs tend to report higher ERR and DR than non-ICWs firms. Particularly, the use of higher DR by ICW firms is heightened under FAS 158 which requires the funding status of plans to be reported on the balance sheets. Next, we find that the effect of ICWs on pension assumptions is much stronger when managers have greater incentives to report high profits. Finally, we find that remediation of ICWs reduces the bias in assumed ERR for smaller plans.
Keywords: pension assumptions; internal control weaknesses; discount rate; expected rate of return; earnings management; pension assumption manipulation.
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.
Audit socialisation and professional success: evidence from tax auditors in Thailand
by Kornchai Phornlaphatrachakorn
Abstract: The objective of this study is to examine the effects of audit socialisation and professional commitment on professional success of tax auditors in Thailand through individual learning as the moderator. This study collected data from 249 tax auditors in Thailand by using a questionnaire. To investigate the research relationships, both a structural equation model and multiple regression analysis are implemented. According to the research results, audit socialisation has a significant positive effect on professional commitment and professional success while professional commitment has an important positive influence on professional success. Similarly, individual learning positively moderates the professional commitment-professional success relationships. In summary, audit socialisation is important for auditing professions and it is a key determinant of professional success. Thus, auditors need to pay attention to audit socialisation through learning and understanding it and applying its concepts to audit works to increase auditors professional success, continuous survival and long-term sustainability.
Keywords: audit socialisation; professional commitment; individual learning; professional success; tax auditors.
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.
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.