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10th Year

The Impact of Capital Market Developments on Accounting
Regulatory Policy in Emerging Markets: A Study of ASEAN

Shahrokh M. Saudagaran and Joselito G. Diga

The heterogeneous, often conflicting, interests which accounting must cater to has engendered continuing discussions on various normative aspects of accounting policy (Demski 1973; Cyert and Ijiri 1974; Buckley 1980). The absence of definitive criteria for making choices requires those involved in accounting policy determination to exercise their own value judgements in making choices (May and Sundem 1976; Beaver 1981). Although the policy dimensions of accounting extend to several areas, the role of accounting in the context of domestic capital markets has garnered most of the attention. The extant research focuses on the industrialized countries in Europe, North America and Australia. Research outside these geographical areas has been sparse. This study examines whether and to what extent the accounting policies formulated in the five Southeast Asian countries respond to the structure and demands of their capital markets.

Based on the extant literature, we distinguish between macro-user and micro-user oriented accounting systems. We find the relationship between capital markets and financial accounting systems in ASEAN to be subtle and complex, rather than direct as suggested in prior contingency-based accounting research. The hypothesis that a country’s dominant source of finance is a major determinant in whether the accounting system is a macro-user of micro-user oriented finds cautious and qualified support. A more accurate depiction in ASEAN is that the capital markets, as shaped by a configuration of historical, political and economic factors, provided one of the necessary conditions for cultivating accounting policies in each country. The historical origins of capital markets in ASEAN is found to be a particularly relevant factor. The effects of colonization had permeated not only the nature and content of extant legislation but, more fundamentally, the conditions in which capital markets developed in these countries. These findings support the view the "spheres of influence" have and will continue to strongly impact accounting developments in countries with emerging markets such as those in ASEAN. Supplement 1, 1997, pgs. 3-48.

U.S. Stock Market Reaction to Preliminary Earnings Announcements
and SEC Form 20F of Foreign Firms

Ruth W. Epps

This research examines the information content of financial reports of foreign firms listed on U.S. stock exchanges. The financial reporting events analyzed in the study are foreign firms’ preliminary earnings announcements and Securities and Exchange Commission (SEC) filings. Emphasis is placed on the effect of disclosure sequence and firms’ reporting environments on abnormal stock returns. Foreign firms announce their preliminary earnings a few months earlier than the SEC filings, which the firms file close to the statutory filing date of 180 days after the fiscal year-end. However, the U.S. stock market’s reaction to the SEC flings is significant when the SEC flings occur in the absence (or in advance) of preliminary earnings announcements, indicating the impact of information arrival sequence on the market. Foreign firms’ reporting environments also have a significant impact on the U.S. stock markets. Supplement 1, 1997, pgs. 49-74.

Reporting Practices of Foreign Firms Listed in the United States

Sylwia Gornik-Tomaszewski and Heidi Hylton Meier

Despite strict regulation, reporting and disclosure requirements imposed by the Securities and Exchange Commission (SEC), foreign companies have entered the U.S. capital market in record numbers during the 1990s. Within these SEC requirements, there are various registration and reporting choices available to foreign firms wishing to raise capital in the United States.

A detailed discussion of these choices is presented and followed by a classification scheme developed for this study. The reporting practices for 364 firms for the years 1989 through 1993 are grouped according to this classification and then analyzed. The distributions of each reporting group are examined to determine potential differences and similarities with regard to: (1) the stock exchange on which the foreign firm is listed; (2) total assets, sales, beta, price-earnings (PE) ratio, and total 3-year return; and (3) changes in the reporting practices of these firms within that time period. Results of statistical tests show that significant differences exist among these groups.

Current SEC regulation results in diverse reporting practices by foreign issuers of securities listed on U.S. markets. However, the SEC has recently been involved in several initiatives and proposals in order to balance the demands of the growing international market with that of protecting the interests of the public. Supplement 1, 1997, pgs. 75-95.

Agency Theory, Corporate Governance, and the Accounting Regulation of Islamic Banks

Simon Archer and Rifaat A.A. Karim

Unlike conventional banks, Islamic banks do not take interest-bearing deposits, since Islamic Shari’a principles forbid the charging or paying of interest. Instead, Islamic banks offer profit-sharing investment accounts, such that the investors’ return depends on the return of the assets financed by the investors’ funds. Such investment accounts may be either unrestricted or restricted. In the case of unrestricted investment accounts, the investors’ funds are used to finance the bank’s general pool of assets, while for restricted investment accounts, the use of investors’ funds is restricted to financing a specified type of asset, such as credit sale receivables or leased assets.

The calculation of the return due to such an investor (investment account holder) for a financial period is thus affected by the accounting policies used by the bank in income recognition, asset valuation, and expense allocation. The choice and application of accounting policies may also affect the allocation of income between investment account holders and shareholders (especially in the case of unrestricted investment accounts holders), or between different classes of investment account holders. As these accounting policies and their application are not known to investment account holders, and the latter have no legal rights to appoint members of the bank’s board of directors or auditors, issues arise of asymmetric information, monitoring, and corporate governance. The paper analyzes the problems arising from this situation and discusses how they may be mitigated by accounting and auditing standards promulgated by a self-regulatory organization for Islamic banks. Supplement 1, 1997, pgs. 97-114.

The Role of the Code of Ethics for the Internal Auditing Profession:
An International Perspective

Philip H. Siegel, Khursheed Omer, and Khondkar E. Karim

The purpose of this study was to compare the impacts of cultural background on the understanding of the Code of Ethics in the internal audit profession in three different regions of the world (United States, Canada, and the Pacific Rim countries). Although respondents of all three groups strongly support the Code of Ethics, cultural influences are evident in the responses. Supplement 1, 1997, pgs. 115-127.

An Examination of Cultural Influence on Audit Environments

Michele L. Wingate

This study investigates the existence of a relationship between the culture of a country and two aspects of the business environment of that country, the amount of accounting disclosure required, and the level of litigiousness. Hofstede (1980, 1983, 1984) developed measures of the culture of a country which he called cultural value dimensions. His four dimensions – Individualism, Uncertainty Avoidance, Power Distance, and Masculinity – have been used to explain differences and similarities between societies and in the patterns of institutional development in those societies. Gray (1988) hypothesized relationships between Hofstede’s measures and a particular institution – accounting. Gray’s hypotheses were tested by Salter and Niswander (1995) and found, generally, to be empirically supported.

This study extends the prior research to a particular sub-institution – the audit environment. The audit environment is defined as those country-specific characteristics that influence the demand for and supply of audit services in a particular country. This research tests eight hypothesized relationships between Hofstede’s dimensions and two aspects of the audit environment – accounting disclosure requirements and the level of litigiousness.

The results of the study support five of the eight hypotheses. In particular, disclosure is positively related to Individualism and negatively related to Uncertainty Avoidance. Litigiousness in negatively related to Uncertainty Avoidance and positively related to Masculinity and Individualism. The existence of a relationship between culture and the business environment – specifically, the audit environment – is partially supported.

The results of this study should be useful to audit firms taking on clients in new markets, to business managers entering new markets, and to regulators who influence and monitor those markets. Supplement 1, 1997, pgs. 129-148.

An Examination of British, Irish, and U.S. Partners’ Responses to Ethical Dilemmas

Donald F. Arnold, Sr., and Richard A. Bernardi

The research seeks to explain the differences in extent and specificity of accounting and auditing standards between countries by examining the relationship between moral development and auditing ethical dilemmas. The sample included 102 partners from the United Kingdom, the Republic of Ireland, and the United States. The research found that partners from the United Kingdom and Ireland were more likely to do additional audit work and that higher-moral-development partners had lower estimates of underreporting. The data did not support the anticipated difference in moral development between partner from the British Isles and the United States. However, about 41% of the partners from the British Isles did not have a college education, which has been shown to increase moral development. Supplement 1, 1997, pgs. 149-172.

U.K. Accounting: Recent Developments with an International Perspective

Marilynn Collins and Robert Bloom

To introduce recent developments in U.K. accounting, U.K. standard-setting is described and compared to and contrasted with U.S. standard-setting. Also, the elements and organization of typical financial statements are reviewed. The standards selected for discussion are those that illustrate the conflict between economic substance and legal form, namely, business combinations and the related areas of consolidated financial statements, goodwill, long-term investments, foreign currency translation, segmented reporting, and off-balance-sheet reporting. These standards evidence changes in the role of accounting and financial statements in the United Kingdom. Supplement 1, 1997, pgs. 173-197.

The Relationship Between Culture and Accounting Regulation:
Questioning Conventional Analysis with the Case Study of Indonesia

Sudarwan and Timothy J. Fogarty

A substantial literature has indicated the role of culture in the development of accounting regulation. However, the conclusions drawn from this work have depended on cross-sectional empirical analyses of many nations. Whether the underlying ideas can stand the scrutiny of more in-depth case studies of particular countries, with particular attention to longitudinal dimensions, is uncertain. This paper considers theoretical ideas about cultural values developed by Hofstede and accounting values developed by Gray as they apply to Indonesia, a nation whose size and importance in the world economy belies its neglect in the accounting literature. The case approach allows us to question the meaningfulness of the research designs and measures currently employed in the literature. The analysis also suggests that "culture" and "accounting" may be more dynamic than suspected. Further nation-specific work on empirical and theoretical issues is suggested in order to more precisely specify the link between cultural differences and accounting regulation. Supplement 1, 1997, pgs. 199-219.

Ethos Abandoned: Accounting As An Instrument of Corporate Regulation

Graeme W. Dean and Frank L. Clarke

Professional attention to reforming accounting has for many years been directed to important, but mainly peripheral, issues. Official standard-setting bodies have been established and modified over time. Due process for forging accounting standards has been devised and revised, but the quality of the end products has not improved. Arguably, it has deteriorated. A miscellany of often inconsistent processing and valuation rules continues to form the basis of the compulsory conventional accounting procedures and policies. Diversity in accounting practice persists. There is retention by the profession of its long-stated position that the balance sheet is not a statement of net worth and that all that is required is that the public be educated as to the limitation of accounts. When there is an inquiry into an accounting’s (and auditing’s) effectiveness, invariably the public is fed the notion that the financial data are misleading and creative, by virtue of practitioners deviating from, or deliberately misinterpreting, the prescribed accounting standards.

This paper considers the dilemma facing accountants, directors, and auditors in Australia’s mixed professional and legislative-based regulatory regime, with its overriding emphasis on statutory authority. In this regime, mandatory compliance with promulgated and approved accounting standards is taken to be prima facie evidence that the accounts show a "true and fair view" of an entity’s financial state of affairs and performance. That assumed outcome is highly contestable. It is argued here that compliance is being mandated, even when it contravenes financial common sense.

Implications of downgrading the true and fair override in the Australian corporate disclosure regulatory regime are examined and we put forward a case for it regaining its primary override position. It is argued that accounting information as a serviceable product and accountancy as a professional endeavor are undeniably at the cross roads! Without change, users will continue to lament as another writer suggests that "corporate accounting does not do violence to the truth occasionally, and trivially, but comprehensively, systematically, and universally, annually and perennially." (Chambers 1991, p.17). Supplement 1, 1997, pgs. 221-243.

Variation In and Consequences Of Auditor Selection and Audit Reports in Scandinavia:
A Regulatory Framework With Multiple Auditors

Wanda A. Wallace

An examination of annual reports of three Scandinavian countries—Denmark, Sweden, and Norway—provides insights that larger entities seem to often use Big Six CPA firms, whereas smaller entities use two to three auditors. The issuance of other than a boilerplate report is associated with higher interest cost. Specifically, clean audit reports are associated with lower costs of borrowing, quantified as a 2.38% differential. Interestingly, clean audit reports are more likely to be issued in two-auditor settings. Some greater return is suggested for the presence of two auditors, but may be size related or a proxy effect of the differential auditors’ reporting observed, and no similar effect is discernable for three auditors. Tentative insights are provided that use of two or three auditors, often observed in Scandinavia, may be a means of "substitution" for the use of Big Six auditors by larger entities. Implications for regulators are discussed. Supplement 1, 1997, pgs. 247-274.

International Accounting Standards: Ongoing Progress Suggests They May Become a Reality

Arthur R. Wyatt

Interest in International Accounting Standards is growing rapidly as the International Accounting Standards Committee continued to make real progress in developing and refining its standards. Many barriers to widespread acceptance of IASC standards exist, but as the quality of the standards improves and as an effective interpretive mechanism for their maintenance evolves, these barriers are likely to lose significance. With cross border trade growing at a remarkable pace, interest in international accounting standards will remain high. Acceptance broadly of international accounting standards during the next quarter century looks increasingly likely. To meet the ongoing needs for increasingly high quality standards, the structure of IASC itself is likely to change to improve its efficiency and the quality of its work product. Supplement 1, 1997, pgs. 277-286.

IASC and FASB Standards: Do Differences Make A Difference?

Carrie Bloomer

As the IASC nears completion of its core standards project, it is time to reflect upon the impact of the potential use of IASC standards by foreign issuers in U.S. capital markets. Use of IASC standards instead of various sets of national accounting standards is likely to increase comparability of financial reporting outside the United States. If the SEC accepts use of IASC standards instead of reconciliation to U.S. GAAP, that will likely lower the cost to foreign issuers listing in the United States. However, because IASC standards differ from U.S. GAAP in many areas, their use in U.S. markets can introduce noncomparability, which increases the costs faced by investors in comparing investment opportunities. The challenge to the SEC will be assessment of the credibility and integrity of IASC standards in areas that differ from U.S. GAAP. Supplement 1, 1997, pgs. 287-294.

The Development of the Accounting Profession in China

Yunwei Tang

Accounting standards and auditing standards are the bases on which the accounting profession are built. They came very late in China. It is good, though, that since from the very beginning, the accounting regulatory body and accounting profession have accepted internationally recognized accounting and auditing practices and incorporated them into two local standards to a great extent. The implementation of the two standards will take some time, considering the current standard of Chinese accountants.  

Supplement 1, 1997, pgs. 295-312.

China’s Accounting Reform Project: Developing Detailed Accounting Standards

Anne J. Rich, Richard M. Goligoski, and Gu Liang Tang

China culminated the first stage of its accounting reforms by issuing a conceptual framework titled Accounting Standards for Business Enterprises (ASBE) in November 1992. Accounting journals and other Chinese publications already provide several overviews of China’s conceptual framework for accounting and the underlying rationale for its publication. The second step in the accounting reform project is the creation of detailed accounting standards. To date, China has developed 28 exposure drafts and issue one standard. This paper summarized the accounting reform project and the process used by the Chinese Ministry of Finance to generate detailed accounting standards. In addition, this paper provides a summary of each of the standards currently proposed. If all of the standards are implemented and enforced, Chinese financial statements will look very much like those of the industrialized countries. However, the process has assured that China will have maintained its independent thought and its responsiveness to China’s unique needs. Supplement 1, 1997, pgs. 313-329.

The Development of Accounting Regulation in India

R. Narayanaswamy

This paper describes important features of the regulation of financial accounting and disclosure in India. It examines the evolution of Indian financial reporting, highlights significant influences on this evolution, and presents the current state of financial reporting regulation. An attempt has been made to view these developments within larger theoretical frameworks: Choi and Mueller (1986), Puxty et al. (1987), and Gray (1988). The evidence presented confirms the predictions of these theories and offers new insights on the effect on accounting regulations of a country’s economic, social, legal, and other systems. Comparisons with selected foreign jurisdictions are made. Given the increasing importance of India in global capital markets and the paucity of research on Indian financial reporting, the paper would help set the agenda for research in Indian accounting and disclosure regulation. Supplement 1, 1997, pgs. 331-365.

The Global Regulation of Accounting Education:
Reciprocity and the IFAC International Education Guidelines

Belverd E. Needles, Jr.

This papers addresses the forces that underlie the increasing global regulation of accounting education with special emphasis on the qualifications of professional accountants as promulgated by the IFAC International Education Guideline (IEG) and their implications for reciprocity. It consists of five parts, covering the following issues: the ways in which the qualifications of accountants are regulated at the state, national, and international levels; the role of the International Federation of Accountants and its Education Committee; the importance of reciprocity under the General Agreement on Trade of Services (GATS) and the reaction of the IFAC Education Committee; the revised IEG No. 9, "Prequalification Education, Assessment of Professional Competence and Experience of Professional Accountants," as a basis for mutual recognition; and the potential ramifications of the developments presented in this paper. Supplement 1, 1997, pgs. 367-391.