Audit Quality Across Non-Audit Service Fee Benchmarks: Evidence from Material Weakness Opinions
J. Legoria, G. Rosa and J.S. Soileau
Regulators have voiced concerns regarding the impact of auditor provided non-audit services (NAS) on auditor independence, and by extension, audit quality. This study considers whether the provision of various levels of (NAS) influences the auditor’s propensity to issue material weakness opinions (MWO). The results indicate that audit clients that purchase zero NAS, and clients that purchase NAS less than Sarbanes-Oxley’s benchmark of NAS fees less than 5% of total fees, are more likely to receive a MWO than clients with a NAS at higher levels.
Keywords: Non-audit fees; material weakness; audit quality
Too Big to Fail and Bank Loan Accounting in Developing Nations:
Evidence from the Mexican Financial Crisis
A. Hazera, Carmen Quirvan and Anis Triki
During the 1990s and early 2000s, developing nations in all parts of the world experienced financial crisis. Studies have documented, both theoretically and empirically, that authorities’ guarantee that insolvent financial institutions would be “bailed out” increased the incentives of banks especially large institutions, to take on excessive loan risk. However, little research has been conducted on how the possibility of being “bailed out” impacts banks’ decisions regarding the understatement of loan loss reserves (i.e. the tendency to conceal loan risk). We argue that the Mexican financial crisis of the 1990s represents a rich setting to investigate the link between “bailout assistance” and banks’ accounting for loan loss reserves. The analysis of loan trends for the entire financial system shows that Mexican banks fully reserved non-performing loans not in 1997, when new accounting standards took effect, but rather in 1999-2001, after the largest institutions had been sold to foreign banks and international bailout assistance had been exhausted. Also, the results show that in the period preceding their sale to foreign institutions, “Too Big To Fail” (TBTF) banks used bailout assistance to directly manage their reserves. By contrast smaller banks used non-bailout sources of capital to reserve non- performing consumer loans, and directly swapped non-performing commercial loans for bailout assistance. Thus, while both TBTF and smaller banks utilized bailout assistance, the bailout funds only affected loan loss reserve levels in the case of TBTF banks.
Keywords: Too Big To Fail, Financial Crisis, Mexico, Bank Loan Accounting.
Geographic Segment Disclosures under IFRS 8: Changes in Materiality and Fineness European, Australian and New Zealand Blue Chip Companies
S. J. Cereola, N. B. Nichols and D. L. Street
This study examines how the adoption of International Financial Reporting Standard (IFRS) 8, Operating Segments, changed the entity-wide geographic segment reporting by European, Australian and New Zealand blue chip companies. The focus is on the revised requirements that companies disclose revenues for the country of domicile and other material countries. Specifically, it investigates the materiality level companies use to determine material countries and whether the revised requirements result in a finer set of geographic information than previously disclosed under International Accounting Standard (IAS) 14R.
The study finds a significant decrease in the number of companies reporting only broad geographic regions and a significant increase in the number of companies reporting country specific segments and a mix of countries and regions after the adoption of IFRS 8. The increase in companies reporting country specific and mixed segments indicates that the requirement to disclose material countries under IFRS 8 resulted in a significant number of companies reporting disaggregated revenues at the individual country level. To the extent country specific information is more useful, financial analysts and the International Accounting Standards Board (IASB) should welcome this result.
All three fineness measures increase significantly with the adoption of IFRS 8. These results indicate that the adoption of IFRS 8 did improve the fineness of the geographic disclosures provided by companies and suggests that the geographic data provided under IFRS 8 is less aggregated than the disclosures under IAS 14R.
Keywords: International Financial Reporting Standards; IFRS 8; geographic areas; segment reporting; IASB post-implementation review; materiality; fineness
Norm Entrepreneur Lobbying and Persuasion: A Case Study Involving the IASB's Modification of an Exposure Draft
Noriaki Okamoto, Rikkyo University
The dynamics of IFRS are a significant influence on regulators and accounting standard setters in many countries. Many previous studies on accounting standard setting have focused on comment letter submissions and analyzed the relationship between lobbying behavior and lobbyists’ attributes (e.g., Larson, 2008). However, how and to what extent each actor can participate effectively in the IASB’s standard-setting process has not been thoroughly studied. This case study deals with this issue and contributes to the literature by introducing the theoretical perspective of norm entrepreneur actions during accounting standard setting. It investigates a case involving the modification of an IFRS exposure draft that did not reflect Japanese opinions. This study identifies two factors that appear to be crucial in relation to the IASB’s final decision: the actions of Japanese norm entrepreneurs and their analogical persuasion.
Keywords: Accounting standard setting; International Financial Reporting Standards (IFRS); International politics; Norm entrepreneur; Analogical reasoning
Enhanced disclosure of other comprehensive income and increased usefulness of net income: The implications of Accounting Standards Update 2011-05*
L. Shi, P. Wang and N. Zhou
Accounting Standards Update (ASU) 2011-05 eliminates the option to present other comprehensive income (OCI) in the statement of changes in stockholders’ equity. This study empirically investigates whether this mandatory change of OCI presentation format achieves FASB’s stated objective of improving the transparency of financial reporting. First, ASU 2011-05 is found to greatly reduce the continuity of OCI from one period to the next. As OCI items are transitory in nature, the increased OCI volatility makes firms’ inherent risk more transparent to investors. Second, ASU 2011-05 is found to significantly increase the ability of net income to influence stock prices. As OCI and net income are intertwined, the more salient presentation of OCI enables investors to better interpret earnings. Supporting FASB’s position that OCI items need to be more prominently displayed, these findings suggest that the new standard improves transparency and usefulness of the reported OCI information.
Keywords: Other comprehensive income; Presentation format; ASU 2011-05
Compliance with Accounting Standards by Financial Institutions: Some Evidence from Bangladesh
M. Islam and A. T. Hossain
As Bangladesh is going through socio-economic and political changes, this paper investigates the disclosures required by ‘Bangladesh Accounting Standards’ or ‘International Financial Reporting Standards’, as adopted/adapted in Bangladesh and whether affiliation with Big-4 accounting firms leads to better compliance with disclosure requirements. We analyze the financial statements of 26 banks on liquidity, concentrations of assets, liabilities and off-balance-sheet items, related-party transactions, and unconsolidated entities. Our results indicate that banks are not ensuring essential compliance with all disclosure items in national standards. Banks audited by Big-4 affiliates display better compliance in financial statements than those audited by non-affiliates, with some exceptions. Our research provided evidence that, in contrast to general understanding and expectation, Big-4 associates in developing country may not absolutely outperform local firms. We also find systematic non-compliance with provisions of standards that would be useful for inferring group membership despite compliance with other disclosure provisions.
Key words: Financial Reporting Practices; International Financial Reporting Standards; Compliance; Factors motivating compliance
Measuring the Financial Impact of Environmental Regulations on the Trucking Industry
M. T. Dugan, E. H. Turner, Mark A. Thompson and Susan M. Murray
Since 2002, the Environmental Protection Agency has enacted federal regulations aimed at reducing pollution caused by diesel engines. This study provides an empirical examination of the effect of EPA regulations on the financial performance of firms in the trucking industry. The findings are relevant to regulators, practitioners, and academics because it addresses the impact of environmental regulations as well as the financial accounting standards process.
Keywords: Environmental regulations, Trucking industry, Operating Ratio, Financial impact
Setting Expected Rates of Return on Pension Plan Assets:
New Evidence on the Influence of Audit Committee Accounting Experts*
J. Comprix, J. Guo, Y. Zhang and N. Zhou
This study examines whether having accounting experts on audit committees can mitigate the upward bias of expected rates of return (ERR) on pension plan assets documented in prior research. ERRs are found to be lower in firms with accounting expertise on their audit committees. These results are robust after controlling for variables from extant governance and pension research, and they suggest that audit committee accounting experts can help deter managers from setting higher ERRs on pension assets. While extant studies find that opportunistic setting of pension assumptions can be controlled through regulation, this paper provides new evidence on the influence of audit committee accounting experts on critical pension estimates. This newfound governance effect is different from and incremental to the regulation effect previously documented in the pension accounting literature.
Keywords: Audit committee accounting expert; Expected rate of return (ERR); Pension accounting; Complex accounting estimate
Reporting order of financial statements in SEC filings: Evidence from 10-K filings of S&P 500 entities
A. Barua and J. H. Kim
The current accounting regulations are silent about the order of financial statements reported in SEC filings, although some SEC regulations deal with reporting requirements for the SEC filings of public entities (i.e., S-K), and formats and content of financial reports (i.e., S-X). We investigate the order of financial statements reported in 10-K filings and identify factors associated with such order based on a manually collected sample of S&P 500 entities. We find that more than half of entities report an income statement in the beginning, while a large number of entities still report a balance sheet as the first financial statement. We also document that larger entities and entities with more investment in tangible assets and R&D are more likely to list an income statement first. On the other hand, entities with larger shareholders’ equity (relative to total assets) tend to report a balance sheet in the beginning. However, profitability does not appear to be related to the order of financial statements. Findings of this study should be of interest to academia, financial statement users and policy makers.
Keywords: Reporting order of financial statements, Income statement, Balance sheet, 10-K filings
Evolution of Corporate Reporting: From Stand-alone Corporate Social Responsibility Reporting to Integrated Reporting
K. H. Rupley, Darrell Brown and Scott Marshall
Both financial and corporate social responsibility (CSR) reporting are bound by global constraints. A common trait among the reporting systems is a growing movement toward comparability and accountability. Global pressures initially motivated the push toward stand-alone CSR reporting and now toward integrated reporting. Integrated reports (IR) include financial, economic, governance, and social information in one report. In the United States, integrated reporting is voluntary and only a small number of companies have issued IRs to date. This report provides a history of CSR reporting and then examines whether the non-financial economic, governance and social indicators identified in prior literature as being of interest to retail investors (Cohen et al. 2011) are disclosed in the pioneering U.S. IRs. Descriptive results indicate the initial IRs cover predominately indicators of economic and social performance with little focus on governance. Further analysis indicates that the IRs examined do not, as a rule, provide the information most highly desired by investors (i.e. market share, executive compensation, and product safety). This study provides a baseline for companies preparing IRs and for regulators (i.e. SEC, FASB) in the context of determining future disclosure regulations.
Keywords: integrated reports, CSR, voluntary disclosure, non-financial reporting, SASB, GRI
International Financial Reporting Standard 3 (2008), Business Combinations Determining Whether Net Economic Resources Acquired Constitute a Business
G. Kalashyan
With globalization the economic operations between entities become more complicated. Therefore, financial accounting of these economic operations and their presentation in financial statements also are increasingly complex. Thus international financial accounting standards and implementation which are subsequently applied by entities need to be suitable to the newest requirements of business. Thus researchers and practitioners should study international financial reporting standards to address such improvements. The paper explores ways to improve IFRS 3, Business Combinations (2008). It considers the revision of the definition of outputs and clarification of “merger of equals” and “joint arrangements” definitions.
Key Words: IFRS 3; Business Combinations; Outputs; Merger of Equals; Joint Arrangements
Managing the Over-Load -- A Non-Review of Pierre Bayard
J. Peterson
The paper brings light to how readers manage the information overload by remarking on literally practices that readers have resorted to. He provides anecdotal and scientific data to present his perspective on the topic.
Key Words: Information; Reading; Pierre Bayard
Asian Financial Statement Analysis: Detecting Financial Irregularities
G. A. Jonas
This paper is a book review of Thomas R. Robinson’s book, Asian Financial Statement Analysis. The Robinson provides an exposition on corporation’s financial misrepresentation in Asia and argues that the reporting issues may be attributed to the corporate governance practices in on the continent. The book analyzes that nature of the financial statement irregularities in Asia and supports arguments with real-life examples.
Key Words: Asia; Corporate Governance; Earnings Management; Accruals