The Interrelation between Audit Quality and Managerial Reporting Choices and Its Effects on Financial Reporting Quality

Two distinct lines of research have been dedicated to empirically testing how financial reporting quality (measured as the earnings response coefficient or ERC) is associated with management's choice of reporting bias and with audit quality. However, researchers have yet to consider how ERCs are affected by either the auditor's reaction to changes in the manager's reporting bias or the manager's reaction to changes in audit quality. Our study provides theoretical guidance on these interrelations and how changes in the manager's or the auditor's incentives affect both reporting bias and audit quality. Specifically, when the manager's cost (benefit) of reporting bias increases (decreases), we find that expected bias decreases, inducing the auditor to react by reducing audit quality. Because we also find that the association between expected audit quality and ERCs is always positive, changes in managerial incentives for biased reporting lead to a positive association between ERCs and expected reporting bias. When the cost of auditing decreases or the cost of auditor liability increases, we find that expected audit quality increases, inducing the manager to react by decreasing reporting bias. In this case, changes in the costs of audit quality lead to a negative association between ERCs and expected reporting bias. Finally, we demonstrate the impact of our theoretical findings by focusing on the empirical observations documented in the extant literature on managerial ownership and accounting expertise on the audit committee. In light of our framework, we provide new interpretations of these empirical observations and new predictions for future research

Accrual-based and real earnings management and political connections

This study examines whether the trade-off between real and accrual-based management strategies differs between firms with and without political connections. We argue that politically connected firms are more likely to substitute real earnings management for accrual-based earnings management than non-connected firms. Although real earnings management is more costly, we expect that politically connected firms prefer this strategy because of its higher secrecy and potential to mask political favors. Using a unique panel data set of 5493 publicly traded firms in 30 countries, our results show that politically connected firms are more likely to substitute real earnings management strategies for accrual-based earnings management strategies than non-connected firms. We also find that when public monitoring and, therefore, the risk of detection increases, politically connected firms are more likely to resort to less detectable real earnings management strategies. Our finding that political connections play a significant role in the choice between accrual-based and real earnings management strategies suggests that focusing only on accrual-based measurements underestimates the total earnings management activities of politically connected firms

Discussion of Analyzing Speech to Detect Financial Misreporting

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/91211/1/j.1475-679X.2012.00451.x.pd

Financial Reporting Quality, Private Information, Monitoring, and the Lease-versus-Buy Decision

A flourishing stream of research suggests that liquidity-constrained firms with low accounting quality have limited access to capital for investments. We extend this research by investigating whether these firms are more likely to lease their assets. Lessors’ superior control rights allow them to provide capital to constrained firms with low-quality accounting reports. Consistent with this conjecture, we find that low accounting quality firms have a higher propensity to lease than purchase assets. To verify that leasing does not merely reflect these firms’ desire for off-balance-sheet accounting, we investigate whether banks’ access to private information and monitoring affect the relation between accounting quality and leasing. We find the association between accounting quality and leasing decreases when banks have higher monitoring incentives and when loans contain capital expenditure provisions. These results suggest that other mechanisms can substitute for the role of accounting quality in reducing information problems

How does financial reporting quality relate to investment efficiency?

Prior evidence that higher-quality financial reporting improves capital investment efficiency leaves unaddressed whether it reduces over- or under-investment. This study provides evidence of both in documenting a conditional negative (positive) association between financial reporting quality and investment for firms operating in settings more prone to over-investment (under-investment). Firms with higher financial reporting quality also are found to deviate less from predicted investment levels and show less sensitivity to macro-economic conditions. These results suggest that one mechanism linking reporting quality and investment efficiency is a reduction of frictions such as moral hazard and adverse selection that hamper efficient investment

The Role of Accounting in the Financial Crisis: Lessons for the Future

The advent of the Great Recession in 2008 was the culmination of a perfect storm of lax regulation, a growing housing bubble, rising popularity of derivatives instruments, and questionable banking practices. In addition to these causes, management incentives as well as certain U.S. accounting standards contributed to the financial crisis. We outline the significant effects of these incentive structures and the role of fair value accounting standards during the crisis, and discuss implications and relevance of these rules to practitioners, standard-setters, and academics

Genetic Relationship of Body Energy and Blood Metabolites with Reproduction in Holstein Cows

Body condition score (BCS), energy content (EC), cumulative effective energy balance (CEEB), and blood serum concentrations of glucose, beta-hydroxybutyrate (BHBA), and nonesterified fatty acids ( NEFA) were measured throughout first lactation in 497 Holstein cows raised on a large commercial farm in northern Greece. All these traits are considered to be indicators of a cow's energy balance. An additional measure of BCS, EC, and blood serum glucose, BHBA, and NEFA concentrations were taken approximately 2 mo (61 +/- 23 d) before first calving. During first lactation, first service conception rate, conception rate in the first 305 d of lactation, interval from calving to conception, number of inseminations per conception, incidence of metritis, and incidence of reproductive problems of these cows were recorded; interval between first and second calving, and second lactation first service conception rate were also recorded. Random regression models were used to calculate weekly animal breeding values for first lactation BCS, EC, CEEB, glucose, BHBA, and NEFA. Single trait animal models were used to calculate breeding values for these traits measured on pregnant heifers before calving. Reproductive records were then regressed on animal breeding values for these energy balance-related traits to derive estimates of their genetic correlations. Several significant estimates were obtained. In general, traits that are known to be positively correlated with energy balance (BCS, EC, CEEB, and glucose) were found to have a favorable genetic relationship with reproduction, meaning that increased levels of the former will lead to an enhancement of the latter. On the other hand, traits known to be negatively correlated with energy balance (BHBA and NEFA) were found to have an unfavorable genetic association with reproductive traits. Body condition score, BHBA, and NEFA recorded early in lactation, and glucose concentrations measured in pregnant heifers had the highest genetic correlation with future reproductive performance. Results suggest that genetic selection for body energy and blood metabolites could facilitate the genetic improvement of fertility and overall reproductive efficiency of dairy cows.</p

Corporate social responsibility: country-level predispositions and the consequences of choosing a level of disclosure

We study the different levels of corporate social responsibility (CSR) disclosures of the largest European firms. We find that firms are more predisposed to disclose more CSR information in countries with: better investor protection, higher levels of democracy, more effective government services, higher quality regulations, more press freedom, and a lower commitment to environmental policies. Our analysis of the association of different levels of CSR disclosure with share prices indicates that a high level of CSR disclosure is associated with higher share prices, whereas a low level of CSR disclosure in sensitive industries is associated with lower share prices (compared to no disclosure). These results are also present when we analyse changes in CSR disclosure, and are robust to the inclusion of an accounting quality measure in our model. The overall effect of the association of higher levels of CSR disclosure with higher share prices is stronger in countries with more democracy, more government effectiveness, better regulatory quality, and more press freedom. Therefore, market participants find CSR disclosures more informative in countries where investors are in a better position to voice their concerns and where there is better regulation and more effective government implementation of regulations.Nova Forumhttp://www.tandfonline.com/loi/rabr202016-10-30hb201

Transparency, disclosure and the pricing of future earnings in the European market

Paper presented at "Accounting at a Tipping Point", the American Accounting Association (AAA) Annual Meeting held in New York City on August 1-5, 2009. Final version published in Journal of Business Finance and Accounting until title Accruals, Disclosure and the Pricing of Future Earnings in the European Market. Available online at http://onlinelibrary.wiley.com/The present study examines the role of disclosure in assisting market participants to form expectations of future earnings by observing the accrual content of reported earnings. Accounting research has been focusing on investigating the ability of accounting numbers and practices to provide relevant information to market participants. In the context of the association between market returns and accounting numbers or practices, conclusions can be only drawn on the effect of these numbers and practices at an average level of disclosure. Here it is shown that these conclusions can be significantly altered at varying levels of disclosure. Employing a sample of European firms and their Transparency and Disclosure ratings conducted by Standard and Poor’s, we show how disclosure and accruals jointly affect earnings expectations that are included in current stock returns. It is shown that both the joint effect of disclosure and accruals depends on the magnitude, sign and the nature of accruals (i.e. current and non-current accruals), and that increased disclosure appears to correct overstated expectations arising mostly from the extensive use of current accruals and negative non-current accruals