Accounting Figures Research Articles

Window Dressing of Financial Statements in the Era of Digital Finance: A Study of Small Cap Indian Companies

With the paradigm shift from the local “ bahi-khata (indigenous accounting and record-keeping system)” to the online annual statements, companies are continuously searching for ways to window dress accounts and present a better financial picture. Window dressing is an old phenomenon and lies within the boundaries of lawfulness. As we enter the era of Digital India Programme, it becomes imperative to present correct accounting figures. Studies have revealed that small size companies include more data irregularities than their large size counterparts. Thus, the article aims at analysing the financial statements of 100 companies listed on Nifty Free Float Smallcap Index for the period 2011–2015 with the help of Beneish model. The results indicate that the largest amount of window dressing takes place in the construction industry. The study implies that an in-depth study of the audited reports is required to identify their authenticity and detect any instances of window dressing.

“Big Data” Analysis: Putting the Data Cart Before the Modelling Horse?

The statistical analysis of very large data sets, so‐called Big Data or Data Analytics, has become enormously popular in Statistical Analysis and Operations Research. In some cases, such as research into the buying habits of online consumers, the results have come quickly and been very significant. Analysis of other data sets, however, is questionable. For example, time‐series based statistical analysis, often under the descriptive envelope of “neural networks” and “data mining,” of stock market and futures prices, sometimes in combination with historical accounting figures such as earnings and cash flows.The appeal is understandable given the availability of share price data and cheap computer processing power. Nevertheless, the notion that historical data form some sort of repeatable pattern over time, and that complex time series or neural network techniques can be then be used to forecast future prices is hard to justify.Economic modeling necessarily needs to factor in human behavior, unlike modeling in the pure sciences. The authors cite Lancaster University Professor Michael Pidd who summarizes six relevant principles: Model simple, think complicated Be parsimonious, start small and add Divide and conquer, avoid mega models Use metaphors, analogies and similarities Do not fall in love with data Model building may feel like muddling through. Economic modeling must recognize three key components: (i) the incorporation of human cognitive understanding and experience of the underlying systems, (ii) the use of data to validate emerging models, and (iii) the role of mathematics to ensure internal coherence and logic. Decision‐makers ought to be very skeptical of models which skimp on any one of these three components. The authors emphasize that, rather than Big Data adding value, per se, people add value by creating models that use it.

Accounting for international trade in value added: a comment on the OECD–WTO project

ABSTRACTIn the global economy of today, global value-added chains allow firms and countries to take apart the production process and do the part they are best at. In response to this new reality, OECD and WTO have launched a common statistics project of the ‘OECD–WTO Trade in Value-Added (TiVA) Database’. The database links national input–output tables with bilateral trade data to develop inter-country input–output tables that allow compiling, and revealing such chains. Its data are actual nominal values compiled at current exchange rates. The paper takes issue with that choice. Recalling that elsewhere in the United Nations national accounting figures are transformed to purchasing power parity before being compared internationally the paper suggests to follow suit and compile international value-added chains at real exchange rates, as well, and it sketches an introductory outline of how to do so.

Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies

Corporate social responsibility (CSR) disclosures have gained great attention both in media and academic community. In this paper, we check if socially responsible firms adopt transparent financial reporting strategy, or opportunistically manipulate accounting figures. Using a sample of 34 listed companies during five years (2010-2014), our results show a positive relationship between abnormal accruals and the level of CSR disclosures thereby enhancing the opportunistic hypothesis of earnings management but not the transparent financial reporting hypothesis. By contrast, we find no relationship between CSR disclosures and the three real manipulation proxies: abnormal operating cash-flows, abnormal production costs and abnormal discretionary expenses. Moreover, there is a positive relationship between CSR disclosures and the extent of income smoothing consistent with the opportunistic perspective of earnings management. Overall, our study shows that opportunistic and transparent financial reporting perspectives are not mutually exclusive since earnings management practice conducted by socially responsible firms may be context-oriented.

Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies

Corporate social responsibility (CSR) disclosures have gained great attention both in media and academic community. In this paper, we check if socially responsible firms adopt transparent financial reporting strategy, or opportunistically manipulate accounting figures. Using a sample of 34 listed companies during five years (2010-2014), our results show a positive relationship between abnormal accruals and the level of CSR disclosures thereby enhancing the opportunistic hypothesis of earnings management but not the transparent financial reporting hypothesis. By contrast, we find no relationship between CSR disclosures and the three real manipulation proxies: abnormal operating cash-flows, abnormal production costs and abnormal discretionary expenses. Moreover, there is a positive relationship between CSR disclosures and the extent of income smoothing consistent with the opportunistic perspective of earnings management. Overall, our study shows that opportunistic and transparent financial reporting perspectives are not mutually exclusive since earnings management practice conducted by socially responsible firms may be context-oriented.

EASTERN EUROPE - DEINDUSTRIALIZED, INCAPACITATED, DEMORALIZED, OVERINDEBTED, RE-FEUDALIZED, RARIFIED AND DE-SLAVICIZED

The single trend of negative growth (incl. the income levels and income distribution, inequality extraction ratio, suicide rates and functional illiteracy figures) comparable by its duration and severity to this of Eastern Europe, is situated only in (the countries of Chad lake- Grand lakes- Horn of Africa triangle of) sub-Saharan Africa. Further on, recent generational accounting figures illuminate a highly disturbing future prospect for the youth of Eastern Europe. Neither their economic performance nor birth rates would sustain the financial burden left for the future by the present irresponsible and defeatist generation. Simply, set up to fail.Is today’s Eastern Europe a classic case of indirect rule? Is that a deterrito- rialized deep imperial periphery of nominally independent native rulers, while in reality the true power holder resides outside, although is domestically supported by a dense web of NGOs, multinational corporations and handpicked local ‘elites’?

A Study of the Level of Applying Creative Accounting in Vietnamese Companies

Creative accounting has been an interesting research topic because it relates to manupulations of actual accounting figures to the ones desired by the management by taking advantage of the existing accounting rules or ignoring them. Based on literature review and survey on companies of different sectors in Hanoi, this research summarizes popular techniques and motivations of using creative accounting, and evaluates the trend and the level of applying creative accounting in Vietnamese companies. The research results show an increasing trend of using creative accounting in Vietnam, and the level of applying creative accounting depends on the size and the type of companies, and motivations of using creative accounting are mainly for the purpose of tax benefit optimization, business value added and budget achievement.

PERFORMANCE EVALUATION OF LEADING FMCG FIRMSs

Performance of a company is evaluated with respect to its use of assets, shareholder equity and liability, revenue and expenses. Financial ratio analysis plays a significant role in evaluating performance of a Company and comparison with peer group. A ratio is defined as the indicated quotient of two mathematical expressions and the relationship between two or more things. In financial analysis, a ratio is used as a benchmark for evaluation financial position and performance of a firm. The absolute accounting figures reported in financial statements do not provide a meaningful understanding of performance and financial position of a firm. An accounting figure conveys meaning when it is related to some other relevant information. In this paper, an attempt has been made to analyse performance of 5 leading Indian FMCG companies in terms of various Financial Ratios and ANOVA. Profitability in long run contributes to sustained growth of company. Therefore Companies must focus on productivity and optimal resources utilization. The evaluation depicts that ITC Limited position is better in comparison to other FMCG Firms.

An Empirical Research on Fu-Wang Foods Ltd: Industry, Strategy, Accounting, Ratio, Valuation and Proforma Analysis

In this study an attempt was made to prepare the research on Fu-Wang Foods Ltd. We have also analyzed the strategies, accounting policies and ratios. Historical and Proforma income statements, balance sheet and cash flow statement have been made. We have also determined, loosely speaking, the intrinsic value of stocks of firm. The company is in food processing industry. The position of Fu-Wang is good in this industry. Its long term profitability and sustainability is also secured. The accounting policies and estimates of Fu-Wang as well as the food industry are flexible enough. Management enjoys moderate discretionary powers. Analysis of the various ratios over the five years reveals that many of them are satisfactory and some are not. By doing the valuation of the company with some assumption we found the intrinsic value of the firm is approximately 36 tk. Sensitivity of stock price by changing the discount rate and sales growth rate has also been examined. By projecting the historical accounting figures we have also prepared Proforma income statements, balance sheets and cash flow statements and found that the future of Fu-Wang Foods ltd. is rather satisfactory, given some assumptions.

Structural changes in covenants through the adoption of IFRS in Brazil

This study examines changes in the structure of covenants in debt agreements of companies issuing debentures during the adoption of International Financial Reporting Standards (IFRS) in Brazil. We investigate debt contracts of public and private companies that issued debentures before and after IFRS adoption in Brazil, between the years 2006–2008 and 2011–2014. We develop a database with all covenants from 126 contracts via hand-collected data, with 78 contracts from before IFRS adoption and 48 contracts afterward. We find high increases in covenants after adoption. However, this growth is observed only for restrictive security and non-accounting covenants, excluding clauses with accounting multiples. Our results show that IFRS adoption in Brazil shifted incentives and, as a result, shaped a new structure of debt contracts. Our findings complement and expand previous studies and can be useful to academics, regulators and practitioners by showing that the incentives to use accounting figures and ratios shifted in the credit market after IFRS adoption.

The effect of using fair value accounting on fundamental analysis: Some evidence from the emerging economies

The objective of this paper is to examine the effect of the use of the fair value model under IAS 40 of accounting for an investment property on the fundamental analysis of Barwa Company, a real estate developer company listed in Qatar Exchange. This examination of effect concentrates on whether or not this choice will have an impact on the fundamental financial analysis of the company and consequently on investors' decision-making. The research methodology depends on selecting balance sheet and income statement items that are affected by the adoption, then restating them by adjusting for the revaluation gain or loss recognized and comparing them to the original values. Profitability and financial market ratios are utilized to examine the impact on the accounting numbers. Ratios are calculated over 17 consecutive quarters from Q1-2007 to Q1-2011. The study finds that while the choice of the fair value model results in a small impact on balance sheet items, the effect on income statement items seemed to be significant. Among the accounting numbers affected, net income remains to have suffered the highest impact. Furthermore, all accounting ratios were affected by the choice. The ratios used are those of profitability and market value including profit margin ratio, the cost to income ratio, return on assets, return on equity, price/book value ratio and earnings per share. Interestingly, upward and downward market corrections for the company⁉s share price were not associated with the company's recognition of fair value revaluation gains or losses. This suggests that the share price of the company may not be driven by the company specific characteristics, rather by different market factors. The study contributes to the literature by examining the effect of the adoption of fair value rules in IFRS on the financial information as the study documents the direct effect of the use of the fair value model in IAS 40 on accounting figures in general and reported net profit or loss in particular. Moreover, looking at Fair Value Model (FVM) from the firm fundamental perspective is important for both standard setters and shareholders. For standard setters, the results of such inquiry help to verify whether the standard on fair value reached its goal of providing the capital markets with relevant and reliable accounting information that mitigates the information gap between the firm and outsiders. For shareholders, FVM is important from both investment and contracting reasons. From an investment perspective, IAS40 has an impact on the last line of the income statement, and shareholder decision on whether to buy, hold or sell, depends mostly on the informativeness of firm reported earnings. Second, FVM has an impact on the contractual arrangements with both managers and creditors.

An application of Benford s law to fundamental accounting figures reported by Borsa Istanbul (BIST) companies

The financial reporting of public firms is argued for being subject to manipulation and fraud. Since adherence to this mysterious law is accepted as a sign for the data’s reliability, Benford’s Law has long been used by auditors as a tool to test the integrity of a dataset and to detect fraud. The expected distribution of digits in any set of natural numbers has initially been put forward by Benford (1938). Benford’s law states that probability distribution of digits’ occurrence is not uniform. Smaller digits are found to exist more frequently than the greater ones. This study tested the compliance of fundamental figures reported by Borsa Istanbul (BIST) companies with Benford’s Law, by means of a data between 2005 and 2015 covering 148 companies. According to the different testing approaches utilized, which imparted rather similar results, reported figures of current assets and net sales seemed to be almost in perfect conformity with Benford’s Law. However, the study detected several deviation points in the data of total assets and net profit figures from Benford’s Law. From the results of this study, we cannot conclude that they are extensively manipulative or they are in full conformity with the Benford’s Law. Nevertheless, this study suggests the possible point of interest for further researches. In application of Benford’s Law non-conformity should be evaluated with discretion. The deviations are only a signal to analyze the data further, and should not be seen as a solid proof of fraud or manipulation.

Accounting for Extractive Industries: Has IFRS 6 Harmonised Accounting Practices by Extractive Industries?

Accounting for extractive industries has historically been practiced by one of a number of methods: successful efforts, full costing, area of interest, appropriation and reserve recognition accounting. The choice of method adopted leads to different accounting figures. The difference in the treatment of the costs leads to different accounting figures being reported in the financial statements of extractive companies. This means that the ‘tell it like it is’ criteria of accounting functions differently, so that stakeholders find like‐with‐like comparisons for decision‐making purposes difficult. These difficulties have culminated in the release of IFRS 6 Exploration for and Evaluation of Mineral Resources, to help harmonise accounting practice. This paper, through content analysis of annual reports of 122 upstream oil and gas companies from around the world, investigates the role of IFRS 6 in harmonising extractive industries’ accounting practices. Our analysis identifies seven types of company, which differ in their compliance with IFRS 6. Hence, we conclude that IFRS 6 has had some success in harmonising accounting treatments of exploration and evaluation expense but that this success is limited and more needs to be done to achieve wider harmonisation for the extractive industries.

Corporate Governance Failure: The Case Of Enron And Parmalat

Corporate governance is a central and dynamic aspect of business. The term governance is derived from the latin word gubernare, meaning to steer. It usually applies to the steering of a ship. Thus, this implies that corporate governance involves the function of direction rather than control. Corporate governance has come to the forefront of academic research due to the vital role it plays in the overall health of economic systems. Corporate governance was long ignored as a matter of potential importance for the development of a nation’s economy. The wave of U.S. corporate fraud in the 1990s was attributed to deficiencies in corporate governance. The recent 2008-2009 global financial crisis, triggered by the unprecedented failure of Lehman Brothers and the subprime mortgage problems, renewed interest on the role of corporate governance in the financial sector. The development of a strong corporate governance framework is important to protect stakeholders, maintain investor confidence in the transition countries, and attract foreign direct investment. This paper looks at the collapse of Enron and the Parmalat, which was a particular Italian scandal. Parmalat, Enron, and other American firms such as Tyco and WorldCom all have a number of fudging at their core – efforts to make the companies look healthier than they were. Parmalat’s collapse began in November when its auditor raised questions about a $135 million derivatives profit. After additional evidence of accounting misstatements, the company’s chief executive and founder, Calisto Tanzi, resigned on the 15th of December. Four days later, the company disclosed the fake Bank of America letter. On the 23rd of December, Italian investigators stated that the company had used dozens of offshore companies to report non-existent assets to offset themselves. This was as much as $11 billion in liabilities. Also, this is in addition to the fact that Parmalat might have been falsifying its accounting figures for as long as 15 years.

The impact of financial constraints on accounting conservatism

Objective – This study investigates the effects of financial constraints on the conservatism practices of Brazilian firms. Design/methodology/approach – A sample totaling 1,086 observations of Brazilian publicly traded companies listed on BM&FBovespa was developed from 2000 to 2012. In the sample 106 observations were classified in condition of financially constrained according to the criteria related to lower dividends payout, large amount of cash and equivalents available and investment or capital expenditures (property, plant and equipment). We use Basu (1997) and Ball and Shivakumar (2005) models to investigate the relationship between financial constraints and accounting conservatism. Findings – The results show financially constrained firms adopt less conditional conservatism practices on their accounting figures. In other words, those firms avoid to disclose losses trying to access more external funds, however, increasing information asymmetry. Practical implications – The evidence of this study could be used by creditors and regulators to support new financing policies and risk monitoring through firms’ financial statements. Originality/value – We empirically show that conditional conservatism practices are affected by financial constraints. Also, we develop an alternative way to classify companies in terms of financial constraints from a combination of three proxies traditionally applied in the literature such as cash and cash-equivalent, capital expenditure (property, plant and equipment) and dividends payout.

A Influência do Tamanho da Empresa na Informação Contábil: Evidências em Empresas Large Caps e Small Caps Listadas na BM&FBovespa

O presente trabalho investigou a relação de aspectos da informação contábil com o nível de capitalização das empresas listadas na Bolsa de Valores de São Paulo, classificadas em Large Caps ou Small Caps, empresas de maior e menor capitalização, respectivamente, no período de 2010 a 2012. Foram abordadas três métricas da informação contábil: informatividade, conservadorismo e relevância, por meio da aplicação dos modelos da informatividade dos lucros de Easton e Harris (1991), o modelo de conservadorismo condicional de Basu (1997) e o modelo de value relevance, baseado em Ohlson (1995). Os resultados apontaram que embora as Large Caps apresentem maior grau de conservadorismo, seus números contábeis mostraram-se menos informativos e mais relevantes em comparação às Small Caps. Devido à maior produção de informação privada (predisclosure) em torno das empresas de maior porte, o mercado tenderia a responder com menos força ou surpresa à publicação das informações contábeis dessas empresas, ao passo que a própria escassez de informação antecipada, tornaria o efeito da divulgação desses números mais preponderante para as empresas de menor porte (Small Caps).

Private Lenderss Demand for Audit

We study the demand for audit in private lending agreements by recording whether the lending agreement includes an obligation on the borrower’s auditor to verify compliance with the financial covenants in the loan contract. We find that auditor covenant compliance obligations are significantly associated with the level of adjustments of net income definitions, suggesting that auditors play an important monitoring role in private debt markets by certifying non-GAAP accounting figures. Increased auditor obligations to lenders are also positively associated with the number of covenants, the level of intangibility of the borrower’s assets, the size of the loan syndicate, loan maturity, and the presence of accounting-based performance pricing provisions. As well as offering a new measure of private lenders’ demand for audit, we provide evidence of the audit market playing an important role in enhancing efficient contracting.

Value-relevance of financial statements

Purpose– The Chinese capital markets are divided into two segments comprising of A-shares (traded by domestic investors) and B-shares (traded by foreign investors). Firms issuing A-shares are required to produce accounting reports under the Chinese Accounting Standards (CAS) and firms issuing B-shares are required to report under the International Accounting Standards (IAS). The purpose of this paper is to investigate the comparative value-relevance of accounting information in the Chinese capital markets, in particular whether the value-relevance associated IAS exceeds that of CAS.Design/methodology/approach– This study undertakes a capital market research approach. Two statistical models are employed to test the value-relevance of competing accounting information on share prices: the Price Model and the Return Model. This study takes advantage of the parallel reporting frameworks governing the A-share and B-share markets buy using the same firms which issue both A-shares and B-shares.Findings– The analysis supporting the study demonstrates that both CAS and IAS information is value relevant to investors in the Chinese capital markets but that IAS provide more useful information. Additionally it is observed that reconciliation variables (representing the discrepancy between IAS- and CAS-based accounting figures) are not significant in explaining market valuation or returns on stock.Research limitations/implications– This study provides evidence of value-relevance of accounting reports on the Chinese capital markets for the period of 1999-2005. The period under investigation captures the significant development in China's accounting regulations which took place in 1998 and 2001. The recent shift in accounting regulations in China from CAS to IAS is expected to improve the dissemination of financial information by publicly listed Chinese firms.Practical implications– This study investigates the reporting requirements on the Chinese capital markets during a period in which accounting reporting requirements underwent a significant change as part of the internationalization of accounting standards. Both A- and B-share markets were investigated simultaneously in order to provide an objective analysis and avoid sampling selection bias present in other studies.Social implications– The recent shift in accounting regulations in China from CAS to IAS is expected to improve the dissemination of financial information by publicly listed Chinese firms.Originality/value– This paper extends previous research on value-relevance of accounting reports in the Chinese capital markets by capturing the period in which the reporting requirements had experienced significant change. This paper also takes advantage of the dual reporting framework in order to mitigate potential sampling bias present in previous studies and employs a reconciliation variables not previously used.

A study on the relationship between operational cash flow and the return of stockholders

Performance measurement in managerial accounting is normally associated with cash flow and it is executed based on different figures such as testing information content abuse and accounting figures. However, increasing the information content in accrual components of earning and internal performance measurement provides additional informative insights. This paper studies the relationship between operating cash flows and earnings along with total shareholder returns. The study chooses the information of 54 firms from Tehran Stock Exchange. The results show that there were some meaningful relationship between the operating cash flow, profitability and the returns of all stakeholders. However, this happens by increasing profitability and cash flow of information asymmetry proportion to their correlation with the economic efficiency of shareholders’ returns.

IFRS Adoption in Italy: Which Effects on Accounting Figures and Subjectivity?

The issue about the degree of subjectivity incidental to financial statements is topical, although it has long been studied and debated. Indeed, such issue recurs anytime new accounting rules or standards are issued. And, of course, it recurs in case of a complete renovation of the accounting system of reference, such as the one that took place in Europe in 2005, when all listed companies were required to repeal their national accounting rules and GAAP, and to adopt IFRS for the preparation of their consolidated financial statements. This study focuses on such transition with specific reference to the Italian context and explores three interconnected issues: a)identification of the changes in the evaluation criteria – from the Italian regulations and GAAP to IFRS – which actually impact on the financial statements presented by Italian companies in the year of transition; b) appreciation of the importance of such impacts, based on (1) how often each adjustment recurs; (2) whether they determine an increase or decrease of accounting figures and (3) how relevant are their effects on the main accounting figures, namely net earnings and net capital; c) discussion about the managerial discretion introduced by the most impacting evaluation criteria identified, in comparison with the Italian provisions and GAAP previously applied. The overall analysis demonstrates that IFRS introduction determined wide impacts on financial statements, affecting most assets and liabilities, but its impacts on accounting figures were less significant than could be expected. In terms ofsubjectivity, however, differences are very significant.