Accounting Scandals Research Articles

The Impact of Authority on Reporting Behavior, Rationalization and Affect

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Do characteristics of audit committees and board of directors influence earnings management?

Earnings management has attracted much attention in this globalised economic environment due to large accounting scandals such as Enron and WorldCom. National governments and other market-regulation institutions are taking measures to restrain earnings management in order to ensure the reliability and transparency of financial reporting. This study explores whether audit committees and boards of directors influence earnings management using the literary review method. The findings show that both discretionary accruals and abnormal accruals are mostly used as dependent variables to detect earnings manipulation estimated by the Jones and modified Jones models. For the most part, evidence from previous literature indicates that the more independent the members of the audit committee and board, the higher the quality of earnings in financial reporting. However, some opposite findings exist.

Audit Quality

The importance of fostering more accurate audits has been heightened by a series of high-profile accounting scandals at the beginning of the millennium. These scandals prompted more stringent regulations over corporate governance and financial reporting and the creation of audit oversight bodies as the Public Company Accounting Oversight Board (PCAOB) in the United States and the Public Oversight Board (POB) in the United Kingdom. In parallel, the growing globalization of business has brought forth calls for adherence to a common set of International Financial Reporting Standards (IFRS). Even if a common standard is promulgated, it will not lead to similar results if implementation differs across countries. Therefore, it is important to investigate the auditing regulatory regimes in different nations and the status of cross-border audit inspections. Accordingly, we begin by describing the cross-national institutions (e.g., the International Federation of Accountants [IFAC]) that impact national regulatory choices. Then we survey the audit regulatory practices of public company auditors of a select group of major economic powers and based on this analysis, we discuss the challenges and obstacles to engaging in intra-national audit, cross-national audit/inspections, and the challenges posed by differences in auditing standards used in various linked (e.g., by joint ventures, etc.) nations. We include in this discussion the effects of national culture, investor legal protection, economic development, and differing financial standard sources.

Who Should Decide Whether the Apple is Rotten? Tax Disclosure and Corporate Political Agency

Enron-type corporate financial accounting scandals in the beginning of the millennium have given rise to a renewed interest in corporate tax disclosure. Anecdotal evidence suggesting a connection between corporate fraud and aggressive tax planning has motivated academics and policymakers to reconsider tax disclosure as a way to monitor corporate governance and limit tax avoidance. This article offers a different perspective on tax disclosure, tying it to the broader question of how policymakers should monitor the political impact of corporate business activities. The article claims that policymakers should view corporations’ tax planning strategies as part of a broader corporate political impact on social issues. This impact results from the genuine difficulty of bifurcating corporate business decisions from their political ones. This difficulty is a result of many judgment calls required in such decisions, which relate to individuals’ moral and political preferences. Tax planning is one of these mixed business-political decisions, and the article advances the notion that policymakers should analyze tax planning not only as a law enforcement issue, but also through corporate governance lenses. To establish this inquiry, the article explains why the investor-shareholder relationship gives rise to political agency problems, which neither traditional nor critical corporate law literatures recognize. It then demonstrates how the costs associated with this type of agency relationship could be reduced via disclosure of information about the impact of corporate activities on issues of political concern. The article uses insights from financial markets theory to explain how disclosure of non-financial information would help to better align corporate actions with the political preferences of shareholders, despite shareholder rational passivity and apathy. It is then illustrated, through the Apple case, how policymakers can use the theoretical conclusions reached through this analysis to formulate a real world policy proposal with respect to corporation tax planning. Through its use of a wide range of interdisciplinary resources, this article aims to reformulate the multi-layered inquiry over the benefits and costs associated with corporate tax disclosure.

Review of Evidence between Corporate Governance and Mandatory IFRS Adoption from the Perspective of Agency Theory and Information Asymmetry

Prior studies illustrate the issues of agency theory stemmed from the separation between ownership and management. As such, information asymmetry between the agent and principal is the major reason why agent can take advantages from adverse selection and moral hazard, which is the obvious problem in recent accounting scandals. Boards of directors therefore have fiduciary duties to exercise effective corporate governance mechanism to control information asymmetry. We have reviewed the extant literature on whether corporate governance is positively related to more and better disclosure as an attempt to reduce information asymmetry. Also, when IFRS requires more disclosure and IFRS adoption becomes mandatory for many jurisdictions, we examined recent studies on whether firms adopting IFRS with corporate governance regimes can reduce information asymmetry by making themselves more transparent. In general, empirical findings are mixed due to the complex and inter-related nature of corporate governance systems including single-country or cross-country studies, self-constructed or comprehensive corporate governance metrics and whether self-selection and endogeneity can be controlled in modeling.

SOCIAL ENTREPRENEURSHIP AND IMPACT INVESTING

The financial crisis and accounting scandals in large companies have stimulated a thorough assessment of the contribution of enterprises and financial institutions to the greater public good and economic prosperity. This assessment has led to a revaluation of the ideas of social entrepreneurship and impact investing. In this article we explore the nature and character of these ideas by a philosophical analysis and by comparison with profit-driven organizations and corporate social responsibility. We show that social entrepreneurs and impact investors distinguish themselves by their social and environmental objectives, their focus on the justified interests of all stakeholders, and their values and world view. We also make a reasonable case that in the coming decade social entrepreneurs and impact investors will play an important role in the development of the global world.

Auditors and Corporate Governance: A Qualitative Study in Polish Public Companies

In the aftermath of major accounting scandals at the beginning of the century, significant reforms of the responsibilities of management, external auditing and corporate governance have been undertaken. A number of studies have examined the experiences of various actors (management, audit committee members, auditors and internal controllers) with corporate governance. This study is a direct response to the call for studies outside the Anglo-American model. It examines auditor’s experiences with CG in the setting of a two-tier board system and a capital market characterized by high ownership concentration. Fifteen auditors from international and local audit firms providing audit services for companies listed on Warsaw Stock Exchange participated in the study. The auditors indicate that the corporate governance environment has changed to some degree in the recent years. Corporate Governance mechanisms, effective audit committees and internal controls are often implemented in the best and biggest companies, mainly those with foreign investors. At the same time, auditors report only some reliance on corporate governance information in the planning phase and no reliance in the field-testing or review phases. The findings differ from those of prior studies (e.g., Cohen et al., 2010), in which auditors reported far greater reliance on corporate governance in all phases of the audit process. The two possible reasons for this difference in findings could be the different stages of the development of the respective capital markets and/or the different corporate governance systems.

Survey of appropriate skills required by forensic accountants: empirical evidence from a developing economy

Accounting frauds and scams are perennial. They occurred in all eras and in all countries, and affected many organizations, regardless of their size, location, or industry. From Enron and WorldCom in 2001 to Madoff and Satyam in 2009, accounting frauds and scams have been dominating news items in the past decade. Corporations and regulatory bodies are trying their best to analyze and correct existing defects in their reporting system. After having an overview of the fraud scenario in India, it is apparent that criminals have become technology-savvy, and invented newer schemes to perpetuate crimes. In the current reporting environment of “digital-age,” forensic accountants (FA’s) are in great demand for their ‘niche’ accounting, auditing, legal and investigative skills. Hence, ‘forensic’ accounting has been thrown in the “forefront of the crusade” against financial deception and accounting scandals. The present study investigates through a questionnaire, which was conducted in three leading States of the national capital region (NCR) of India during 2011-12, “if there are differences in the views of the relevant skills of FA’s among accounting practitioners, academics, and users of forensic accounting services.” From the statistical test of the hypotheses propounded for this study, we discovered that “core skills are not enough requirements for FA’s, there are significant differences in the relevant skills of FA’s, as given by previous researchers with the current research, and the necessary skills of FA’s, as identified by both academics and professionals, will hopefully meet employers’ expectations too.” Therefore, FA’s, being professional experts having ‘sixth’ sense and possessing ‘special’ skills are urgently required to counter all the ingenuity of these criminals. At present, some Universities in India are considering adding forensic accounting course to their curriculum. The results of this study may provide some guidance to educators for the development of forensic accounting curriculum by identifying the pertinent skills to accompany such a program of study.

HealthSouth, Inc.: An Instructional Case Examining Auditors' Legal Liability

ABSTRACT This instructional case explores auditors' legal liability under the Securities Exchange Act of 1934 by asking students to assume the role of either the plaintiffs' (investors') or defendants' (Ernst & Young's) legal counsel. By using publicly available documents and testimony (provided on a dedicated website for this instructional case) in their arguments, students not only explore in depth one of the more egregious accounting scandals of the new millennium, but also are exposed to the plaintiff's burden of proof and the defendant's defenses in a Rule 10b-5 action. Additionally, by understanding the root causes of the fraud and why it took so long to uncover, students can better understand a number of the provisions set forth by the Sarbanes-Oxley Act of 2002. Results of a student survey after completion of the case indicate that case objectives were met. Students also report enjoying the case materials and welcoming other cases using similar types of materials.

Sharing Accounting's Burden: Business Lawyers in Enron's Dark Shadows

A familiar pass-the-buck pas de deus in deal meetings occurs when the accountant says, after an impasse, that's a legal problem while the lawyer says that's an accounting problem. The truth is, both are right; the trouble is, as Enron shows, prevailing professional cultures create a crack between law and accounting that resolute fraud artists exploit, not cultures that emphasize the intersection of law and accounting that should foil would-be fraudsters. As policymakers rush to respond to Enron, this perspective on law and accounting should be appreciated, as should Enron's place in soecity's parade of corporate debacles. At Enron's core are accounting chicanery related to off-balance sheet financing and related party transactions, but in its penumbra are also colossal examples of governance, audit, and regulatory failure. Even in its accounting aspects, Enron is both an isolated example of fraud and epitome of systemic failure in the financial reporting and disclosure regime. It is another accounting scandal added to the sum of accounting scandals that evidences a broader dysfunction. While not in the league of the LBO, BCCI, or S&L debacles, Enron as an accounting scandal is the straw that broke the accounting camel's back. Among possible regulatory responses are wresting the standard setting function from the profession of accounting and rendering accounting rules and standards matters of law, as is done in many countries. While such a bold move would surely constitute a huge power shift from accountants to lawyers, the effect on the competent business lawyer's practice would be more modest. Competent business lawyers already treat accounting principles as an important tool in their professional toolbox, even if by virtue of the manner and source of their present promulgation they are better understood as facts rather than law. Despite the increasing role accounting plays in business law practice since the mid-1970s, accounting teaching in law schools has declined. First taught in 1950, professors at top schools rapidly published impressive books and the number teaching the subject gradually increased through 1975, its peak, and has decreased as steadily since. In 1975, 150 full-time law professors taught accounting while today only 96 do, a drop of 36% during a period when the number of law schools increased by 19% and the number of full-time law professors increased by 35%. So beginning when accounting rose in practical importance to lawyers, the academy began to demote its significance in the law school curriculum. Reasons for the decline include the rising intellectual influence of modern finance theory. This theory's efficient market hypothesis discounts the relevance of accounting data in a world where financial analysts pierce the form of accounting reports to discover fundamental values wholly apart from accounting choices. In law schools, modern finance theory became the centerpiece of a rival course, corporate finance. The string of accounting debacles culminating in Enron show the folly and fantasy of ECMH and modern finance theory. When coupled with the practice of business lawyers, questions beyond pedagogy arise, particularly the professional ethics of business lawyers. It suggests that the ethical duty of competence should require knowing some accounting. The professional literature concerning legal ethics offers a more equivocal answer. Yet all lawyers know that just because something is legal doesn't mean it is right. In the area of legal ethics, just because a duty can be technically discharged in a painless way, doesn't mean client interests are served.

The Disciplining Role of the Market Versus Government Regulation: The Case of Sarbanes-Oxley and the Earnings Quality of M&A Targets

This study examines whether and how the passage of the Sarbanes-Oxley Act (SOX) affected earnings quality, proxied by accrual measures, prior to mergers and acquisitions (MA (2) the technology bubble (1998--3/2000); (3) the bubble collapse (4/2000--9/2001); and (4) the pre-SOX scandal period (10/2001--7/2002). We document that abnormal accruals moved from significantly positive to significantly negative during the period of the major corporate scandals immediately preceding SOX, and remained negative in the post-SOX period. However, abnormal accruals in the post-SOX period were significantly less negative than during the scandals. Thus, a reduction (increase) in abnormal accruals (earnings quality) seems to have occurred concomitantly with the scandals, not as a result of the passage of SOX. We also document that investors' awareness of earnings manipulation by sellers consistently grew after the bursting of the technology bubble, as reflected in an increase in the discount applied to transaction prices throughout the sub-periods. Hence, concomitantly with the decrease (increase) in the levels of abnormal accruals (earnings quality) occurring during the scandals, the discount to transaction price due to suspected earnings manipulation also increased. Furthermore, the higher discount applied after SOX, relative to that immediately prior to SOX, implies that investors do not rely on SOX to prevent management from manipulating their earnings prior to a sale transaction. We conclude that changes in earnings quality prior to M&A transactions cannot be attributed to SOX. Rather, other events such as the bursting of the technology bubble and revelations of major accounting scandals seem to have affected managers' propensity to manipulate earnings. It seems that market response has a greater effect on managers' behavior than government regulation. Copyright 2013, Oxford University Press.

Prácticas de manipulación contable: causas y consecuencias. Un análisis de su justificación teórica

Accounting scandals that have hit the headline in last decade have been associated with Earnings Management practices which are based on discretionary practices carry out by company managers in order to satisfy their own interests. The aim of this research is to highlight not only theoretical justification of these unethical actions, but also their main causes and consequences. Furthermore, we are referring to the main models for the detection of these practices based on (i) financial decisions and (ii) real decisions.

会计道德研究回顾与展望

会计、审计人员是资本市场的重要行为主体，其职业判断决定着会计信息质量。近来，众多财务丑闻引发全社会对会计、审计人员道德取向的怀疑，因为弄虚作假首先涉及的是道德问题。本文梳理了会计道德研究，并就未来的研究方向提出了看法和建议。 Moral judgments of accounting professionals affect the quality of financial information, which is one of the keys to the smooth development of the capital market. Recent accounting scandals have raised concerns about the ethical orientations of accountants and auditors because accounting fraud is closely related to ethical problems. This paper reviews the development of theories in moral psychology and related accounting ethics research, and suggests a number of research areas and approaches for conducting accounting ethics research in the future.

Determinants of auditor changes for non-accelerated filers

Significant accounting scandals and the imminent collapse of Arthur Andersen in 2001 precipitated a period of heightened regulatory response, most notably the enactment of the Sarbanes–Oxley Act of 2002. In the years that followed, the Securities and Exchange Commission created a separate class of non-accelerated filers (companies with public float of up to $75 million) and provided these companies with significant regulatory relief from certain financial reporting disclosure and auditing requirements, including the extension of scaled disclosure to these companies in 2007. Over the period of 2001 through 2007, as non-accelerated clients anticipated and responded to their different and evolving regulatory regime, audit firms were adjusting to the increased concentration in their market, a new monitoring structure, and significant changes to the scope of their work. We examine whether auditor–client misalignment is a significant determinant of auditor change during this period, particularly for non-accelerated filers, as large auditors sought to rebalance their client portfolios. We find evidence that auditor–client misalignment increases the likelihood of auditor change (resignation and dismissal) for non-accelerated, but not accelerated, filers. We also find that auditor–client misalignment increases the likelihood of downward changes to third-tier auditors for non-accelerated, but not accelerated, filers.

What do we make of Japan? Myths and realities

The disastrous events of 2011—an earthquake and a nuclear accident, a major accounting scandal at a well-known company, and an unusual current account deficit—have brought Japan back into the international news. Although China and other countries in Asia have grown faster and gained greater attention in the last decade, Japan continues to be an important business player. Japan has the world's third-largest economy and is home to many major corporations, leading-edge technology, operational knowhow, and a strong currency. While much about Japan seems familiar, many of our beliefs about the country remain frozen in the early 1990s, when Japanese management was a hot topic and Japanese businesses appeared invincible. Japan has changed much since then, however, and deserves an updated understanding. In this article, we identify six commonly held myths about Japan, present corresponding realities, and discuss recent developments and implications for managers.

The Costs and Consequences of the Sarbanes-Oxley Act of 2002

This paper considers the economic consequences of Pub.L. 107-204, more commonly known as the Sarbanes-Oxley Act of 2002 (SOX). SOX is an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Waste Management, and WorldCom shook investor confidence in financial statements and brought about an overhaul of regulatory standards. I will address what SOX is, what it does, and the reasons for it; namely, audit and analyst failures. Next I will consider the economic implications of SOX, including its costs, benefits, and market based alternatives. Finally I will discuss the efficiency of the law itself from a Governmental standpoint, ie. litigation regarding SOX. I hope to show that through the Courts and market based solutions regulations such as SOX are inefficient and the practical outcome can be achieved in a more efficient manner.

Technology Commercialization Strategy Dynamics and Entrepreneurial Performance

Abstract: How do technology entrepreneurs formulate a commercialization strategy, and how do those choices impact performance? We present evidence from all entrants into the speech recognition industry, where a “greenfield” commercialization environment affords wide latitude in strategic choice. While the initial choice of commercialization strategy does not predict performance, subsequently “pivoting” to another strategy strongly increases the hazard of a liquidity event. Intra-industry spinoffs are particularly likely to pivot. Results are confirmed when we instrument for pivoting with the unanticipated 2001 demise of the industry’s largest technology licensor following an accounting scandal. Our results extend the literature on commercialization strategies, both by examining the dynamics of strategy-making and their impact on ultimate outcomes. They also suggest a novel mechanism underlying the success of spinoffs and indicate a possible role for dynamic capabilities in small firms.

The Elephant in the Server Room

IntroductionOrganizations tend to view governance, risk management, and compliance (GRC) as an overhead but a poor economy increases likelihood of fraud, bribery, and corruption for individuals beyond pressure of reaching often unrealistic organizational targets. Governance is process by which policies are set and decision-making is executed; risk management ensures that important business processes and behaviors remain within tolerances associated with those policies and decisions, going beyond that which creates an unacceptable potential for loss; and compliance is process of adherence to policies and decisions. The massive public failures in GRC around globe in recent years as evidenced by Enron, WorldCom, Fannie Mae, Freddie Mac, and Lehman Brothers mean that organizations and employees are under increasing pressure to conduct their business operations not only effectively and profitably but also ethically-and be able to prove it to regulators, in courts, to press, and to public. The risks associated with inappropriate ethical behavior have grown in number, likelihood, and severity. Ensuring ethical behavior among employees can gain organizations goodwill and trust of their stakeholders and clients, avoid unfavorable publicity, and protect them and their employees from legal action. Although importance of ethics in IT has been recognized for several decades in IT field, to date very little consideration has been given to need for an ethics specialized role dedicated to IT function. At same time, broader culture within a country influences its business culture that in turn influences organizational cultures as well as its legislation, which impacts how ethical behavior in organizations is viewed and promoted.In this paper we argue for such a specialized role in IT in form of an ethics officer using U.S. as point of departure. To this end this paper is structured as follows: first, we provide a brief overview of drivers for initiatives to promote ethics in organizations. Second, we examine reasons why ethics in IT function in particular is of especial importance to establish and maintain an ethical culture in organizations. The paper concludes with our argument that an Ethics Officer in IT function is needed to contribute to an ethical culture in an organization.Promoting an Ethical Culture in OrganizationsSo why is ethics so important to organizations today? In United States, Chapter 8 Part B of 2005 Federal Sentencing Guidelines entitled Remedying Harm From Criminal Conduct, and Effective Compliance and Ethics Programs (U.S. Sentencing Commission, 2005) necessitates an effective compliance and ethics program which should be designed to prevent and detect criminal conduct. It notes that this particular section is in response to section 805(a)(2)(5) of Sarbanes-Oxley Act of 2002 (U.S. House of Representatives, 2002) in which U.S. Sentencing Commission is directed to review and amend, as appropriate, guidelines and related policy statements to ensure that guidelines that apply to organizations in this chapter 'are sufficient to deter and punish organizational criminal misconduct.' The Sarbanes-Oxley Act (or SOX for short) is a U.S. federal law enacted in 2002 as a reaction to a number of major corporate and accounting scandals such as Enron and WorldCom. Then President George W. Bush, who signed it into law, called legislation the most far-reaching reforms of American business practices since time of Franklin Delano Roosevelt (quoted in Bumiller, 2002). Sarbanes-Oxley also has implications not only with respect to U.S. organizations' IT function but also for non-U.S. businesses that are listed on U.S. stock exchanges (see for example O'Conor, 2005; Anand, 2008).Apart from U.S. legislation effecting organizations in and outside U.S., there are also national legislation and/or regulation that pertain to organization's ethics (or lack thereof. …

Restoring Trust Among Investors after Shredded CPA Reputation: Evidence from China

Our study examines whether CPA firms take measures to improve their audit quality and restore trust among investors when their reputations are in danger subsequent to disciplinary actions by the government regulatory agencies in China. Compared with a control group of the CPA firms without a reputation crisis, we find that the CPA firms with shredded reputation have lower audit quality, experience more CPA turnover, and earn lower audit fees prior to the publicized accounting scandals and relevant disciplinary actions. We also find that, subsequent to the disciplinary actions, these CPA firms significantly increase their audit quality when they operate under strong legal environments and when affiliated with Big 4, have no difference in audit quality from the control group, and are less likely to be dismissed and more likely to charge higher audit fees after taking remedial action. These results should be of interest to the accounting profession in general and those in emerging markets in particular.

The determinants of the purchase of D&O insurance in Taiwanese firms: Corporate governance and management turnover perspectives

Accounting scandals in recent years have exposed that a high risk in business operations and caught the public attention. Thus, the Taiwanese government has strengthened the necessary regulations to protect shareholders’ rights, emphasizing breach of trust by managers and irresponsibility by board of directors (BOD). Situations such as class action lawsuits filed by investors against firms for deficiency in disclosures revealed that firms could purchase directors & officers liability insurance (D&O insurance) to reduce and diversify the potential risks that result in severe harms by management and board decisions. Our study also shows that decisions to purchase D&O insurance may influence the decision making process of BOD and high-level management, and it may even impact the likelihood of management turnover. The purpose of the study is to examine the main determinants that would influence the firm’s decision on whether to purchase D&O insurance. From empirical evidence, we find the purchase of D&O insurance is more likely when firms are greater in BOD independence, higher BOD average compensation, with greater high level management turnover, larger in size, and in the electronics industry. On the other hand, firms are less likely to purchase D&O insurance when there are higher frequencies in change of external auditors, greater deviation of ultimate controlling shareholders cash flow rights and equity control rights, and when firms are with greater in BOD directors serving as firm managers. However, no relationship is found for firms’ D&O insurance purchase relates to information disclosure transparency, and duality of CEO and BOD chairman