Corporate Accounting Scandals Research Articles

Statutory Auditors’ Independence in Protecting Stakeholders’ Interest: An Empirical Study

The central theme of the book is statutory auditors’ independence in protecting stakeholders’ interest which has created a lot of buzz over the last couple of years. Quite a few books have been published in this field, among which the works of Jones (2011, John Wiley & Sons), Saha (2015, Lap Lambert, Germany), Adelopo (2012, Routledge) and Saha & Roy (2017, Emerald) are notable. The book adds to the existing pool of knowledge by making a cross-country analysis of regulatory and ethical framework governing statutory auditors’ independence in select countries; comparing the statutory auditors’ independence in select cases of corporate accounting scandals; and empirically analyzing the opinion of select classes of respondents on three inter-linked themes that represent the title of the book. Corporate failures and accounting scandals had shaken the investor confidence in the accountability of big corporate houses. There had also been public disquiet about the role of professional auditors associated with these corporate scandals. Every time a scandal got exposed, question on auditors’ independence was raised. In some cases, big audit firms were observed to have a nexus with the management to falsify financial reports and in other; their unintentional negligence resulted in disastrous consequences. Stakeholders were betrayed and ethical responsibility of the auditors was questioned. Hence, statutory audit failure in the backdrop of recent corporate accounting scandals and their irreparable impact on stakeholders’ interest of the business is the main theme of the book.

Corporate governance and the performance of non-financial firms: the case of Oman

Last two decades, corporate accounting scandals have represented a serious challenge to economic sustainability. To protect the shareholders right against abusive managerial conduct, the concepts of corporate governance structures and provisions have widely attracted the attention of practitioners and researchers. The main purpose of this paper is to examine the linkage between corporate governance and the performance of non-financial firms listed on Muscat Securities Market over the period 2007-2017. Additionally, whether financial leverage acts as a mediating factor is investigated. A panel fixed effect regression is conducted to test if there is a relationship between corporate governance, capital structure and firm performance. Overall results show that women on board, audit committee size, leverage and firm size are positively related to firm performance. The study presents a strong understanding to senior management to be focused more on corporate governance codes and regulations, as well as to both internal and external auditors to strictly monitor the application of corporate governance regulations.

Audit Committee Effectiveness and Audit Fee among Listed Deposit Money Banks in Nigeria

The persistent cases of corporate accounting scandals which have rocked the Nigerian banking sector in spite of auditor certification of financial statements as free from material error have raised concern not only on the effectiveness of audit committees but also on audit services despite the huge amount charged on their clients. Hence, this study examined the effect of audit committee effectiveness on audit fee of listed deposit money banks in Nigeria. Using an ex-post facto research design, the data sourced through the annual reports of twelve (12) banks for the period between 2012 and 2018 were analysed using random-effect regression analysis. The result of the study revealed that audit committee effectiveness proxy with audit committee audit committee expertise (t-value =3.22 & p-value = 0.000), audit committee diligence (t-value = 3.57, & p-value = 0.000) and audit committee gender diversity (t-value = 3.85 & p-value =0.000) has significant positive effect on audit fee of listed deposit money banks in Nigeria. This implies that an effective audit committee would demand for high audit quality service from the auditor, thereby increasing the audit efforts and time which subsequently result to higher audit fee. The study concluded that an effective audit committee would demand high audit service from the external auditor thereby ensuring that the financial statement published is relevant and of faithful representation.

Corporate Governance Changes as a Signal: Contextualizing the Performance Link

Promoting “good” corporate governance has become an important concern. One result has been the creation of indexes that purport to measure the quality of a firm’s corporate governance structure. Prior scholarship reports a positive relationship between firms with good corporate governance index ratings and stock-price-based measures of a firm’s ability to create share value, such as Tobin’s Q. Little work, however, explores why we observe this relationship.We hypothesize one reason for the relationship is that a rating-altering change in corporate governance structure can be a signal concerning the quality of a firm’s management. Changes in governance structures that result in better ratings tend to make a firm’s management more vulnerable to a hostile takeover, or give independent directors or activist shareholders more voice. These effects impose lower costs on high quality managers, who have less to fear, than on poor quality ones. The willingness of a firm’s managers to make such a change thus signals that they are high quality. This positive signal leads to a share price improvement and hence a higher Tobin’s Q.Our hypothesis suggests that this signal would be particularly strong in a period where there was unusually high uncertainty about the quality of firm managers. We focus on 2001-2002, a period of an unprecedented cascade of corporate accounting scandals, including Enron and WorldCom. This led to reduced confidence in the accounting of all the other firms in the market. Using a fixed effect regression technique, we compare the change in Tobin’s Q for firms that engaged in rating-altering governance changes during this 2001-2002 period with the parallel change in Q for firms making such changes in the years surrounding the accounting scandal period (1992-2000 and 2003-2006). Consistent with our hypothesis, we find that an improved governance index score in the accounting scandal years is associated with a much larger increase in Tobin’s Q than a comparably sized rating improvement occurring in the surrounding years. We empirically rule out that this finding is solely the result of one or both of the finding’s two most likely alternative explanations. One is that having a structure with a higher rating leads over time to a firm having higher quality managers, and that higher quality managers are particularly appreciated in crisis times. A second is that managers, regardless of quality, are better motivated and informed when operating under a more highly rated governance structure, and that these drivers of better performance are particularly valuable in crisis times. Using an OLS regression technique, we compare the cross-sectional relationship between the sample firms’ governance ratings and their Tobin’s Qs for 2001-2002 with the parallel relationship in the years surrounding the accounting scandal period (1992-2000 and 2003-2006). There was no significant difference between the crisis years and the ordinary ones. In other words, in contrast to firms that changed their governance structures in the 2001-2002 period, for firms that did not change, there was no difference between 2001-2002 and other times in the strength of impact on Tobin’s Q from having a good rating versus a bad one.By enhancing share price accuracy, reducing the asymmetry of information between the market and corporate insiders concerning the quality of management enhances the efficiency of the economy. Our results show how the signaling activities of private actors can help in this regard. They also suggest how sharply asymmetries about management quality can grow if regulatory and gatekeeper failures allow a substantial number of accounting frauds to develop.

Does Economic Rationalization Decrease or Increase Accounting Professionals\u2019 Occupational Values?

Following corporate accounting scandals there has been an increasing concern with understanding the factors that undermine the occupational values of accounting professionals, which emphasize self-transcendence in the pursuit of public good and openness to change in the pursuit of autonomy and creativity. Prior studies have demonstrated that these values are undermined in economically rationalized organizational environments. Our study advances this research by examining how accounting professionals’ occupational values are influenced by the economic rationalization of countries where they are employed. While economic rationalization of countries is recognized as a key macrostructural, social-level influence on individual values, the theory is divided regarding its normative effects. While economic rationalization may decrease the priority of occupational values by transforming professional action in accordance with the calculative logic of economic rationality, it can also increase the priority of these values by providing resources necessary for freeing professionals from the material constraints of survival. We test these divergent insights using the European Social Survey data for 28 countries. Our results indicate that economic rationalization decrease accountants’ occupational values beyond the effects of cultural values and work-related characteristics.

A critical review of corporate governance reforms in Malaysia

Following the East-Asian financial crisis in 1997 and the corporate accounting scandals, the shareholder’s confidence in the audited financial statements was adversely affected and regulators started to think seriously reforming the existing corporate governance practices. As a result, numerous initiatives were implemented to accelerate improvement of corporate governance practices. One of these initiatives was the Malaysian Code on Corporate Governance (MCCG). The code was derived from the approach applied by the British Hampel Committee, which attempt to mitigate the agency problem between corporate managers and outside owners. This study suggests that the British approach is unsuitable to Malaysian business environment. Particularly, the MCCG that had been lunched since 2011 ignore the uniqueness of Malaysia’s capital market, regulation environment and ownership structure. Therefore, the study recommends that policy makers and other regulators should consider the local business environment when establishing future code on corporate governance.

Statutory Auditors' Independence in Corporate Accounting Scandals: A Case Study of Satyam Computer Services Ltd

Statutory auditors are professional accountants, external to the business enterprise, appointed to verify authenticity of financial statements of a corporate entity. They accept their responsibility to act in public interest. Thus, auditors play an important role in the economy in protecting stakeholders' interest. In India, Chartered Accountants (CA) perform the significant task of statutory audit of financial statements in Indian companies. Since the financial decision of a large part of the society related to businesses depends upon their opinion, professional institutions like The Institute of Chartered Accountants of India (ICAI) enforce certain regulatory pronouncements to maintain their integrity, independence, and unbiased functioning. These regulatory pronouncements require a statutory auditor to avoid circumstances that may cause threats to their independence. However, if threats are unavoidable, regulation also requires an auditor to apply safeguards available in their work environment or offered by regulation or disciplinary, academic, or non-academic measures. This framework is designed to ensure independence of the statutory auditor in an audit engagement with an ultimate goal of protecting stakeholder interest. In the present day economic environment, greed and tremendous urge to survive in the cut throat competition induces some company managements to breach accounting laws and manipulate their financial statements. Accounting irregularities in the financial statements eventually come under the regulatory radar, leading to a company's demise, thereby impacting most of its stakeholders. Every time a scandal is revealed, a question is raised regarding the auditors' sincerity, integrity, and independence. On many occasions, ensuing investigations into fraud detect an unholy nexus between statutory auditors and managements or their inadvertent negligence that caused disastrous consequences. Among many scandals in different parts of the globe, one notable Indian scandal where independence of the statutory auditor was questioned was the scandal at Satyam Computer Services. In this study, an attempt was made to analyze the extent to which independence of the statutory auditor in the said scandal was impaired and the study also identified possible causes behind it.

Statutory Auditors' Independence in Corporate Accounting Scandals: A Case Study of Satyam Computer Services Ltd

Statutory auditors are professional accountants, external to the business enterprise, appointed to verify authenticity of financial statements of a corporate entity. They accept their responsibility to act in public interest. Thus, auditors play an important role in the economy in protecting stakeholders' interest. In India, Chartered Accountants (CA) perform the significant task of statutory audit of financial statements in Indian companies. Since the financial decision of a large part of the society related to businesses depends upon their opinion, professional institutions like The Institute of Chartered Accountants of India (ICAI) enforce certain regulatory pronouncements to maintain their integrity, independence, and unbiased functioning. These regulatory pronouncements require a statutory auditor to avoid circumstances that may cause threats to their independence. However, if threats are unavoidable, regulation also requires an auditor to apply safeguards available in their work environment or offered by regulation or disciplinary, academic, or non-academic measures. This framework is designed to ensure independence of the statutory auditor in an audit engagement with an ultimate goal of protecting stakeholder interest. In the present day economic environment, greed and tremendous urge to survive in the cut throat competition induces some company managements to breach accounting laws and manipulate their financial statements. Accounting irregularities in the financial statements eventually come under the regulatory radar, leading to a company's demise, thereby impacting most of its stakeholders. Every time a scandal is revealed, a question is raised regarding the auditors' sincerity, integrity, and independence. On many occasions, ensuing investigations into fraud detect an unholy nexus between statutory auditors and managements or their inadvertent negligence that caused disastrous consequences. Among many scandals in different parts of the globe, one notable Indian scandal where independence of the statutory auditor was questioned was the scandal at Satyam Computer Services. In this study, an attempt was made to analyze the extent to which independence of the statutory auditor in the said scandal was impaired and the study also identified possible causes behind it.

Evidences of Vagueness in the Accounting Standards and Their Consequences for the Principles- versus Rules-Based Debate

Since the outbreak of corporate accounting scandals such as Enron case, claims for standards based in principles instead of in rules became more frequent and enthusiastic. Then, standard setters introduced a transition to a more principles-based approach and the immediate consequence of such a transition is the increasing need of professional judgment in accounting. However, principles-based standards tend to be more intensively characterized by vagueness (Penno, 2008). The literature has addressed the rules- versus principal-based accounting standards debate, but questions about how accounting decisions are made under vague conditions were hardly explored in practical terms: this is our focus. To address such an issue, we formulated two propositions: (1) accountants’ decisions made under vague conditions are significantly different from those made under non-vague conditions; and as an alternative explanation, (2) accountants’ decisions can be influenced by their individual cognitive reflection ability. To test the hypotheses connected to those proposition, we collected data via a questionnaire containing accounting tasks related to the classification of assets and cash flows, and the three questions from the Cognitive Reflection Test developed by Frederick (2005). Based on a sample of 859 accountants, we developed univatiate analyses and found that the dispersion on classification is significantly higher under vague conditions, than under non-vague conditions. Moreover, the results suggest that the cognitive reflection ability does not help accountants to deal with vague circumstances. Thus, no matter how much they reflect about a transaction, such dispersion persists. It mitigates the consistent application of IFRSs and the quality of accounting information – indeed, its comparability.

Účetnictví pohledem institucionální ekonomie

V souvislosti s účetními skandály firem obchodovaných na amerických burzách cenných papírů nastala renesance zájmu o funkci účetnictví nazývanou skládání účtů. Článek se zabývá ekonomickou podstatou účetnictví pohledem institucionální větvě ekonomické teorie. Dále je analyzován vztah vlastník-manažer prizmatem modelu principál-agent. Výchozí model teorie zastoupení pomáhá mj. odhalit příčiny, které vedly k selhání auditorské profese na počátku tohoto tisíciletí. V reakci na tyto skandály přijal americký Kongres tzv. Sarbanes- Oxley Act, ve kterém jsou zavedena nová pravidla regulace účetnictví a auditu s cílem chránit investory před nelegálními praktikami.

Framework for e-mail records management in corporate environments

The corporate accounting scandals have forced businesses to improve the management level of corporate e-mail records. To provide the management framework of e-mail records in corporate environments is the purpose of this paper. This paper investigates an industrial state of e-mail record management using questionnaires. Based on the literature reviews on security management and regulations, and according to the result of questionnaires, the purpose of the e-mail record management is provided. Finally, a management framework is suggested to improve the management of corporate e-mail records.

The Strategic Background to Corporate Accounting Scandals

The accounting scandals that rocked the corporate world have been blamed on a range of factors, including unethical behaviour among executives, incentives to manipulate financial information for personal gain and lack of independence among monitors. This paper introduces an additional cause: weaknesses in strategic management. The thesis is that the 1990s boom was associated with less attention by major companies to the fundamentals of strategic analysis. Supporting evidence is provided by case studies of 12 US and European companies involved in major accounting scandals during 2001–3. Among these companies the authors identify a misfit between the strategy pursued and either the requirements of external environment or the companies' resources and capabilities. Examples of strategic misfit included: overambitious growth targets, multiple acquisitions and excessive debt financing. Inappropriate strategies led to deteriorating performance and an increasing divorce between top management aspirations and business reality. The paper concludes by saying that as more rigorous requirements for company reporting result in board members and executives redirecting their efforts from strategy to compliance, recent regulatory measures may do little to enhance effective corporate governance.

Corporate scandals and the market response of dividend payout changes

This paper examines whether the dividend valuation changed after corporate accounting scandals such as that of Enron in October 2001 broke out. We find that dividend increasing firms experienced positive abnormal returns in the industry affected by corporate scandals up to four months after the first scandal in the industry became public. We interpret this finding in the context of the agency theory of Jensen (1986). To provide a perspective, we examine the dividend valuation from early 1980s to early 2000s, and find that the dividend valuation increased consistently for this time period. We also find that the dividend valuation was highest in the information technology industry after the year 2000. These findings fit well with the agency theory as well.

Following the money: the Enron failure and the state of corporate disclosure

A few years ago, Americans held out their systems of corporate governance and financial disclosure as models to be emulated by the rest of the world. But in late 2001 U.S. policymakers and corporate leaders found themselves facing the largest corporate accounting scandals in American history. The spectacular collapses of Enron and Worldcom uas well as the discovery of accounting irregularities at other large U.S. companies useemed to call into question the efficacy of the entire system of corporate governance in the United States. In response, Congress quickly enacted a comprehensive package of reform measures in what has come to be known as the Sarbanes-Oxley Act. The New York Stock Exchange and the NASDAQ followed by making fundamental changes to their listing requirements. The private sector acted as well. Accounting firms uwatching in horror as one of their largest, Arthur Andersen, collapsed after a criminal conviction for document shredding utightened their auditing procedures. Stock analysts and ratings agencies, hit hard by a series of disclosures about their failings, changed their practices as well. Will these reforms be enough? Are some counterproductive? Are other shortcomings in the disclosure system still in need of correction? These are among the questions that George Benston, Michael Bromwich, Robert E. Litan, and Alfred Wagenhofer address in Following the Money . While the authors agree that the U.S. system of corporate disclosure and governance is in need of change, they are concerned that policymakers may be overreacting in some areas and taking actions in others that may prove to be ineffective or even counterproductive. Using the Enron case as a point of departure, the authors argue that the major problem lies not in the accounting and auditing standards themselves, but in the system of enforcing those standards. Rather than attempting to craft a single set of accounting and reporting standards for all companies throughout the world, the authors advise policymakers to allow competition between the two major sets of standards: Generally Accepted Accounting Principles and International Financial Reporting Standards. The authors also believe that the corporate disclosure system needs to be updated to reflect changes in the underlying economy. In particular, they recommend new forms of disclosure for a variety of nonfinancial indicators to better enable investors and analysts to ascertain the source and nature of intangible assets. They also urge policymakers to exploit the advantages of the Internet by encouraging more frequent financial disclosures in a form that will make them more widely accessible and more easily used.

The Sarbanes–Oxley Act and non-US issuers: Considerations for international companies

The Sarbanes–Oxley Act of 2002 was signed into law by President George W. Bush on 30th July, 2002, in the wake of an unprecedented wave of corporate governance and accounting scandals that fundamentally shook public confidence in the integrity of the US securities markets. The Act's widespread effects continue to be analysed and dissected by companies and their advisors both in the USA and abroad. One of the most controversial elements of this legislation is its impact outside the borders of the USA, which is beginning to affect some of the most basic corporate governance and disclosure practices of companies worldwide. Foreign issuers subject to the Act must now begin to review their corporate governance practices carefully in order to ensure compliance with the new rules.

Corporate Governance and Accounting Scandals

Abstract This paper empirically examines whether certain corporate governance mechanisms are related to the probability of a company restating its earnings. We examine a sample of 159 U.S. public companies that restated earnings and an industry‐size matched sample of control firms. We have assembled a novel, hand‐collected data set that measures the corporate governance characteristics of these 318 firms. We find that several key governance characteristics are unrelated to the probability of a company restating earnings. These include the independence of boards and audit committees and the provision of nonaudit services by outside auditors. We find that the probability of restatement is lower in companies whose boards or audit committees have an independent director with financial expertise; it is higher in companies in which the chief executive officer belongs to the founding family. These relations are statistically significant, large in magnitude, and robust to alternative specifications. Our findings ...

Corporate Governance and Accounting Scandals

This paper empirically examines whether certain corporate governance mechanisms are related to the probability of a company restating its earnings. We examine a sample of 159 U.S. public companies that restated earnings and an industry-size matched sample of control firms. We have assembled a novel, hand-collected dataset measuring corporate governance characteristics of these 318 firms. We find that several key governance characteristics are unrelated to the probability of a company restating earnings. These include the independence of boards and audit committees, and the provision of non-audit services by outside auditors. We find that the probability of restatement is lower in companies whose boards or audit committees have an independent director with financial expertise; it is higher in companies where the CEO belongs to the founding family. These relations are statistically significant, large in magnitude, and robust to alternative specifications. Our findings are consistent with the idea that independent directors with financial expertise are valuable in providing oversight of a firm's financial reporting practices.

The Sarbanes–Oxley Act and non-US issuers: Considerations for international companies

The Sarbanes–Oxley Act of 2002 was signed into law by President George W. Bush on 30th July, 2002, in the wake of an unprecedented wave of corporate governance and accounting scandals that fundamentally shook public confidence in the integrity of the US securities markets. The Act's widespread effects continue to be analysed and dissected by companies and their advisors both in the USA and abroad. One of the most controversial elements of this legislation is its impact outside the borders of the USA, which is beginning to affect some of the most basic corporate governance and disclosure practices of companies worldwide. Foreign issuers subject to the Act must now begin to review their corporate governance practices carefully in order to ensure compliance with the new rules.