Discretionary Accruals Quality Research Articles

Does the Disclosure of an Audit Engagement Partner’s Name Improve the Audit Quality? A Difference-in-Difference Analysis

On 15 December 2015, the Public Company Accounting Oversight Board (PCAOB) passed Rule 3211, requiring audit firms registered with PCAOB in the U.S. to disclose the audit engagement partner’s name in the Form AP, effective 31 January 2017. The regulation aims to improve the transparency and quality of audits, thereby increasing investors’ confidence in financial statements. Using the audit firms registered with the PCAOB and their clients as the treated sample, we employed a difference-in-difference analysis to investigate whether and the extent to which implementing Rule 3211 impacts audit quality and audit costs. We compared the audit quality (proxied by the abnormal discretionary accruals quality, the probability of restating the financial statements, and the ratio of the audit fees to the total fees) and audit costs (proxied by the total audit fees) from one year (up to three years) pre- to one year (up to three years) post-Rule 3211, to a control sample (comprised of U.K. audit firms, which were not subject to such regulation during the sample period). The empirical results generally indicate that there was an increase in the audit quality and in the audit costs from the pre- to the post-Rule 3211 period and also suggest that auditor independence increased in the post-regulation period compared to the pre-regulation period. Our empirical results are new and contribute to the research on the PCAOB and audits.

THE INFLUENCES OF ACCRUALS QUALITY AND TAX MANAGEMENT ON THE FUTURE MARKET VALUE: CASE STUDY OF THE LISTED FIRM ON INDUSTRY MANUFACTURING SECTORS

This empirical research has proven that the investor insisted on the management to level up the earnings quality constantly, there is no tolerance for any distortion, including the negative effect of opportunistic accruals. The high earning quality paves out the way for the investor to calculate the future return accurately, by minimizing the volatile movement of market price and agency cost. This research tested how the accruals quality and tax management influences the investor’s perception in the future, that measured by future market value. The observation data had used the samples on the listed company in the industrial manufacturing sector for the period 2015 until 2017, which had amounted to 384 observation data. This multiple regression model with data panel has used the discretionary accruals quality, tax management, and future market value, the result is the earnings quality has a positive influence on the future market value significantly. The management should carry out consistently all available tax accounting standards and tax regulations at the maximum level without any infringement, this one is related to deduct the risk. It is an implication of the Signalling and Regulation Theory. The investor has realized the gap between the accounting standard and tax regulation intolerance zone, absolutely it has no crucial impact on the volatile movement of the market price. Primarily they concern about the high book and tax accruals, meanwhile ignoring both positive or negative. Principally, the high-quality accounting information has a contribution to predicting the better-expected return accurately in the future period, this is aimed to protect the investment in the high safety area.

Accruals quality and the cost of debt: Evidence from Vietnam

This study investigates the impact of accruals quality (AQ) on the cost of debt. Using a sample of Vietnamese listed companies during the period 2012–2017, we show that AQ has a significant negative relation with the cost of debt. Particularly, the 10% best AQ firms enjoy a 1.35% lower interest costs than the 10% worst AQ firms. Furthermore, the discretionary AQ component has a significant negative association with the cost of debt, while innate AQ shows an insignificant impact on the cost of debt. The study delivers an important message to firms regarding the economic benefits of providing high-quality accounting information.

The relation between CEO equity incentives and the quality of accounting disclosures: New evidence

This paper provides new evidence on the negative relation between CEO equity incentives and accounting disclosure quality. We analyze a comprehensive set of disclosure quality variables, including discretionary accruals quality, the quantity and quality of voluntary disclosures, fineness of reported financial statement information, and the narrative quality of regulatory filings, and use them to create information disclosure quality indices. We address the potential endogeneity of CEO equity incentives by conducting two-stage least squares/IV models and natural experiments created by situations in which there is an exogenous shock to the use or value of CEO stock options. Our results are robust to subsample analyses and to alternative measures of the incentives created by CEO options.

THE ACCRUALS QUALITY AND THE ESTIMATED FUTURE PERFORMANCE

This previous empirical research has shown out, that the usage of accruals had the contribution negatively on investor’s perception, this current research has shown that the discretionary accruals quality had a positive contribution, which paves the way for investors to predict the future performance by concerning on the effect of dividend’s phenomenon. By developing out the measurement of the future prospect, this research has used the future market value as a new indicator, where the accounting information has a significant effect on an investment decision. This moderated multiple regression has used the dividend policy, where played a critical role in signaling communication, Thus, The causal research has the samples, that amounted 154 of the listed companies in the industrial manufacturing sector for the period 2015 until 2017. The result indicated that the discretionary accruals quality had given a practical guideline for the investor to estimate the future return with high accuracy. This dividend policy has minimized the pattern of opportunistic behavior in providing a misleading bias in the performance reporting when the dividend has strengthened the discretionary accruals quality positively on the future market value. By developing a mapping with the decision model, combined with Bayes Theorema, empirical research provides a brief illustration, pointed out the high financial statements quality implies the game theory. This research recommended that this dividend policy can be used as a mandatory obligation, and the regulators must issue public policies, which provide a push to management in implementing high accounting information quality.

PEMETAAN PERILAKU OPPORTUNISTIK TERHADAP PROSPEK PERUSAHAAN MENDATANG MELALUI AKTIVITAS MANIPULASI

This research have tested out the influence of opportunistics’s behaviour on the fluctuation of market price by using the manipulation activity later this research provide the mapping between investor’s decision with accruals quality in financial reporting. Because of the usefullness information financial reporting, so that the investor can done the predicting the future prospect by estimating the growth rate, so it give the feedback to management. The dividend policy can be used s as the communication process, management have proclivity to diseminate that the prospect had been better in the future. The previous research had tested out the using of accruals had been the negative perspective on investor’s view, so the research have developed out the estimation of discretionary accruals quality as an critical measurement of reducing the opportunistic behaviour. This research used the statistics model by developing the the multiple regresion by developing out the new indicators for the estimated price, that based on earnings and equity as independent variables. This research have the causal approach by using the purposive sampling on the manufacturing industry by using the real based manipulation activity, so the manipulation activity had been treated as a proxy for grouping the patern of opportunistics behaviour. By using future market value based on earning and equity, the investor have enough capability in detecting the earning management, the investor have calculated the net market value in predicting the company’s prospect in future. In this research have developed out the accruals quality literature by mapping the feedback of interaction in decision tree model with Teorema Bayes. The positive perception of dividend policy show out the investor involvement in formulating cooperate operational policy. The investor’s positive perception can be formed when they found “the good” news by detecting out the negative manipulation and high accruals quality. It has paved the investor out the way in controlling and monitoring the company’s performance for the better prospect one. As novelty, this research have created out the new measurement in earning quality (by modifying a new formula for discretionary accruals quality) and future value market (based on earnings and equity). By re-shaping the new paradigms of the financial statement’ concept as decision usefulness information, this research have created out the predictive model in describing out the investor’s perception and the asymmetric information area in efficient market.

PEMETAAN PERILAKU OPPORTUNISTIK TERHADAP PROSPEK PERUSAHAAN MENDATANG MELALUI AKTIVITAS MANIPULASI

This research have tested out the influence of opportunistics’s behaviour on the fluctuation of market price by using the manipulation activity later this research provide the mapping between investor’s decision with accruals quality in financial reporting. Because of the usefullness information financial reporting, so that the investor can done the predicting the future prospect by estimating the growth rate, so it give the feedback to management. The dividend policy can be used s as the communication process, management have proclivity to diseminate that the prospect had been better in the future. The previous research had tested out the using of accruals had been the negative perspective on investor’s view, so the research have developed out the estimation of discretionary accruals quality as an critical measurement of reducing the opportunistic behaviour. This research used the statistics model by developing the the multiple regresion by developing out the new indicators for the estimated price, that based on earnings and equity as independent variables. This research have the causal approach by using the purposive sampling on the manufacturing industry by using the real based manipulation activity, so the manipulation activity had been treated as a proxy for grouping the patern of opportunistics behaviour. By using future market value based on earning and equity, the investor have enough capability in detecting the earning management, the investor have calculated the net market value in predicting the company’s prospect in future. In this research have developed out the accruals quality literature by mapping the feedback of interaction in decision tree model with Teorema Bayes. The positive perception of dividend policy show out the investor involvement in formulating cooperate operational policy. The investor’s positive perception can be formed when they found “the good” news by detecting out the negative manipulation and high accruals quality. It has paved the investor out the way in controlling and monitoring the company’s performance for the better prospect one. As novelty, this research have created out the new measurement in earning quality (by modifying a new formula for discretionary accruals quality) and future value market (based on earnings and equity). By re-shaping the new paradigms of the financial statement’ concept as decision usefulness information, this research have created out the predictive model in describing out the investor’s perception and the asymmetric information area in efficient market.

이익의 질과 재량적 발생액이 기업의 고유위험에 미치는 영향에 관한 연구

이익의 질과 재량적 발생액이 기업의 고유위험에 미치는 영향에 관한 연구

The pricing of accruals quality in credit default swap spreads

AbstractWe examine the association between accounting information risk, measured with accruals quality (AQ), and credit spreads, primarily measured with credit default swap (CDS) spreads. Theoretically, AQ measures the precision with which accruals map into cash flows. Better AQ implies a more precise estimate of future cash flows and, we predict, a reduction in credit spreads due to resulting lower uncertainty regarding the ability to meet debt interest and principal payments. In support of this hypothesis, we find a negative relationship between AQ and CDS spreads whereby better AQ is associated with lower CDS spreads. Additionally, we investigate the components of total AQ and find that innate AQ is more strongly associated with CDS spreads than is discretionary AQ. We further show that AQ moderates the market's pricing of earnings: the relationship between earnings and CDS spreads weakens as AQ worsens. Together, our results indicate that accounting information risk is priced in credit spreads and that the CDS market responds not only to the level of earnings, but the quality thereof as well.

State ownership and the market pricing of accruals quality

This paper examines the effect of state ownership on the market pricing of accruals quality. We find that the market pricing effect of accruals quality is larger for non-state-owned enterprises than for state-owned enterprises in China. The results still hold when we divide accruals quality into innate and discretionary accruals quality. Further analyses reveal a higher level of expropriation and a greater fundamental risk in non-state-owned enterprises, leading to a larger market pricing effect of accruals quality. This paper is the first to study the governance role of state ownership from the perspective of market pricing of accruals quality. It also adds to the literature on the market pricing of accruals quality by studying its link with state ownership.

Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality?: A Firm- and Office-Level Analysis

Prior research on the audit quality effects of Big N audit firm mergers is sparse. In this study, we examine the effects of the 1998 merger of Price Waterhouse (PW) and Coopers & Lybrand (CL) on the audit quality of PricewaterhouseCoopers (PwC) at both the firm- and the local office-levels, where audit quality is surrogated by the auditor’s propensity to issue a going concern opinion and the client’s discretionary accruals and accruals quality. At the firm-level, we find only weak evidence of an increase in audit quality for the merged firm (PwC) relative to the audit quality of the pre-merger component firms (PW and CL). At the office-level, we find stronger evidence of an increase in audit quality following the merger but only at the firm’s overlapping local offices, i.e., PwC offices in cities where both PW and CL had separate offices prior to the merger. Following the merger, these overlapping offices immediately increased in size as a result of merging the pre-existing (but separate) PW and CL local offices. Overall, the evidence suggests that Big N mergers increase audit quality only to the extent that there is an increase in office size.

RATINGS: IT'S ACCRUAL WORLD

AbstractLoss reserves are a discretionary tool for managing insurer earnings, with more accurate and/or less volatile reserve errors resulting in higher accruals quality. We investigate whether accruals quality is related to insurer financial strength ratings. Specifically, we use insurer loss reserve errors as a measure of the quality of accruals and examine whether overall accruals quality, as well as a decomposition into innate and discretionary accruals quality, is related to insurer financial strength ratings. We find that firms with lower‐quality (noisier) accruals receive lower financial strength ratings from A.M. Best. This result holds for both innate and discretionary accruals. Overall, we provide the first evidence that the quality of accounting information is a significant factor in ratings of insurance firms.

Busy Auditors, Ethical Behavior, and Discretionary Accruals Quality in Malaysia

The required professional and ethical pronouncements of accountants mean that auditors need to be competent and exercise due care and skill in the performance of their audits. In this study, we examine what happens when auditors take on more clients than they should, thus raising doubts about their ability to maintain competence and audit quality. Using 2803 observations of Malaysian companies from 2010 to 2013, we find that auditors with multiple clients are associated with lower earnings quality, proxied by total accruals and discretionary accruals. Our results demonstrate that associating client firms’ reported discretionary accruals with individual auditors, rather than their firms or offices, is important in determining audit quality. Moreover, we demonstrate that the disclosure of auditors’ signatures on their reports is useful for assessing auditor quality at the individual level, thus contributing to the debate on the usefulness of having auditor identities on reports.

The Effects of Accruals Quality on Audit Hours and Audit Fees

We investigate whether auditors take into account accruals quality, a proxy for the cash flow risk associated with earnings, by adjusting audit hours and audit fees. Accruals quality tells investors about the mapping of accounting earnings into cash flows. Poor accruals quality weakens this mapping and thus increases this cash flow risk. We find a negative relationship between accruals quality and audit hours/fees, indicating that auditors increase their audit efforts by modifying audit procedures and substantive tests and charge higher fees for the increased cash flow risk. In addition, we find that both innate accruals quality and discretionary accruals quality are negatively related to audit hours and fees but that innate accruals quality is more likely to influence audit hours and fees than discretionary accruals quality. The results indicate that auditors incorporate the cash flow risk associated with accruals quality but that their response varies according to the source of accruals quality.

Accruals Quality, Disclosure Costs, and Management Guidance

Research examining managers’ propensity to provide earnings guidance generally focuses on external costs and benefits of such disclosure. Motivated by voluntary disclosure theory, I argue that internal costs of disclosure likely play a significant role in the forecasting decision. Prior research suggests accruals quality (AQ) provides an indication of the quality of managers’ earnings-related information, as accruals that are of higher (lower) quality presumably arise from higher (lower) quality information. I contend that innate and discretionary components of AQ have opposite relations with information acquisition costs, an important theoretical determinant of disclosure. Specifically, higher levels of innate AQ suggest managers bear low information acquisition costs, leading to a positive theoretical association with voluntary disclosure. Conversely, higher discretionary AQ indicates greater information acquisition costs, which offsets the benefit of high quality information. Using forecast occurrence, frequency, timeliness, and specificity as proxies for the quality of voluntary disclosures, I find evidence consistent with these predictions. Further, improvements in innate AQ correspond to a higher (lower) likelihood of starting (stopping) a policy of forecasting. Finally, I show that the quality of “low-cost” information (innate AQ) moderates the effects of several previously identified determinants of forecasting, including institutional holdings, abnormal audit fees, product market competition, and litigation risk. Overall, my results are consistent with theory suggesting information acquisition costs play important roles in managers’ forecasting decisions.

The role of diversification in the pricing of accruals quality

Prior studies suggest that accounting information risk, primarily idiosyncratic in nature, can be diversified away. I show that accounting information risk, proxied by accruals quality, is priced even if it is entirely idiosyncratic. Building on a model developed in the ambiguity literature, I predict that, (1) in an under-diversified market, idiosyncratic information risk is priced even if it is diversifiable, and (2) in a well-diversified market, idiosyncratic information risk is priced when information is subject to managers’ discretion and thus ambiguous. The empirical results corroborate the predictions from the model. An association is observed between (unambiguous if risky) innate accruals quality and cost of capital. This association can be largely mitigated through diversification. However, diversification has little impact on the association between (ambiguous) discretionary accruals quality and cost of capital.

The Role of Diversification in the Pricing of Accruals Quality

Prior studies suggest that accounting information risk, primarily idiosyncratic in nature, can be diversified away. I show that accounting information risk, proxied by accruals quality, is priced even if it is entirely idiosyncratic. Building on a model developed in the ambiguity literature, I predict that (1) in an under-diversified market, idiosyncratic information risk is priced even if it is diversifiable, and (2) in a well-diversified market, idiosyncratic information risk is priced when information is subject to managers' discretion and thus ambiguous. The empirical results corroborate the predictions from the model. An association is observed between (unambiguous if risky) innate accruals quality and cost of capital. This association can be largely mitigated through diversification. However, diversification has little impact on the association between (ambiguous) discretionary accruals quality and cost of capital.

Auditor Tenure and the Pricing of Discretionary Accruals in the Post-SOX Era

ABSTRACTThis study empirically examines the public policy implications of mandatory audit firm rotation in the context of the relation between auditor tenure and the market's perception of discretionary accruals quality in the pre- and post-SOX periods. Consistent with prior research, the pre-SOX results support the effects of auditor learning and auditor closeness on the relation between auditor tenure and audit quality. We further demonstrate that in the post-SOX period, there is no significant relation between auditor tenure and the pricing of discretionary accruals. The post-SOX results indicate that the market's perception of auditor tenure as a significant determinant of audit quality may have diminished in the environment of increased regulation under SOX. The findings further imply that ongoing consideration of a policy that mandates periodic audit firm rotation may no longer be essential with the passage of SOX.Data Availability: Data used in this study were obtained from publicly available sources identified in the text.

Innate and discretionary accruals quality and corporate governance: A case study of Tehran Stock Exchange

Article history: Received June 28, 2012 Received in Revised form August, 26, 2012 Accepted 29 August 2012 Available online 6 September 2012 In this paper, we present an empirical study to find the relationship between discretionary accruals quality as well as innate accruals quality and portion of non-executive board of directors, concentration of ownership ratio and board size in Tehran Stock Exchange. The survey selects 118 qualified stocks from this exchange and using a random technique chooses 42 firms. The study implements two linear regression techniques to estimate the first part of the information and then using structural equation modeling examines six hypotheses. Based on the results of this survey we can conclude that an increase on non-executive members positively influences on discretionary accruals quality and negatively influences innate accruals quality. Concentration of ownership ratio positively influences on discretionary accruals quality and negatively impacts on innate accruals quality. Finally, size of board of directors negatively impacts discretionary accruals quality and positively influences on innate accruals quality. © 2012 Growing Science Ltd. All rights reserved.

Accruals quality and the incentive contracting role of earnings

This paper investigates the association between accruals quality and the usefulness of accounting earnings in incentive contracting. Accruals quality, which measures the precision with which accruals predict future cash flows, has two potential opposing effects on the noise in earnings as a measure of managerial performance. Specifically, higher quality accruals should decrease the deviations of earnings from future cash flows and increase the sensitivity of earnings to cash flows that are not attributable to managerial actions. My evidence indicates that better accruals quality is associated with a higher weight on earnings in compensation contracts, which suggests that accruals quality overall reduces the noise in earnings. I also find that the positive association between accruals quality and the weight on earnings is mainly driven by innate accruals quality rather than discretionary accruals quality. Therefore, accrual errors resulting from the volatility of the operating environment are a primary source of noise in earnings considered by compensation committees.