Discretionary Accruals Research Articles

Does employee ownership improve labour investment efficiency? Evidence from European firms

This paper studies the impact of non-executive employee ownership on labour investment efficiency for a sample of European firms. It empirically documents a negative association between employee ownership and labour investment inefficiency, which serves an inverse measure of labour investment efficiency. This negative association is notably more pronounced for firms reporting higher discretionary accruals in their financial statements (i.e. firms with higher information asymmetry) and for those with a lower percentage of independent directors (i.e. firms with greater agency problems). As such, this paper offers evidence that employee shareholding enhances employment decisions through two channels: reduced information asymmetry and improved management monitoring.

The Impact of Audit Quality on Earnings Management: Evidence from Listed Companies in Sri Lanka

Earnings Management (EM) is related to the manipulation of reported income through accounting practices and decisions. With the occurrence of numerous financial collapses and failures, the reliability of the audit function has been challenged, as auditors play a critical role in expressing an opinion on the financial statements. This study investigates the impact of Audit Quality on EM in Sri Lankan listed companies. This study employs Modified Jones model to examine earnings management practices through Discretionary Accruals (DA). The selected proxies of audit quality which are Length of Audit Tenure, Audit Firm Size and Auditor Independence are the independent variables. The data is collected from annual reports for the financial periods 2015 - 2020 and audit reports for the financial period 2012 - 2020 of listed companies on the Colombo Stock Exchange (CSE). This study employed descriptive statistics, correlation analysis, and multivariate analysis to analyze the data. Based on the quantitative analysis, the results demonstrated that the association between audit firm size and earnings management in Sri Lankan listed companies is negative and significant. It was found that the level of EM between companies using Big 4 auditors and those using non-Big 4 auditors is much lower. This study revealed that auditor independence and EM have a significant negative association. It was suggested that independent auditors have a greater ability to regulate and identify EM activities through company management. Further, this study exposed that there is an insignificant association between the length of audit tenure and earnings management. These findings are useful to shareholders in appointing or reappointing auditors. Furthermore, this study enables stakeholders, including regulatory bodies, to examine the presence of EM practices in listed companies of CSE.

ASSESSING THE IMPACT OF THE SARS-COV-2 PANDEMIC ON EARNINGS MANAGEMENT BEHAVIOUR IN POLAND

The purpose of this paper is to investigate the impact of the SARS-CoV-2 pandemic turbulence on the extent and intensity of earnings management practices according to the opinions of representatives of non-financial companies listed on the Warsaw Stock Exchange (WSE). Methodology. This study is based on the method of standardised computer-assisted questionnaire interviews (CATI). The research sample consisted of 37.1% of all companies indexed on the WSE Main Market that do not operate in the banking, insurance or capital market services sectors. The target respondents were managers, employees of financial and accounting services and other persons authorised by the company's managerial staff representatives. Results. The survey findings showed that the economic turbulence caused by the SARS-CoV-2 pandemic contributed to an increase in earnings management activities in public companies. Respondents who reported that the companies they represented deliberately manipulated earnings were much more confident about the negative impact of the pandemic crisis on the quality of reported data. An interesting finding of the research is that respondents who had experienced earnings management in their professional practice were more likely to believe that the pandemic had distorted the credibility of reported earnings. Finally, the study provided statistical evidence that respondents from larger companies were more likely than respondents from smaller companies to say that the economic crisis related to the SARS-CoV-2 pandemic contributed to an increase in earnings management activities. Practical implications. This investigation may draw the attention of market participants to the deterioration in the financial reporting of non-financial public companies during the SARS-CoV-2 pandemic. The intensification of profit manipulation may not only distort the current perception of the company's economic performance, but also deteriorate the future value of companies. In addition, the findings provide valuable information for statutory auditors, as they highlight potential audit risks that may arise with the onset of the SARS-CoV-2 pandemic. Value/originality. Unlike most studies on the subject, this research does not focus on the estimated values of discretionary accruals, but on the knowledge and experience of financial professionals who are familiar with the specifics of the Polish capital market. An original contribution to the literature is the inclusion in the study of potential factors that could influence the respondents' perception of the impact of the consequences of the SARS-CoV-2 turbulence on the pattern and intensity of the earnings management phenomenon.

A Study of Female Presence in the Audit Process on Audit Quality

ABSTRACT In this paper, we conduct a review of the literature on the under-representation of women as audit partners and audit committee chairs, and assess audit quality when they hold these roles. By using the U.S. sample from 2016 to 2019, our analyses show that firms with female audit partners and/or audit committee chairwomen are more likely to have lower discretionary accruals, implement more effective internal controls, and are less likely to misstate financial reports than are all male pairs. Our paper serves as a resource for those seeking to understand gender differences and to use it as a starting point to illuminate the debate on gender-specific outcomes in the auditing service industry. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M14; M42.

The self-contagion effect of a stock crash on the market response of the auditor’s other client

ABSTRACT This study aims to find out how information regarding a firm’s stock crash affects the stock price of other firms with the same auditor using 3,916 corporations listed in Korean stock market. The result shows that at the time of a stock crash within the industry, information regarding the crash is contagious via the auditor, as the market leverages the information audited for the crashed firm to additionally evaluate the auditor’s other clients within the industry. Moreover, the contagion effect of the crash within the same auditor to other client firms was found to not be related to the information quality of the client firm. When taking out information quality, however, a high positive discretional accruals quality is observed, and the greater the contagion effect of the crash. The results recognize and reflect the future risk of a stock crash for firms with a high amount of positive discretionary accruals due to the opportunistic incentives of managers in the market as well as market participants’ use of crash information audited by the same accounting firm. These results demonstrate that the market appreciates the audit effect on the crash and uses it for actual decision-making.

THE EFFECT OF CSR ON EARNINGS MANAGEMENT: MODERATING ROLE OF BOARD DIVERSITY IN PAKISTANI LISTED FIRMS

This study examines Corporate Social Responsibility (CSR) and Earnings Management (EM) relationship with moderating role of board diversity of two types, i.e., female and foreign directorships on board. Content analysis is used for measurement of CSR through a data sample of 274 firms from the non-financial sector listed on Pakistan stock exchange for years 2012, 2014, and 2015. However, EM is measured over three discretionary accruals models Jones, Modified Jones, and Kothari models. Based on the results of descriptive analysis, it has been found that the level of CSR reporting has been improved in the post-CSR guidelines period as compared to the pre-CSR guidelines period. While results of regression analysis report that the higher CSR level of an organization the lesser would be the EM activities. This study suggests managers to concentrate upon CSR and board diversity for better earning management. Impact of board diversity on relationship as a moderator makes this study more novel because, as far as our research and previous literature is concerned, there has been very limited literature on this topic.

잠정이익공시의 유용성에 관한 연구

[Purpose] This study investigates the propensity of managers to adjust discretionary accruals in response to sign changes in preliminary earnings at the provisional settlement stage. The research specifically aims to explore whether these sign changes serve as incentives for managers to manipulate accounting figures.
 [Methodology] The study utilizes an empirical approach, focusing on 5,945 KOSPI and KOSDAQ listed companies that disclosed their preliminary earnings from 2013 to 2019. It examines the impact of sign changes in preliminary earnings on discretionary accruals and further investigates whether companies that over－report their preliminary earnings with a sign change exhibit larger increases in discretionary accruals.
 [Findings] The findings indicate that discretionary accruals increase when preliminary earnings turn negative and decrease when they turn positive. This suggests that managers are likely to adjust earnings when an anticipated accounting profit sign change may result in a loss. Moreover, regardless of the direction of the sign change, an over－reporting of preliminary earnings is associated with a significant increase in discretionary accruals.
 [Implications] While preliminary earnings announcements enhance timeliness and usefulness, there is a risk of reduced reliability due to managerial optimistic bias. Understanding the reliability of these announcements in advance can provide more relevant information to external users. Despite the challenge in discerning optimistic decision－making at the provisional settlement stage, this study demonstrates the significant relationship between sign changes in preliminary earnings and discretionary accruals, thus contributing valuable insights to the field of accounting.

Does the CEO’s entrenchment affect the financial communication quality? Empirical evidence from France

Research Question: What is the impact of the CEO’s entrenchment on the financial communication quality in the French context? otivation: In fact, it is important to study the different characteristics of the CEO, which can facilitate the entrenchment and their effect on the quality of financial communication in the French context. Idea: The purpose of this paper is to investigate the impact of the CEO’s entrenchment on the financial communication quality examined by the discretionary accruals. Data: Our sample is made up of 335 companies listed on the CAC All Tradable index for the period from 2011 to 2020. However, we have excluded some financial companies due to their atypical behavior in financial reporting, firms with insufficient annual reports and firms with insufficient data about the CEO’s entrenchment. Therefore, the final number of firms used in this study was 151 over ten years, producing a total of 1510 firm-year observations. Tools: Our regressions will be estimated by the feasible generalized least squares (FGLS) method. Findings: Using the discretionary accruals, as a proxy for the earnings management, we obtained results from the Kothari et al. (2005) model, which indicates that there is a significant positive relationship between the CEO’s duality, ownership and the quality of financial communication, while there is no significant relationship between the CEO’s turnover and the financial communication quality. Contribution: This research is a contribution to the literature by demonstrating how the CEOs' entrenchment enables them to manipulate the accounting results to improve their financial situation.

Accounting Conservatism in Borrowers’ Financial Reporting and Earnings Management

[Purpose] This study examines the association between conservatism in borrowers’ financial reporting and their earnings management behavior.
 [Methodology] Based on non－financial companies listed on KOSPI and KOSDAQ for the fiscal years from 2012 to 2021, we find the effect of bank loans on conservatism in borrowers’ financial reporting and their earnings management. We calculate earnings management by using the absolute value of discretionary accruals from the modified Jones model (Dechow et al. 1995) and the absolute value of discretionary accruals from the performance－matched discretionary accrual model (Kothari et al. 2005). We measure the value of firm－year accounting conservatism from Khan and Watts’ (2009) conservatism scores.
 [Findings] We find that earnings management behavior of a borrowing firm decreases as the firm’s accounting conservatism increases.
 [Implications] The results of this study indicate that firms’ accounting conservatism in financial reporting plays an effective role in constraining their earnings management behavior. In addition, results imply that conservatism in financial reporting has an incremental contribution to the governance role of banks in constraining borrowing firms’ opportunistic reporting behavior. Overall, the findings of this study demonstrate that accounting conservatism plays a complementary role to a bank’s monitoring function.

전문성이 필요한 산업에 속한 피감사기업을 감사하는 산업전문감사인의 감사행태

[Purpose] This study aims to examine the behavior of industry specialist auditors according to industry characteristics. Specifically, this study aims to provide evidence on the audit efficiency of industry specialist auditors by analyzing whether the audit hours and audit fees of industry specialist auditors are differentiated for industries requiring industry specialization designated by the Financial Supervisory Service.
 [Methodology] We used a sample of 19,115 firms and years for Korean listed companies from 2008 to 2020. For the industries requiring specialization, we used the industry groups selected by the Financial Supervisory Service in November 2023 based on the opinions of listed companies and accounting firms.
 [Findings] The results show that, first, industry specialist auditors are associated with higher audit fees and more audit hours on average, but these fees and audit hours are significantly lower for industries designated as requiring industry specialty, which can be interpreted as an audit efficiency. Second, the above association does not appear in the analysis using hourly audit fees, explaining the process by which efficiency gains are passed on to client firms. Third, the relations does not appear in analyses of audit quality measured by the absolute value of performance－matched discretionary accruals, providing further evidence of the efficiency with which audit quality is maintained at lower levels of audit time. These results can be interpreted as indicating that industry specialist auditors perform the audit process efficiently in industries where specialization is essential, and that the benefits of reduced audit efforts are fully passed on to the clients through this efficient audit process.
 [Implications] The contribution of this study is that it provides evidence on the audit efficiency of industry specialist auditors through data that directly manifests the need for specialization while reflecting the perspectives of both audited companies as consumers and accounting firms as suppliers of industry specialization.

Detecting Earnings Management And Earnings Manipulation In Indonesia: A Panel Data Analysis

This research aims to measure the quality of profits in non-financial sector companies in Indonesia regarding the extent to which the Company's financial reports are trustworthy to stakeholders. In this research, discretionary accruals are an indicator for measuring earnings manipulation, and non-discretionary accruals are an indicator for measuring earnings management. Secondary data is from annual reports of non-financial sector companies on IDX in 2020-2022. The sample for this research is non-financial sector companies, including the raw materials, manufacturing, and service sectors. Our research uses a modified Jones Model to estimate earnings management and earnings manipulation. The data analysis technique uses panel data regression. The research results show that the value aspect of discretionary accruals significantly influences total accruals. In contrast, the value of non-discretionary accruals does not significantly impact total accruals. This research is expected to help auditors, users of financial reports, and accounting standards bodies identify companies that fraud.

Is Audit Quality Higher When Audit Committees Report Strong Oversight?

SUMMARY This article provides a summary of recent research by Bratten, Causholli, and Sulcaj (2022), who examine whether issuers with audit committees who report strong oversight over the audit function have higher audit quality. Using a novel dataset from Audit Analytics that summarizes reported audit committee activities, Bratten et al. (2022) create a composite measure that captures the strength of the audit committee’s oversight of the audit process. The study uses several measures to capture audit quality, including audit fees, discretionary accruals, and propensity to meet or just beat earnings benchmarks. The authors show that, when issuers’ audit committees report activities consistent with being more active in overseeing the external auditor, issuers, on average, have better audit quality.

Superstition, Risk Aversion, and Audit Quality: Evidence from China

SUMMARY We examine whether signing auditors’ perceptions of bad luck related to the Chinese zodiac-year superstition affect audit quality. We argue that these perceptions of bad luck heighten signing auditors’ sense of risk and lead them to act more cautiously in their zodiac years, leading to improved audit quality. We find that clients audited by lead engagement auditors in their zodiac years exhibit lower discretionary accruals and lower propensity to restate. The effects of zodiac-year superstition are evident among lead engagement auditors who are older and hold the partner title. The effects are also evident in large audit firms, which face greater reputation risk, and in provinces with a strong influence of traditional culture. In addition, we find some suggestive evidence that lead engagement auditors may increase audit effort during their zodiac years. Overall, our results support the contention that lead engagement auditors’ zodiac year beliefs positively affect audit quality. JEL Classifications: D81; M40; M42; Z10.

Investment efficiency of targeted S-curve industries: the roles of CEO duality and financial reporting quality

PurposeThe purpose of this study is to examine the association between the combined roles of chief executive officer (CEO)-chairman titles (CEO duality) and investment efficiency, defined as a lower deviation from expected investment for targeted S-curve firms used to propel an innovation-driven economy. This study also aims to investigate the moderating effect of financial reporting quality on this association.Design/methodology/approachThis paper focuses on the ten targeted S-curve industries – under the definition of the Thailand 4.0 model – listed on the Stock Exchange of Thailand (SET) from 2000 to 2019. Data related to CEO/chairman titles and investment supports were manually collected from the annual reports, the SET market analysis and reporting tool database and the company websites. Financial data used to estimate investment behaviors and discretionary accruals were extracted from 1999. The study analyzes unbalanced panel data using fixed-effects regressions. Additional tests embrace replacing the sample with nontargeted firms, partitioning into granted and nongranted firms, adding CEOs’ demographic moderators, using alternative variable measures and analyzing for lagged independent variables.FindingsThe main findings show that CEO duality reduces overinvestment but worsens underinvestment in targeted firms. Financial reporting quality (FRQ) appears to strengthen CEO duality in mitigating extreme spending but has no impact on the association between CEO duality and underinvestment. Additional results, for example, conclude that CEO duality has no association with both over- and underinvesting at nontargeted firms, but its effect becomes positively significant on overinvestment when financial reporting quality is high. The negative association between CEO duality and overinvestment is found only in government-granted and targeted firms. FRQ encourages CEO duality in lowering overinvestment among targeted firms without grants. CEOs’ female and serviced early years appear to elevate those main findings.Practical implicationsThese findings assist innovative corporations in choosing a proper leadership structure to cope with investment inefficiency. The research gives the government and regulatory bodies an insight into the qualifications of the leadership structure and financial information that helps them put forward effective policies.Originality/valueTo the best of the author’s knowledge, this study is among the first to establish the association between CEO duality and investment efficiency for innovation-driven firms in a transforming economy. The study fills the gap in the literature on management, accounting and finance by unveiling the interplay between dual leadership and financial reporting in affecting the efficiency of investments.

Impact of Financial Distress on Earnings Management with the Moderating Role of Audit Quality: Evidence from Pakistan

The core aim of the financial reports is to provide a firm’s annual results of financial performance and position to stakeholders on time. Several accounting scandals led to the default of many large-scale corporations, leading to investors’ lack of confidence in the reliability of financial information and also putting a question mark on the effectiveness of internal control mechanisms and external audits. Business managers of financially distressed firms use the choice of accrual accounting methods which gives them leverage to misuse their powers and expropriate stakeholders by showing good financial results. So, this study fills this gap by investigating the presence of Financial Distress (FD) and its effect on Earnings Management (EM) with the moderating role of Audit Quality (AQ). The sample of this study contains the data of 96 non-financial listed companies for the period 2017-2022 on the Pakistan Stock Exchange (PSX). This study uses the discretionary accruals as a proxy for the EM and Z-score for FD. The results and analysis find that FD and EM have a significant positive relationship, which reveals that corporate managers of distressed companies do EM while AQ weakens this relationship. This study recommends that professional bodies, regulatory authorities, and corporate governance institutions must design policies that restrict corporate managers from getting involved in earning management practices, especially in the time of FD.

Assessment of Financial Information Quality: Evidence from Tunisian Context

The present paper aims at assessing the financial information quality within Tunisian firms. We analyzed a sample annual data of 78 financial and non-financial Tunisian listed companies. We use the level of discretionary accruals and if the firm restate its financial statement or not as proxies of financial information quality. Our main results show that the financial information quality is globally low. We note a high level of discretionary accruals within financial firms compared to non-financial pears. We also find that financial firms are less likely to restate their financial statements compared to those of non-financial firms.

The Influence of Sustainability Reporting on Audit Quality. Empirical Analysis on Companies Listed on the Bucharest Stock Exchange

The entire range of financial and non-financial activities carried out in companies has an impact on the quality of disclosures. The audit, through its specific procedural approach, contributes to enhancing the quality of reporting by balancing the interests of the two parties involved in the reporting process, i.e. the companies and the users of the information. The paper aims to assess the extent to which sustainability reporting influences audit quality, assessed from a dual perspective, namely that of the audited company (through the quality of the information published and insured by the audit) and that of the auditor (through the audit opinion expressed). Using information specific to companies listed on the main market of the Bucharest Stock Exchange, the study analyzes the link between a series of dummy variables associated with carrying out sustainable activities, social and environmental protection and the size of discretionary accruals, i.e. the audit opinion. The results reveal a negative relationship between the two dimensions analyzed. The involvement of companies in sustainable actions is generally interpreted as an effort that diminishes audit quality, measured from both perspectives. The effect of these social and environmental protection activities is correlated with potential manipulation of the results (decreasing the quality of financial information) and with increasing the likelihood of expressing a modified audit opinion, respectively. The results are also robust following the introduction of control variables into the analysis, such as: leverage, company growth, company size or industry.

Foreign labor and audit quality: Evidence from newly hired H‐1B visa holders

AbstractForeign workers have been an important part of the labor force in public accounting firms over the past two decades. In this paper, we investigate whether and why foreign workers influence audit quality. We find that audit offices with more newly hired foreign labor have a lower mean absolute value of discretionary accruals and a smaller rate of restatements for their clients. The effect is more pronounced for audit offices that face more resource constraints or require greater foreign expertise. The results of improved audit quality are robust to alternative measures of immigrant intensity and audit quality, alternative samples, and using different ways to address endogeneity concerns. Overall, our paper contributes to the literature by showing the impact of foreign labor in the auditing profession and provides public policy implications for the recent H‐1B visa debate.

Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities

The main source of financing is bank loans for Portuguese small and medium-sized entities (SMEs), which implies several constraints to obtaining additional funds. Relying on the argument of Positive Accounting Theory (PAT) that accounting choices are not neutral and on Agency Theory that information asymmetry prevails between insiders and outsiders, we analyzed the impacts of debt on earnings quality, focusing on its level, its increases, and its term of payment. We estimated econometric regressions using panel data with fixed effects over 2013–2019, using discretionary accruals as an inverse proxy of earnings quality. We found empirical evidence that the relationship between debt and earnings quality tends to vary in sign, as the quality of financial information deteriorates with debt, but as debt becomes high, firms tend to increase the quality of earnings. Furthermore, we found that short-term debt tends to decrease earnings quality more than long-term debt. This article aimed to contribute to the prior literature by collecting evidence that debt levels tend to be an incentive to increase earnings management and fill the gap by analyzing the influence of different debt features. This evidence is useful because earnings management may compromise both stakeholders’ confidence and the efficient allocation of capital.

Effects of CPC 47 (IFRS 15) from the perspective of revenue management in the brazilian stock market

This study analyzed the effect of adopting CPC 47 (IFRS 15) for revenue recognition on the quality of accounting information from the perspective of revenue management in the Brazilian stock market. The study sample has a total of 560 observations corresponding to 112 companies from 2016 to 2020. The models by specific discretionary accruals of revenues proposed by Caylor (2010) and Stubben (2010) were considered to measure the management levels. As a method of analysis, we used regression models with panel data and tests at a significance level of 5%. According to the results obtained, it was impossible to confirm that adopting CPC 47 (IFRS 15) affected the quality of accounting information from the increase in revenue management levels, as well as whether the effects on the specific sectors indicated by the literature as more impacted were more significant than the other sectors in the Brazilian capital market. The research is relevant because it advances existing studies by using two different revenue management models to analyze the effects of specific accruals after adopting the standard and, in addition, extends the period and sample of Brazilian companies. Therefore, this research contributes to deepening discussions on the effects of applying accounting standards and assists in the analysis of regulatory bodies, preparers, auditors, and financial information on the effects of the new accounting standard after adoption, especially in the Post-Implementation Review (PIR) process of IFRS15.