Value Of Discretionary Accruals Research Articles

Determinants of the capital structure and accrual-based earnings management

Purpose: The main purpose of the paper is to examine the relationship between the value of discretionary accruals and the legal and economic determinants of capital structure, which are taken into account in static trade-off theory and pecking order theory. Methodology/approach: Discretionary accruals were extracted using the Jones model and the Kang-Sivaramakrishnana model. The empirical research is based on regression analyses, variable distribution statistics, and Spearman's rank correlation coefficient analyses, among others. The study covered 72 public industrial enterprises listed on the Warsaw Stock Ex-change. Findings: In the studied sample, there are statistically significant relationships be-tween discretionary accruals and variables such as effective tax rate, non-debt tax shield, operating risk, enterprise size, and the operating profitability of assets. Research limitations/implications: Due to the limited sample, the research results cannot be generalized to all industrial enterprises. Moreover, the indicators of good-ness-of-fit of the regression models to the empirical data are low, which indicates the need to further explore this field of research. Originality/value: The presented research methodology is innovative in relation to the Polish capital market. Previous empirical research on this issue is limited to showing the relationship between financial leverage and discretionary accruals.

Short Seller, Firm, and Auditor Behavior

Purpose: Although a small part of arbitrage trading, short selling has a significant impact on capital markets. This study empirically examines relationships among short selling, earnings managements, and auditor behaviors. Design/methodology/approach: We employed short selling and abnormal short selling as independent variables. Audit hours, audit fees, and (absolute) value of discretionary accruals as dependent variables. In this study, we basically include ordinary least-squares regression analyses using panel data and interaction analyses. Findings: This study verifies the relationship among short selling, firm earnings management, and auditor behavior, showing positive relationships between short selling and current and future audit fees, audit hours, and current audit quality. Further, higher audit risk, caused by the interaction between abnormal short selling and aggressive earnings management, is reflected in future audit fees and hours. Research limitations/implications: Due to the financial data provided on an annual basis, the daily short selling data was aggregated on an annual basis. This study suggests that short selling is related to firm earnings management behavior, as well as to the auditor behaviors. Therefore, regulators should consider the impacts of short selling on company and auditors as well as investors. Originality/value: This study provides evidence that the positive relationship between short selling and audit fee is not only caused by risk-premium channels, but also by audit-effort channels. Furthermore, we find that the interaction effects of short selling and earnings managements occur only in abnormal short selling. This seemed to impose penalties on short selling exceeding forecasts when auditors considered earnings managements and short selling at the same time.

Audit Quality and Auditor Switching in LQ45 Index Listed Firms of the Indonesia Stock Exchange

Auditor switching is important to maintain audit quality. This study aims to find empirical evidence regarding the effect of auditor switching on the audit quality of companies listed on the LQ45 index of the Indonesia Stock Exchange. Switching Public Accounting Firm and switching audit partner is the dependent variable in this study. Audit quality as the dependent variable is measured by the value of discretionary accruals. The saturated sampling method was used with the entire population of companies listed on the LQ45 index of the Indonesia Stock Exchange with a total of 45 companies in 2019 - 2020. Multiple regression analysis techniques were used. The results of the study stated that Public Accounting Firm switching and audit partners switching does not affect audit quality. Keywords : Public Accounting Firm Switching, Audit Partners Switching, Audit Quality.

Earnings Quality and Accruals over Company´S Life Cycle

Research background: The increasing number of bankruptcies and the growing risk of financial distress highlight the need for quality financial statements, conservative accounting or increase the need for quality tools to detect the occurrence of earnings management. However, the life cycle of a company affects financial performance and key aspects of earnings management, which examined in the international context only to a small extent. Purpose of the article: The paper examines the impact of the life cycle and country-specific factor on the value of discretionary accruals in the tourism sector in the Visegrad countries, which are among the most vulnerable sectors in the coming economic crisis. Methods: This study uses the method of two-way analysis of variance with interaction, while also testing the assumptions of the model by normality tests, homogeneity test and post hoc tests (Scheffé and Tukey methods). Findings & Value added: Earnings quality changes during the life cycle of a business; whereas in the first stages (introduction, growth) and in decline they use downward earnings management. On the contrary, mature and shake-out companies have enough positive earnings before taxes, which is a prerequisite for tax profit optimization. The level of earnings management in tourism varies significantly at different stages of the life cycle, but also in different countries. The results imply that the qualitative variable corporate life cycle in interaction with the country is an important explanatory variable, the implementation of which can improve the explanatory power of earnings management models in Central European developing countries.

THE IMPACT OF OWNERSHIP TYPES ON THE VALUE OF DISCRETIONARY ACCRUALS: WHAT IS THE ROLE OF AUDIT COMMITTEE? EVIDENCE FROM PAKISTAN

The research paper attempts to investigate the connection between Ownership Structure and Audit Committee Effectiveness on discretionary accruals in Pakistan. This study analyzed 5 years of data over the period of 2013 to 2017 of 169 listed firms of the Pakistan Stock Exchanges (PSX). The data is panel and it is analyzed with the fixed-effect regression to check the association between ownership structure and audit committee effectiveness on discretionary accruals. The findings of this article show that the effectiveness of an audit committee is very instrumental in bringing down the value of discretionary accruals. This paper confirms the view that audit committee effectiveness mitigates discretionary accruals in PSX listed firms, Furthermore, this study found no clue that blocks ownership, management ownership, foreign ownership and institutional ownership constrain discretionary accruals. To the best of researchers' knowledge, this empirical study is first of its kind in Pakistan. The present research study recommended and supports the recent amendment in Pakistan Corporate Governance Code about audit committee independence and expertise for reducing discretionary accruals.Keywords: Ownership Types, Audit Committee Effectiveness, Corporate Governance, Discretionary Accruals, Pakistan Stock ExchangeJEL Classifications: G34, M4 DOI: https://doi.org/10.32479/ijefi.10081

The effect of audit quality and degree of international Financial Reporting Standards (IFRS) convergence on the accrual earnings management in ASEAN countries

The purpose of this research is to analyze the effect of the degree of convergence of International Financial Reporting Standards (IFRS) and Audit Quality on company’s accrual earnings management. In addition, this research also aims to investigate the moderation role of the degree of convergence of IFRS on the relationship between audit quality and company’s accrual earnings management. This research covers several Association of Southeast Asian Nations (ASEAN) countries, consists of Philippines, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. The methodology used in this research is the multiple regressions by using Least Square method. This study finds that the higher the degree of convergence of IFRS, the lower discretionary accruals, which means the higher quality of earnings. Meanwhile, the size and specialization of the auditor are not significantly effecting accrual earnings management which is described by the value of discretionary accruals. The results imply that being audited by Big-4 or specialized accounting firm, does not guarantee the lower discretionary accruals, which means do not guarantee that the accrual earnings management will be better. On the other hand, the degree of convergence of IFRS did not have a moderating role that influence the effect of audit quality on the accrual earnings management.

An Examination of Prevalence of Earnings Management in Asia REITs

This study examines the prevalence of earnings management in Real Estate Investment Trust (REIT) funds in Asia. Discretionary Accruals (DA) is used as the measurement of earnings management. A panel data covering all REIT firms in three countries: Malaysia, Singapore and Hong Kong, from year 2007 to 2015 is used for this purpose. The results show all firms having the absolute value of discretionary accruals indicating that earnings management exists in Asian REITs. Further, independent t-test shows that earnings management activities are significantly prevalent in all these three countries despite the regulatory structure of REITs.

The The Influence of Audit Tenure and Audit Committee on Earnings Quality


 
 
 
 One of the Auditor and Audit committee role is to ensure the quality of corporate financial reporting process. This study aims to test the effect of the length of auditor tenure and audit committee on earning quality measured by the absolute value of discretionary accruals. A sample of 465 companies has been selected and data covering the period 2009-2014 has been collected from these firms, where 2325 observation were used in this analysis. The data collected form CSMAR and analyzed using GLS regression analysis.
 
 
 
 
 This study found that the short audit tenure on Chinese listed company in Shenzhen Stock Exchange has a significance negative influence on earning quality, meanwhile this study found that audit committee which is measure by the size of the committee does not has a significance influence on earning quality. This study suggests that auditor should have a longer tenure to gain adequate knowledge of client’s business. Moreover companies should strengthen the role of their audit committee in monitoring financial reporting process by improved their activity and financial knowledge of the member.

Regulatory investigations of audit partners and audit quality improvement

Prior studies of the effect of regulatory monitoring on audit quality focus on regulatory sanctions but ignore regulatory investigations. We hand-collected data on the China Securities Regulatory Commission (CSRC) investigations announced during 2001–2015 to examine the impact of CSRC investigations on the audit quality of the targeted partners. We find that after the audit partners are investigated by the CSRC, their clients exhibit a lower absolute value of discretionary accruals and the partners are more likely to issue modified audit opinions. Our results suggest that CSRC investigations lead to improvement in the audit quality of the partners involved in the investigations. In contrast, CSRC sanctions have a relatively weak effect on the audit quality of the involved partners. Overall, our study provides evidence that CSRC monitoring helps to improve the audit quality of audit partners, and the effect manifests around CSRC investigations.

Pengaruh Konvergensi IFRS terhadap Manajemen Laba dengan Mekanisme Corporate Governance sebagai Variabel Moderating pada Perusahaan Sektor Property dan Real Estate yang Terdaftar di Bursa Efek Indonesia Tahun 2010-2014

The tendency to generate high profits lead management to select accounting policies and apply methods that can provide a better return. It is often known as the earnings management. The purpose of this study is to find out the effect of convergence of IFRS pon earnings management with corporate governance as moderating variable in property and real estate company listed on the Indonesia Stock Exchange in 2010-2014. Convergence of IFRS as an independent variable is proxied by dummy variable. Accrual-earnings management is measured by the value of discretionary accruals and real-earnings management is measured by the value of abnormal cash flows from operations. Mechanism of corporate governance as a moderating variable considering the characteristics of the commissioners, audit committee, auditor quality, institutional ownership and the managerial ownership. The results show that the convergence of IFRS influence real-earnings management significantly,but doesn’t has significant effect on accrual-earnings management. Convergence of IFRS effect real-earnings management significantly, while it is moderated by institutional ownership. Institutional ownership has moderating effect to the convergence of IFRS and real-earnings management

Do Women Engage in Less Earnings Management than Men?: The Case of Privately Held French SMEs

This study investigates the effect of a CEO’s gender on his/her decision to engage in earnings management. We focus on private small and medium-sized enterprises (SMEs) in a code-law accounting framework, namely, that of France. From a sample of 30,476 French SMEs for the year 2012, we use discretionary accruals as a proxy for earnings quality. We first provide evidence that French private SMEs manage earnings: the average value of discretionary accruals is above 9% of total assets. In accordance with our gender hypothesis, we show that, regardless of the model used, firms run by female CEOs engage in significantly less earnings management than firms run by male CEOs. This result is robust to various tests for endogeneity. Moreover, we highlight a negative effect of the feminization of top management on the level of discretionary accruals. Finally, we consider another observable CEO characteristic, namely, age. We find that CEO age is negatively correlated with the magnitude of accruals, but the effect of gender remains significant.

The development of an indicator for measuring information quality of discretionary accruals

This article proposes a new model, referred to as Information Quality Indicator of Discretionary Accrual (IQIDA), to study earnings management. A limitation of prior studies on earnings management is examined using the two dimensions of decision validity. Based on the notion of ‘information quantity’ and ‘information quality,’ using the original values or absolute values of discretionary accruals (DAs) as the measurement for earnings management could lead to suboptimal judgments and decisions. A new model is proposed as an improvement over those models using DAs. The new model attends to both central tendencies and dispersion degrees of variable sample distributions, which requires a two-step transformation process to achieve.

Short-Term Debt Maturity and Accruals-Based Earnings Management in Tehran Stock Exchange (Iranian Evidence)

Firms face the possibility of a debt run when bad news about the firm is coupled with large amount of debt maturing within a short period of time (short-term debt). To avoid such debt run threats, or to further the possibility of debt contract renewal, firms have strong incentives to project an image of strong financial health. 110 companies from the companies listed in Tehran Stock Exchange during the 5 year period between 2008 to 2012 were reviewed. Opportunistic behavior is proxied by accruals-based earnings management which is measured in terms of absolute value of discretionary accruals. Using a sample of 550 firm-years, we find that the coefficient for short-term debt is negatively associated with discretionary accruals for low creditworthy firms. The result show that firm's financial strength have a decreasing role on the effect of debt maturity on earnings management. This result is not consistent with our expectation that firms with higher creditworthiness (investment grade firms) are associated with more monitoring benefits of short-term debt. In addition to ordinary least squares regressions that include controls for industry, and year fixed-effects, we also report results using panel data fixed effects to control for firm and year fixed effects. By establishing the relation between earnings management and debt maturity structure, we suggest another important factor that must be taken into account when studying earnings management.

The Relationship Between Institutional Investment and Earnings Management

The emergence of corporate scandals at the end of the 20th and beginning of the 21th century raised doubts regarding the integrity of financial reporting and the soundness of firms' corporate governance practices. The practice of earnings management is considered to be one of the important causes of these scandals due to its harm to the transparency and quality of financial statements. The discretion exercised by managers in accounting result in agency costs arising from the mismatch between the goals and desires of the principle and the agent causing investors to make suboptimal decisions. The recent surge in institutional investors' shares and associated degree of activism increased their importance as an external control mechanism of corporate governance. Accordingly, the primary purpose of this study is to evaluate the role of these investors on earnings management and alignment of the interests of owners and managers within the context of agency theory. Consequently, two main hypotheses; namely, active monitoring and managerial myopia induced by institutional investors are tested by panel data analysis utilizing data belonging to the firms listed on Borsa Istanbul during the 7 year period between 2005 and 2011, inclusive. The absolute value of discretionary accruals obtained from the performance adjusted cross-sectional industry based accrual model proposed by Kothari, Leone and Wasley (2005) is used as the proxy of earnings management to evaluate whether the presence of institutional investors mitigate or stimulate managers' discretionary accounting practices. Additionally, further analysis is conducted to evaluate the existence of monitoring and clientele effects to better interpret the direction of the relationship between the associated variables of interest.

Discretionary Accruals and Auditor Behaviour in Code-Law Contexts: An Application to Failing Spanish Firms

This study examines the relationship between earnings management and auditor behaviour in the pre-bankrupt client segment of the Spanish audit market. As proxies for auditor behaviour, we use type of audit firm (Big N/non-Big N) and type of audit report. In contrast to the USA, audit reports in Spain often include modifications other than a going-concern opinion. This allows us to study the relationship in more detail than is possible with US data. The results of our study show that discretionary accruals are negatively related to going-concern opinions but are positively related to reports modified for reasons other than going-concern problems. However, unlike Butler et al. (Journal of Accounting and Economics, 37, pp. 139–165, 2004) the negative relationship is explained not by liquidity survival tactics but by auditor conservatism. We find this conservatism not only in the value of discretionary accruals but also in the qualifications that accompany a going concern. In these cases GAAP violations have a much greater income effect and a stronger relationship with the reversal of manipulation accumulated over the years than with the manipulation introduced during the last year. Finally, our results suggest that Big N differentiation in a code-law country is context-specific and depends on the business risk parameter of the ‘audit risk model’. In particular, for high-risk firms, Big N auditors show a significantly lower level of discretionary accruals and a greater propensity to issue a going-concern opinion.

IAS Versus U.S. GAAP: Assessing the Quality of Financial Reporting in South Africa, the United Kingdom, and the United States

Abstract In this study, we investigate whether financial reporting, using International Accounting Standards (IAS) results in quality disclosures, given differences in institutional and market forces across legal jurisdictions. This study contributes to the global accounting debate by utilizing U.S.-based companies complying with U.S. Generally Accepted Accounting Principles (U.S. GAAP) as a benchmark for measuring the quality of IAS as applied by South Africa (S.A.) and United Kingdom (U.K.) companies. Although South Africa, United Kingdom, and the United States are common law countries with strong investor protection, South Africa's institutional factors and market forces vary from that of the U.K. and the U.S. South Africa's financial market is less developed than that of the U.K. and the U.S. We compare the discretionary accruals of firms complying with U.S. GAAP to the discretionary accruals of U.K. and S.A. firms complying with IAS. This allows a comparison between companies (S.A. and U.K.) operating under different institutional factors and market forces that have adopted IAS versus U.S. companies that report under U.S. GAAP. Our sample, consisting of U.S., S.A., and U.K. listed firms, contains 3,166 firm-year observations relating to the period 1999–2001. The results of our study indicate that S.A firms utilizing IAS report absolute values of discretionary accruals that are significantly greater than absolute values of discretionary accruals of U.S. firms utilizing U.S. GAAP. In contrast, U.K. firms utilizing IAS report discretionary accruals that are significantly less than the discretionary accruals of companies in the United States reporting under U.S. GAAP. This study contributes to the literature by providing evidence of the quality of financial information prepared under IAS and its dependency on the institutional factors and market forces of a country.

Ownership Concentration, Debt Financing and the Investment Opportunity Set as Determinants of Accounting Discretion: Empirical Evidence From Spain

ABSTRACTUsing a sample of 783 observations, belonging to 109 firms quoted in the Spanish capital market over the period 1991–1999, our research analyses the discretion and restrictions of accounting policy in a Continental European country, where firms present important differences in ownership structure and corporate governance compared to that of Anglo Saxon countries.This article shows that the absolute value of discretionary accruals declines with ownership concentration, this result being consistent with large shareholders playing an active role in corporate governance. In our financial system, where firms and banks enter into long term relationships, debt financing generates incentives for the exercise of accounting discretion, as also occurs in market oriented financial systems. The third variable analysed refers to the investment opportunity set. This variable exhibits a positive relation, that is, the more growth opportunities firms have the more accounting discretion managers exercise. The results reported in this study are also important because they are obtained from the estimation of a dynamic panel data model, which allows us to control for the reversion of accruals.

Has Audit Quality Declined? Evidence from the Pricing of Discretionary Accruals

This study examines whether the audit quality of Big 5 auditors declined after 1995. A decline in audit quality is measured by whether there is greater accruals-based earnings management, lower proportion of audit qualifications and lower pricing of discretionary accruals over the period 1991-2000. Using a sample of more than 4,500 clients of Big 5 auditors for the same period, we find that for the average client, the absolute value of discretionary accruals scaled by total assets is significantly greater for the years 1996-2000 compared to 1991-1995. We also find an increase in the percentage of unqualified audit reports and a decline in the pricing of discretionary accruals over the same period. Our results (including an overall year by year analysis) suggest a decline in Big 5 audit quality over the sample period.