Abstract

We investigate an unexplored channel—loss given default (LGD)—through which accounting information can shape the design of debt contracts. Using a sample of defaulted bonds, we find that borrower accounting information available at contract initiation possesses significant power for predicting realized LGD at the subsequent default date. We then use this model to construct an accounting-based measure of expected LGD at the contracting date for a large sample of bond issuances. We find that this measure is positively associated with issuance date interest spread and covenant use, and document that these relations are not artifacts of an association between LGD and probability of default. We then show that accounting-based expected LGD has a stronger association with issuance date spread when the borrower’s underlying accounting is more conservative and when the accounting-based LGD predictors are more persistent. Our results increase our understanding of both the informational role and contracting role of accounting information.

Introduction

Financial reports are an important source of frm-specifc information available to lenders at the contracting date and thus may afect lenders’ behavior in the design of debt contracts. Whereas prior literature focuses on the usefulness of accounting information for probability of default assessment (e.g., Beaver 1966; Altman 1968; Shumway 2001), this study suggests that accounting information may also shape contracts by facilitating lenders’ assessment of loss given default. Loss given default, defned as the percentage loss that lenders experience from $1 of outstanding principal in a case of default, is a critical component of credit risk and debt contracting theories.1 Despite the theoretical importance of loss given default, there is little empirical evidence regarding how accounting information available to lenders at the contracting date is associated with their expectations about loss given default. This study is the frst to provide evidence that accounting information at the contracting date is a useful predictor of realized loss given default and that lenders behave as if they use accounting information about loss given default to design debt contracts.

Conclusion

A substantial body of research focuses on the informativeness of accounting information with respect to probability of default. However, there is very little research concerning the informativeness of accounting information with respect to loss given default, particularly at the contracting date. There exists some ancillary evidence in extant literature regarding the informativeness of accounting data about loss given default at the time of default. However, given the relatively long time between debt issuance and eventual default, this evidence says little about whether accounting information is useful to lenders in assessing expected loss given default at the contracting date—when lenders need information the most.

This study contributes to the literature along several dimensions. First, using a sample of defaulted bonds, we show that accounting measures available to lenders at the contracting date are informative about future loss given default. To the best of our knowledge, this study is the frst to do so. This fnding complements the literature which shows that accounting measures are informative about probability of default and therefore enhances our understanding of the informational role of accounting. Second, we construct an intuitive measure of accounting-based expected loss given default at the time of bond contract initiation, which could be of use in future research. Third, we show that lenders behave as if their accounting-based expectations about loss given default signifcantly afect price and non-price terms of bond contracts. We provide evidence that the association is stronger when the accounting-based predictors are more persistent, consistent with the intuition that accounting information with higher persistence is more reliable for predicting future outcomes. This fnding contributes to the literature on the role of accounting information in debt contracting by showing a specifc channel through which accounting information may be useful in lending decisions. Finally, our results provide important evidence that establishes a direct link between accounting-based LGD estimation and lenders’ demand for fnancial reporting conservatism.

Abstract

Competing effectively in the contemporary marketing landscape is becoming increasing challenging. Equally increasing therefore is the pertinence for organisations to be customer oriented. Academic discourse emphasises the need for more customer-oriented approach. Inspired by gaps in the literature, this study explores the contingency factors and performance implications of customer accounting in the Kuwaiti financial services industry. A questionnaire was used to collect data, and data analysis was based on 115 responses from management accountants of participating firms. This study reports critical insights that enhance the no one-size fits all notion of contingency foundation. For organisations in the industrial and geographical setting covered in this study, the insights from this study offer relevant cues for optimising customer accounting operationalisation and maximising the organisational performance impact. The limitations of this study have been acknowledged and critical directions for further knowledge development flagged.

Introduction

For many decades, scholars have emphasised the importance of management accounting in organisational dynamics (e.g. [1,2,3,4]. Theoretically, it is contended that if organisations endorse and effectively implement management accounting practices, they would achieve improved performance. A plausible rationale for that argument is that management accounting plays the critical enabling role of providing management with relevant information to enhance managerial decision-making for overall organisational performance (e.g. [5,6,7]. Given this importance, there is increasing research interest on management accounting practices (e.g.[4, 6, 8,9,10].

Despite that increase, there is still much room for empirical research towards enhancing the understanding of this topic. (e.g. [6, 11,12,13,14]). Bearing in mind that successful managerial decisions improve overall organisational profitability [15, 16] and also that the extent to which the overall organisational profitability is improved hinges on strategic alignment (e.g. [17,18,19]), the focus on management accounting has evolved much for over 25-years now, with scholars emphasising more the strategic component (strategic management accounting) (SMA). Within this focus, scholars advocate for a management accounting approach that gives due attention to the need for accounting for strategic positioning [19,20,21]. Elaborated by Langfield-Smith [9], SMA advocates contend that accounting should be strategically tailored towards achieving a more market-oriented focus.

Discussion and conclusion

Theoretical implications
This study contributes to the understanding of customer accounting practices usage, contingency factors, and organisational performance impact (e.g. [6, 24, 25, 51]). With regard to customer accounting practices usage, this study contributes in the way of reinforcing prior research that underlines the importance for a customer-oriented accounting approach in management accounting (e.g. [6, 10, 24, 25]). The results from this study show that Kuwaiti FSOs are embracing customer accounting practices as a way of staying customer oriented.

Secondly, this current study contributes to the literature on the contingency factors of customer accounting practices usage (e.g. [6, 24, 25, 48, 51]). The evidence from this study offers supports and contrasts to past literature, an outcome that thus add support to the contextual intricacies that surround contingency features. This study argues that competition intensity would aid the adoption of customer accounting practices, evidence that reinforces Foster and Gupta [48] but contrasts Ojra [6] who found no support in the Palestinian context. Furthermore, this current study supports and contrasts Guilding and McManus [51] who suggest a support as well as contrast for the notion that high competition intensity would lead to high customer accounting practices usage.

Abstract

This paper presents the first empirical test of a hypothetical classification of financial reporting in Africa based on de facto or actual practices as opposed to de jure rules. Three multivariate techniques (principal component analysis, cluster analysis, and multidimensional scaling) were used to analyze the accounting policies of large, listed companies in Africa that are required by law to adopt International Financial Reporting Standards (IFRS). It was found that there is a dichotomy between the IFRS policy choices of companies in Francophone and Lusophone countries, on the one hand, and those in common law jurisdictions, on the other, thus, confirming the two-group classification schemes proposed by Elad (2015) and Nobes (1983). These findings have important policy implications, particularly in the context of recent recommendations of the World Bank and the International Monetary Fund that large entities in Africa adopt IFRS.

Introduction

Several studies have suggested that there are opportunities for systematic differences of practice to exist within International Financial Reporting Standards (IFRS) usage (Nobes, 2006; 2013) and that different national versions of IFRS practice have emerged in some jurisdictions as a new feature of comparative international accounting. In particular, Nobes (2006, 2011, 2014) developed and tested some hypotheses on the persistence of national differences under IFRS in industrialized countries and invited other researchers to investigate this issue further, thus, opening up a new research agenda. The present study is a direct response to Nobes’ call for further research.

This paper seeks to contribute to the international accounting literature in two ways. First, unlike earlier accounting classification studies, this paper attempts to classify accounting systems in Africa using data on actual practices as opposed to rules and regulations. This is important because several recent studies have painted a somewhat misleading picture of the extent to which IFRS have been adopted in some national settings simply because they relied solely on accounting rules and regulations. One classic example is a paper by Khlif et al. (2020), which concluded that the extent of convergence with IFRS in Algeria is higher than in Morocco and Tunisia. Contrary to this claim, the level of adoption of IFRS appears to be higher in Morocco than in Algeria or Tunisia because Morocco is the only North African country that allows listed companies to use IFRS in consolidated financial statements. IFRS are currently prohibited for statutory reporting purposes in Algeria and Tunisia (Deloitte, 2022). In addition, IAS (International Accounting Standard) 1 (paragraph 16) makes it clear that an entity shall only describe financial statements as complying with IFRS if the financial statements comply with all the requirements of IFRS. Khlif et al. (2020) inadvertently convey the impression that Algeria, Morocco, and Tunisia have adopted international standards, whereas IFRS have only influenced (to some extent) the development of national generally accepted accounting principles (GAAP) in these countries. Khlif et al. used data from the PricewaterhouseCoopers (PwC, 2011) survey of accounting regulations to support their key arguments. The survey report states on page 202 that IFRS are ‘‘required for consolidated and standalone/separate financial statements” in Algeria. However, the 2015 edition of the report now states unequivocally that IFRS are ‘‘neither required nor permitted in Algeria.” (PwC, 2015, p. 229). This point is re-emphasized in the most recent (2017) edition, which also states that ‘‘IFRS are neither required nor permitted in Algeria” (PwC, 2017, p. 205).

Conclusion

The three multivariate analyses in this study (principal component analysis, cluster analysis, and multidimensional scaling) all lead to the same conclusion that a two-group classification (Anglo-American School and Franco-German School) can be discerned in the IFRS practices of listed companies in Africa, thereby supporting H1. These results also support H2, that pre-IFRS national rules influence IFRS policy choices, and H3, that there are systematic national differences in the accounting policy choices of listed companies in Africa.

Unlike earlier work by Elad (2015), which tested the classification in Fig. 2 using only data on de jure regulations from the PwC (2011) survey, this paper presents the first classification of financial reporting in Africa based on de facto practices. Classifications based on statutory rules rather than accounting practices could mislead researchers if the rules are not followed in practice. This paper shows that many recent studies use erroneous data on the adoption status of IFRS in African countries simply because they relied solely on statutory accounting rules and regulations.

Abstract

Keywords

1. Introduction

2. Literature review

3. Research case, design and methods

4. China’s hegemonic progress, economic reforms and International GS

5. Accounting and control practices in International GS

6. Conclusion

Acknowledgements

Appendix A.

Appendix B.

References

Abstract

This paper critically analyses the role of accounting in China’s new phase of politically driven economic reforms, which is the international expansion of Chinese enterprises. In particular, the paper examines how China’s multinational state-owned enterprise (SOE) and its managers conceive of, and use, accounting and control practices in response to the state’s international political and economic objectives. Drawing upon neo-Gramscian concepts of hegemony, this study contends that the Chinese Communist Party (CCP) has sought to create and maintain its hegemony by turning its political ideologies into initiatives of “economic development”, articulated through intensive ideological and political work exercised from the national to the organisational level. The study highlights the role of SOE managers in accommodating accounting and control practices in line with the state’s hegemonic and ideological demands. Crucially, it reveals the ability of managers to coordinate and balance the state’s political ends and the enterprise’s economic interests, where there is a selective use of accounting and control practices deployed for reasons beyond their economic functionality. This paper argues that it is necessary to include the superstructure and economic base of the Chinese state in a hegemonic analysis, and to investigate how the managerial cadre engages with ideology building at the organisational level. By focusing on the Chinese state’s new political dynamism regarding the expansion of multinational business operations, this paper provides new insights into the complexity of the motivations underlying the use of accounting and control practices in a globalised context

Introduction

Materials and Methods

Results

Discussion

References

Abstract

Purpose: To quantify cost drivers for thoracic duct embolization based on time-driven activity-based costing methods. Materials and Methods: This was an Institutional Review Board-approved (HUM00141114) and Health Insurance Portability and Accountability Act-compliant study performed at a quaternary care institution over a 14-month period. After process maps for thoracic duct embolization were prepared, staff practical capacity rates and consumable equipment costs were analyzed via a time-driven activity-based costing methodology. Sensitivity analyses were performed to identify primary cost drivers. Results: Mean procedure duration was 4.29 hours (range: 2.15-7.16 hours). Base case cost, per case, for thoracic duct embolization was $7466.67. Multivariate sensitivity analyses performed with all minimum and maximum values for cost input variables yielded a cost range of $1001.95 (minimum) to $89,503.50 (maximum). Using local salary information and negotiated prices for materials as cost parameters, the true cost per case of thoracic duct embolization at the study institution was $8038.94. Univariate analysis demonstrated that the primary driver of staffing costs was the length of time the attending anesthesiologist was present. The predominant modifiable cost drivers included cyanoacrylate glue volume used (minimum $4467; maximum $12,467), cost of glue utilized (minimum $5217; maximum $10,467), and cost of coils utilized (minimum $7377; maximum $10,917). Univariate analysis predicted that the use of Histoacryl glue in place of TRUFILL cyanoacrylate glue resulted in a cost savings of $2947.50 per case. Conclusions: The base cost per case for thoracic duct embolization was $7466.67. Costs, namely anesthesia staffing costs, cyanoacrylate glue, and coils were large, potentially modifiable drivers of overall cost for thoracic duct embolization.

Introduction

The cost of healthcare in the United States exceeds $2.7 trillion annually, accounting for 18% of the gross domestic product.1 While increasing administrative, pharmaceutical, and home healthcare expenses are responsible for a large portion of this increase, the direct costs of providing hospital care are still the primary driver of overall healthcare costs.1-3 As providers and hospitals prepare to move from a relative value units-based system to a value-based payment system there is an increasing need to be able to determine the true costs of delivering care and services. Accurate cost accounting represents an opportunity to identify novel avenues for cost reduction in clinical interventions. Time-driven activity-based costing (TDABC) is an accounting method which has gained popularity in business and is gaining increasing prominence as a tool for estimating healthcare delivery costs.2,4-6 TDABC allows healthcare providers to measure the costs of treating patients for a specific medical or surgical condition across a full longitudinal care cycle. It uses process mapping from industrial engineering and activity-based costing from accounting.6 TDABC relies on estimates of capacity cost rates and utilization times to estimate the overall cost associated with a system or intervention.4,7 Capacity cost rate is defined as the monetary cost of a resource per unit time (in dollars per hour), calculated by dividing the total cost of a resource by the approximate time the resource is utilized.4 This may be calculated for all resources employed in a system, including staff (as wages plus benefit costs divided by hours worked), equipment (as purchase cost divided by lifetime use), and occupancy (as rental costs divided by total annual productive occupancy time).

This paper examines the impact of corruption culture on accounting quality (AQ) of listed firms at the municipal level in China. We consider municipalities with (without) corrupt top government officials as having high (low) corruption culture. To isolate the effect of corruption culture, we use the arrest of corrupt officials (the events) to capture the change in local corruption culture, and apply the difference-in-difference method to compare AQ of firms operating in the jurisdictions of corrupt officials pre and post the events, compared to control firms. We find that AQ of firms affiliated with corrupt officials is higher after the events, which is robust to the placebo test, time-trend analysis, and various robustness tests. We complement the literature by showing that the increase in AQ is greater for firms associated with more powerful officials and having stronger connections with corrupt officials. Moreover, the positive effect on accounting quality is stronger in the post-2012 period. Further, we document that firms improving AQ after the events issue more SEOs and have lower cost of capital. Finally, analyses on channels firms used to improve AQ show that firms switch to higher quality auditors, have better internal control, and issue more management forecasts. This study has implications for policymakers in countries that suffer from corruption.

Introduction

Accounting plays an essential role in terms of resource allocation and economic growth (Biddle et al., 2009; Piotroski and Wong, 2012), as it bridges communication between business firms and capital markets, and serves as the foundation for various contracts, e.g., managerial and debt contracting (Watts and Zimmermann, 1986; Rajan and Zingales, 2003). Due to the importance of accounting, it is warranted to examine the impact of various factors on accounting quality. Ball et al. (2003) show that accounting quality is profoundly affected by market and political forces that influence managers’ incentives.1 While acknowledging the contributions of this study, Holthausen (2003) criticises the heterogeneity issues in its setting of four East Asian countries. We follow up Ball et al. (2003) by focusing on the impact of one specific aspect of political forces, i.e., regional corruption culture on accounting quality, and adopting a setting of a single country to mitigate the above concern. This paper examines how local corruption culture could affect accounting quality (AQ) of firms operating in the region using data from China. Corruption culture is measured by whether the top government officials that have the highest power in the region are corrupt.2 Guiso et al. (2006, p. 26) suggest that ‘‘Power is not merely domination but hegemony – that is, the ability to influence society morally and intellectually”. Moreover, Liu (2016) argue that corruption could be affected by political environment. We consider regions with corrupt top officials as having strong corruption culture and regions without corrupt top officials as having weak corruption culture.3 Dass et al. (2017) show that there is significant regional variation in terms of ‘‘corruption culture” in the United States, and public firms in more corrupt regions exhibit a greater propensity for corruption. When a corrupt top official is arrested on charges of corruption, this occurs as a shock to the public including both the corrupt officials themselves and the affiliated firms. This official will be removed from her post and this is very likely to affect the regional corruption culture because the connection between the corrupt official and firms is broken.

Many governments have replaced traditional cash-based accounting with some form of accrualbased accounting system. However, empirical evidence on the effects of the public accounting system on fiscal policy is scarce. Following rules by the federal states, municipalities in Germany have adopted accrual-based accounting systems gradually. By exploiting variations over time and across states I find no evidence for an impact on the overall financial balance. However, my findings suggest that accrual accounting has altered the structure of the budget. Revenues from the sales of non-financial assets have decreased significantly. This supports the hypothesis that municipalities had used these one-off measures before to meet fiscal constraints. Using data on entities controlled by the municipalities, the analysis provides no evidence for repercussions on these public funds, institutions or enterprises.

Introduction

Traditionally, the budget and accounting information of governments have been based on the cash principle. Starting in the 1980s, public sector accounting has experienced some fundamental changes. Private sector-style management instruments have been implemented, and in many countries a move towards accrual accounting has taken place (OECD/IFAC, 2017). Primarily, these reforms aspire to reveal the long-term budgetary impact of policy decisions and to capture public assets and liabilities. With the intention to improve fiscal monitoring, the discussion about accrual standards for public sector accounting has gained renewed interest after the sovereign debt crisis. The European Commission currently intends to introduce harmonized, compulsory accrualbased European Public Sector Accounting Standards (EPSAS) for all member states (European Commission, 2013). The voluntary switch to accrual accounting has already been actively encouraged and sponsored by the Commission. Despite the relevance of the topic and the prominent political debate, empirical evidence on the effects of the public accounting system is scarce. In particular, there has been little research on the costs and benefits of such reform. There are some studies, mainly from the accounting literature, that primarily analyze the effect of accrual-based accounting on the efficiency of the public sector.

1- Introduction

2- Development of theoretical framework

3- Method

4- Results

5- Discussion and conclusion

References

Abstract

Prior literature informs us that a company’s decision to outsource a business process depends on process characteristics such as how frequently the process is performed or how specific the assets required by the process are. In this article, we compare the effects of accounting process characteristics on outsourcing decisions across users of traditional and cloud-based accounting information systems (AIS). By focusing on outsourcing of accounting processes among small and medium sized enterprises, we investigate the effect of five business process characteristics (frequency, human asset specificity, uncertainty, information intensity, and need for customer contact) on the outsourcing decision. Our results reveal that process frequency has a weaker negative effect on the outsourcing decision among users of cloud-based AIS. This appears to contribute to users of cloud-based AIS outsourcing a larger variety of accounting processes. Compared to traditional AIS, the inherent properties of cloud-based AIS such as ubiquitous access, scalability, and integration seem to encourage users of cloud-based AIS to also outsource processes that are frequently performed.

Introduction

During the last few decades, the business process outsourcing (BPO) market has expanded rapidly as more and more companies outsource a wider range of business functions to professional service providers (Asatiani et al., 2019; Lacity et al., 2016). The rationale for outsourcing processes within these functions is simple: it is often cheaper to acquire (buy) services from a professional from the market than it is to develop and maintain the required competence to do (make) them in-house (Fill and Visser, 2000). This make-or-buy decision lies at the core of the substantial body of literature on outsourcing, in which one of the main questions has been whether the business process characteristics influence this decision. The increasing BPO trend can be partially attributed to the increased use of cloud-based information systems that facilitate outsourcing by reducing transaction costs associated with setting up an outsourcing relationship (Clemons et al., 1993; Gurbaxani and Whang, 1991; Han and Mithas, 2013). A key mechanism through which the use of cloud-based information systems enables outsourcing is that it allows the business process groups to be disaggregated into smaller processes1 that can transcend organizational or geographic boundaries (Apte and Mason, 1995; Quinn, 1992), which, in turn, allows the processes to be organized more efficiently between the outsourcer and the outsourcing service provider. This increases flexibility in how the delivery of processes can be organized, thus enabling companies to both reduce costs and concentrate on core processes (Apte and Mason, 1995; Jacobides, 2005; Kedia and Mukherjee, 2009; Mithas and Whitaker, 2007). However, disaggregation can also complicate outsourcing decisions. Instead of merely choosing whether to outsource a business process, companies that practice disaggregation need to make many processlevel micro-decisions. This disaggregation of business processes is especially prevalent in accounting. In today’s accounting outsourcing market, a company can decide to outsource only payroll tax calculation and retain control over the other payrollrelated processes, such as payments and reporting to government agencies. Therefore, to achieve the most efficient work arrangement, the company would need to carefully consider which parts of the process group to outsource.

1- Introduction

2- Literature review and research hypotheses

3- Research design

4- Empirical test and analysis

5- Further testing

6- Conclusions

References

Abstract

This paper investigates how accounting standards (AS) convergence influences Chinese firms’ overseas mergers and acquisitions (M&As) and shows that this convergence significantly promotes Chinese firms’ overseas M&As. Specifically, we find that both the probability of success and the value of transactions increases significantly in countries that implemented International Financial Reporting Standards (IFRS) prior to 2007. These results suggest that accounting standards (AS) convergence can improve the comparability of accounting information between China and other countries that have adopted IFRS. Moreover, we find that the impact of accounting standards (AS) convergence on state-owned enterprise (SOE) acquirers is weak. These findings demonstrate that accounting standards (AS) convergence can facilitate Chinese firms’ overseas M&As by improving the comparability of accounting information between China and target countries.

Introduction

The number of overseas mergers and acquisitions (M&As) made by Chinese enterprises has grown rapidly. M&A has become one of the main avenues of foreign direct investment (FDI) in the country, and it has received considerable attention from the government. The 2011 Review and Prospects on Mergers and Acquisitions by Chinese Enterprises released by PricewaterhouseCoopers shows that Chinese enterprises’ overseas M&As have maintained strong momentum, with the number of transactions reaching a record-setting 207, a year-over-year growth of 10%, and the total value of transactions reaching USD42.9 billion, a year-overyear growth of 12%. The Yellow Book of World Economy released by the Chinese Academy of Social Sciences in 2011 also shows that Chinese enterprises, as the acquiring parties, rank second globally in terms of the number of transactions in M&As, gradually shifting from the role of the acquired parties in the past to acquiring parties. To alleviate the pressure of renminbi appreciation, secure energy supplies, and upgrade industries, the Chinese government encourages eligible enterprises to develop overseas investments. The report of the 17th National Congress of the Communist Party of China clearly proposes a ‘‘go global” strategy, which has become an important part of the national strategy and national policy for long-term development. Owing to the continuous growth in overseas M&As, the literature investigates numerous factors that affect the success of overseas M&As and the performance of companies post-M&A, such as institutional and sociocultural factors, industrial and company factors, and transaction details and management style. Today, over a hundred countries and regions have converged their standards with International Financial Reporting Standards (IFRS). However, the literature on the effects of accounting standards (AS) convergence on corporate overseas M&As is limited.

1- Introduction

2- Previous literature and hypothesis development

3- Research design and sample selection

4- Empirical results

5- Conclusion

References

Abstract

This study investigates whether agency costs of free cash flow (FCF) are associated with conditional conservatism. Prior research documents that conditional conservatism improves ex ante efficient investment decisions and facilitates ex post monitoring of managers’ investment decisions. As conditional conservatism can provide protection from possible managerial expropriation, the demand for conditional conservatism should increase with the agency costs of FCF. Using excess cash as a proxy for the agency costs of FCF, I provide evidence that firms with higher agency costs of FCF incorporate losses in a timelier manner relative to gains compared to their counterparts. Additionally, the association between excess cash and conditional conservatism predictably varies with the presence of alternative monitoring mechanisms that mitigate FCF problems, such as debt or dividend payouts or repurchases. Further investigation suggests that greater conservatism is associated with a lower likelihood of overinvestment among firms bearing high agency costs of FCF, demonstrating the ability of conservatism to reduce agency costs of FCF.

Introduction

This study investigates whether potential agency costs of free cash flow (FCF) affect a firm’s level of conditional conservatism.1 Previous studies document that when companies are prone to overinvest, investors discount the value of cash and, consequently, the corporate value. Jensen (1986) refers to this type of loss of firm value as the agency costs of FCF, a type of agency costs between a manager and shareholders. Most prior studies focus on corporate governance as a monitoring mechanism for manager–shareholder agency conflict (Dittmar & Mahrt-Smith, 2007; Dittmar, Mahrt-Smith, & Servaes, 2003; Pinkowitz & Williamson, 2007). However, governance structures are not designed ex ante to optimally mitigate agency problems and are not very responsive to demands arising from stakeholders (Richardson, 2006). Other than shareholder litigation, which is ex post in nature and very costly, there is no specific action that shareholders can take against possible managerial expropriation.2 Prior research provides ample evidence that asymmetrically timely loss recognition, otherwise known as conditional conservatism, serves as an ex ante safeguard against ex post managerial opportunism while at the same time being demand driven (e.g., Beatty, Weber, & Yu, 2008; Gao, 2013; Holthausen & Watts, 2001; LaFond & Roychowdhury, 2008; LaFond & Watts, 2008; Ramalingegowda & Yu, 2012; Watts, 2003a). Conditional conservatism imposes stricter verification standards for recognizing gains than for losses, which results in recognition of losses ahead of realization and a delay in the recognition of gains until realization. The requirement of conservative reporting makes the recognition of losses from overinvestments less likely to be deferred to the future, and ex ante knowledge that future losses in cash flows will be recognized in income in a timelier manner provides disincentives for managers who might otherwise undertake negative net present value (NPV) projects (Ball & Shivakumar, 2006). As conditional conservatism can provide protection from possible managerial expropriation, the demand for conditional conservatism should increase with the agency costs of FCF.

1- Introduction

2- Design of a fraud detection process for financial statements of business groups

3- Development of fraud detection techniques for financial statements of business groups

4- Demonstration and evaluation of the proposed approach

5- Conclusions

References

Abstract

Investors rely on companies’ financial statements and economic data to inform their investment decisions. However, many businesses manipulate financial statements to raise more capital from investors and financial institutions, which reduces the practicality of financial statements. The modern business environment is highly information-oriented, and firms’ information systems and activities are complex and dynamic. Technology for avoiding fraud detection is continually updated. Recent studies have focused on detecting financial statement fraud within a single business, but not within a business group. Development of methods for using diverse data to detect financial statement fraud in business groups is thus a high priority in the advancement of fraud detection.
This study develops an approach for detecting fraud in the financial statements of business groups. The proposed approach is applied to reduce investment losses and risks and enhance investment benefits for investors and creditors. The study objectives are achieved through the following steps: (i) design of a process for detecting fraud in the financial statements of business groups, (ii) development of fraud detection techniques for use with such statements, and (iii) demonstration and evaluation of the proposed approach.

Introduction

Since the Procomp case and Enron event, investors, governments, and regulatory authorities have begun to focus on financial statement fraud committed by business groups. Falsified financial statements may result in large losses for investors and creditors in capital markets. The modern business environment is highly information-oriented, and firms’ systems and activities are complex and dynamic. Technology used to avoid fraud detection is constantly updated. Development of methods for using diverse data to detect financial statement fraud in business groups is thus a high priority in the advancement of fraud detection. Various approaches have been developed to detect fraud in corporate financial statements. Kirkos et al. (2007) explored the effectiveness of data mining (DM) classification techniques for detecting firms’ fraudulent financial statements (FFS) and identified factors associated with FFS. Auditors assisted in detecting fraud using DM techniques. The study also investigated the usefulness of decision trees, neural networks, and Bayesian belief networks in identifying FFS. Ravisankar et al. (2011) also used DM techniques such as multilayer feed forward neural network (MLFF), support vector machine (SVM), genetic programming (GP), group method of data handling (GMDH), logistic regression (LR), and probabilistic neural network (PNN) to identify companies that had committed financial statement fraud. Each of these techniques was tested on a dataset covering 202 Chinese companies, and the results of tests with and without feature selection were compared. Among the techniques, PNN was the most accurate without feature selection, and GP and PNN were the most accurate with feature selection (with marginally equal accuracies).

1- Introduction

2- Theoretical context

3- IFRS in Jordan: multi-level institutional aspects

4- Method

5- Analysis: IFRS and the accounting domain

6- Additional discussion and conclusion

References

Abstract

This study highlights how the implementation of International Financial Reporting Standards, in a context of minimal readiness, induces power imbalance between corporate accounting and audit, and changes acceptable accounting practices, and roles. Using the concept of institutional work, I analyze data from interviews and secondary sources, focusing attention on the practices of issuing financial statements. I find that the technical dependency of corporate accounting on audit blurs the boundaries between the two fields. I argue that this generates conditions for implicit negotiations, in which both groups (corporate accountants and auditors) engage in institutional work. Two subtypes of institutional work are identified as corporate accountants relinquish some of their traditionally institutionalized activities to the ‘expert’ auditors, to maintain field stability, while auditors encroach on the corporate accounting field, to remove obstacles during the implementation of IFRS. While there is no shortage of research documenting the economic outcomes of the adoption of IFRS, there is hardly any examination of how this technical disruption, has affected practices and relations within the accounting domain. Incorporating views and actions from the much-ignored corporate accounting field enables a more holistic view of how responses to IFRS are constructed, especially in contexts where IFRS are adopted for legitimacy.

Introduction

The interpretive stream of research argues that the adoption of International Financial Reporting Standards (IFRS) across many countries is motivated by seeking the legitimacy from powerful states and transnational organizations, within a context of increased institutional complexity and the interconnectedness of national and global forces (e.g. Arnold, 2005; Chand & White, 2007; Gallhofer, Haslam, & Kamla, 2011; Guerreiro, Rodrigues, & Craig, 2012; Irvine, 2008; Mir & Rahaman, 2005). Prior research explains developing countries’ decisions to adopt IFRS with economic dependence, pressures from the World Bank and the International Monetary Fund (IMF), absence of national accounting standards, and a perception of the neutrality of IFRS, (Annisette, 2004; Chua & Taylor, 2008; Judge, Li, & Pinsker, 2010; Mir & Rahaman, 2005). In one example, Al-Akra, Jahangir Ali, & Marashdeh (2009) argue that Jordan’s economic and political dependency is critical in explaining the wholesale adoption of IFRS. Institutional theorists suggest that, in light of legitimacy-seeking acts, we can expect at least loose coupling between the formal processes, and subsequent technical activities (Bromley & Powell, 2012; Meyer & Rowan, 1977). Abd-Elsalam and Weetman (2003) point to the lack of familiarity with international accounting standards, and the linguistic challenges involved in producing compliant financial statements, in Egypt.

1- Introduction

2- Literature review

3- Institutional background

4- Hypothesis development

5- Empirical tests

6- Firm-level cross-section analyses

7- Effects of foreign investors’ home country institutions and IFRS experience

8- Robustness tests

9- Conclusion

References

Abstract

We examine the effectiveness of China’s IFRS adoption from the perspective of an important set of financial report users, foreign institutional investors. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decrease after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that the weak institutional infrastructure in China’s transitional economy impairs IFRS’s intended goal of attracting institutional investment through improved financial reporting quality. Further, financial information users’ home country institutions and IFRS adoption experience affect the effectiveness of IFRS adoption.

Introduction

In an effort to improve financial reporting quality and attract foreign investment, China’s domestic capital markets now use International Financial Reporting Standards (IFRS) (MOF, 2006; IASB, 2006).1 Advocates of IFRS claim that it reduces information acquisition costs, thereby increasing investors’ willingness to invest across borders (e.g., SEC, 2008; Tweedie, 2008). IFRS, however, is modeled on developed economies with strong institutions, and little is known about the effects of IFRS adoption in large transitional economies such as China, where institutions are weak. Further, foreign institutional investors’ home country institutions and IFRS adoption experience may affect the ability of IFRS to attract foreign investment. The purpose of our study is to test whether China’s IFRS adoption has achieved its intended goal of attracting foreign institutional investment and whether foreign investors’ home country institutions and IFRS adoption experience influence the association between IFRS adoption and foreign institutional investment. The stated goal of the International Accounting Standards Board (IASB) in formulating IFRS is to create a single set of high quality accounting standards that ‘‘take into account the financial reporting needs of emerging economies” (IFRS, 2011). As a result, many developing countries have adopted or are planning to adopt IFRS in the near future. Consistent with this trend, China mandated IFRS adoption for all publicly traded firms beginning in 2007. A primary goal of China’s IFRS adoption is to attract greater foreign investment (MOF, 2006). Prior research has generally found positive capital market consequences following mandatory IFRS adoption (Daske et al., 2008; Li, 2010; Tan et al., 2011; DeFond et al., 2011). Much of this research, however, is based on evidence from the European Union (EU), where economic and legal institutions tend to be stronger than those in China. In settings where IFRS is unlikely to be credibly implemented, the benefits of IFRS adoption tend to be weak or non-existent, consistent with the notion that the effectiveness of high quality accounting standards depends critically on managers’ reporting incentives (Fan and Wong, 2002; Ball, 2006; Ball et al., 2003; Leuz, 2003). Characterized by poor investor protection, weak rule of law, and poor audit quality, China’s institutional setting creates weak incentives for managers to produce high quality financial statements (DeFond et al., 2000; Chen and Yuan, 2004; Wang et al., 2008; He et al., 2012). In addition, IFRS’s principlesbased standards and a greater use of fair value accounting provide more opportunities for Chinese managers to misreport (He et al., 2012). Therefore, we predict that IFRS adoption in China is unlikely to result in increased financial reporting quality that will attract greater foreign investment.