Are auditor’s going concern opinions affected by debt-related events?

This paper examines the issue of audit failure and attempts to answer the question why some bankrupt firms receive unmodified opinions while others do not. Specifically, we examine the impact of debt-related events on auditors’ decisions to issue going-concern opinions. We find that, in general, the occurrence of debt-related events does not prompt the issuance of going-concern opinions. The results suggest that audit failures may be attributed to the auditors’ downplay or negligence of the importance of debt-related events. The findings also suggest that managers who try to bring the company out of financial distress should avoid taking debt financing activities that prompt auditors to make going-concern qualifications

An explanation for earnings management : opportunistic or signaling?

In a two-period and two-type framework, the market does not know a firm’s economic earnings creation ability, which could be high or low, but infers it by observing the firm’s accounting earnings. The firm liquidates some of its shares in the first period, and the rest in the second period. This paper provides a reason that a manager, no matter the firm’s type, may transfer some earnings from the second period and report high accounting earnings in the first period, ifthe first period’s economic income is low, because such action could have positive effects on the firm’s market value. We further argue that smoothing earnings is a signaling strategy for a high type firm, but an opportunistic behavior for a low type firm. In addition, we point out that the higher the liquidation needs in the first period, or the less information about the firm’s type the market has, then he more aggressive the manager may engage in earnings smoothing

Stock prices and the location of trade : evidence from China-backed ADRs

This study examines whether the trading location affects equity returns of China-backed American Depository Receipts (ADRs) traded in the US. If international financial markets are integrated, stock prices should be affected only by their fundamentals; otherwise, stock prices may also be affected by their trading locations/investor sentiment. We find that China ADRs’ returns are affected more by the US market fluctuations than by Chinese market returns. We interpret the results as suggesting that country-specific investor sentiment affects stock prices

Effects of takeover protection on earnings overstatements : evidence from restating firms

A staggered board can substantially protect a firm’s incumbents from takeover in either a hostile acquisition or a proxy contest. We use the existence of a staggered board as enhanced takeover protection and examine the association between staggered boards and earnings manipulation. Following a rigorous procedure to identify a sample of restating firms that overstated earnings, manually collecting data on several governance characteristics and using a matched-pairs methodology, we find that firms with staggered boards are less likely to overstate earnings. One potential interpretation of our results is that staggered boards lessen takeover threats and thus mitigate managers’ pressure to overstate earnings

A comparative analysis of U.S. GAAP versus IAS/IFRS : : the effects of discretionary accruals, R & D, and deferred tax expense on earnings management

This study examines whether the relatively rule-based U.S. Generally Accepted Accounting Principles (GAAP) and the more principle-based International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) provide different opportunities for earnings management (EM). Management can use strategic management decisions to smooth income that may or may not maximize the firm’s value under either the rule-based or principle-based accounting standard. Comparisons of accounting standards across different markets and countries are difficult because of the differences in institutional factors and corporate governance issues (Frost and Pownall, 1994; Leuz, 2003). This problem is controlled via the unique feature of dual listing in the current German Frankfurt Stock Exchange. Firms that choose to list their shares under the Prime Standard can report in accordance with either the U.S. GAAP or the IAS/IFRS. Findings suggest that EM through R&D expenditure and deferred tax expense is higher for the IAS/IFRS firms compared to the U.S. GAAP firms and that EM through discretionary accruals is higher for the US-GAAP firms compared to the IAS/IFRS firms. The results inform US regulators considering IAS/IFRS adoption

The influence of firm specific context on realizing information technology business value in manufacturing industry

Both rising competitions and the enormous size of information technology (IT) investment have led to serious managerial concerns over the business value of IT. Despite high perceived values of IT, empirical studies have generally reported mixed results when examining the relationship between IT spending and firm productivity. Using contingency theory, we hypothesize that IT business value is influenced by firm specific context. An empirical examination of more than 3000 firm years over 1998–2000 from U.S. manufacturing industries reveals that durable goods industry firms and firms with higher level of vertical integration realized higher IT business value in improved labor and administrative productivity. In addition, the findings support the theoretical claim that IT spending does matter strategically in the right setting

Wealth creation from information technology investments using the EVA®

EVA® has recently been touted by the business press, analysts and researchers as the best method for assessing firm performance. EVA® focuses on maximization of incremental income above capital costs while adjusting for accounting items frequently used to manage earnings. In the current study, EVA® is used to assess differences in firm performance as related to IT investment in order to add clarity to conflicting results in the extant research. Our study focuses on manufacturing firms during 1998-2000 when there was widespread adoption of factory automation, enterprise resource planning and advanced production scheduling systems. Consistent with several earlier studies, results in the sample firms were inconsistent when applying traditional accounting measures (i.e. IT investment was not correlated with increases in ROI and ROA but was correlated with ROE and ROS). However, a significant relationship exists between IT investment and EVA®, indicating increased IT investment was associated with increased wealth creation

Factors influencing responsibility attribution to the auditors

The purpose of this study was to identify factors influencing the jurors’ responsibility attribution to the auditors in audit failure litigation. These factors included affect, perception of the auditors’ role in fraud detection and loss sharing, and the jurors’ risk attitude. In a laboratory setting, participants read a hypothetical audit failure case, completed several questions pertaining to the independent and dependent variables, and provided their demographic information. The findings indicated positive relationships between (1) affect and responsibility attribution to the auditors, (2) affect and the auditors’ role in fraud detection and loss sharing, and (3) the auditors’ role in fraud detection and loss sharing and responsibility attribution to the auditors. In addition, the results demonstrated the mediating role of the auditors’ role in fraud detection and loss sharing in the relationship between affect and responsibility attribution. The findings also revealed the moderating role of risk attitude in the effect of affect on responsibility attribution

Net income comparability between EU-IFRS and US-GAAP before release no. 33-8879 : evidence from fifty US-listed European Union companies

Since November 15, 2007, US-listed foreign companies that prepare financial statements in accordance with IASB-IFRS (International Financial Reporting Standards as issued by the International Accounting Standards Board) no longer need to reconcile their financial statements to US-GAAP (U.S. generally accepted accounting principles) as per release no. 33-8879. Most companies that used to report with EU-IFRS (European Union members’ implementation of IFRS) claimed compliance with IASB-IFRS immediately. This study explores the comparability between IFRS and US-GAAP reported net income right before release no. 33-8879 took effect. Net income reconciliation from IFRS to US-GAAP by fifty randomly selected US-listed EU companies for financial year 2006 is analyzed. The evidence shows that significant differences still exist between IFRS and US-GAAP in reported net income. Such differences were primarily a result of different accounting treatments of research and development expenditures, pensions, business combinations, and deferred income taxes

Modified problem-based learning in accounting curriculum

This paper proposes the use of a bounded problem based learning (BPBL) approach in an accounting curriculum. Studies have shown that PBL is designed to (1) promote lifelong learning, (2) integrate theory with practice, (3) develop soft skills and (4) confront multifaceted problems, hence aiding in students’ exposure to the real world. Little research has been done on the use of PBL in an accounting context. This paper argues for and serves as a guide for the use of a BPBL approach in multidisciplinary accounting modules. Results from our exploratory study indicates that students generally prefer the BPBL approach and there was significant intelligence improvement observed from using this approach