Accounting Choices During COVID 19 Pandemic: Does Corporate Strategy and Corporate Social Responsibility Matter?

This study aims to understand the accounting effects of the Corona pandemic in more depth and clarity, where the study explores the accounting choices during the pandemic period and the impact of the firms strategic orientation and its social responsibility performance on those choices. Using data from non-financial Saudi companies, the accounting choices divided into aggressive accounting strategy and conservative accounting strategy, and regression models used to examine the study hypotheses. The results of the study provide a clearer and in-depth vision about the nature of accounting practices during the pandemic and indicated that business strategy affects accounting choices, while corporate social responsibility does not affect. The results can imply useful information for the market regulators that help them in controlling and stabilizing the market, as well as for professional accounting organizations to help them issue guidelines for accounting work during crises

The Role of Enforcement in the Decision Making of Preparers and Auditors of Financial Statements

Theoretical thesis.Bibliography: pages 131-141.1. Introduction -- 2. Firm disclosures about enforcement reviews -- 3. Auditor conservatism in the presence of financial reporting enforcement -- 4. The role of enforcement in shaping conservative accounting choices -- 5. Conclusions -- References.This thesis investigates the role of financial reporting enforcement in the decision making of financial statement preparers and auditors. Enforcement bodies are governmental or private agencies that have the authority to review audited financial statements of listed corporations. Enforcement, in general, describes the supervision of listed firms by such agencies with the objective of ensuring compliance with accounting standards. Prior literature indicates that the introduction of enforcement mechanisms is associated with positive capital market effects such as increasing liquidity. Moreover, error announcements by enforcers result in significant negative market reactions for the censured firms. Hence, enforcement provides additional incentives for firms to prepare error-free financial statements. Moving beyond capital market effects, it is the aim of this thesis to provide evidence on the direct effects of enforcement on the decision making of involved stakeholders. This thesis includes three studies which examine the influence of enforcement on disclosure and accounting choices of managers and auditors. The first study "Firm Disclosures about Enforcement Reviews", in a descriptive and exploratory investigation of the annual reports of German firms subject to enforcement scrutiny from 2006 to 2016, finds that managers voluntarily disclose information about enforcement reviews even when the reviews are still ongoing. Content analyses reveal that these disclosures are potentially associated with strategic considerations. For instance, the study provides weak evidence that market reactions to error announcements are mitigated by pre-emptive voluntary disclosure about the ongoing reviews. The second study "Auditor Conservatism in the Presence of Financial Reporting Enforcement" utilises an experimental design to test whether the likelihood of being subject to an enforcement review increases an auditor's tendency to require conservative accounting choices from his/her client. The findings suggest that the expectation of an enforcement review and its likelihood are not associated with more conservative behaviour by the auditor. However, auditors who were directly affected by enforcement reviews in the past are more likely to make more conservative decisions. The third and final study "The Role of Enforcement in Shaping Conservative Accounting Choices" tests and finds in a cross-country setting that substantive changes in enforcement regulation are associated with increases in accounting conservatism. Moreover, findings suggest that the impact of enforcement on accounting conservatism is stronger for firms with weak corporate governance than for firms with strong corporate governance. In conclusion, this thesis supplies evidence that enforcement plays a significant role in the decision making of both managers and auditors. It influences managers' disclosure and accounting choices, while it may have an impact on auditors' accounting choices if auditors have had direct experience with enforcement reviews in the past. The thesis' findings suggest that the strengthening of enforcement institutions is associated with higher accounting conservatism. Increasing the frequency of enforcement reviews, on the other hand, may enhance auditor conservatism as it will result in more auditors having been directly affected by enforcement reviews -- abstract.Mode of access: Internet.1 online resource (x, 141 pages) illustration

The Earnings Quality Consequences of Announcements to Voluntarily Adopt the Fair Value Method of Accounting for Stock-Based Compensation

We identify 133 firms that between July and December 2002, announced plans to voluntarily adopt the fair value method of accounting for stock-based compensation. We investigate whether such announcements increased the quality of these firms’ earnings as perceived by market participants. Answering this research question not only provides evidence relevant to the debate surrounding the expensing of employee stock options, but doing so provides evidence that conservative accounting choices in general lead to higher perceived earnings quality. Using two measures of earnings quality, the price-earnings relation and the earnings response coefficient, we find evidence consistent with an increase in perceived earnings quality for these firms relative to a control set of firms that in 2002 did not announce plans to adopt the SFAS 123 stock-based compensation recognition provisions.SFAS, stock options, accounting, expensing options, fair value method

The effect of analyst coverage on accounting conservatism

Purpose – The purpose of this paper is to examine whether high analyst coverage increases or decreases accounting conservatism. Design/methodology/approach – Sample firms were selected from the Compustat and I/B/E/S databases for years 1989-2006. The authors used both accrual-based and market-value-based measures of accounting conservatism, also the extent to which negative cash flow from operations is more timely recognized via accruals than positive cash flow from operations to measure accounting conservatism. The regression analyses are conducted to test the hypotheses. Findings – Strong evidence was found that analyst coverage is positively associated with accounting conservatism. The results suggest that firms choose more conservative accounting methods when they are followed by more analysts than when they are followed by fewer analysts. The results are robust to a battery of sensitivity analyses. Originality/value – This paper sheds light on how analyst coverage affects firms\u27 accounting choices and extends the limited research on the monitoring role of analyst coverage. The findings are consistent with the notion that analyst coverage plays an important corporate governance role in the financial reporting process. This paper also adds to the literature on the economic determinants of accounting conservatism, and provides some implications for practitioners

Consequences of Announcements to Voluntarily Adopt the Fair Value Method of Accounting for Stock-Based Compensation

We identify 133 firms that between July and December 2002, announced plans to voluntarily adopt the fair value method of accounting for stock-based compensation. We investigate whether such announcements increased the quality of these firms’ earnings as perceived by market participants. Answering this research question not only provides evidence relevant to the debate surrounding the expensing of employee stock options, but doing so provides evidence that conservative accounting choices in general lead to higher perceived earnings quality. Using two measures of earnings quality, the price-earnings relation and the earnings response coefficient, we find evidence consistent with an increase in perceived earnings quality for these firms relative to a control set of firms that in 2002 did not announce plans to adopt the SFAS 123 stock-based compensation recognition provisions

Earnings Management and Long-Run Stock Underperformance of Private Placements

The study investigates whether private placement issuers manipulate their earnings around the time of issuance and the effect of earnings management on the long-run stock performance. We find that managers of U.S. private placement issuers tend to engage in income-increasing earnings management in the year prior to the issuance of private placements. We further speculate that earnings management serves as a likely source of investor over-optimism at the time of private placements. To support this speculation, we find evidence suggesting that the income-increasing accounting accruals made at the time of private placements predict the post-issue long-term stock underperformance. The study contributes to the large body of literature on earnings manipulation around the time of securities issuance

Accounting Conservatism and Risk Disclosures

This thesis adopts a broad view of conservative financial reporting—managers can use two ways to communicate business uncertainties to outsiders, namely, conservative accounting via timely loss recognition and narrative risk disclosures about a firm’s downside risk. I posit that managers trade off conservative accounting and risk disclosures because they both can alleviate information asymmetry about downside risk and reduce shareholder litigation, and they both impose significant costs on firms. Using a sample of U.S. industrial firms from 1995 to 2018, I find support for this substitutive (trade-off) relation when narrative risk disclosures were voluntary but not when they were mandatory in annual reports. Moreover, I hypothesize and find evidence that firms have stronger incentives to make such trade-offs in order to reduce overall reporting cost, when they are planning seasoned equity offerings, are closer to debt covenant violations, face higher proprietary costs, or have greater needs for debt financing. Additional tests show that external monitoring, by financial analysts or by shareholders through litigation threats, constrains firms’ flexibility in making such trade-offs. For the period after 2005 when the U.S. Securities and Exchange Commission (SEC) has mandated risk factor disclosures in annual reports, I find firms with lower analyst following or lower litigation risk exhibit a significant substitutive relation between these two accounting choices. Stock return tests show that, while investors fully anticipated managers to make such trade-offs when risk disclosures were voluntary, they reacted negatively to firms that appear to have made trade-offs between these two choices in the period after the SEC has mandated risk disclosures. Collectively, my research suggests that firms trade off conservative accounting recognition and risk disclosures, especially in the period when qualitative risk disclosures were voluntary, even though investors appear to prefer consistent information between quantitative accounting numbers and qualitative risk disclosures

Shareholder Value and Auditor Independence

This Article questions the practice of framing problems concerning auditors\u27 professional responsibility inside a principal-agent paradigm. If professional independence is to be achieved, auditors cannot be enmeshed in agency relationships with the shareholders of their audit clients. As agents, the auditors by definition become subject to the principal\u27s control and cannot act independently. For the same reason, auditors\u27 duties should be neither articulated in the framework of corporate law fiduciary duty, nor conceived relationally at all. These assertions follow from an inquiry into the operative notion of the shareholder-beneficiary. The Article unpacks the notion of the shareholder and tells a particularized story about the shareholder interest. The exercise complicates the agency description, highlighting multiple and unstable shareholder demands that displace the unitary model of the shareholder usually brought to bear. This fragmented and volatile model of the shareholder provides neither a basis for articulating a coherent set of instructions respecting aggressive accounting nor for imposing conservative accounting. The Article concludes that legal positivism provides a more appropriate conceptual framework. Auditor duties should be conceived in formal rather than relational terms, with fidelity going to the rules and the system that auditors apply rather than to a client interest

Business strategy and earnings quality

ABSTRACT: Using the Miles and Snow (1978) strategy typology, this study investigates whether business strategy is associated with the quality of reported earnings. In a sample of U.S. listed firms, we predict and find that defender strategy firms are associated with higher levels of earnings management and prospector-strategy firms are associated with higher levels of accounting conservatism. However, this relation between business strategy and earnings quality is altered during high and low economic growth periods. In high-growth periods, while prospector firms exhibit lesser accounting conservatism, defender firms exhibit lesser earning management. In low-growth periods, the prospector firms become more conservative in reporting while the defender firms engage in more aggressive earnings management. Our findings provide direct evidence of the link between business strategy and earnings quality

The economic determinants of conditional conservatism.

We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognized otherwise, or by delaying the recognition of current economic gains that would have been recognized had circumstances been different.Conservatism; Contracting; Taxation; Political costs; Litigation risk;