The oversight of financial reporting in Germany: Essays on audit quality and on accounting enforcement

Reliability, transparency, and quality of financial information are critical for the stability of the financial market. To support the oversight of financial reporting, the EU has promoted the institution of national enforcement systems, which supervise the compliance of financial statements with the applicable reporting framework, and has issued, in April 2014, Directive 2014/56/EU and Regulation (EU) No 537/2014, which aim at strengthening the role of the statutory auditor. This dissertation focuses on two aspects of the oversight of financial reporting in Germany, namely audit quality and accounting enforcement, and analyses whether the above-mentioned regulatory measures are potentially able to increase the quality of financial information among PIEs. The first part of the dissertation examines whether the limitations introduced by the EU-regulation on the provision of certain non-audit services (NAS), on NAS fees as well as on the proportion of fees an auditor can obtain from a client, and on the length of audit engagements, might improve audit quality. Audit quality is measured with the existence in audited financial statements of accounting errors, which are identified thanks to the enforcement announcements disclosed in the Federal Gazette. The second part of the dissertation evaluates whether companies with enforcement findings have a higher probability of engaging in earnings management (measured with Beneish’s m-score) than companies subject to the enforcement regime, which have not issued any enforcement announcements over the analysed period. The results show that the two-tier enforcement system is potentially able to find and sanction companies engaging in earnings management, which means that its work might contribute to increasing the quality of financial information. Conversely, there is only partial evidence that further restricting the provision of NAS, setting a cap on NAS fees as well as on the proportion of fees an auditor can obtain from a client, or limiting the length of audit engagements are effective in strengthening the role of the statutory auditor and in enhancing the quality of financial statements

THE CORPORATE GOVERNANCE DRIVERS, PERFORMANCE AND RISK: EMPIRICAL EVIDENCE FROM ITALIAN CONTEXT

In this work we carried out an empirical research on a sample of 98 Italian companies continuously listed during 2005-2011, with the objective of deepening the analysis : we tried to verify the role played by the Corporate on performance and default risk, with the definition of an index of good Governance (scG); we tried to verify the variables of Corporate Governance that produce effects on performance and risk of default (Z-score and leverage); we tried to verify the difference of effects of Corporate governance Index on performance and risk for family business and for companies active in M&A; we conducted an analysis on a sample of Italian companies to measure Corporate Governance quality and to evaluate the relationship with the accounting and market performance and the effect on risk level. We find that The Corporate Governance quality presents some correlation with performance and risk parameters. The non family companies are better structured. They show a positive correlation between some Corporate Governance drivers and performance and Z-score. We can observe that le “well-advised” firms in external strategies are able to obtain a better correlation with performance and also a good relation with Z-score

Coordonatele auditului in marketingul financiar-bancar - situatia din Romania

The general term of internal audit was established in relation to the financial accounting activity; this notion was gradually replaced by a new approach which expands the sphere of the audit so that the preoccupation for the future is very important for any audit activity. If forming and consolidating a favorable image of the bank among service consumers represents a marketing problem, then solving it requires numerous instruments from the marketing policies; the most important role is attributed to the audit. The final goal of the marketing audit is drawing up a table regarding the performances and the efficiency of the bank, in relation to the risks involved by financial institutions and its operations. In this respect, specialists in banking management have come up with different models of calculations and rating systems in their trials to obtain the most accurate scan of the “state of health” of the banks, and moreover in their trials to identify the institutions which face financial and operational difficulties leading to bankruptcy. The uniform bank rating system is a specific instrument for the supervising activity and has its origins in the USA ; it has later been borrowed by German, Italian, Great Britain authorities, which use influential components in their banking system; later on, their system was adopted by most central banks within the European Union. In Romania, the uniform bank rating system has been implemented by N.B.R. (the National Bank of Romania) since 2000; the specific components that were analyzed are: the capital adequacy (C), the quality of assets (A), the management (M), profitability (P), liquidities (L) and sensitivity (S) starting from the year 2005. For short, this system is called CAMPL. The evaluation of these specific elements represents an important criterion for establishing a compound rating, which means assigning scores to each bank. The compound rating for the banking system is established based on economic – financial indicators and prudence indicators.marketing audit; uniform bank rating system; the capital adequacy; the quality of assets ; sensitivity to market risk

Earnings Management, Tunnelling Behaviour and Corporate Governance: The Case in China

This thesis explores three aspects of minority shareholder protection in the Chinese stock market, where earnings management depends on the split share structure reform (SSSREF) and mergers and acquisitions (M&As), as well as impact of mutual fund ownership on controlling shareholders’ tunnelling behaviour and firm performance. More precisely, Chapter 2 empirically shows that China’s SSSREF has not fundamentally improved the quality of firm financial information. However, the reform exogenously created an incentive alignment effect that influences firm’s earnings management behaviour. Specifically, the use of discretionary accruals by firm`s has been constrained since the reform and has consequently shifted to less detectable and underscrutinized real earnings activities after the SSSREF. This shift is similar to that seen with the passage of the Sarbanes–Oxley Act (SOX) and International Financial Reporting Standards (IFRS) on firm earnings behaviour in developed countries with a strong investor protection environment. The results also suggest that the shift between firm’s accrual-based and real earnings methods is an overlooked area for investors in the Chinese stock market and may require regulatory attention. Chapter 3 explore fully the role of mutual funds in corporate governance in Chinese listed firms through examining whether mutual fund ownership can effectively reduce controlling shareholders’ tunnelling behaviour and improve firms’ performance. The corresponding results find a non-linear association between mutual fund ownership and firm performance. In particular, a higher level of mutual fund ownership is associated with better firm performance, which indicates that mutual funds could serve as sophisticated investors to provide useful accounting information to outsiders, and are also capable of monitoring to improve the corporate governance mechanism. When the mutual fund ownership reaches a certain level, the negative relation between high mutual fund ownership and firm performance may imply that mutual fund managers are more likely to expropriate value from minority shareholders when they have dominant controlling power. In addition, the non-linear relation between mutual fund ownership and firm performance is still observable when controlling shareholders implement tunnelling behaviours. At last, mutual fund ownership can effectively reduce controlling shareholders’ tunnelling behaviour. Therefore, in order to realize fully the benefit of mutual fund ownership in improving corporate governance, it is necessary to further liberalize the mutual fund industry and to decentralize regulation by government agencies. Chapter 4 extends the study of Chapter 2 and examines the environment of investor protection in the Chinese stock market by looking at the relation between earnings management and M&As. In details, the findings reveal M&As in China have a positive effect on promoting real earnings management and a negative effect on limiting accrual-based earnings management during the year of M&As. This finding indicates acquirers in China prefer to engage in more real earnings management mainly because of strict regulatory supervision by CSRC and the high percentage of deals paid by cash. However, accrual-based earnings management yields a significantly positive correlation with both real earnings proxies and their interaction with M&As instead of a substitution effect between accrual-based and real earnings management around M&As. This further reflects the absence of effective corporate governance and weak investor protection for the Chinese stock market. In addition, the results show a decline in earnings informativeness in the year of the M&A, and this further supports that the adjustment of earnings upwards around M&A can lower firm’s informational quality. Finally, due to the increase in real earnings management activities around M&As, the market is more likely to react negatively to such earnings strategy, especially in the year of the M&A. Consequently, the empirical evidence in this thesis contributes to the current literature and related policy making by expanding our understanding of the Chinese stock market and paying more attention to protecting minority shareholder interests

The financial reporting quality, choice of payment and due diligence auditor in M&As: evidence from China

This dissertation contains three essays that examine the relationship between Chinese acquiring firms’ financial reporting quality, payment methods, auditor’s industry specialisation and their domestic merger and acquisitions (M&As) short-term performance (measured by CARs) and long-term performance (measured by ROA/ROE). As the result of its remarkable economic growth rate and admission to the World Trade Organisation (WTO), China has witnessed a dramatic increase of M&A activities over the past two decades. However, despite the vast amount of research on M&As, little has been produced about the area of China. Considering the impact of China’s economy as the second biggest in the world as well as the unique nature of Chinese institutions, more research should be done and it is the aim of this paper to enrich the literature in this area. It is hoped that the conclusions drawn from this research will be of interest to both market regulators and participants. The first essay examines the relationship of the acquiring firm’s financial reporting quality, payment method and their M&A performance in a sample of domestic M&As between unrelated parties. The results show that there is a significantly positive market reaction to acquisitions with high financial reporting quality, and acquirers with high financial reporting quality tend to choose stock involved payment. The research also shows that lower financial reporting quality acquiring firms tend to pay a higher premium to the target, which might be for compensating them for accepting stock payment. The second essay examines the relationship of the acquiring firm’s financial reporting quality, payment method and their M&A performance in a sample of domestic M&As between related parties. Since China still adopts two accounting approaches (purchase and pooling of interests) for business combination, there would be concern that acquiring firms would like to try to manipulate to adopt a certain approach. The research does not show that significant discretionary accruals difference between the firms for two approaches. However, it shows that when transactions are among related parties, because of less information asymmetry, there would be less likely of accrual manipulation. Furthermore, the distinction of the common control and uncommon control (as the criteria for applying accounting methods) imply the possibility that under common control there would be concern of tunnelling and M&As in cash payment would have more concern on this. The market response to the cash payments confirms this. The third essay examines the relationship acquiring firms’ financial reporting quality, auditor industry specialisation and their unrelated-party M&A performance. Since financial reporting quality is very important for investment decisions, financial reporting auditors also plays an important role. Also, when the involved parties are unrelated, the auditors are getting more important. Hence, the choice of due diligence auditor is very important to the acquiring firms. China allows listed companies to use same auditor to provide due diligence services. The research shows that when financial reporting auditors are industrial experienced, the acquiring firms are less likely to appoint a new auditor for due diligence. Also, when acquiring firms appoint a new auditor for due diligence, the market would not have significant response; however, when they appoint a new auditor with good industry experience, the market response positively. In summary, the three essays try to show in a developing market with transparency problem, there are some information asymmetry mediators, like financial reporting quality, payment methods choices and auditor/due diligence services; and also try to show how they work together and how they work to the M&As short-term and long-term performance. The following chapter explains the background and motivation of the research and introduces the contribution of the work to the existing body of knowledge

The influence of banks on auditor choice and auditor reporting in Japan

Debt as opposed to equity as the major source of financing and the influence of banks on the corporate governance of listed companies are unique features of the Japanese business environment. This thesis investigates how these features affect the choice of auditor by Japanese listed companies and auditor reporting by Japanese CPA firms on those companies. Pong and Kita (2006) provided some univariate analyses and indicated that Japanese companies tended to select the same external auditors as their main banks to reduce the agency costs. In this thesis, I further examine the influence of main banks on auditor selection by logistic regression and also investigate the influence of main banks on auditor reporting quality after controlling self-selection bias. Using data from Japanese listed companies in the Tokyo Stock Exchange over the 2002-2008 period, I provide empirical evidence that companies with more reliance on main bank loans are more likely to choose their main banks’ external auditors. Using the Propensity Score Matching method and the Heckman two-step binary probit model to control for self-selection bias, the empirical results support the hypothesis that main bank auditors are more likely to issue modified opinions to the borrowing companies than non-main bank auditors, providing evidence of higher audit quality from main bank auditors. As a sensitivity test, I also use discretionary accruals as a measure of audit quality. the results indicate that companies who choose the same auditors as their main banks have higher audit quality than companies who choose different auditors from their main banks. My thesis contributes to the existing auditing literature in several ways. First, by studying the influence of debt financing on auditor choice and auditor reporting, this thesis extends the auditor market research that focuses mainly on the role of auditors in equity markets to the bank-based market. Furthermore, this thesis also complements auditing research on the influence of institutions on audit quality

The effect of audit quality on firm value : a case in Indonesian manufacturing firm

Purpose: This study aims to examine the effect of audit quality on firm value in manufacturing companies listed on the Indonesian Stock Exchange in 2013 to 2017. Design/methodology/approach: Population in this study are all manufacturing companies listed on the Indonesian Stock Exchange. Sampling was carried out using a purposive sampling method. Research data were tested using multiple regression analysis. Findings: The results from this study show that audit quality has a positive effect on firm value in manufacturing companies on the Indonesian Stock Exchange. Practical Implications: The Indonesian capital market gives a positive appreciation to companies that have higher quality audits. Higher audit quality is expected to reduce agency costs, reduce information asymmetry and increase firm value. Companies are advised to use higher quality auditors in order to increase firm value in the Indonesian capital market. Originality/value: Audit quality which is proxied by Big 4 and non-big 4 auditors has been proven to have a positive influence on firm value in manufacturing companies on the Indonesia Stock Exchange.peer-reviewe

Did the market overreact to the mandatory switch to IFRS in Europe?

Despite studies which indicate that mandatory adoption of International Financial Reporting Standards (IFRS) reduced the cost of capital for adopting firms and improved analysts’ forecasts, the evidence supporting any improvement in accounting quality is mixed. In a European wide country study, we calculate a broadly based measure of earnings management defined as accruals which are unrelated to current activity or past-current-future cash flows. At the individual country level we find that accounting quality improved only in France, Germany and Netherland, which are categories as ‘legal origin countries’. Moreover, based on an equity valuation model adjusted for earnings quality, we find that, in most European countries, the market overreacted to the impact of mandatory IFRS adoption. Further test shows that investors do not seem to understand the exact components of the financial statements that IFRS will have impact on

Accounting quality under IFRS during stressed volatility: an examination of UK banks

This paper examines whether accounting quality is maintained for UK banks that report under the IFRS accounting standards during times of stressed market price volatility. We find that the UK banks’ accounting quality, measured from 1992 to 2008 using the relationship between total shareholders’ equity and market price, experienced a significant decrease during the high levels of market price volatility in 2008. This paper contributes to research that examines the IFRS accounting standards and to the examination of accounting quality in banks during periods of stressed volatility. Furthermore, this study concludes by calling for the examination of methods and processes to mitigate risks that impact on accounting quality