Earnings Management: The Effects of National Audit Environment, Audit Quality and International Capital Markets

This paper studies earnings management in an international context. More specifically, the effects of three factors on earnings management are studied: national audit environment, audit firm quality and reliance on international capital markets. National audit environments vary strongly in terms of independence rules, auditor education and auditor liability. Hence, it can be expected that the restrictions imposed by national audit environments on earnings management vary. However, there are two factors that can mitigate the national audit environment effect. First, there is strong evidence that audit firm quality, as indicated by the Big 5 and non-Big 5 dichotomy, affects earnings management opportunities for clients. In the context of this study an important issue is to what extent this quality effect overrides national differences. In other words, to what extent do the international audit firms provide a standardized high quality audit across different jurisdictions? Second, the reliance on international capital markets might reduce companies’ earnings management, irrespective of the opportunities provided by the national environment. The study uses data for the period 1991 - 1999 from listed firms in four jurisdictions: France, UK, the Netherlands and Germany. The total number of firm year observations is 17,838. The results of the study suggest that national differences in audit environments are strongly affecting earnings management. While earnings management is also affected by the audit quality of the audit firm and the reliance on international capital markets, the effect is rather small. The evidence provided in this study is relevant for the current worldwide integration of capital markets and the acceptance of international accounting standards. For the international comparability of earnings, not only the standardization of financial reporting is important but also the standardization of enforcement across jurisdictions. The results of this study suggest that the enforcement of financial reporting still varies strongly across countries.accounting and auditing ;

Benchmarking the production of audit services: An efficiency frontier approach

To compete effectively in an increasingly competitive audit market audit firms need information on the efficiency of the audit services they offer. This study reports on the cost and labor efficiency for a sample of 114 audit engagements conducted by one of the (then) Big 6 audit firms. Estimating the efficiency of audit engagements is a form of benchmarking, of which economics oriented research has seen many applications. The application to auditing however is, as far as we know, relatively new. To determine the cost and labor efficiency of the audit engagements we employ the statistical technique of stochastic frontier estimation. Using models from the well-known and established audit fee and audit production literature we find that for our sample audit services are produced in a cost and labor efficient manner. Keywords: accounting and auditing, economics; audit production, cost and labor efficiency, stochastic frontier estimation Data availability: The data used in this study are proprietary to the audit firm studied and cannot be released by the authors. Address for correspondence: Caren Schelleman, Maastricht University, Faculty of Economics and Business Administration, MARC, PO Box 616, 6200 MD MAASTRICHT, The Netherlands. Phone: ++31.43.388.37.14. Fax: ++31.43.388.48.76. E-mail: [email protected] ;

Voluntary adoption of non-local GAAP in the European Union: a study of determinants

This study examines the determinants of voluntary adoption of non-local accounting principles for financial reporting (non-local GAAP) by non-financial companies listed and domiciled in the European Union. We restrict ourselves to the two most predominant internationally accepted sets of accounting standards: International Accounting Standards (IAS) and United States generally accepted accounting principles (US GAAP). The maintained hypothesis is that firms will switch from local to non-local GAAP if the benefits outweigh the costs. This study provides insight in the characteristics of firms that experience positive net-benefits from non-local GAAP adoption. Considering that mandatory adoption of IAS is envisaged for listed EU companies from 2005 on, the results are of potential interest to EU and national financial reporting regulators.We have used various sources to identify EU companies that use non-local GAAP. The 1999 annual reports of all these companies were examined. We find that 133 non-financial companies in the EU voluntarily adopted non-local GAAP in 1999. This suggests that the net-benefits of using non-local GAAP are positive for only a small minority of EU companies.Companies that do voluntarily use non-local GAAP are more likely to be listed on a US exchange, the EASDAQ exchange in Brussels, and have more geographically dispersed operations. Furthermore, they are more likely to be domiciled in a country with lower quality financial reporting and where IAS is explicitly allowed as an alternative to local GAAP.accounting and auditing ;