Initial Evidence from the German Audit Market

This study investigates the economic auditor–client dependency issue by examining the association between abnormal audit fee pricing and audit quality. Our study is the first to analyze this phenomenon empirically for the institutional setting of German IFRS firms by using a sample of 2,334 firm- year observations for the period from 2005 to 2010. Our empirical results demonstrate that positive abnormal audit fees are negatively associated with audit quality and imply that the audit fee premium is a significant indicator of compromised auditor independence due to economic auditor–client bonding. Audit fee discounts generally do not lead to a reduced audit effort, or respectively, audit quality is not impaired when client bargaining power is strong. The association of positive abnormal audit fees and audit quality is robust to different audit quality surrogates such as absolute discretionary accruals, financial restatements, and meeting or beating analysts’ earnings forecasts

Executive compensation and goodwill recognition under IFRS:Evidence from European mergers

Based on principal agent theory we posit that managers account for a business combination opportunistically by recognizing goodwill in excess of its economic determinants. We examine the relationship between CEOs' short-term cash bonuses and the amount of goodwill recognized in IFRS acquisitions. We find that with increasing cash bonus intensity managers recognize more goodwill. More detailed analysis indicates that this relationship is not a linear one. Instead, there seems to be a corridor in which CEOs are susceptible to the incentive given by bonus payments. In particular, the relationship seems to be fulfilled only for CEOs whose cash bonus is between 150% and 200% of their base salary prior to the acquisition. Our findings have an implication for companies that bonus caps should be introduced to limit CEOs' bonuses to a given percentage of their base salary. By doing so, they may re-align shareholders' and managers' interests and avoid an increased impairment risk in the future

Enforcing financial reporting standards:The case of white pharmaceuticals AG

This instructional resource is based on an actual case of financial reporting enforcement and invites students to reflect on two main themes: the treatment of research and development costs and the enforcement of financial reporting standards. First, students are to analyze a cooperation agreement under which German company White Pharmaceuticals AG receives access to the research and development results of their U.S.-based partner. While applying managerial judgment in interpreting the transaction, students review the treatment of internally generated and separately acquired intangible assets under IFRS and U.S. GAAP. In addition, they are asked to discuss the convergence of the two major accounting regimes. Second, the case study fosters students understanding of how financial reporting standards are enforced when the German Financial Reporting Enforcement Panel (FREP) starts an investigation into how White Pharmaceuticals AG accounted for payments that the company conducted in the course of the cooperation. Students become aware of the consequences such an investigation may have as the FREP finally adjudges that White Pharmaceuticals AG should restate their financial statements

Plausibilisierungsmöglichkeiten einer Kaufpreisallokation nach IFRS 3 - Theoretische Grundlagen und Fallbeispiel

When accounting for a business combination according to IFRS 3, an acquirer often encounters considerable challenges. Fair values, which are the applicable measurement basis in the context of IFRS 3, are caught in a trade-off between relevance and faithful representation, and an acquirer is required to assess the reliability of his acquisition accounting. This article examines theoretically, as well as using an illustrative example, how an acquirer can check the accounting for a business combination for plausibility. An analysis of the internal rate of return (IRR) as well as of the weighted average rate of return on assets (WARA) is presented