Equity incentives, earnings management and corporate governance: Empirical evidence using UK panel data

Using a UK panel data set drawn from 1675 Chief Executive Officer (CEO) year observations and 1540 Chief Financial Officer (CFO) year observations, we examine the relationship between CEO and CFO equity incentives and earnings management. In addition, we examine the moderation effect of corporate governance mechanisms on the relationship between executives’ equity incentives and earnings management. We use multivariate regression models to test our hypotheses. We find that CEO equity incentives are related to higher absolute and income increasing earnings management. These results support the managerial power theory argument that CEOs exploit equity-linked compensation to obtain more personal benefits without causing public anger. Contrary to CEO equity incentives, we could not find any significant relationship between CFO equity incentives and any of the earnings management proxies. In addition, we find that corporate governance quality (measured by individual mechanisms and overall index) has no effect on the relationship between executives’ equity incentives and earnings management. This result indicates that whereas some corporate governance mechanisms can reduce earnings management in general, they do not affect wealth driven incentives to manipulate accruals. In total, results question the effectiveness of the corporate governance system in mitigating opportunistic behavior motivated by executives’ compensation structures

The association between firm characteristics and the quality characteristics of the internal audit function in the UK: An agency perspective

This study investigates firm characteristics that may affect the IAF's quality characteristics: size, independence, methodology, and competence. Its motivation is that a firm's agency and economic costs can affect its way to invest in the IAF quality. In this study, a postal questionnaire survey was sent to the head of internal audit (HIA) in 213 UK non-financial companies with in-source IAF, and archival data were collected from the respondent companies' annual reports. The study found that a firm's size and the proportion of cash flows from its operations are positively associated with the IAF's quality characteristics, a suggestion that a high quality IAF is an important way of compensating for the direct loss of control and of managing internal agency risks. In addition, it found evidence that having a high quality IAF is a costly process; the level of debt had a significant negative association with the IAF's quality characteristics. Furthermore, the supporting OLS regression revealed a positive significant association between the effectiveness of the audit committee and the quality characteristics of the IAF. This study has important implications for both practice and future internal auditing research and provides a composite measure that can be used to assess IAF quality.Scopu

Internal audit quality and earnings management: evidence from the UK

Purpose: This study aims to examine the association between internal audit quality and the involvement of UK companies in earnings management practices. Design/methodology/approach: To measure the internal audit quality, this study uses 115 responses for a postal questionnaire that was addressed to the heads of internal audit departments in a sample of non-financial listed companies in the UK context. The other financial and governance data for the respondent companies were collected from the Datastream and the companies’ annual reports. The present study uses the signed abnormal accruals as a proxy for earnings management and uses both logistic and ordinary least squares regression models to test the research hypothesis. Findings: This study finds a negative relationship between the internal audit quality and the abnormal accruals, implying the prominent role of internal audit in reducing the upwards earnings management. The study also finds a significant impact of the internal audit competence on reducing the engagement of UK companies in income-increasing earnings management compared to the internal audit independence. This remarkable result suggests the companies need to focus more on enhancing the internal audit competence to reduce the opportunistic management’s behaviour. Practical implications: This study has important implications for the internal audit’s practice, regulation and research. Originality/value: This is the first study that investigates the relationship between internal audit quality and earnings management in the UK context. Furthermore, it uses a comprehensive measure for the internal audit function (IAF) quality covering different aspects of IAF quality based on the global Institute of Internal Auditor standards and prior internal audit literature

Enhancing students’ understanding and performance in a distance-learning setting: evidence from an audit simulation at a GCC university

Purpose: Drawing on experiential learning theory (ELT), this study aims to examine students’ performance and perceptions after performing an experiential learning activity (ELA) by completing a mini-audit simulation (AS) on the purchase and cash disbursement processes in a distance-learning environment at a Gulf Cooperation Council (GCC) university. Design/methodology/approach: Adopting a mixed-methods approach, we collected quantitative and qualitative data from 176 students using the grade centre on Blackboard and their responses to a semi-structured questionnaire. Findings: The pre-and post-simulation tests indicate significant improvement in students’ understanding and performance after performing the mini-AS. The students’ responses also provide robust evidence of student engagement, active participation and positive recognition of the AS’s value. Practical implications: This study has several implications: for the accounting education literature, how AS strengthens in-depth learning through the lens of ELT; for professional accounting bodies, informing the need to maximise the awareness and benefits of adopting simulations in accounting education and examination; and for educators, considering simulations in their ELAs to enhance student learning. Originality/value: This study introduces a new authentic mini-AS instrument that can be adapted to a distance-learning setting, adds to the very limited studies in AS using ELT, uses a mixed-methods approach and explores students who learn in an Arabic-speaking country

Risk governance: exploring the role of organisational culture

Purpose: This study aims to investigate the association between organisational culture (OC) and the extent to which risk governance (RG) practices are implemented in Qatar. Design/methodology/approach: It relies on the institutional theory and OC perspectives to generate testable hypotheses and explain the empirical findings, using data from 85 Qatari firms collected based on questionnaires. It also applies ordinary least squares regression to examine the associations between five OCs (innovation, outcome orientation, attention to detail, team orientation and tight versus loose control) and the level of implementing RG practices, whilst controlling for the presence of internal audit (IA), firm size, listing status, type (private/government) and sector (financial/non-financial). Findings: An OC of “tight control”, the presence of an IA and being a private firm are significantly associated with implementing RG practices. An OC of teamwork is negatively associated with RG practices. Practical implications: Policymakers and corporate managers are encouraged to set guidelines governing the formation of cohesive cooperative teams within organisations. They must develop strategies that promote the “risk culture” as a major component of OC. Policymakers should also monitor the culture and institutional forces behind the successful implementation of RG that involves the collaboration of employees at different organisational levels. Originality/value: To the best of the authors’ knowledge, this study is novel because it empirically examines the OC–RG relationship in an emerging market economy (Qatar)

Global economic burden of unmet surgical need for appendicitis

Background There is a substantial gap in provision of adequate surgical care in many low- and middle-income countries. This study aimed to identify the economic burden of unmet surgical need for the common condition of appendicitis. Methods Data on the incidence of appendicitis from 170 countries and two different approaches were used to estimate numbers of patients who do not receive surgery: as a fixed proportion of the total unmet surgical need per country (approach 1); and based on country income status (approach 2). Indirect costs with current levels of access and local quality, and those if quality were at the standards of high-income countries, were estimated. A human capital approach was applied, focusing on the economic burden resulting from premature death and absenteeism. Results Excess mortality was 4185 per 100 000 cases of appendicitis using approach 1 and 3448 per 100 000 using approach 2. The economic burden of continuing current levels of access and local quality was US $92 492 million using approach 1 and$73 141 million using approach 2. The economic burden of not providing surgical care to the standards of high-income countries was $95 004 million using approach 1 and$75 666 million using approach 2. The largest share of these costs resulted from premature death (97.7 per cent) and lack of access (97.0 per cent) in contrast to lack of quality. Conclusion For a comparatively non-complex emergency condition such as appendicitis, increasing access to care should be prioritized. Although improving quality of care should not be neglected, increasing provision of care at current standards could reduce societal costs substantially