Financial reporting? - It simply doesn't work. Views on 'Corporate Reporting Revisited' by J. Hegarty, C. Beckers and E. De Keleneer.

Management; Financial reporting;

Corporate images of audit firms in a multilingual society.

The paper investigates the corporate images of the leading auditing firms in Belgium, focussing on the perceptions of the two language groupings in Belgium, the Dutch speaking Flemings and the French speaking Walloons. Our major objective is to assess whether there are differences in the corporate images of a company's audit firm that can be attributed to the differing self-images of Flemings and Walloons. The corporate image of the audit firms was ascertained by using a semantic differential measuring instrument, which contained a number of anthropomorphic dimensions. Based on a review of the literature concerning the images and cultures of the two language groupings, we develop hypotheses of an association between these anthropomorphic dimensions of corporate image and the images and culture of the two language groupings. We obtained an assessment of the dimensions of corporate image via a postal questionnaire to financial executives of leading Belgium companies. Our analysis of the data shows that there is a relationship between the images and culture of the two language groupings, but that the relationship is an inverse one, whereby an attribute that is associated more with one of the two language groups is assessed by a respondent from that language group to be less in his or her audit firm. The paper also shows that the Big Five are perceived differently to each other by the two language groupings and that the Walloons perceive bigger differences amongst the Big Five than do the Flemings.Image;

Pricing and supplier concentration in the private client segment of the audit market : market power or competition ?.

This study differs from prior audit pricing-studies as 1) it focuses on the issue of price competition in the (small) private client segment of the audit market, and 2) addresses the question whether and how the audit-pricing model changed in that market between 1989-1997. Given the significant increases in market concentration and two big audit-firm mergers in that period, we try to assess whether price competition (market power) has increased (decreased) or decreased (increased). We use Belgian data on privately owned companies from 1989 and 1997 for our analyses. We find that audit fees are significantly associated with the incumbent auditor's market share both in 1989 and 1997. Our results are in line with prior studies on public client samples and hence do not support prior assumptions (see, for example, Simunic 1980) that there are no price premia charged by large auditors in the small-client segment of the audit market. It is however not clear whether the reported price premium is due to market power or differentiated audit quality. As to the evolution of audit pricing in the private client segment of the Belgian audit market between 1989 and 1997, we find that the impact of various audit-fee determinants changed significantly and report evidence supportive of increased price competition.Management; Companies; Pricing; Competition;

The simultaneous relation between audit report type and business termination : evidence for non-listed companies in a non-litigious audit environment.

This study provides evidence on the relationship between audit report type and subsequent business termination in an environment where firms are closely held and the audit environment is non-litigious. The results show that an endogenous relationship exists between bankruptcy and audit report type, and between voluntary liquidation and audit report type. A non-clean opinion is typically given to firms with financial difficulties, which in turn become more severe after the receipt of a non-clean audit opinion. We find evidence that, even without a litigation deterrent in Belgium, financial performance has a similar impact on audit report type as in litigious environments, that is, the worse the financial condition the higher the likelihood of receiving a non-clean audit report. We also find that the self-fulfilling prophecy holds for bankruptcy, that is that a non-clean audit report triggers bankruptcy. Our paper investigated the relationship between audit report type and business termination for various types of business terminations including bankruptcy, voluntary liquidation and merger. The results reveal significant differences across the forementioned types of business terminations. One difference is that the self-fulfilling prophecy only holds when the audited firm has no decision power as to termination of is operations, that is for bankruptcy. It does not hold for voluntary liquidation nor merger. Another important difference relates to business termination through merger. No significant difference in performance exists between surviving and merging firms and no endogenous relationship exists between mergers and audit report type. For merging firms audit report qualifications are triggered by the weakness of the auditee's internal control system and not by substandard financial performance. Finally, our study provides some evidence on quality differentiation between Big Six and non Big Six auditors in the Belgian audit market. When financial difficulties are obvious, as is the case when a company is about to go bankrupt, both Big Six and non big Six auditors are as competent and/or independent to assess and report going concern problems. However, when financial difficulties are less apparent, as is the case for firms which are about to go into liquidation, our results indicate that Big Six auditors are more likely to issue a qualified audit opinion.Management; Companies;

The role of risk management and governance in determining audit demand.

Most prior research into audit fees has been based on a theoretical model which treats audit fees as the by-product of a production function (Simunic, 1980) hereby ignoring potential demand forces that may drive the level of the audit fee. In such a production-oriented view of auditing, alternative control mechanisms (such as internal auditing and corporate governance) are hypothesized to be substitutes for external auditing, and hence more of one control mechanism is expected to be negatively associated with the level of external auditing, and hence the audit fee. In this paper we examine the impact of risks and controls in the determination of audit fees. Inspired by prior 'anomalous' results, we take a different perspective by focusing on some omitted demand factors that may affect the level of the audit fee. Based on Hay and Knechel (2004), we argue that when multiple stakeholders are included in the analysis a positive association between various risk management / control mechanisms and external audit demand is a very likely outcome, which is attributable to sharing of control costs between stakeholders and positive control externalities amongst stakeholders. Using data collected from a sample of listed companies in Belgium, we consider both disclosures about risk and risk management and actual decisions about corporate governance to examine whether audit fees are higher when hypothesized demand forces exist. Consistent with our expectations, our results indicate that audit fees are higher when a company has an audit committee, discloses a relatively high level of financial risk management, and has a larger proportion of independent Board Members. Audit fees are lower when a company discloses a relatively high level of compliance risk management. The latter result indicates that controls are only complementary as long as they are voluntary, as mandated controls act as substitutes for non-mandated controls.Auditing; Belgium; Companies; Cost; Decision; Stakeholders;

Earnings management and institutional differences: literature review and discussion.

Management;

Evidence on (the lack of) audit-quality differentiation in the private client segment of the Belgian audit market?.

Auditor size is used as audit-quality proxy. Prior evidence on audit-quality differentiation between big 6 and non-big 6 auditors in the private client segment of the Belgian audit market is mixed. In this paper we investigate whether these mixed results tem from the inability of the dichotomous Big6/non-Big6 variable to capture auditor-size differences in a less concentrated audit market. To that end we examine whether alternative continuous measures of audit-firm size (i.e. auditor market hare, number of audit-firm clients, number of partners in the audit firm, total assets and operating profit of the audit firm) have a constraining impact on earnings management in a large sample of privately held Belgian companies (n = 1302). Overall, we do not find evidence that is supportive of quality differentiation in the private client segment of the Belgian audit market.

Earnings management and institutional differences Literature review and discussion.

This paper provides a review of the empirical earnings management literature. In particular, it presents a review of the factors that induce and constrain earnings management through accounting decisions. The consequences of actual or assumed earnings management are also discussed. The far majority of the literature focuses on the Anglo-Saxon context. However, major differences exist between Anglo-Saxon and continental European countries. This may result in differences in the importance of various incentives of and constraints on earnings management. In particular, we argue that explicit contracts and a firm's relations with capital markets may be less important sources of earnings management in continental Europe. Implicit contracts and the political and regulatory process may however be of major importance. We question further whether a firm's ownership and internal governance structure and the quality of the external auditor can constrain the ability to manage earnings in continental European countries.Management; Factors; Accounting; Decisions; Country; Markets;

Earnings management and institutional differences : Belgian evidence and audit quality as a constraint on earnings management.

This study reports the results of an exploratory study on earnings management in a continental European institutional environment, i.e. Belgium. The far majority of the literature (both analytical and empirical) focuses on the Anglo-Saxon context. However, major differences exist between Anglo-Saxon and continental European countries. This might result in differences in the importance of various incentives for and constraints on earnings management. For a pooled sample of 486 firm-year observations of privately held companies in the Belgian textile and paper industries, we tested whether a higher quality audit constrains earnings management more than a lower quality audit. We used the dichotomous variable big6/non-big6 auditor as a measure for audit quality and discretionary accruals as a measure of earnings management. Discretionary accruals were estimated using a cross-sectional version of the Jones' model that was slightly adapted to fit the Belgian context. We performed a univariate as well as a multivariate analysis. In the multivariate analysis, we adapted the control variables to the continental European context. In addition we also tested whether the income smoothing hypothesis holds in Belgium.Our findings do not support the hypothesis that higher audit quality constrains earnings management more than lower audit quality. This result contrasts those of prior Anglo-Saxon studies (Becker et al., 1998; Francis et al., 1997). The results do however support the income smoothing hypothesis. This finding is (1) consistent with institutional differences being important in earnings management research and (2) the results from a prior Belgian study on earnings management (Branson and Loits, 1997).Management; Studies; Companies; Industries; Multivariate analysis; Variables;