Click to access ACC-3%20Manuscript%2036%20Mark%20Evans%20Indiana.pdf

Reporting Regulatory Environments and Earnings Management: U.S. and Non-U.S. Firms Using U.S. GAAP or IFRS

Mark E. Evans Wake Forest University

Richard W. Houston University of Alabama

Michael F. Peters University of Maryland

Jamie H. Pratt Indiana University – Kelley School of Business – Department of Accounting
December 4, 2014
Accounting Review, Forthcoming
Kelley School of Business Research Paper No. 15-12

Abstract: 
Based on data collected from 616 experienced financial officers who use U.S. GAAP or IFRS and are domiciled in the U.S., Europe, or Asia, we examine how reporting standards (U.S. GAAP vs. IFRS) and domicile (U.S. vs. non-U.S.) affect earnings management (real vs. accrual). U.S. firms using U.S. GAAP rely more heavily on real methods than non-U.S. firms that use either IFRS or U.S. GAAP, and U.S. firms using IFRS. U.S. firms using U.S. GAAP operate in an environment that encourages real over accruals methods; specifically, U.S. GAAP facilitates detection of earnings management and enforcement is more effective in the U.S. Further, the likelihood and amount of earnings management does not differ across conditions, suggesting that firms using less accruals earnings management tend to fully compensate by increasing real methods. So, stronger reporting environments do not necessarily reduce total earnings management, but instead encourage substitution of real for accruals methods.

http://bswllc.com/related-parties-to-face-enhanced-auditor-scrutiny/

Posted by KOH Lee Kuen, Year 4 undergrad at the School of Accountancy, Singapore Management University

Issues with related parties played a prominent role in the scandals that surfaced more than a decade ago at Enron, Tyco International and Refco. Public outrage about these scandals led Congress to pass the Sarbanes-Oxley Act of 2002 and establish the Public Company Accounting Oversight Board (PCAOB). Similar problems have arisen in more recent financial reporting fraud cases, prompting the PCAOB to unanimously approve a tougher audit standard on related-party transactions and financial relationships. Continue reading →

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=2ab3c412-cbcb-4194-a5c2-c9aed97a8fbd%40sessionmgr4001&vid=0&hid=4113

Special Purpose Vehicles: Empirical Evidence on Determinants and Earnings Management.

Mei Feng¹ Gramlich, Jeffrey D.² Gupta, Sanjay³

Accounting Review. Nov2009, Vol. 84 Issue 6, p1833-1876. 44p. 1 Diagram, 9 Charts, 1 Graph.

Abstract:

We investigate the use, determinants, and earnings effects of special purpose vehicles (SPVs). Based on a proxy of SPV activity that can be applied to a broad cross-section of firms over time, we find a two-and-a-half fold monotonic increase in the percentage of firms using at least one SPV during the eight-year period from 1997 through 2004. Tobit regressions of the determinants of SPV use show that SPV activity increases with financial reporting incentives and economic and tax motivations, but strong corporate governance tends to mitigate their use. In addition, the evidence is consistent with SPVs arranged for financial reporting purposes being associated with earnings management, whereas the same does not appear to be the case for SPVs set up mainly for economic, tax, and other reasons.

Earnings Management and Derivative Hedging with Fair Valuation: Evidence from the Effects of FAS 133

Jongmoo Jay Choi Temple University – Department of Finance; Temple University; Temple University – International Business

Connie X. Mao Temple University – Fox School of Business and Management; Temple University – Department of Finance

Arun Upadhyay University of Nevada, Reno

October 21, 2014
The Accounting Review (Forthcoming)
Fox School of Business Research Paper No. 15-043

Abstract: 
Barton (2001) and Pincus and Rajgopal (2002) show that earnings management through discretionary accruals and derivative hedging are partial substitutes in smoothing earnings before 1999. In this study, we investigate whether FAS 133 regarding hedge accounting in 2000 has influenced the relative merit of the two earnings smoothing methods. Based on a sample of S&P 500 non-financial firms during 1996-2006, we find that the substitution relation between derivative hedging and discretionary accrual is significantly attenuated after FAS 133 implementation. We also document a significant increase in earnings volatility associated with derivative hedging post-FAS 133. These results are robust to the use of various model and method specifications, as well as controlling for contemporaneous macroeconomic and regulatory shocks. Overall, our results suggest that a material change in an accounting rule regarding derivatives can influence the level and volatility of reported earnings, as well as the method of income smoothing.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=5a545e25-fd28-4ab9-92b8-4c1ca45e8578%40sessionmgr4001&vid=4&hid=4105

Tone Management.

Xuan Huang¹ Siew Hong Teoh² Yinglei Zhang³ Source:

Accounting Review. May2014, Vol. 89 Issue 3, p1083-1113. 31p. 11 Charts.

Abstract:

We investigate whether and when firms manage the tone of words in earnings press releases, and how investors react to tone management. We estimate abnormal positive tone, ABTONE, as a measure of tone management from residuals of a tone model that controls for firm quantitative fundamentals such as performance, risk, and complexity. We find that ABTONE predicts negative future earnings and cash flows, is positively associated with upward perception management events, such as, just meeting/beating thresholds, future earnings restatements, SEO, and M&A, and is negatively associated with a downward perception management event, stock option grants. ABTONE has a positive stock return effect at the earnings announcement and a delayed negative reaction in the one and two quarters afterward. Balance sheet constrained firms and older firms are more likely to employ tone management over accruals management. Overall, the evidence is consistent with managers using strategic tone management to mislead investors about firm fundamentals.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=ac03be2a-1c9c-4391-b6fa-e0985566033f%40sessionmgr4004&vid=4&hid=4111

Posted by M Laavanya, Year 3 undergrad at the School of Accountancy, Singapore Management University

Management Motive, Weak Governance, Earnings Management, and Fraudulent Financial Reporting: Malaysian Evidence.

Hasnan, Suhaily¹ Abdul Rahman, Rashidah² Mahenthiran, Sakthi³

Journal of International Accounting Research. 2013, Vol. 12 Issue 1, p1-27. 27p. 1 Diagram, 8 Charts.

Abstract:

This study examines ten factors associated with fraudulent financial reporting (FFR) in Malaysian publicly listed companies. We hypothesize that three factors proxy for management rationalization, four factors proxy for management motives, and three factors proxy for the opportunity to commit fraud. Our sample consists of 53 fraud firms convicted of securities fraud and 53 no-fraud firms, all of which were listed on the Bursa Malaysia and have a complete set of data from 1996-2007. With regard to rationalization, we find that prior violations and founders on the board are positively and significantly associated with FFR. With regard to motive, we find that financial distress is positively and significantly associated with FFR while family ownership is negatively and significantly associated with FFR. Our opportunity for fraud proxies, multiple directorships, and audit quality are positively and significantly associated with FFR. Additionally, we find evidence of earnings management in the years leading up to FFR.

Click to access CFS_managing_August7%202012.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2114454

Managing the Balance Sheet with Operating Leases

Kimberly Rodgers Cornaggia American University – Kogod School of Business

Laurel Franzen Loyola Marymount University

Timothy T. Simin Pennsylvania State University
July 19, 2012

Abstract: 
We test whether firms use the off balance sheet (OBS) treatment of operating leases in order to strengthen their balance sheets. We find that firms’ lease versus buy decision has changed over time. Time series evidence suggests that firms and industries not expected to have traditional economic benefits of leasing are increasingly financing with operating leases. We infer that such firms use operating leases to expand OBS debt capacity and we explore their incentives to report conservative balance sheets. We find that (1) OBS leasing allows firms to better manage debt covenants limiting debt or capital expenditures (2) unexplained OBS leasing is diminished by scrutiny of institutional investors and (3) firms investigated by the SEC or DOJ for financial misrepresentation exhibit high levels of unexplained operating leases.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=03b2086b-bcdd-4ec1-b5b4-75b7d05ed90a%40sessionmgr4003&vid=0&hid=4202

INDIA’S SATYAM SCANDAL: EVIDENCE THE TOO LARGE TO INDICT MINDSET OF ACCOUNTING REGULATORS IS A GLOBAL PHENOMENON.

Pai, Kalpana¹ kpai@txwes.edu
Tolleson, Thomas D.¹ ttolleson@txwes.edu

Review of Business & Finance Studies. 2015, Vol. 6 Issue 2, p35-43. 9p.

Abstract:

This paper examines the capture of government regulators using the case of Satyam Computer Services Ltd., one of India’s largest software and services companies, which disclosed a $1.47 billion fraud on its balance sheet on January 7, 2009. The firm, which traded on the New York and Bombay Stock Exchanges, was required to file financial reports with the SEC. Price Waterhouse of India, the local member of PricewaterhouseCoopers (PWC), served as its auditor. After news of the scandal hit the airwaves, Price Waterhouse of India issued a press release and stated that its audit was conducted in accordance with applicable auditing standards and was supported by sufficient audit evidence. Because Satyam shares were quoted on Wall Street, SEC rules prohibited auditors from having business relations with their clients. U.S. regulators failed to take action against PWC. Is this lack of enforcement related to PWC’s size and the impact that the failure of a Big 4 firm would have on the global financial marketplace? We question whether government regulators have been captured by the key market players in the auditing services market. One outcome of this “capture” is moral hazard, which implies that the Big 4 accounting firms, or their local affiliates, may place less emphasis on quality audits. Such an approach to the audit function places the selfinterests of the audit firm above the public interest. We also question whether foreign companies that are listed on US Stock Exchanges fall under the purview of US Laws and if these companies and their auditors face the same regulatory scrutiny as publicly-traded US Corporations. In addition, the paper provides suggestions to protect the public interest while citing lessons learned from this scandal.

http://ruddyts.blogspot.sg/

THE ARENA OF MULTIINTEREST, GOVERNANCE AND FRAUD A CRITICAL REVIEW OF BC BAILOUT

Ruddy Tri Santoso, M. Hartono, M. Agung Prabowo, Guntur Riyanto, Sujoko Eferin, Yenny Tjiamudjaja

ABSTRACT

The bailout of PT. Bank Century (BC) at the end of 2008 ignites many debates. If the Indonesian Central Bank had not bailed it out, would it have been a systemic disaster for Indonesian economic? BCs total assets were not significant to the national banking asset. Why was it so important to bail BC out? This research wants to find answers to the following questions: 1) considering the internal problems of BC since 2005, was it worth to bail it out, and was the amount paid appropriate? 2) How bad was the internal problem in consideration of corporate governance theory, fraud theory, and in accordance with prudential banking principals? 3) Was the decision to bail out relevant for the national banking stabilization? 4) Was the failure of BC in 2008 a symptom of market failure, or a governance failure of BC and a regulation failure of the Indonesian Central Bank? This research uses descriptive qualitative method by in-depth analysis. The qualitative variables are classified to some significant factors which influence the decision to bail out. The result of this research shows that the historical performance, the corporate government and the fraud of the bank were not appropriately reviewed before the government decided to bail BC out. Even though the bailout was able to keep the national banking stabile at that time, the judgment of the decision was not purely economical. The non-economic factor was that the bank was too politically significant to fail.

http://ac.els-cdn.com/S0278425414000684/1-s2.0-S0278425414000684-main.pdf?_tid=1428bd6c-a0c7-11e4-bcce-00000aab0f6b&acdnat=1421773942_e4d24b7227d92a003914d82a20cf45f9

Investigators at Louisiana State University Report Findings in Finance (Does pedigree matter? Earnings quality of US listed domestic firms via reverse mergers)

24 January 2015

Investment Weekly News

2015 JAN 24 (VerticalNews) — By a News Reporter-Staff News Editor at Investment Weekly News — Researchers detail new data in Finance. According to news originating from Baton Rouge, Louisiana, by VerticalNews correspondents, research stated, “This paper examines earnings quality of U.S. domestic firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 to 2011. In order to mitigate confounding effects of legal regime, law enforcement, and culture, we require both the acquiring and target firms to be incorporated and headquartered in the U.S. to be included in our sample.”

Our news journalists obtained a quote from the research from Louisiana State University, “We also use the Heckman (1976) procedure to control for self-selection bias. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, discretionary revenues, real activities earnings management, and accrual estimation errors. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that U.S. domestic RM firms have lower earnings quality compared with U.S. IPO firms.”

According to the news editors, the research concluded: “Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process.”

Journal of Accounting and Public Policy

Volume 33, Issue 6, November–December 2014, Pages 573–595

Does pedigree matter? Earnings quality of U.S. listed domestic firms via reverse mergers

Yu Chen^a, , , Jared S. Soileau^b, 1, 

Abstract

This paper examines earnings quality of U.S. domestic firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 to 2011. In order to mitigate confounding effects of legal regime, law enforcement, and culture, we require both the acquiring and target firms to be incorporated and headquartered in the U.S. to be included in our sample. We also use the Heckman (1976) procedure to control for self-selection bias. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, discretionary revenues, real activities earnings management, and accrual estimation errors. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that U.S. domestic RM firms have lower earnings quality compared with U.S. IPO firms. Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process.