Trading and earnings management: Evidence from China’s non-tradable share reform

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http://ac.els-cdn.com/S0929119915000140/1-s2.0-S0929119915000140-main.pdf?_tid=6d8b6b82-af6a-11e4-aefe-00000aacb35e&acdnat=1423383416_7c29f0f5118532277231da624c46ae5a

Journal of Corporate Finance Volume 31, April 2015, Pages 67–90

Trading and earnings management: Evidence from China’s non-tradable share reform

Gang Xiao, 

Highlights

  • China’s non-tradable share reform converted non-tradable shares to tradable.
  • Earnings management increases after the government enforced the reform.
  • Market participants respond less favorably to earnings surprises after the reform.
  • Trading by blockholders and insiders explains the rise in earnings management.

Abstract

This paper examines the effect of trading on earnings management under the setting of China’s non-tradable share reform. The government-enforced reform converted non-tradable shares to tradable and thus enabled blockholders and insiders to reduce holdings via public trading. We find significant increases in accruals among Chinese listed companies after the reform. The impact of the reform on earnings manipulations is increasing with the potential for share trading, the degree of information asymmetry and the intensity of stock selling by insiders and blockholders. Our findings support that trading by large shareholders and insiders significantly increases earnings manipulations.

Thinking Fast versus Thinking Slow: The Effect on Auditor Skepticism; Auditors are more likely to judge an asset as potentially impaired if they use their intuition as opposed to analytical processing

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2512329

Thinking Fast versus Thinking Slow: The Effect on Auditor Skepticism

Christopher J. Wolfe Texas A&M University – Department of Accounting

Brant E. Christensen Texas A&M University – Department of Accounting

Scott D. Vandervelde University of South Carolina – Darla Moore School of Business
October 20, 2014

Abstract: 
Based on psychology theory, we propose that intuition can be a key element stimulating auditor skepticism, whereas overreliance on analytical processing can overwhelm auditors’ intuition thereby reducing skepticism. We test our expectations with an experiment containing responses from 85 senior auditors. Our results support our theory. We find that auditors are more likely to judge an asset as potentially impaired if they use their intuition as opposed to analytical processing. When we categorize auditors on their innate use of intuition, our results become more pronounced. We find that auditors using analytical processing, who rarely use their intuition, seldom judge the asset as potentially impaired. Our research suggests that intuition can be of use to auditors, and when ignored, auditors can become less skeptical. These findings should help inform regulators, standard setters, and audit firms as they seek to enhance professional skepticism.

[Flashback] Good Apples, Bad Apples: Sorting Among Chinese Companies Traded in the US

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024826

Posted by John SOH Yong Ye, Year 4 undergrad at the School of Economics, Singapore Management University

Abstract:

Committing financial fraud is a serious breach of business ethics. However, there are few large scale studies of financial fraud that involve ethical considerations. In this study, we investigate the pervasive financial scandals, which by the end of 2012 involved more than a third of the U.S.-listed Chinese companies. Based on a sample of 262 U.S.-listed Chinese companies, we analyze factors that differentiate between firms that commit financial fraud and those that do not. We find that firms more predisposed to unethical behavior, due to their low regional social trust in the home country and low respect for regulations and laws as proxied by political connections, are more likely to commit accounting and financial fraud. They take advantage of low hurdles for listing via reverse mergers and avoid third-party monitoring through poor governance and auditors. Finally, we find evidence after these scandals of non-fraudulent firms differentiating themselves from the fraudulent firms by sending costly signals such as insiders purchasing shares, increasing dividends, and going private.

China uncovers power abuses, nepotism at oil giant

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http://news.asiaone.com/news/asia/china-uncovers-power-abuses-nepotism-oil-giant

Posted by Joel CHUA Yong Sheng , Year 3 undergrad at the School of Business, Singapore Management University

BEIJING – China’s anti-corruption watchdog said on Saturday that it had uncovered evidence of graft at China Petrochemical Corp (Sinopec Group), warning the state-owned oil giant to take strong action to eradicate kickbacks, nepotism and theft.

Sinopec, the parent company of China Petroleum & Chemical Corp , must take steps to stop “power-for-money dealings” and prevent the loss of state assets, the Central Commission for Discipline Inspection (CCDI) said. Continue reading →

NVC Lighting says founder enters pledge deal without knowledge of board; Wang Donglei, who is now chairman of NVC, had alleged that founder Wu Changjiang embezzled about RMB573m

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http://www.scmp.com/print/business/china-business/article/1704557/nvc-lighting-says-founder-enters-pledge-deal-without

NVC Lighting says founder enters pledge deal without knowledge of board

Friday, 06 February, 2015, 4:53pm

Toh Han Shihhanshih.toh@scmp.com

NVC Lighting, one of China’s biggest lighting manufacturers, recently discovered its founder and former chief executive Wu Changjiang has made a pledge agreement of 23 million yuan (HK$29.2 million) without the knowledge of its board of directors, the Hong Kong-listed firm announced on Friday. “The board is not presently aware of a fair and reasonable justification for the purported entering into of the agreement, nor has the board been provided with a proper explanation by Mr. Wu which indicates that the agreement is in the interests of the company or its shareholders. The company is taking steps to obtain more details on the circumstances in which the agreement was entered into, and is obtaining legal advice to protect its interests,” said NVC.

Wu was dismissed last August 2014. Police in Huizhou formally registered a case of “money embezzlement by Wu and others” on October 22. NVC announced in November that hundreds of millions of yuan were withdrawn from the company’s bank accounts in Chongqing without the board’s permission in relation to loan pledges entered into by Wu. In December, mainland media reported that Wu was under criminal detention in Huizhou, Guangdong province. Wang Donglei, who is now chairman of NVC, had alleged that Wu embezzled about 400 million yuan from NVC’s bank accounts in the Chongqing branches of Industrial and Commercial Bank of China and China Minsheng Banking Corp, and an additional 173 million yuan from the Chongqing branch of Bank of China. Continue reading →

[Flashback] Firms eyeing growth in anti-fraud market

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business.asiaone.com/news/firms-eyeing-growth-anti-fraud-market

Posted by Eugene SAY Gui Hua , Year 4 undergrad at the School of Business, Singapore Management University

AS CORPORATE hacking becomes commonplace and regulators face no shortage of wayward companies to put under scrutiny, the cyber-security and anti-corruption business is growing fast.

The market for fraud investigation and dispute services in the Asia-Pacific region – including China but excluding Japan and India – is worth more than US$400 million (S$530 million) a year, estimates professional services firm Ernst & Young (EY). If compliance work were included, that number would rise dramatically. Continue reading →

Fake Bank in Nanjing Decorated As State-Owned Bank, Illegally Collected 200 Million Yuan [RMB] in Deposits

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http://www.chinasmack.com/2015/stories/fake-chinese-bank-in-nanjing-scams-depositors-of-200-million.html

Posted by Low Hwan Hong, Year 4 undergrad at the School of Business, Singapore Management University

According to a Xinhua report, a “cooperative” that had absolutely no financial qualifications meticulously decorated their interior to resemble that of a state-owned bank and used high interest rates to entice city residents to come deposit their money, scamming nearly 200 people in just over a year, involving nearly 200 million yuan [RMB]. Continue reading →

Indian Auditors Ask Cos to Keep Their Books in Order Before April ’16, from when issues like fraud in a firm they examine could land them in jail. Under the new Companies Act, the board of directors and the auditors will be held responsible for fraud or discrepancies in company operations

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http://economictimes.indiatimes.com/industry/services/consultancy-/-audit/new-companies-act-auditors-ask-companies-to-keep-their-books-in-order-before-april-2016/articleshow/46139172.cms

Auditors Ask Cos to Keep Their Books in Order Before April ’16, from when issues like fraud in a firm they examine could land them in jail. Under the new Companies Act, the board of directors and the auditors will be held responsible for fraud or discrepancies in company operations.

Sachin.Dave@timesgroup.com

6 February 2015

The Economic Times – Delhi Edition

Auditors are prodding the companies they audit to set their house in order before April next year, from when issues like fraud in a firm they examine could land them in jail. Under the new Companies Act, the board of directors and the auditors will be held responsible for fraud or discrepancies in company operations. Starting this year, directors will have to comment on the existence and effectiveness of internal financial controls in their board report. External auditors have one more year to report on their assessment of the existence and effectiveness of these controls, say industry trackers. Once the regulations become applicable, the onus will lie on the auditors to ensure that the books of the companies they audit are clean. Starting 2016, the external auditor could face up to 10 years of jail term for failing to raise red flags about frauds. Continue reading →

Former HealthSouth CFO who served jail time after accounting fraud writes ethics playbook

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http://www.bizjournals.com/birmingham/morning_call/2015/02/former-healthsouth-cfo-who-served-jail-time-after.html

Former HealthSouth CFO who served jail time after accounting fraud writes ethics playbook

Ryan Phillips

5 February 2015

Birmingham Business Journal Online

Aaron Beam, a business ethics speaker and founding chief financial officer of HealthSouth Corp. (NYSE: HLS), has penned a new book on business ethics. Beam said his newest book, “Ethics Playbook: Winning Ethically in Business,” stands out against other works in the field of ethics by providing lessons to help avoid unethical business practices. Beam is able to relate these lessons to readers because of his involvement in an accounting fraud scheme at HealthSouth under then-CEO Richard Scrushy. Beam surrendered to federal authorities in 2003 and served time in prison before becoming a public speaker in 2009. “It’s not a text or highly academic,” Beam said in a written statement. “It’s got practical ideas and principles that people can use to avoid the pitfalls of unethical business practices—in whatever career stage they’re in. I learned my lesson the hard way, but that doesn’t mean they have to.” He will have a book signing event in Birmingham next month. The event will be held at Workplay and is scheduled for Thursday, March 5., from 5:30 p.m. to 7:30 p.m., according to a release from Beam.