Substitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions
Substitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions.
Chan, Lilian H.1Chen, Kevin C. W.2 Tai Yuan Chen2 Yangxin Yu3
Accounting Review. Jan2015, Vol. 90 Issue 1, p147-174. 28p. 5 Charts.
Abstract:
To deter financial misstatements, many companies have recently adopted compensation recovery policies–commonly known as ”clawbacks”–that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial misstatements and increase investors’ confidence on earnings information. We show that the benefits come with an unintended consequence of certain firms substituting for accruals management with real transactions management (e.g., reduce research and development [R&D] expenditures), especially firms with strong incentives to achieve short-term earnings targets, such as firms with high growth or high transient institutional ownership. As such, the total amount of earnings management does not decrease subsequent to clawback adoption. We further show that although real transactions management temporarily boosts those clawback adopters’ short-term profitability and stock performance, this trend reverses after three years. In summary, clawbacks may have unexpected effects for a subset of firms whose managers are under greater pressure to meet earnings goals.
Mutual Fund Billionaire Accused of Fraud in Suit; lawsuit claims that Charles B. Johnson concealed $146 million in Franklin Resources shares that were intended to go to the heir of an early investor
Mutual Fund Billionaire Accused of Fraud in Suit
JANUARY 14, 2015 3:21 PM January 14, 2015 3:21 pm 9 Comments
Charles B. Johnson built Franklin Resources, the publicly traded mutual fund business, into a juggernaut before he retired.Credit Robert Holmgren
Charles B. Johnson has been lauded for numerous accomplishments. He built Franklin Resources, the publicly traded mutual fundbusiness, into a juggernaut that has nearly $900 billion under management and a market value of about $34 billion. He is a highly respected philanthropist, recently pledging $250 million to Yale University, his alma mater. He is said, by Forbes, to be worth about $6.5 billion and is the largest single shareholder of the San Francisco Giants, the reigning World Series champions.
But now Mr. Johnson, 82, stands accused of helping defraud the heir of one of the earliest investors in Franklin Resources out of $150 million. Continue reading
Anonymous letter sparks off Malaysian-listed mTouche discovery of RM6.3m accounting fraud
Anonymous letter sparks off mTouche discovery of RM6.3m fraud
Wednesday, 14 January 2015
KUALA LUMPUR: mTouche Technology Bhd’s shares were untraded at 21.5 sen on Wednesday as the company provided details and lodged a police report over the possible financial irregularities concerning operating expenditure transactions totalling RM6.3m from February 2009 to October 2010 following an anonymous letter addressed to its audit committee. Continue reading
Founder Securities denies related company embezzled 2.8 billion yuan
Related news: (1) Founder Group executives held in graft probe following Zenith allegations that executives have committed insider trading, selling state assets, rigging stocks, as well as bribery and forgery of documents (Link)
(2) Court orders 3b yuan in Founder Securities assets to be frozen; Beijing Zenith has accused Founder Group directors of various crimes, including insider trading, money laundering, embezzling state assets, forging documents (Link)
Founder Securities denies related company embezzled 2.8 billion yuan
Wednesday, 14 January, 2015, 5:26pm
Toh Han Shihhanshih.toh@scmp.com
Mainland brokerage Founder Securities has denied reports its business was disrupted after a related company, Founder Finance, embezzled 2.8 billion yuan (HK$3.5 billion) from Founder Securities for “emergency” purposes, but said it would deposit an unspecified amount of money with Founder Finance. Continue reading
FBI raids Florida firm Med-Care Diabetic & Medical Supplies with ‘Wolf of Wall Street’ link; firm allegedly engaged in Medicare fraud by using aggressive and misleading telemarketers to sell unneeded medical equipment to patients
http://www.reuters.com/article/2015/01/14/us-fbi-wolfofwallstreet-idUSKBN0KN25Y20150114
FBI raids Florida firm with ‘Wolf of Wall Street’ link: witnesses
4:15pm EST
By Aruna Viswanatha and Zachary Fagenson
WASHINGTON/BOCA RATON, Fla. (Reuters) – U.S. FBI agents on Wednesday raided the offices of Med-Care Diabetic & Medical Supplies Inc, a Florida medical device company whose executive vice president helped inspire the movie “The Wolf of Wall Street,” according to a Reuters reporter and other witnesses. Continue reading
Accounting Fraud, Auditing and the Role of Government Sanctions in China
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2402330
Posted by Nureen CHAN Wan Wei, Year 4 undergrad at the School of Accountancy, Singapore Management University
The paper first highlights that China has a different legal landscape to the U.S.. Public enforcement in the form of government sanctions against audit firms is used in place of private enforcement (class action law suits in the West) to ensure high quality audits in China. Shareholder litigations are far and few, and rarely successful even when the government has imposed penalties on these auditors. This makes one question why did the Chinese government choose to deviate from the norm of allowing the free market to regulate audit firms? Continue reading
[Flashback] There’s No Accounting for China
http://www.reuters.com/article/2012/09/17/us-peregrine-wasendorf-idUSBRE88G16U20120917
Posted by Nureen CHAN Wan Wei, Year 4 undergrad at the School of Accountancy, Singapore Management University
U.S. regulators inadvertently raise a question about who’s to blame for investor losses.
In a ruling last week, an administrative trial judge at the U.S. Securities and Exchange Commission suspended the Chinese branches of the Big Four accounting firms from practicing at the SEC for six months. As a consequence, these accountants will not be able to sign off on the books of Chinese companies listed in the U.S., which could force the Chinese firms to delist at least temporarily for lack of audited accounts. The Big Four are appealing the ruling. Continue reading
Phosphagenics CEO vows to rebuild company’s reputation after it was embroiled in a $6 million accounting fraud conducted by former CEO Esra Ogru to fund her lifestyle and support her sick daughter
http://www.theage.com.au/business/biotech-ceo-took-money-for-need-greed-20141009-113thh.html
“Her lawyer David Grace QC said some of the embezzled money went on lifestyle, including travel, jewellery and mortgage repayments. “In some way she felt…she deserved more in terms of remuneration and wanted a better lifestyle in a hurry,” he told the Victorian County Court on Thursday. But Mr Grace said her motivation changed in May 2008 with the birth of her daughter, who had a life-long condition stemming from a missing gene. “Prior (to May 2008) can be characterised as greed, (but) post, greed and need,” he said. Mr Grace said the family home was renovated to accommodate the daughter’s needs and a special wheelchair was bought. But he also said a lot of money was spent on funding the girl’s medical needs. He said his client’s daughter became the first human in the world to trial an experimental therapy developed on animals in Germany, which had to be administered daily, and said the treatment had led to the drug becoming a prescription medicine worldwide.”
Phosphagenics CEO vows to rebuild company’s reputation
January 14, 2015 – 5:37PM
Jessica Gardner
New Phosphagenics chief executive Ross Murdoch will seek partnerships with pharmaceutical giants and consider simplifying the company’s many and varied projects, but says one of his main jobs will be rebuilding the reputation of the embattled drug delivery developer.
The company has struggled to impress investors after it was embroiled in a $6 million fraud conducted by Dr Murdoch’s predecessor, Esra Ogru, and two other staff members, which was uncovered 18 months ago. Continue reading
When Heirs Become Major Shareholders: Evidence on Tunneling and Succession Through Related-Party Transactions
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411412
When Heirs Become Major Shareholders: Evidence on Tunneling and Succession Through Related-Party Transactions
Sunwoo Hwang University of North Carolina (UNC) at Chapel Hill – Kenan-Flagler Business School
Woochan Kim Korea University Business School; European Corporate Governance Institute (ECGI); Asia Corporate Governance Institute (AICG)
March 19, 2014
ECGI – Finance Working Paper No. 413/2014
KDI School of Pub Policy & Management Paper No. 14-01
Abstract:
In family firms, the succession of controlling equity stake to next generation is an issue of paramount importance. This, however, can be a major challenge in the presence of heavy inheritance or gift tax burden (high tax rate and absence of tax-saving vehicles, such as trusts or foundations) and in the absence of dual-class equity. Such regulatory environment may lead families to seek alternative ways of succession. As for families controlling business groups, one way of doing so is making use of related-party transactions among member firms. By favoring firms where the heir holds significant equity stake, the family can tunnel corporate resources to the heir. Eventually, the firm can grow large enough to acquire controlling equity stakes in other firms within the group. In this paper, we investigate this possibility using Korean chaebol firms during a sample period of 2000-2009. We identify firms where heirs become a major shareholder (treatment group) and compare them against their year-industry-size-matched firms (control group) before and after the ownership change. Difference-in-differences test with firm fixed effects reveal that treatment group firms experience greater related-party transactions, benefit from them in terms of earnings, pay out more dividends, and become more important in controlling other firms in the group.
AsianExtractor: Unearthing Accounting Fraud in Asia 