Financial reporting incentives for conservative accounting: The influence of legal and political institutions

2006 ◽  
Vol 42 (1-2) ◽  
pp. 107-148 ◽  
Author(s):  
Robert M. Bushman ◽  
Joseph D. Piotroski
Keyword(s):  
Financial Reporting ◽  
Political Institutions ◽  
Conservative Accounting ◽  
Reporting Incentives

scholarly journals Financial reporting incentives: Taxation and external financing need

2020 ◽  
Vol 12 (1) ◽  
pp. 57-69
Author(s):  
Nino Serdarević ◽  
Ajla Muratović-Dedić
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Tax Burden ◽  
External Financing ◽  
Financial Reports ◽  
Debt Contracting ◽  
Taxable Income ◽  
Conservative Accounting ◽  
Reporting Incentives ◽  
Aggressive Financial Reporting

Earnings management literature extensively explores tax regime and debt contracting as possible incentives in financial reporting. Firms engage with aggressive financial reporting to bias earnings in periods when the need for external financing increases. Contrary to this, the tax burden represents incentive for more conservative reporting. We argue that the level of firm's financial reporting aggressiveness is not constant but rather floating from period to period, directly affecting the quality of financial reports. We assume that firm's management on its own discretion determines the level of conservatism, balancing between these two incentives. The prevailing of two incentives, the need for external financing and the tax burden, determines the level of conservatism in particular reporting period. We hypothesised that the reduction in tax burden incentive overcomes the debt contracting incentive in the years of decreasing external financing need, implying more conservative accounting to balance between economic and taxable income. The total accruals are used as a measure of earnings management reflected to working capital accruals. The data analysis conducted on financial reports of 297 firms in the time-series of five years shows a significant correlation between total accruals, external financing needs and difference between economic and taxable income.

scholarly journals Do Political Connections Affect the Conservative Financial Reporting of Family Firms?

2019 ◽  
Vol 11 (20) ◽  
pp. 5563
Author(s):  
Hsin-Yi Chi ◽  
Tzu-Ching Weng ◽  
Guang-Zheng Chen ◽  
Shu-Ping Chen
Keyword(s):  
Financial Reporting ◽  
Family Firms ◽  
Political Connections ◽  
Policy Makers ◽  
Listed Firms ◽  
Reporting Incentives ◽  
Final Sample ◽  
The Family ◽  
Governance Practice ◽  
Using Data

This paper investigates the effect of political connections on the association between family firms and conservative financial reporting. While family firms have incentives to reduce agency and litigation-related costs by means of conservative reporting, firms with political connections tend to have opaque financial reporting, which enable them to engage in rent-seeking activities. Using data for Taiwanese listed firms between 1996 and 2012, the final sample observations were 13,877 firm-year observations from a population of 21,393 firm-year observations. We found that political connections weaken the positive relationship between family ownership and conservative financial reporting. This suggests that politically connected family firms make fewer demands for conservative financial reporting. This study contributes to the literature on how political connections affect the family owners’ reporting incentives. Policy makers may consider political connections as an essential factor with respect to establishing governance practice in family firms.

Tax Reporting Aggressiveness and Its Relation to Aggressive Financial Reporting

2009 ◽  
Vol 84 (2) ◽  
pp. 467-496 ◽  
Author(s):  
Mary Margaret Frank ◽  
Luann J. Lynch ◽  
Sonja Olhoft Rego
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Tax Law ◽  
Reporting Incentives ◽  
Reporting Behaviors ◽  
Aggressive Financial Reporting ◽  
Tax Reporting ◽  
Better Than

ABSTRACT: We investigate the association between aggressive tax and financial reporting and find a strong, positive relation. Our results suggest that insufficient costs exist to offset financial and tax reporting incentives, such that nonconformity between financial accounting standards and tax law allows firms to manage book income upward and taxable income downward in the same reporting period. To examine the relation between these aggressive reporting behaviors, we develop a measure of tax reporting aggressiveness that statistically detects tax shelter activity at least as well as, and often better than, other measures. In supplemental stock returns analyses, we confirm that the market overprices financial reporting aggressiveness. We also find that the market overprices tax reporting aggressiveness, but only for firms with the most aggressive financial reporting.

Mandatory IFRS Adoption and Institutional Investment Decisions

2012 ◽  
Vol 87 (6) ◽  
pp. 1993-2025 ◽  
Author(s):  
Annita Florou ◽  
Peter F. Pope
Keyword(s):  
Financial Reporting ◽  
Data Availability ◽  
Market Outcomes ◽  
Institutional Investment ◽  
Financial Reporting Standards ◽  
Institutional Holdings ◽  
Reporting Incentives ◽  
Annual Reporting ◽  
Commercial Sources ◽  
First Time

ABSTRACT We examine whether the mandatory introduction of International Financial Reporting Standards leads to an increase in institutional investor demand for equities. Using a large ownership database covering all types of institutional investors from around the world, we find that institutional holdings increase for mandatory IFRS adopters. Changes in holdings are concentrated around first-time annual reporting events. Second, we document that the positive IFRS effects on institutional holdings are concentrated among investors whose orientation and styles suggest they are most likely to benefit from higher quality financial statements, including active, value, and growth investors. These results are consistent with holdings changes being associated with the financial reporting regime change. Finally, we show that increased institutional holdings are concentrated in countries in which enforcement and reporting incentives are strongest, and where the differences between local GAAP and IFRS are relatively high. Overall, our study helps shed new light on the channels by which IFRS information becomes impounded in market outcomes. JEL Classifications: G11; K22; M41; M42. Data Availability: The data used in this study are available from the commercial sources identified in the paper.

scholarly journals International Differences Between Big Four Auditors and Their Smaller Counterparts in Monitoring Earnings Management

2012 ◽  
Vol 2 (2) ◽  
pp. 55 ◽  
Author(s):  
Xinhua Wang ◽  
Bibo Yang
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
The United States ◽  
Persistent Problem ◽  
International Differences ◽  
Financial Reporting Standards ◽  
Reporting Incentives ◽  
Agency Issues ◽  
Accounting Reports ◽  
Big Four

Earnings management that misrepresents the firm’s financial picture and misleads investors is a persistent problem. One role of the auditor is to efficiently monitor the accounting reports so as to better inform investors as to the true status of the firm and help close the asymmetric information gap between owners and management. Auditors, however, operate within the constraints of social and legal environments that often display vast international differences. Using sample data from around 50,000 firm-year observations in 42 countries, the paper shows that in the United States the Big Four auditors more effectively monitor overstated earnings than their smaller counterparts, while elsewhere they tend to be more effective in monitoring both overstated and understated earnings. An important policy implication of the results is that uniform worldwide audit and financial reporting standards may not be as effective as might be hoped, because international differences in ownership structures and the resultant agency issues create different reporting incentives.

scholarly journals Does Revenue-Expense Matching Relate To Going-Concern Audit Opinion Conditional On Firm’s Financial Distress?

2016 ◽  
Vol 32 (3) ◽  
pp. 947-966 ◽  
Author(s):  
Hak Woon Kim ◽  
Sooro Lee
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Management Behavior ◽  
Audit Opinion ◽  
Going Concern ◽  
Conservative Accounting ◽  
Aggressive Accounting ◽  
And Behavior

This paper investigates how firms manage the revenue-expense relationship in the presence of a going-concern audit opinion (GCO). Using Korean data, we find that firms with GCOs both delay and accelerate recognition of current expenses for current revenues. We also find that firms in severe financial distress that receive GCOs exhibit conservative accounting, whereas GCO firms in relatively less financial trouble adopt aggressive accounting. Overall, our results imply that firms’ matching extent and behavior provide useful information regarding financial reporting and can explain the earnings management behavior of firms with GCOs.

scholarly journals Is Egyptian corporate financial reporting becoming more conservative?

2017 ◽  
Vol 15 (3) ◽  
pp. 333-346 ◽  
Author(s):  
Ahmed H. Ahmed ◽  
Khaled Hussainey
Keyword(s):  
Financial Reporting ◽  
Accounting Conservatism ◽  
Firm Characteristics ◽  
Content Type ◽  
Conservative Accounting ◽  
Quality Of Accounting Information ◽  
Prior Literature ◽  
Second Period ◽  
Practical Implications

Purpose The study aims to compare the level of accounting conservatism amongst the sample companies prior to the 2011 uprising and after that uprising. The study proceeds further to examine the association between accounting conservatism and the level of leverage and profitability of the sample companies covering the same period. Design/methodology/approach First, a review of the extant literature on accounting conservatism is undertaken. Second, the sample comprises all the non-financial companies listed on the Egyptian Exchange. Accounting conservatism is measured using the market-to-book (MTB) ratio, which is one of the most widely used proxies for determining the extent of accounting conservatism in prior literature. The two-sample t-test has been used to compare the level of accounting conservatism six years prior to the 2011 uprising and four years following that uprising. Univariate and multivariate analyses have been used to examine the association between some firm characteristics and the level of accounting conservatism amongst the sample companies at the two investigated periods. Findings The evidence implies that the sample companies are actually engaging in less-conservative accounting policies following the uprising. The results also reveal that data for the first period seems to have greater variations in the first period than in the second period, as can be seen from the values of the standard deviation. The multivariate analysis reported a significant positive relationship between only size and the level of accounting conservatism at both periods. Research limitations/implications This study adds Egyptian evidence with respect to the directions of accounting conservatism throughout crisis periods, as the majority of prior studies focus on countries with developed capital markets. In addition, the absence of any specific evidence concerning the direction of accounting conservatism during crisis periods will lead to naïve investors misinterpreting earnings figures and not realising the actual value of their shares. Practical implications The results reported in this study may encourage those investors to seek out extensive, widely-sourced information regarding investee firms before deciding whether to hold or sell their holdings. Furthermore, the results presented in this paper should therefore be of interest to regulators and standard-setters charged with developing accounting standards to improve the quality of accounting information. Originality/value To the best of authors’ knowledge, this is the first and most recent study that examines the level of accounting conservatism amongst non-financial companies in a developing country like Egypt.

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