The Effects of Accruals Quality on Audit Hours and Audit Fees

2015 ◽  
Vol 32 (3) ◽  
pp. 372-400 ◽  
Author(s):  
Myojung Cho ◽  
Eunsun Ki ◽  
Soo Young Kwon
Keyword(s):  
Cash Flow ◽  
Negative Relationship ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Accounting Earnings ◽  
Accruals Quality ◽  
Cash Flow Risk

We investigate whether auditors take into account accruals quality, a proxy for the cash flow risk associated with earnings, by adjusting audit hours and audit fees. Accruals quality tells investors about the mapping of accounting earnings into cash flows. Poor accruals quality weakens this mapping and thus increases this cash flow risk. We find a negative relationship between accruals quality and audit hours/fees, indicating that auditors increase their audit efforts by modifying audit procedures and substantive tests and charge higher fees for the increased cash flow risk. In addition, we find that both innate accruals quality and discretionary accruals quality are negatively related to audit hours and fees but that innate accruals quality is more likely to influence audit hours and fees than discretionary accruals quality. The results indicate that auditors incorporate the cash flow risk associated with accruals quality but that their response varies according to the source of accruals quality.

The effect of auditor industry specialization and board independence on the cash flow reporting classification choices under IFRS: evidence from Taiwan

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shuling Chiang ◽  
Gary Kleinman ◽  
Picheng Lee
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Negative Relationship ◽  
Cash Flows ◽  
Board Independence ◽  
Firm Level ◽  
Industry Specialization ◽  
Content Type ◽  
Auditor Industry Specialization ◽  
Board Of Director

Purpose This study aims to explore the relationship between audit partner and firm industry specialization and board of director independence on the decision by Taiwanese firms to use International Financial Reporting Standards (IFRS) flexibility concerning reporting interest income and expense and dividends received in different sections of the statement of cash flows. This flexibility existed in Taiwan for the first time in 2013, the year that Taiwan switched from its own generally accepted accounting principle to IFRS. Design/methodology/approach Using 2013 data for a sample of 1,227 firms, 354 of whom changed their reporting classification, this study examined the interaction effect of board independence and partner-level and firm-level auditor industry specialization on the cash flow reporting decision using logistic regression. Findings The results show there is a substitute relationship between board independence and partner-level industry specialization on the change in cash flow reporting classification, but a complementary relationship between board independence and firm-level auditor specialization. Further, both partner-level and firm-level auditor industry specializations have a complementary (but negative) relationship with board independence as to whether the firm is likely to report interest expense paid in the operating or financing activities sections. Practical implications An important implication is that knowing the levels of audit firm and partner specialization and how independent the board is, is useful for researchers and regulators in investigating auditor-client relationships and understanding the influences of variables investigated here on the outcome(s) of accounting policy and regulatory changes. Originality/value This study improved the field’s understanding of the impacts of audit partner and firm specialization, board independence and relevant interactions on cash flow reporting choices.

Relationship between earnings management, CEO compensation, and stock return on Tehran Stock Exchange

2019 ◽  
Vol 23 (1) ◽  
pp. 1-22
Author(s):  
Mahdi Moardi ◽  
Mahdi Salehi ◽  
Simin Poursasan ◽  
Homa Molavi
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Significant Relationship ◽  
Stock Return ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Content Type ◽  
Future Cash Flow ◽  
Accruals Quality ◽  
The Relationship

Purpose The purpose of this paper is to investigate the relationship between earnings management and chief executive officers’ (CEOs) compensation. Owing to the fact that earnings management does not have only opportunistic effects, but signaling effects, this study focuses on accruals quality to examine earnings management incentives. Thus, accruals quality is described against future cash flow. The empirical evidences suggest that a positive relationship between discretionary accruals and future cash flow provides predictive elements for earnings management, whereas a negative relationship between discretionary accruals and future cash implies to opportunistic elements for earnings management. Should there is no significant relationship between discretionary accruals and future cash flow, there will be no earnings management, and such a result suggests that incentives and managers’ performance in these firms differ. Design/methodology/approach The statistical population of this research consists of all listed companies on the Tehran Stock Exchange during 2009–2016. Panel data method is applied in order to estimate the research model. Findings Findings of the study show that there is no significant relationship between discretionary accruals and future cash flow in pharmaceutical and food industries, thus they have neither predictive nor opportunist earnings management, while the results evidence a negative significant relationship between discretionary accruals and future cash flow in machineries, automobile, mineral and chemical industries. Furthermore, it can be alleged that there is no significant difference between CEOs’ compensation in firms with opportunistic earnings management (OEM) and other types of earnings management. It shows that firms do not have appropriate plans for CEOs’ compensation. Moreover, the relationship between earnings management and stock return has been investigated in this study. We document that stock return is influenced by accruals quality and its components. In other words, stock return significantly differs in firms with OEM and firms without any kind of earnings management. Research limitations/implications The authors’ findings provide contributions; for managers, it is noticeable that stock markets have sufficient comprehension about financial statements and the undertaken procedures on them, resulting in a higher return base on fair information. For investors and regulators, using the findings, may have deeper understanding to distinguish between industries that are recognized as opportunistic and non-opportunistic, which, in turn, results in better decision and regulation. Originality/value Previous studies have been mostly investigated OEM, while the current study examines both signaling and opportunistic aspects of earnings management.

scholarly journals EFFECT OF INFORMATION ON ACCOUNTING PROFITS AND CASH FLOW COMPONENTS ON STOCK PRICES OF INSURANCE COMPANIES LISTED IN INDONESIA STOCK EXCHANGE (BEI) 2008-2012 PERIOD

2019 ◽  
Vol 15 (2) ◽  
pp. 171
Author(s):  
Nico Lukito ◽  
Kristian Chandra
Keyword(s):  
Interest Rates ◽  
Cash Flow ◽  
Stock Prices ◽  
Stock Exchange ◽  
Financial Statements ◽  
Cash Flows ◽  
Insurance Companies ◽  
Research Model ◽  
Accounting Earnings ◽  
Independent Variables

<p><em>Many factors influence the fluctuation of stock prices, including: deposit interest rates, stock trading volume, return on equity, earnings per share. The last two factors are part of the financial statements presented by the issuers. The financial statements contain accounting earnings information and cash flow. Therefore it is necessary to examine empirically whether accounting earnings and cash flows have an influence on changes in stock prices. Data is collected from the stock prices of insurance companies that have gone public in the Jakarta Stock Exchange which have a nominal value per share of Rp.1,000.00 (one thousand rupiah) from 2008 to 2012. This study took 10 existing insurance companies to analyze. The basis for this sampling is based on the amount of data available on the Jakarta Stock Exchange Website. From the results of variable analysis of total cash flow and accounting profit variables in the first equation individually can not significantly influence stock prices. And together all the independent variables have no effect simultaneously on stock prices. The value of Squared R is very low, which means that the variable cannot explain stock prices, but can be explained by other variables not included in the research model. Variable operational cash flows, investment cash flows and funding cash flows in the second equation individually can not influence stock prices significantly. And together all the independent variables have no effect simultaneously on stock prices. Also obtained is a very low R Squared value, which means that the variable cannot explain stock prices, but can be explained by other variables not included in the research model</em></p>

scholarly journals The Effect of Cash Flows on Firm’s Profitability of Construction Sector in Malaysia

2019 ◽  
Vol 2 (1) ◽  
pp. 31-39
Author(s):  
NAZARIA MD ARIS ◽  
RAZMAN ANUAR ◽  
Ivan Trofimov ◽  
Nurhidayah Sokat
Keyword(s):  
Cash Flow ◽  
Positive Impact ◽  
Pearson Correlation ◽  
Negative Relationship ◽  
Cash Flows ◽  
Construction Sector ◽  
Business Managers ◽  
Return On Assets ◽  
Listed Firms ◽  
Information Set

This research investigates the effect of cash flows towards firm’s profitability using the data collected and analysed from listed firms in construction sector on Bursa Malaysia. The sample comprises of 98 firms and the data is for 6 years throughout January 2009 to December 2015. For the purpose of this analysis, a discriminatory panel regression and Pearson correlation are used to test the hypotheses. This research uses cash flow from operations (CFO), cash flow from investments (CFI), and cash flow from financing (CFF) activities as independent variables to measure cash flows. In order to measure the firm’s profitability, this research uses Return on Assets (ROA) as the dependent variable. The result from this research reveals that cash flows from operations (CFO) and cash flow from investments (CFI) has a significant and positive impact on the profitability of the firms. The findings also show there is a negative relationship exists between cash flow from financing (CFF) and firm’s profitability.Thus, taking all into consideration, this research provides insights to the business managers in overseeing the cash for ongoing operations, controlling the investing strategy and tracking the financing activities for survival and growth of the organisation. On the other hand, other stakeholders of the business use historic cash flows in this information set to make projections for future cash flows investment decisions.

scholarly journals The Effect of Leverage, Size, Liquidity, Operating Cash Flow on Fixed Asset Revaluation

2017 ◽  
Vol 7 (1) ◽  
pp. 31
Author(s):  
Dian Firmansyah ◽  
Nurmala Ahmar ◽  
JMV Mulyadi
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Audit Fees ◽  
Fair Value ◽  
Cash Flows ◽  
Fixed Asset ◽  
Operating Cash Flows ◽  
Fixed Assets ◽  
Asean Countries ◽  
Tax Payments

This study tries to prove empirically the effect of leverage, size, liquidity and operating cash flows on the revaluation of fixed assets. It used a sample of all non-financial companies, which revalued assets in the periode of 2012-2015, at companies listed on Indonesia Stock Exchange with upward revaluation category. The analysis was done using Path analysis (PLS) without requiring classical assumption and normality test. The results show that leverage affects Asset revaluation, it proves that high leverage because the company to do revaluation of fixed assets, large companies tend to want to display earnings reports that are not too large to reduce their political costs, with asset revaluation, the value of depreciation is calculated Repeated and reduce the company's profit. Operating cash flows affect the revaluation of fixed assets on the grounds that the company requires funds to pay its obligations as well as in revaluation assets cost a great deal for the appraisal services, audit fees and final tax payments. Yet, liquidity has no effect on the revaluation of fixed assets, Within the last 4 years, the study found that users of the Asset revaluation model reporting in Other Comprehensive Income continue to grow and are expected to become financial statements that have superiority and good quality by reporting fair value. In the next research to add the number of variables on Asset revaluation, as well as expand the sample by involving the company revaluation and non revaluation. In addition, to examine the development of asset revaluation, especially in ASEAN countries related to the adoption of IFRS in the case of fixed asset revaluation.Keyword: Leverage, Size, Liquidity, Cash Flow from operation, and Revaluations Assets.

scholarly journals Earnings Management Incentives and the Pricing of Discretionary Accruals

2019 ◽  
Vol 14 (7) ◽  
pp. 77
Author(s):  
Sondes Draief
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Cash Flow ◽  
Insider Trading ◽  
Financial Distress ◽  
Negative Relationship ◽  
High Growth ◽  
Discretionary Accruals ◽  
Free Cash Flow ◽  
Management Incentives

The objective of this research is to investigate whether earnings management incentives influence the pricing of discretionary accruals. Specifically, we verify if growth opportunity, leverage, free cash flow, insider trading and financial distress are useful to investors to discriminate between opportunistic and informative earnings management. Using a sample of 486 American firms for the period 2002-2010, we find that discretionary accruals are positively related to stock returns. This relation is more intensive in high growth firms and high levered firms. Indeed, these firms use more informative earnings management to communicate future prospects and good financial situation to external investors. However, discretionary accruals are negatively priced by investors in distressed firms. These firms have a greater incentive to manage earnings opportunistically to hide any financial problem. Likewise, we detect a negative relationship between discretionary accruals and stock returns in firms with excessive free cash flow revealing the opportunistic perspective of earnings management. Finally, we demonstrate that investors award positive (negative) value to discretionary accruals in case of insider buying (selling).

scholarly journals Financing Cash Flow, Discretionary Accruals and Stock Return of Firms Listed in Nairobi Securities Exchange, Kenya

2021 ◽  
Vol 04 (12) ◽  
Author(s):  
Samoei Ben Kipngetich ◽  
Keyword(s):  
Regression Analysis ◽  
Stock Returns ◽  
Cash Flow ◽  
Stock Return ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Hierarchical Regression ◽  
Discretionary Accrual ◽  
Financial Firms ◽  
The Relationship

The purpose of the study was to establish the effect of financing cash flow on stock return and to test the moderating effect of discretionary accruals on the relationship between financing cash flow and stock return. Panel data was collected from 29 listed non-financial firms at NSE for 12 years from 2007-2019. Fixed effect hierarchical regression analysis showed that financing cash flow had a positive and significant effect on stock return while discretionary accruals negatively moderate the relationship between financing cash flows and stock returns. The study concludes that financing cash flow improves stock return, however, high discretionary accruals adversely reduce the effect of financing cash flow on stock return. Therefore, the study recommends that NSE should enact incisive regulations pertaining to discretionary accrual practices and its implication on stock return to protect investor vulnerability to losses in their investment due to managers’ opportunistic behaviours.

scholarly journals Discretionary accruals and the predictive ability of earnings in the forecast of future cash flows: Evidence from Australia

2011 ◽  
Vol 9 (1) ◽  
pp. 597-608 ◽  
Author(s):  
Shadi Farshadfar ◽  
Reza Monem
Keyword(s):  
Cash Flow ◽  
Direct Method ◽  
Predictive Ability ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Australian Context ◽  
Out Of Sample ◽  
Aggregate Earnings ◽  
Flow Components ◽  
Future Cash Flows

We examine whether discretionary and non-discretionary accruals improve the predictive ability of earnings for forecasting future cash flows in an Australian context. Using both within-sample and out-of-sample forecasting tests; we demonstrate that discretionary accruals improve the predictive ability of earnings in the forecast of future cash flows. Further, discretionary and non-discretionary accruals and direct method cash flow components together are more useful than (i) aggregate earnings, (ii) aggregate cash flow from operations and total accruals, and (iii) aggregate cash flow from operations, discretionary accruals and nondiscretionary accruals.

Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management

2013 ◽  
Vol 33 (1) ◽  
pp. 117-138 ◽  
Author(s):  
John Daniel Eshleman ◽  
Peng Guo
Keyword(s):  
Audit Quality ◽  
Negative Relationship ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Conflicting Evidence ◽  
Research Designs ◽  
Prior Literature

SUMMARY Are high audit fees a signal that the auditor exerted more effort or a signal that the auditor may be losing her independence? Prior literature offers conflicting evidence. In this paper, we reexamine the issue on a sample of clients who have both the incentive and the ability to use discretionary accruals to meet or beat the consensus earnings forecast. We find a negative relationship between the level of abnormal audit fees paid by the client and the likelihood of using discretionary accruals to meet or beat the consensus analyst forecast. The evidence is consistent with the notion that abnormal audit fees are indicative of greater effort on the engagement. In other words, the results suggest a positive relationship between abnormal audit fees and audit quality. We show that the conflicting evidence in prior research was caused by research designs that did not consider the incentives of the manager. JEL Classifications: M42; M41. Data Availability: All data are available from public sources quoted in the text.

Accruals Quality and Internal Control over Financial Reporting

2007 ◽  
Vol 82 (5) ◽  
pp. 1141-1170 ◽  
Author(s):  
Jeffrey T. Doyle ◽  
Weili Ge ◽  
Sarah McVay
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Internal Controls ◽  
Earnings Persistence ◽  
Firm Characteristics ◽  
Material Weakness ◽  
Material Weaknesses ◽  
Accruals Quality

We examine the relation between accruals quality and internal controls using 705 firms that disclosed at least one material weakness from August 2002 to November 2005 and find that weaknesses are generally associated with poorly estimated accruals that are not realized as cash flows. Further, we find that this relation between weak internal controls and lower accruals quality is driven by weakness disclosures that relate to overall company-level controls, which may be more difficult to “audit around.” We find no such relation for more auditable, account-specific weaknesses. We find similar results using four additional measures of accruals quality: discretionary accruals, average accruals quality, historical accounting restatements, and earnings persistence. Our results are robust to the inclusion of firm characteristics that proxy for difficulty in accrual estimation, known determinants of material weaknesses, and corrections for self-selection bias.

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