Exploring the Strategic Integration of Sustainability Initiatives: Opportunities for Accounting Research

SYNOPSIS We report the results of a survey of 178 corporate responsibility officers designed to explore how accountants can add value to sustainability initiatives. Specifically, we examine how three areas of accounting expertise (risk identification and measurement, financial reporting, and independent review/assurance) contribute to the strategic integration of sustainability initiatives (cf. Porter and Kramer 2006; IIRC 2011). Our results indicate that accounting professionals are rarely involved in sustainability initiatives, but their involvement is highly associated with strategic integration. This finding suggests that increased involvement likely would provide significant benefits to organizations and their stakeholders. We use these and other important insights into a series of research questions for future accounting or interdisciplinary research in sustainability. These insights about accountants' ability to enhance the strategic integration of sustainability initiatives also should be of interest to accounting and consulting firms as they design and market their sustainability services. Data Availability: Data are available upon request.

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The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process

The Accounting Review ◽

10.2308/accr-50585 ◽

2013 ◽

Vol 89 (1) ◽

pp. 243-273 ◽

Cited By ~ 115

Author(s):

Jeffrey R. Cohen ◽

Udi Hoitash ◽

Ganesh Krishnamoorthy ◽

Arnold M. Wright

Keyword(s):

Financial Reporting ◽

Audit Committee ◽

Data Availability ◽

Holistic View ◽

Reporting Process ◽

Two Measures ◽

External Auditor ◽

Accounting Expertise ◽

Better Than ◽

Industry Expertise

ABSTRACT Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators and the extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company's operations within a particular industry. Taking a holistic view, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures of external auditor oversight (audit and nonaudit fees). As predicted, we find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process. Data Availability: All data are gathered from publicly available sources.

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Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

Accounting Horizons ◽

10.2308/acch-52262 ◽

2018 ◽

Vol 33 (1) ◽

pp. 39-59

Author(s):

Jimmy F. Downes ◽

Tony Kang ◽

Sohyung Kim ◽

Cheol Lee

Keyword(s):

Financial Reporting ◽

Cash Flows ◽

Data Availability ◽

The European Union ◽

Accounting Quality ◽

Financial Reporting Standards ◽

Ifrs Adoption ◽

Accounting Estimates ◽

Accounting Accruals ◽

Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

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Interim Reporting Frequency and the Mispricing of Accruals

Accounting Horizons ◽

10.2308/acch-52097 ◽

2018 ◽

Vol 32 (3) ◽

pp. 29-47

Author(s):

Shou-Min Tsao ◽

Hsueh-Tien Lu ◽

Edmund C. Keung

Keyword(s):

Financial Reporting ◽

Stock Prices ◽

Data Availability ◽

Financial Reports ◽

Regulatory Changes ◽

Sample Composition ◽

Reporting Frequency ◽

Over Time ◽

Jel Classifications ◽

Accrual Mispricing

SYNOPSIS This study examines the association between mandatory financial reporting frequency and the accrual anomaly. Based on regulatory changes in reporting frequency requirements in Taiwan, we divide our sample period into three reporting regimes: a semiannual reporting regime from 1982 to 1985, a quarterly reporting regime from 1986 to 1987, and a monthly reporting regime (both quarterly financial reports and monthly revenue disclosure) from 1988 to 1993. We find that although both switches (from the semiannual reporting regime to the quarterly reporting regime and from the quarterly reporting regime to the monthly reporting regime) hasten the dissemination of the information contained in annual accruals into stock prices and reduce annual accrual mispricing, the switch to monthly reporting has a lesser effect. Our results are robust to controlling for risk factors, transaction costs, and potential changes in accrual, cash flow persistence, and sample composition over time. These results imply that more frequent reporting is one possible mechanism to reduce accrual mispricing. JEL Classifications: G14; L51; M41; M48. Data Availability: Data are available from sources identified in the paper.

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On the Pricing of Mandatory DCF Disclosures: Evidence from Oil and Gas Royalty Trusts

The Accounting Review ◽

10.2308/accr-51128 ◽

2015 ◽

Vol 90 (6) ◽

pp. 2449-2482 ◽

Cited By ~ 11

Author(s):

Panos N. Patatoukas ◽

Richard G. Sloan ◽

Jenny Zha

Keyword(s):

Cash Flow ◽

Stock Price ◽

Oil And Gas ◽

Cost Accounting ◽

Data Availability ◽

Discounted Cash Flow ◽

Historical Cost ◽

Security Valuation ◽

Accounting Expertise ◽

Historical Cost Accounting

ABSTRACT We identify a setting in which firms are required to disclose discounted cash flow (DCF) estimates relating to the value of their primary assets. ASC 932 (formerly SFAS No. 69) has mandated DCF disclosures for proved oil and gas reserves since 1982, and these reserves constitute the primary assets of oil and gas royalty trusts. For a hand-collected sample of oil and gas royalty trusts, we find that (1) the mandatory DCF disclosures are incrementally value-relevant over historical cost accounting variables, (2) investors misprice royalty trust units because they underweight the disclosed DCF estimates when forecasting future distributions, and (3) media articles bringing attention to discrepancies between price and the disclosed DCF estimates are significant stock price catalysts. While our evidence indicates that mandatory DCF disclosures can be incrementally useful for security valuation, it also indicates that investors may overlook such information, potentially due to lack of attention and accounting expertise. Data Availability: Data are publicly available from sources indicated in the text.

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Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51575 ◽

2016 ◽

Vol 36 (2) ◽

pp. 21-43 ◽

Cited By ~ 9

Author(s):

Lucy Huajing Chen ◽

Hyeesoo H. (Sally) Chung ◽

Gary F. Peters ◽

Jinyoung P. (Jeannie) Wynn

Keyword(s):

Financial Reporting ◽

Internal Audit ◽

Positive Association ◽

Audit Fees ◽

Data Availability ◽

Company Performance ◽

Potential Threat ◽

External Audit ◽

Internal Auditors ◽

Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

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Retroactive Tax Legislation, Reported Earnings, and Investors' Responses to Earnings “Surprises”: Evidence from R&D Credit Extensions

Journal of the American Taxation Association ◽

10.2308/atax-51395 ◽

2016 ◽

Vol 38 (2) ◽

pp. 87-109 ◽

Cited By ~ 7

Author(s):

Brian Bratten ◽

David S. Hulse

Keyword(s):

Financial Reporting ◽

Stock Prices ◽

Unintended Consequences ◽

Data Availability ◽

Substantial Part ◽

Tax Rates ◽

Financial Reporting Standards ◽

Average Decrease ◽

Tax Legislation ◽

Reported Earnings

ABSTRACT When Congress retroactively extends a temporary tax rule, the effect on earnings is complex because financial reporting standards require firms to apply the integral method using enacted tax law to determine quarterly income tax expense. We model this effect and examine earnings announcements following retroactive extensions of the federal R&D tax credit to test how investors incorporate the effect into stock prices. We find that investors respond when earnings are announced, even though the effect could have been determined several weeks earlier. We also show that in recent years, the effects of retroactive extensions of the credit are a substantial part of the average decrease in effective tax rates (ETRs) from the third to fourth quarter for calendar-year firms. Our results have implications for investors and researchers examining earnings and ETRs around retroactive extensions of temporary tax rules and suggest that congressional delays and GAAP interact to produce unintended consequences. JEL Classifications: M41; M48; G14; H25. Data Availability: Data used in this study are available from the sources identified in the text.

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Does Investment-Related Pressure Lead to Misreporting? An Analysis of Reporting Following M&A Transactions

The Accounting Review ◽

10.2308/accr-10210 ◽

2012 ◽

Vol 87 (3) ◽

pp. 839-865 ◽

Cited By ~ 34

Author(s):

Daniel A. Bens ◽

Theodore H. Goodman ◽

Monica Neamtiu

Keyword(s):

Financial Reporting ◽

Large Body ◽

Financial Statements ◽

Probability Of Detection ◽

Data Availability ◽

The Public ◽

Announcement Returns ◽

Reporting Decisions ◽

The Face ◽

Near Term

ABSTRACT This study examines whether managers alter their financial reporting decisions in the face of investment-related pressure. We define investment-related pressure as the increased pressure managers feel to retain their job following an M&A poorly received by the market. We hypothesize that managers attempt to assuage pressure by delivering strong performance post-merger, creating incentives for misreporting. Our findings indicate that acquirers with more negative M&A announcement returns are more likely to misstate financial statements in the post-investment period and the issuance of misstated financials mitigates this pressure, at least in the near term. Our study contributes to the literature on the relation between corporate investing and financial reporting by showing how investment-related pressure leads to misreporting, even in a setting where the costs (e.g., greater probability of detection) are high. Our study also has implications for the large body of research that evaluates various consequences of M&As using post-merger performance. Specifically, researchers should be careful to distinguish real from misstated financial performance in the post-investment period. Data Availability: Data are available from the public sources indicated in the text.

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The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50007 ◽

2011 ◽

Vol 30 (2) ◽

pp. 103-124 ◽

Cited By ~ 29

Author(s):

Jennifer Joe ◽

Arnold Wright, and ◽

Sally Wright

Keyword(s):

Financial Reporting ◽

Internal Controls ◽

Data Availability ◽

Audit Firm ◽

Sarbanes Oxley ◽

Big 4 ◽

Time Period ◽

Confidentiality Agreement ◽

Financial Scandals ◽

The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

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Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on International Auditing and Assurance Standards Board Exposure Draft, Proposed International Standard on Auditing 315 (Revised): Identifying and Assessing the Risks of Material Misstatement and Proposed Consequential and Conforming Amendments to Other ISAs

Current Issues in Auditing ◽

10.2308/ciia-52338 ◽

2018 ◽

Vol 13 (1) ◽

pp. C1-C9 ◽

Cited By ~ 6

Author(s):

Veena Looknanan Brown ◽

Paul J. Coram ◽

Sean A. Dennis ◽

Denise Dickins ◽

Christine E. Earley ◽

...

Keyword(s):

Information Technology ◽

Financial Reporting ◽

Data Availability ◽

Professional Skepticism ◽

International Standard ◽

Auditing Standards ◽

Explicit Recognition ◽

Automated Tools ◽

Tools And Techniques

SUMMARY On July 16, 2018, the International Auditing and Assurance Standards Board (the Board or IAASB) issued a request for comment on its Exposure Draft, Proposed International Standard on Auditing 315 (Revised): Identifying and Assessing the Risks of Material Misstatement and Proposed Consequential and Conforming Amendments to Other ISAs (ED-315). Major enhancements proposed include explicit recognition of the auditor's use of automated tools and techniques, requiring an understanding of an auditee's use of information technology relevant to financial reporting, acknowledging the influence of an entity's complexity on the audit plan, and increasing the emphasis on the need for professional skepticism. The comment period ended on November 2, 2018. This commentary summarizes the participating committee members' views on selected questions posed by the IAASB. Data Availability: ED-315, including questions for respondents, is available at: https://www.ifac.org/publications-resources/exposure-draft-isa-315-revised-identifying-and-assessing-risks-material.

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Corporate Social Responsibility, Audit Committee Expertise, and Financial Reporting: Empirical Evidence from Korea

Sustainability ◽

10.3390/su131910517 ◽

2021 ◽

Vol 13 (19) ◽

pp. 10517

Author(s):

Haeyoung Ryu ◽

Soo-Joon Chae ◽

Bomi Song

Keyword(s):

Corporate Social Responsibility ◽

Social Responsibility ◽

Financial Reporting ◽

Audit Committee ◽

Earnings Quality ◽

Audit Committees ◽

Accounting Expertise ◽

Corporate Social

Corporate social responsibility (CSR) involves multiple activities and is influenced by the cultural and legal environment of the country in which a firm is located. This study examines the role of audit committees’ (AC) financial expertise in the relationship between CSR and the earnings quality of Korean firms with high levels of CSR. Using a multivariate analysis, it investigates whether the ACs that include members with accounting expertise, finance expertise, or supervisory expertise individually affect a firm’s decision making. It also examines how ACs with diverse expertise contribute toward improving the financial reporting quality of firms with high levels of CSR. The results demonstrate that when there is a certified accountant in the AC of a firm that practices CSR based on ethical motivation, the earnings management through discretionary accruals is more strictly controlled. This is more effective when the AC comprises members with accounting and non-accounting expertise. This finding implies that the AC plays a positive role in improving the accounting information quality of firms with CSR excellence. Moreover, while the role of accounting experts in the AC is important for maintaining high earnings quality, combining other types of expertise creates synergy.

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