Orphans Deserve Attention: Financial Reporting in the Missing Months When Corporations Change Fiscal Year

2012 ◽  
Vol 88 (3) ◽  
pp. 945-975 ◽  
Author(s):  
Kai Du ◽  
X. Frank Zhang
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Transition Period ◽  
Data Availability ◽  
Fiscal Year ◽  
Lower Income ◽  
Reporting Practices ◽  
Earnings Surprise ◽  
Growth Firms ◽  
Earnings Targets

ABSTRACT We examine firms' financial reporting practices during the missing months that are induced by fiscal year changes and not covered by regular quarters. We find that firms tend to report much lower income for the missing months than for adjacent quarters, mainly by recording higher operating expenses. We also find that managers have various incentives to manage earnings. Executive compensation is not tied to firm performance in the transition period as it is in adjacent fiscal years. Growth firms, firms with poor stock returns, and firms with weak external and internal monitoring tend to manage earnings more. Finally, we find that firms are more likely to meet or beat earnings targets in the subsequent quarter by reporting lower income in the missing months. Investors and analysts perceive the earnings surprise to be less persistent in the quarter after than in the quarter before the missing months. Data Availability: Data are available from sources identified in the paper.

Strategic Management Forecasts and Accounting Choices: A Case of Employee Downsizing in Japan

2020 ◽  
Vol 19 (3) ◽  
pp. 91-109
Author(s):  
Keishi Fujiyama ◽  
Makoto Kuroki
Keyword(s):  
Stock Returns ◽  
Data Availability ◽  
Financial Statement ◽  
Fiscal Year ◽  
Forecast Errors ◽  
Management Forecasts ◽  
Reporting Practices ◽  
Accounting Choices ◽  
Using Data ◽  
Labor Negotiations

ABSTRACT Prior research shows that managers make income-decreasing accounting choices around labor negotiations and predicts that managers disclose bad news during labor negotiations. This study extends the literature by investigating whether disclosure and financial statement reporting practices are consistent during employee downsizing years. Using data from Japanese domestic firms during the period 2002–2016, we find that beginning-of-period management forecasts (i.e., disclosure) are positively associated with during-period negative stock returns for downsizing firms but not for non-downsizing firms. Also, downsizing firms report more conservative earnings at the end of the fiscal year (i.e., financial statement reporting). Our supplementary analyses show no difference in an association between management forecast errors and stock returns between downsizing and non-downsizing firms with during-period negative stock returns, nor in an association between discretionary accruals and employee downsizing. These results suggest that managers strategically inform firms' prospects during employee downsizing years. JEL Classifications: G34; J51; M41. Data Availability: Data are available from the public sources cited in the text.

Internal Control Deficiencies in Tax Reporting: A Detailed View

2015 ◽  
Vol 29 (4) ◽  
pp. 917-942 ◽  
Author(s):  
Lynford Graham ◽  
Jean C. Bedard
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Public Information ◽  
Data Availability ◽  
Fiscal Year ◽  
Sarbanes Oxley ◽  
Financial Misstatement ◽  
Internal Control Deficiencies ◽  
Using Data ◽  
Tax Reporting

SYNOPSIS Prior research, using data from Sarbanes-Oxley Act Sections 302/404 (SOX, U.S. House of Representatives 2002) disclosures, finds that material weaknesses (MWs) in internal controls over financial reporting of taxes are more frequent and consequential than other account-specific MWs. Understanding internal control deficiencies (ICDs) in tax reporting is important but public information is limited, as MWs comprise only control flaws remaining unremediated at year-end and few details on their nature are available from SEC filings. We supplement prior studies by providing a detailed look at all Section 404 control deficiencies in tax reporting in a proprietary sample of engagements in 2004–2005 from several large auditing firms. We find that tax ICDs are less likely to be remediated between discovery and fiscal year-end, more likely to be severe, and more likely to have caused a financial misstatement. Remediation failure for tax ICDs is greater when management missed detecting the problem, and more prevalent for poorly designed controls, controls over the tax provision, and monitoring control activities. Auditors' severity classifications imply that ICDs relating to the tax provision and deferred taxes, and those that failed in operation, have higher potential for producing misstatements. Overall, our results underscore the importance of auditor involvement in internal control reporting in the tax area. Data Availability: Data used for this study were provided under confidentiality agreements, and cannot be shared.

Do Quarterly and Annual Financial Statements Reflect Similar Financial Statement Error in the Post-SOX Era?

2021 ◽  
Vol 6 (1) ◽  
pp. 1-31
Author(s):  
Erik S. Boyle ◽  
Melissa F. Lewis-Western ◽  
Timothy A. Seidel
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Data Availability ◽  
Financial Statement ◽  
Annual Reports ◽  
Fiscal Year ◽  
High Quality ◽  
Financial Reports ◽  
Quality Reporting ◽  
Public Company

ABSTRACT The U.S. has invested substantial resources into the regulation and oversight of public-company financial reporting. While these investments should incentivize high-quality reporting among quarterly and annual financial statements, the sharp rise in public company auditor oversight may disproportionately benefit annual reports given the fiscal year-centric nature of audits. We compare the within company-year difference in financial statement error between quarterly and annual financial reports and examine how any difference changed following SOX. We find that pre-SOX error is lower for audited financial statements than for reviewed financial statements and that this difference increases following SOX. Additional tests suggest that elevated auditor oversight, rather than managerial incentives, is the impetus for the change. Despite regulatory investment designed to incentivize the production of high-quality quarterly and annual financial statements, the post-SOX difference in error between quarterly and annual financial statements appears to have increased. Data Availability: Data are available from public sources cited in the text. JEL Classifications: M41; M42.

Reputation Repair After a Serious Restatement

2014 ◽  
Vol 89 (4) ◽  
pp. 1329-1363 ◽  
Author(s):  
Jivas Chakravarthy ◽  
Ed deHaan ◽  
Shivaram Rajgopal
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Data Availability ◽  
Firm Characteristics ◽  
Press Releases ◽  
Market Returns ◽  
Multiple Stakeholders ◽  
Repair Strategy ◽  
Before And After ◽  
Reputation Building

ABSTRACT: How do firms repair their reputations after a serious accounting restatement? To answer this question, we review firms' press releases and identify 1,765 reputation-building actions taken by: (1) 94 restating firms in the periods before and after their restatement; and (2) a set of matched control firms during contemporaneous periods. We posit that firms have incentives to target multiple stakeholders in a reputation repair strategy—including capital providers, customers, employees, and geographic communities—and that actions targeting each group generate positive market returns as reputation capital is repaired. Consistent with our predictions, the frequency of, and stock returns to, reputation-building actions are greater for restating firms in the period after their restatement than for the control groups. In addition, firm characteristics predict the types of stakeholders targeted by firms. Finally, actions targeted at both capital providers and other stakeholders are associated with improvements in the restating firm's financial reporting credibility. Data Availability: The data used in this study are available from the sources indicated.

Does the Presence of a General Counsel in Top Management Affect Audit Effort and Audit Outcomes?

2020 ◽  
Vol 34 (3) ◽  
pp. 39-59
Author(s):  
Marcus R. Brooks ◽  
Stephanie A. Hairston ◽  
Phillip Kamau Njoroge ◽  
Ji Woo Ryou
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Data Availability ◽  
Top Management ◽  
General Counsel ◽  
Audit Risk ◽  
Reporting Practices ◽  
Audit Market ◽  
Reporting Process ◽  
Aggressive Financial Reporting

SYNOPSIS This study examines whether the presence of a general counsel (GC) in top management affects audit effort and audit outcomes. Hopkins, Maydew, and Venkatachalam (2015) find that firms with GCs in top management have lower financial reporting quality and tolerate more aggressive financial reporting practices, which likely influences audit risk. Given the GCs' influence on the financial reporting process, we posit that auditors of firms with GCs in top management increase the amount of effort they expend to provide reasonable assurance that financial statements are stated fairly. We find that the presence of GCs in firms' top management is positively associated with audit effort but does not directly affect the likelihood that these firms will receive unqualified audit opinions that contain explanatory language. Our findings suggest that GCs influence the external audit market by participating in the financial reporting process. JEL Classifications: M42. Data Availability: Data are available from the public sources cited in the text.

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

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.

Interim Reporting Frequency and the Mispricing of Accruals

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.

Measuring Pension Liabilities under GASB Statement No. 68

2014 ◽  
Vol 28 (3) ◽  
pp. 421-454 ◽  
Author(s):  
John W. Mortimer ◽  
Linda R. Henderson
Keyword(s):  
Financial Reporting ◽  
Risk Index ◽  
Pension Plans ◽  
Low Risk ◽  
Sensitivity Analyses ◽  
Fiscal Year ◽  
Defined Benefit ◽  
Discount Rates ◽  
Risk Rate ◽  
Pension Liabilities

SYNOPSIS While retired government employees clearly depend on public sector defined benefit pension funds, these plans also contribute significantly to U.S. state and national economies. Growing public concern about the funding adequacy of these plans, hard hit by the great recession, raises questions about their future viability. After several years of study, the Governmental Accounting Standards Board (GASB) approved two new standards, GASB 67 and 68, with the goal of substantially improving the accounting for and transparency of financial reporting of state/municipal public employee defined benefit pension plans. GASB 68, the focus of this paper, requires state/municipal governments to calculate and report a net pension liability based on a single discount rate that combines the rate of return on funded plan assets with a low-risk index rate on the unfunded portion of the liability. This paper illustrates the calculation of estimates for GASB 68 reportable net pension liabilities, funded ratios, and single discount rates for 48 fiscal year state employee defined benefit plans by using an innovative valuation model and readily available data. The results show statistically significant increases in reportable net pension liabilities and decreases in the estimated hypothetical GASB 68 funded ratios and single discount rates. Our sensitivity analyses examine the effect of changes in the low-risk rate and time period on these results. We find that reported discount rates of weaker plans approach the low-risk rate, resulting in higher pension liabilities and creating policy incentives to increase risky assets in pension portfolios.

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

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
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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