It Is Not Only What You Know, It Is Also Who You Know: CEO Network Connections and Financial Reporting Quality

2018 ◽  
Vol 37 (2) ◽  
pp. 27-50 ◽  
Author(s):  
Avishek Bhandari ◽  
Babak Mammadov ◽  
Austin Shelton ◽  
Maya Thevenot
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Reporting Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Economic Benefits ◽  
Financial Reporting Quality ◽  
Financial Restatements ◽  
External Connections

SUMMARY The study investigates whether CEOs' external connections with other executives and directors are associated with enhanced financial reporting quality. We find that CEOs with larger connections have lower discretionary accruals and are less likely to have financial restatements and material internal control weaknesses. Further results show that larger social networks are associated with higher audit quality, which translates into higher audit fees. The results are robust to a variety of alternative specifications, including controls for endogeneity, and are consistent with well-connected CEOs providing economic benefits to their firms, rather than using their position to extract rents at the expense of shareholders.

scholarly journals Does Control Self-Assessment Influence Financial Reporting Quality?

2020 ◽  
Vol 5 (4) ◽  
pp. 70-76
Author(s):  
Hiroshi Uemura
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Audit Fees ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Control Environment ◽  
Self Assessment ◽  
Positive Effects

The aim of this study is to examine the effect of control self-assessment (CSA) on financial reporting quality by using CSA as a proxy of monitoring quality. CSA has an important feature that allows the employees themselves to become involved in the assessment of internal controls’ effectiveness. Moreover, CSA has two important monitoring functions. First, it can add value to internal auditing. Second, because all employees of operational units participate in the assessment of internal controls in CSA, that control environment is expected to be mature. The investigation of this study used data from 3,517 Japanese firms listed on the First Section, Second Section, Mothers, and JASDAQ of the Tokyo Stock Exchange. The result of 2SLS regression shows that CSA adoption has a negative relationship with the number of financial restatements and audit fees, and therefore, I conclude that CSA has positive consequences for financial reporting quality. This result indicates that the internal monitoring mechanism that continuously monitors internal control over financial reporting (ICFR) effectiveness and in which all employees participate has some positive effects on financial reporting quality. There are two reasons for this result. First, employees have easier access to negative information concerning ICFR effectiveness than outsiders and can share that information with the internal personnel in charge of monitoring (e.g., internal auditors). Moreover, CSA is expected raise an entity’s awareness of ICFR, that is, the control environment of ICFR components is made into an environment that prevents and detects impropriety in the accounting process. Keywords: Control

scholarly journals Corporate Governance and Financial Reporting Quality in Selected Nigerian Company

2014 ◽  
Vol 2 (3) ◽  
pp. 7-16
Author(s):  
Onuorah Anastasia Chi-Chi (PhD) ◽  
Imene Oghenefegha Friday
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Financial Reporting Quality ◽  
Board Structure ◽  
Quality Audit

This paper evaluated the level of performance of some selected companies ranging from commodities, brewery, banking, oil and gas and beverages in terms of corporate governance measure indictors on the firm quality of financial reporting in Nigeria. The data were collected from 2006 to 2015. Econometric analysis were conducted and the result suggests that the correlation among corporate governance indicators of board structure (size-BRDSZ and independence-BRDID), audit quality (audit committee size (ADCMZ), the quality of external audit (EADTQ) as measured by the presence of an auditor among the big-4), board experience (i.e. experience-BRDEX) and financial reporting quality is 93.47%. The independent variables can explain the variation in the FRQDA by 54.29%. There is overall significance among the parameters measuring financial reporting quality as discretionary accruals of firm (FRQDA). Board structure (size-BRDSZ), board experience (experience-BRDEX) and the quality of external audit (EADTQ) have positive impact on the financial reporting quality measured by the discretionary accruals of firm (FRQDA) by 16.01, 0.05 and 2.75. However, independent directors on the board of firm (independence-BRDID) and audit quality (audit committee size (ADCMZ) negatively affect financial reporting quality measured by the discretionary accruals of firm (FRQDA) as much as 0.99 and 20.01. Guarantee Trust Bank Plc. among the five selected companies of study in Nigeria has better performance of financial reporting based on board structure (size-BRDSZ) and audit committee size (ADCMZ). This revealed that there is short run relationship among Audit quality (audit committee size (ADCMZ), and the quality of external audit (EADTQ) as measured by the presence of an auditor among the big-4) and board experience (i.e. experience-BRDEX) have not granger cause FRQDA. It further recommended that greater focus on corporate governance indicators so as to bring about global standard financial reporting in the Nigerian emerging market for investment opportunity.

scholarly journals Ownership Structure and Financial Reporting Quality: Influence of Audit Quality Evidence from Jordan

2019 ◽  
Vol 8 (4) ◽  
pp. 2212-2220
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Ownership Structure ◽  
Audit Quality ◽  
Positive Impact ◽  
Reporting Quality ◽  
Institutional Ownership ◽  
Mediating Effect ◽  
Financial Reporting Quality

The issues of ownership structure, audit quality, earnings management and financial reporting quality have received more consideration from public, profession and other interested parties particularly after persistent firms' scandals. Ownership structure play essential role in improve financial reporting quality (FRQ) through acting as effective internal control. This study examines the influence of the various types of ownership on the FRQ and the influence of audit quality. A stream of literature has examined the relationships between the different types of ownership, audit quality and FRQ. This study aims to connect such of these variables to produce an integrated model describing the influence of ownership structure with in the company and audit quality on FRQ. Therefore, the following relationships are tested: Ownership structure and FRQ, Mediating effect of auditor quality on these relationships, and audit quality and FRQ. Using Panel Data of 180 Jordanian company listed in ASE from 2009-2017, results showed that directors' and family ownership have significantly positive effect on FRQ through reducing earnings management; Institutional ownership has significantly negative influence on FRQ; Managerial ownership has insignificant impact on FRQ. Audit quality has partial mediating impact on these relationships. Audit quality found to has significantly positive impact on FRQ, it implies that audit quality is considered as deterrent to earnings management. This study suggests to increase the supervisory and monitoring role of institutional ownership on the management when preparing financial statements.

scholarly journals Earnings Management Behavior in Malaysia: The Role of Ownership Structure and External Auditing

2020 ◽  
Vol 19 (3) ◽  
pp. 185-221
Author(s):  
Nor Irdawati Mahyuddin ◽  
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
External Control ◽  
Listed Firms

"This paper aims to empirically investigate firms’ earnings management (EM) behaviour, representing an issue in the realm of corporate financial reporting. Specifically, it explores the strategic roles of two common governance elements of ownership (managerial, institutional and family) and external audit in shaping the firms’ EM behaviour based on the two common EM attributes of Discretionary Accruals (DA) and Real Activities EM (REM). The analyses based on 227 survived Malaysian listed firms throughout the sixteen-year period from 2001 to 2016 (3,632 firm-year observations) indicate a dynamic EM behaviour depending on the presence of different ownership structures. Whilst a high percentage of family and institutional ownership mitigates DA, it however does not hold true for REM. Further, this paper also shows that the external control mechanism of audit quality is not significant in mitigating both EM attributes. The empirical results suggest that firms facing different challenges would affect the firms’ financial reporting behaviours in their choice of EM. The paper adds to the growing body of empirical knowledge dealing with the determinants of DA and REM from the lens of an emerging economy like Malaysia. KEYWORDS: Earnings management, discretionary accruals, real earnings management, accrual earnings management, financial reporting quality."

Auditor and FASB Responsibilities for Representing Underlying Economics—What U.S. Standards Actually Say

2018 ◽  
Vol 32 (3) ◽  
pp. 83-90 ◽  
Author(s):  
Zoe-Vonna Palmrose ◽  
William R. Kinney
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Reporting Quality ◽  
Or Practice

SYNOPSIS Does the auditor's responsibility under U.S. authoritative guidance extend to providing assurance of financial reporting quality—specifically whether financial statements “faithfully reflect the firm's underlying economics”—after the auditor has concluded that financial statements are fairly presented in conformity with GAAP, in all material respects? The question arises because DeFond and Zhang (2014) state such a view and cite U.S. authoritative guidance as support. We review SEC, PCAOB, and FASB guidance and other sources and find no authoritative support for DeFond and Zhang's (2014) view. We also find that the PCAOB explicitly recognizes the lack of objective criteria that would be necessary to evaluate financial reporting quality beyond application of GAAP to events and transactions. Further, we find no evidence that practicing auditors do (separately) assess or assure that financial statements faithfully reflect the entire firm's underlying economics. Overall, these findings suggest DeFond and Zhang (2014) express a personal (and impracticable) normative view and not the auditor's actual responsibility or practice under extant U.S. standards. More broadly, results reinforce the importance of defining and measuring audit quality based on the auditor's actual responsibilities and the importance of accurately characterizing authoritative guidance and practice for scholarship regarding complex and multifaceted matters, including audit quality.

Understanding the Relation between Financial Reporting Quality and Audit Quality

2016 ◽  
Vol 35 (4) ◽  
pp. 1-22 ◽  
Author(s):  
Lisa Milici Gaynor ◽  
Andrea Seaton Kelton ◽  
Molly Mercer ◽  
Teri Lombardi Yohn
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Recursive Relation ◽  
Financial Reporting Quality ◽  
Task Environment ◽  
Future Research

SUMMARY A primary goal of both financial reporting research and audit research is to understand the determinants of quality, and researchers in both areas have identified a wide set of variables that enhance or impair quality. In this paper, we define financial reporting quality and audit quality and use a person/task/environment framework to summarize prior findings on the determinants of each. We use this framework to discuss the links between the financial reporting and audit academic literatures and highlight the recursive relation between financial reporting quality and audit quality. Our discussion provides insights and suggestions on how financial reporting and audit researchers can learn from each other to improve our collective understanding of financial reporting and audit quality. Using this framework, we also identify opportunities for future research.

Family ownership and financial reporting quality: Iranian evidence

2018 ◽  
Vol 8 (3) ◽  
pp. 339-356 ◽  
Author(s):  
Mahmoud Mousavi Shiri ◽  
Mahdi Salehi ◽  
Fatemeh Abbasi ◽  
Shayan Farhangdoust
Keyword(s):  
Financial Reporting ◽  
Family Firms ◽  
Stock Exchange ◽  
Accounting Information ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Reporting Quality ◽  
Family Ownership ◽  
Content Type

PurposeIn the process of reporting accounting information, the auditor’s objective is to detect possible misstatements and errors in accounting information. Audit evidence aids auditors in providing reasonable assurance about the quality of financial reporting. Studying the quality of family firms’ financial reporting is of higher importance relative to non-family firms due to lower risk of accounting manipulation. Therefore, the purpose of this paper is to examine the relationship between family ownership structure and financial reporting quality from an auditing perspective.Design/methodology/approachTo analyze the research hypotheses, the authors use a sample data consisted of 221 companies listed on the Tehran Stock Exchange (including 52 family and 169 non-family firms) over a five-year span from 2011 to 2015.FindingsUsing multivariate regression analysis of panel data, our results indicate that audit risk in family firms is lower than their counterparts. Likewise, the findings are indicative of lower audit fees paid by family firms as compared to non-family ones. The authors also find that auditors put more effort in family firms and thus audit effort is more significant for these kinds of firms.Originality/valueThe study focuses on family ownership and financial reporting quality in a developing country like Iran and the results of the study may be beneficial to other developing nations, as Iran stock market possesses some unique features which are not normally prevailing in other equity markets, even in the Middle East.

scholarly journals Do Abnormally High Audit Fees Impair Audit Quality?

2010 ◽  
Vol 29 (2) ◽  
pp. 115-140 ◽  
Author(s):  
Jong-Hag Choi ◽  
Jeong-Bon Kim ◽  
Yoonseok Zang
Keyword(s):  
Financial Reporting ◽  
Normal Level ◽  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Negatively Associated ◽  
Audit Fee ◽  
The Difference

SUMMARY: This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings suggest that auditors’ incentives to deter biased financial reporting differ systematically, depending on whether their clients pay more than or less than the normal level of audit fee. Our results are robust to a variety of sensitivity checks.

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