The Effect of Tax-Related Material Weakness in Internal Controls on the Market Valuation of Unrecognized Tax Benefits

2014 ◽  
Vol 37 (1) ◽  
pp. 129-155 ◽  
Author(s):  
Allison Koester ◽  
Steve C. Lim ◽  
Robert L. Vigeland
Keyword(s):  
Financial Reporting ◽  
Information Quality ◽  
Value Relevance ◽  
Market Value ◽  
Internal Controls ◽  
Positive Relation ◽  
Material Weakness ◽  
Related Material ◽  
Empirical Tests ◽  
Tax Benefits

ABSTRACT This paper examines the effect of tax-related material weakness in internal controls (MWIC) over financial reporting investors' valuation of unrecognized tax benefits (UTBs). Firms are required to record a UTB when their uncertain tax positions are unlikely to be sustained upon tax return audit. While Koester (2012) finds that investors positively value UTBs, we posit that a tax-related MWIC represents information risk in the tax account, reducing the value-relevance of UTBs. We predict that the positive relation between market value of equity and UTBs is attenuated when firms report a tax-related MWIC, and our empirical tests reveal that the relation is completely mitigated in the presence of a tax-related MWIC. Falsification tests confirm that non-tax-related MWICs do not attenuate the positive relation between market value of equity and UTBs, consistent with tax-related MWICs capturing low information quality specific to the tax account.

Growing Pains at Groupon

2013 ◽  
Vol 29 (1) ◽  
pp. 229-245 ◽  
Author(s):  
Saurav K. Dutta ◽  
Dennis H. Caplan ◽  
David J. Marcinko
Keyword(s):  
Financial Reporting ◽  
Intrinsic Value ◽  
Securities And Exchange Commission ◽  
Internal Controls ◽  
Revenue Recognition ◽  
Material Weakness ◽  
Going Public ◽  
Right Of Return ◽  
Growing Pains ◽  
Financial Metrics

ABSTRACT On November 4, 2011, Groupon Inc. went public with an initial market capitalization of $13 billion. The business was formed a couple of years earlier as an offshoot of “The Point.” The business grew rapidly and increased its reported revenue from $14.5 million in 2009 to $1.6 billion in 2011. Soon after going public, prior to its announcement of its first-quarter results, the company's auditors required Groupon to disclose a material weakness in its internal controls over financial reporting that impacted its disclosures on revenue and its estimation of returns. This case uses Groupon to motivate discussion of financial reporting issues in e-commerce businesses. Specifically, the case focuses on (1) revenue recognition practices for “agency” type e-commerce businesses, (2) accounting for sales with a right of return for new products, and (3) use of alternative financial metrics to better convey the intrinsic value of a business. The case requires students to critically read, analyze, and apply authoritative accounting guidance, and to read and analyze communications between the Securities and Exchange Commission (SEC) and the registrant.

The Unintended Consequences of Internal Controls Reporting on Tax Decision Making

2019 ◽  
Vol 42 (1) ◽  
pp. 83-102
Author(s):  
Victoria J. Hansen
Keyword(s):  
Decision Making ◽  
Financial Reporting ◽  
Internal Control ◽  
Unintended Consequences ◽  
Internal Controls ◽  
Corporate Tax ◽  
Material Weakness ◽  
Reporting Requirements ◽  
Internal Control Deficiencies ◽  
The Impact

ABSTRACT This study investigates the impact of the internal controls over financial reporting requirements (ICFR) on the decision making of corporate tax executives. I examine tax executives' decisions to disclose an internal control deficiency by amending a prior year return when the internal control deficiency will be classified as either a significant deficiency or a material weakness. I also examine if tax executives' decisions are impacted by whether amending results in a refund or additional tax due. I find tax executives are less likely to disclose (amend) when the internal control deficiency is classified as a material weakness. When facing a material weakness, 16.7 percent choose not to disclose. Tax executives are also less likely to disclose (amend) when amending results in additional tax due. These results indicate the ICFR requirements may have unintended consequences. If executives do not disclose internal control deficiencies, the reliability of financial reporting is limited.

SOX Section 404 Material Weakness Disclosures and Audit Fees

2006 ◽  
Vol 25 (1) ◽  
pp. 99-114 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Fiscal Year ◽  
Section 404 ◽  
Control Material ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
The Mean

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).

Material Weakness in Internal Controls and Stock Price Crash Risk

2017 ◽  
Vol 35 (1) ◽  
pp. 106-138 ◽  
Author(s):  
Gerald Lobo ◽  
Chong Wang ◽  
Xiaoou Yu ◽  
Yuping Zhao
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Positive Association ◽  
Internal Controls ◽  
Crash Risk ◽  
Significant Relation ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Section 302

We investigate the association between material weakness in internal controls (MW) disclosed under Section 302 of the Sarbanes–Oxley Act of 2002 (SOX) and future stock price crash risk. We argue that relative to firms with effective internal controls, firms with MW have lower financial reporting precision. The lower reporting precision (a) increases divergence of investor opinion with regard to firm valuation and (b) facilitates managers’ withholding of negative information, which increases the information asymmetry between managers and outside investors. We hypothesize that both these effects increase the probability of a future stock price crash. We find empirical evidence consistent with our prediction. In additional analyses, we document that the positive association between MW and crash risk is primarily driven by company level rather than by account-specific weaknesses, increases with the number of material weaknesses, and intensifies during the financial crisis. In addition, we find that both the existence and the disclosure of MW incrementally affect crash risk, and that MW facilitates managers’ withholding of bad news. Finally, we fail to find consistent evidence of a significant relation between MW disclosed under Section 404 of SOX and crash risk.

Asymmetric financial reporting quality and firm size: conditional evidence from an emerging market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
T.G. Saji
Keyword(s):  
Financial Reporting ◽  
Information Quality ◽  
Value Relevance ◽  
Emerging Market ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Listed Firms ◽  
Reported Earnings

PurposeThe mandatory adoption/convergence of IFRS has increased the information quality of reported earnings in equity markets across the globe. The purpose of the study is to explore whether the mandatory convergence of Indian Accounting Standards (Ind AS) with International Financial Reporting Standards (IFRS) affect the financial reporting quality of listed firms in India.Design/methodology/approachThe sample includes 355 non-financial publicly listed firms on National Stock Exchange (NSE) of India with 1,065 firm-year observations. The authors use models similar to Jones (1991), and DeFond and Jiambalvo (1994) to investigate value relevance in the period “1st January 2017 to 31st December 2019”. The study uses the quantile regression (QR) analysis to verify our hypothesis.FindingsThe findings suggest that IFRS convergence process adds value to accounting quality of reported earnings in Indian stock market. The authors' QR estimations produce collaborating evidence on the uneven impact of IFRS across quantiles and the financial reporting quality skewed in favour of investors of high-valued firms.Research limitations/implicationsThe effects of convergence with IFRS in value relevance of financial statements could be reinforced by considering alternate accrual models and incorporating more accounting measures on an expanded sample of stocks from several global markets.Practical implicationsPresently, convergence of local accounting standards to IFRS in India is only partial. The findings may produce useful insights for regulators and standard setters to further increase the value relevance of financial reports whilst they move towards full convergence.Originality/valueThe study explores the information quality of reported earnings of Indian listed firms in post-IFRS convergence period, which is not properly investigated in the literature. Moreover, the research is unique in terms of applying QR estimations to examine the value relevance of IFRS-converged financial reporting from the emerging market perspective.

The Value Relevance of Non-Financial Reporting in Determining the Market Value of Equity

2021 ◽  
Vol 19 (162) ◽  
pp. 320-336
Author(s):  
Elena NECHITA ◽  
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Stock Exchange ◽  
Market Value ◽  
Sustainability Reporting ◽  
Relevant Information ◽  
Net Income ◽  
Linear Regression Models ◽  
Book Value ◽  
The Impact

The value relevance of non-financial reporting is a topic of interest in the academic literature, the results of empirical research being often contradictory. In this context, the research objective is analysing the extent to which the disclosure of non-financial information related to sustainable development in the contents of sustainability reports published by companies listed on the regulated market of the Bucharest Stock Exchange (BSE) is influencing their market value. To conduct the analysis, the present study involves the application of multiple linear regression models developed based on the Ohlson (1995) model for a sample of 34 companies listed on BSE between 2015-2019, forming a number of 166 firm-year observations. The research methodology is based on the association between the firm market value and its equity book value, as well as its net income and other relevant information. Therefore, the value relevance is investigated through their impact on the market value. The findings emphasise an increase in relevance in terms of the influence exerted on the market value of capital as a result of reporting on sustainability issues. Moreover, the study highlights an increase in the impact of equity book value and net income on firms’ market value in the period after the adoption of Directive 2014/95/EUD (2017-2019), compared to the previous period (2015-2016). This research complements the literature in the field of sustainability reporting and value relevance, providing empirical evidence on the importance of publishing nonfinancial information in relation to their market value impact.

Walking a mile in their shoes: user workarounds in a SAP environment

2016 ◽  
Vol 24 (2) ◽  
pp. 185-204 ◽  
Author(s):  
Dawna M. Drum ◽  
Aimee J. Pernsteiner ◽  
Adam Revak
Keyword(s):  
Financial Reporting ◽  
Information Quality ◽  
Accounting Information ◽  
Internal Controls ◽  
Process Standardization ◽  
Content Type ◽  
Quality Of Accounting Information ◽  
The Difference ◽  
The Impact

Purpose The purpose of this paper is to examine workarounds from the perspective of the users of the system, focusing on the outcomes of workarounds and their effect on the quality of accounting information. Design/methodology/approach Interviews were conducted with employees in the accounting functions at two international organizations using SAP for their enterprise system. Results were coded by two experienced researchers and one undergraduate student, and included a categorization of the outcomes of workarounds. Findings The most striking result is the difference in views of workarounds between the two organizations. While workarounds are discouraged by the accounting function at both organizations, one seeks out workarounds and enforces standards while the other has not yet achieved process standardization. Not surprisingly, users view the workarounds of others as very detrimental to the quality of accounting information, but view their own workarounds as critical to maintain quality. Practical implications Organizations should obtain input from system users to document the extent that workarounds are used within the organization to determine the impact on the quality of their financial reporting. Originality/value The focus on outcomes of workarounds is an important shift in the literature, and more work is needed to further refine the categories used in this research, particularly for the effect of workarounds on internal controls and information quality. Additionally, this research surfaced a very strong difference in the actions taken to deal with workarounds, which may be due to organizational cultures.

IFRS Adoption and Value Relevance of Accounting Information: Evidence from a Developing Country

2018 ◽  
Vol 19 (6) ◽  
pp. 1416-1435 ◽  
Author(s):  
Habeeb Mohamed Nijam ◽  
Athambawa Jahfer
Keyword(s):  
Sri Lanka ◽  
Financial Reporting ◽  
Value Relevance ◽  
Accounting Information ◽  
Market Value ◽  
Annual Reports ◽  
Reporting Standard ◽  
International Financial Reporting Standard ◽  
Ifrs Adoption ◽  
The Impact

The purpose of this study is to investigate the impact of International Financial Reporting Standard (IFRS) adoption on value relevance of accounting information in Sri Lanka by comparing value relevance of accounting information in pre- and post-IFRS adoption periods. This study employs Ohlson (1995, Contemporary Accounting Research, 11(2), 661–687) price regression model to explain value relevance of accounting information. It explains market value per share (MVPS) using earning per share (EPS) and book value of equity per share (BVEPS). The pre-IFRS period is designated as 2010 through to 2011, and the post-IFRS period is designated as 2012 through to 2014. The sample comprises 188 firms and 935 firm-year observations which nearly constitute to all firms listed in Colombo Stock Exchange except those not having at least two annual reports before and after the year 2012 and those having extreme and incomplete data. It is found that both BVEPS and EPS significantly and positively explain MVPS during the periods followed by IFRS adoption although EPS was not a significant predictor of MVPS prior to IFRS adoption. Pooled regression with data of both regimes, however, maintains that BVEPS and EPS significantly and positively explain MVPS. Although the overall predictive power of value relevance model improved in the years that followed IFRS adoption, value relevance of BVEPS has declined in post-IFRS implementation. However, the decline in value relevance of BVEPS perhaps has been compensated by improved quality of earning thereby making EPS as a significant predictor of market value of equity in the post-IFRS periods. These findings were not rebutted or changed even at the exclusion of the transitional year of 2012 from the sample. This study contributes to the extant value relevance literature and IFRS studies by investigating the impact of IFRS adoption in a developing economy and for the first time in Sri Lanka.

scholarly journals Pengaruh IFR dan Tingkat Pengungkapan Informasi terhadap Nilai Perusahaan dengan Relevansi Nilai sebagai Variabel Intervening

2021 ◽  
Vol 4 (1) ◽  
pp. 53
Author(s):  
Anisa Anisa
Keyword(s):  
Path Analysis ◽  
Financial Reporting ◽  
Firm Value ◽  
Information Disclosure ◽  
Value Relevance ◽  
Stock Exchange ◽  
Accounting Information ◽  
Market Value ◽  
Sampling Technique ◽  
Fair Disclosure

Abstract This research is conducted to investigate Internet Financial Reporting (IFR) and the level of information disclosure on firm value with the value relevance of accounting information as an intervening variable. This research used secondary data for the period 2008-2019 on banking companies listed on the Indonesia Stock Exchange. The sampling technique used saturated sampling. Tools for processing data using SPSS 22. Data analysis using path analysis. The results showed that IFR and the level of information disclosure had a positive effect on value relevance when tested simultaneously. The higher the application of IFR and the level of information disclosure the higher the value relevance. Meanwhile, IFR and the level of information disclosure have a negative effect on firm value. The results show that the application of IFR is good and the level of disclosure of the information is fair disclosure, but the market reaction is down, as evidenced by the value of the stock market value is smaller than the book value (undervalue). Value relevance has no effect on firm value. The results showed that the value relevance is high, but the market value is low. So that it has no value for investors in the company to get capital gains. This means that accounting information has lost its function to influence investors in making decisions. However, value relevance itself is a variable that intervenes between IFR and the level of information disclosure simultaneously on firm value.Keywords: IFR; value of the firm; value relevance; disclosure. AbstrakPenelitian ini bertujuan untuk menguji pengaruh Internet Financial Reporting (IFR) dan tingkat pengungkapan informasi terhadap nilai perusahaan dengan relevansi nilai informasi akuntansi sebagai variabel intervening. Penelitian ini menggunakan data sekunder periode tahun 2008-2019 pada perusahaan perbankan yang terdaftar di Bursa Efek Indonesia. Teknik pengambilan sampel menggunakan sampling jenuh. Alat untuk mengolah data menggunakan SPSS 22. Analisis data menggunakan analisis jalur atau path analysis. Hasil penelitian menunjukkan IFR dan tingkat pengungkapan informasi mempunyai pengaruh positif terhadap relevansi nilai bila diuji secara simultan. Semakin tinggi penerapan IFR dan tingkat pengungkapan informasi semakin tinggi pula relevansi nilainya. Sedangkan IFR dan tingkat pengungkapan informasi memiliki pengaruh negatif terhadap nilai perusahaan. Hasil penelitian menunjukan bahwa penerapan IFR nya baik dan tingkat pengungkapan informasinya pun fair disclosure, namun reaksi pasar nya turun, ini terbukti dari nilai nilai pasar saham lebih kecil dari nilai bukunya (under value). Relevansi nilai tidak memiliki pengaruh terhadap nilai perusahaan. Hasil penelitian menunjukan bahwa relevansi nilai tinggi, namun nilai pasarnya rendah. Sehingga tidak mempunyai value bagi investor di perusahaan untuk mendapatkan capital gain. Hal ini berarti informasi akuntansi telah kehilangan fungsinya mempengaruhi investor dalam pengambilan keputusan. Namun relevansi nilai sendiri merupakan variabel intervening antara IFR dan tingkat pengungkapan Informasi secara simultan terhadap nilai perusahaan.Kata kunci: IFR; nilai perusahaan; relevansi nilai; disclosure.

scholarly journals Effects of IFRS on Accounting Information Quality: Evidence for Brazil

2017 ◽  
Vol 9 (5) ◽  
pp. 44
Author(s):  
Julio Cesar Araujo Da Silva Junior ◽  
Joao F. Caldeira ◽  
Hudson Da Silva Torrent
Keyword(s):  
Financial Reporting ◽  
Information Quality ◽  
Positive Impact ◽  
Value Relevance ◽  
Accounting Information ◽  
International Standards ◽  
Sufficient Evidence ◽  
Accounting Quality ◽  
Financial Reporting Standards ◽  
The Impact

Understanding the effects of the International Financial Reporting Standards (IFRS) on accounting quality is fundamental for policy makers and financial market players in general. This paper analyzes whether the adoption of IFRS in Brazil has had the impact on accounting informational quality. To this end, a differentiated empirical strategy was adopted based on two steps: first, a matching of voluntary adopters of norms and non-adopters by propensity score is performed to construct control groups. This is important to mitigate the selection bias problem. Second, the measures of value relevance, timeliness and conservatism of accounting information are estimated using panel data models. The period of analysis extends from 2006 to 2010, with annual information for the first stage and quarterly for the second. The results show a positive impact of international standards on the value relevance. However, for the measures of timeliness and conservatism, sufficient evidence was not found to indicate any impact on the group of companies evaluated.

Sign in / Sign up

Export Citation Format

Share Document