Asymmetric Monitoring of Quarterly Financial Statements by Big 4 Auditors and the SEC's Timely Review Requirement

2021 ◽  
Author(s):  
Carol Callaway Dee ◽  
Ayalew Lulseged ◽  
Tianming Zhang
Keyword(s):  
Earnings Management ◽  
Earnings Quality ◽  
Financial Statements ◽  
Seasoned Equity Offerings ◽  
Open Market ◽  
Equity Offerings ◽  
Audit Firm ◽  
Quarterly Earnings ◽  
Big 4 ◽  
Timely Review

We investigate if Big 4 firms are asymmetrically more effective than non-Big 4 firms in monitoring income-increasing vs. income-decreasing quarterly earnings management. We also study the Securities and Exchange Commission's (SEC) 2000 requirement that audit firm reviews of quarterly financial statements be completed prior to their filing with the SEC ("timely reviews"). We find Big 4 firms are more effective than non-Big 4 firms in curbing income-increasing earnings management around seasoned equity offerings (SEOs), but not income-decreasing earnings management around open market repurchases (OMRs). In the post-2000 period, after the SEC's mandate for timely reviews began, we find income-increasing earnings management around SEOs declined significantly, and this decline is primarily driven by the clients of Big 4 firms. We provide evidence that timely quarterly reviews improve earnings quality, especially when companies have incentives to engage in income-increasing accruals and are reviewed by Big 4 firms.

scholarly journals Earnings management and seasoned equity offerings: evidence from Taiwan started Go Incubation Board for Startup and Acceleration firms

2020 ◽  
Vol 17 (2) ◽  
pp. 183-197
Author(s):  
An-An Chiu ◽  
Shaio Yan Huang ◽  
Ling-Na Chen ◽  
Wei-Hua Lin
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Small And Medium Enterprises ◽  
Large Body ◽  
Seasoned Equity Offerings ◽  
Negative Consequences ◽  
Equity Offerings ◽  
Accounting Firms ◽  
Big 4 ◽  
Economic Journal

Although a large body of empirical research focuses on listed companies, less is done regarding small and medium enterprises. Under the authorities’ support, Taipei Exchange (TPEx) started Go Incubation Board for Startup and Acceleration Firms (GISA) in January 2014. This research yields insight into earnings management activities around seasoned equity offerings (SEO) based on GISA firms in Taiwan and the effectiveness of external corporate governance. Data for the study come from the GISA Market Observation Post System of TPEx and Taiwan Economic Journal. The results reveal that GISA firms with the incentives of raising funds are prone to upward accrual-based earnings management during SEO to avoid long-term negative consequences. Especially, firms with paid-in capital more than TWD (NT$) 30 million, higher fundraising amounts, or smaller-sized firms, tend to increase discretionary accruals. Finally, Certified Public Accountants (CPAs) and Big 4 accounting firms effectively serve as external corporate governance on mitigating earnings management. This study makes some contributions to GISA literature. First, expands the prior research, the different earnings management level before and listed on GISA, to the firms listed on GISA. Second, link up the relationship between the SEO and earnings management of GISA in Taiwan. Finally, it provides several contributions to regulators, for instance, the effectiveness of the counseling system provided by CPAs or Big 4 accounting firms. Also, the CPAs and Big 4 accounting firms serve as supervisors on corporate governance.

The effect of outside blockholders on earnings management around seasoned equity offerings in French listed companies on the SBF120

2019 ◽  
Vol 17 (3) ◽  
pp. 449-467
Author(s):  
Abir Jerbi Maatougui ◽  
Khamoussi Halioui
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Financial Statements ◽  
Discretionary Accruals ◽  
Seasoned Equity Offerings ◽  
Empirical Literature ◽  
Individual Investors ◽  
Equity Offerings ◽  
Content Type ◽  
The Impact

Purpose The purpose of this study is to test the effect of the presence of outside blockholders on earnings management around seasoned equity offerings (SEOs). Design/methodology/approach Given that SEO can be one of motivations for earnings management, the authors examined the role of outside blockholders in monitoring the opportunistic behavior of managers around 50 SEOs realized by 45 French companies during the 2005-2009 period based on panel data model. Findings The authors found that issuing firms are used for upward earnings management during the pre-offering period. Indeed, the discretionary accruals know a continuous evolution during the three years preceding SEO and peaked in the year prior to the SEO. This result led us to examine the role played by the outside blockholders on earnings management. The results provided empirical evidence that the presence of outside blockholders in SEO firms is able to restrain earnings management practices. Research limitations/implications This study allows to inform investors that French issuing firms are less overvalued in the presence of outside blockholders than in their absence. As a result, investors have an interest in participating in the SEO of firms that hold outside blockholders in their capital structure. Again, based on this study, users of financial statements can trust the reliability of the financial statements published by companies with outside blockholders because of the careful control exercised by these shareholders in the process of producing financial information. However, similar to how any research may suffer from some limitations, this work has two major limitations. Firstly, the authors examined the impact of outside blockholders on earnings management without distinguishing between the different types of blockholders (such as individual investors, pension funds, mutual funds, banks and trusts). Secondly, they have estimated the discretionary accruals by referring to a single model (Kothari et al., 2007). However, the use of two or more models for estimating accruals will lead to more robust results. Originality/value The empirical literature emphasizes the monitoring role played by these shareholders on earnings management. However, it does not distinguish between the circumstances when the monitors either lose or win from exaggerations. This research completes this lack by studying the impact of outside blockholders on earnings management around SEOs.

scholarly journals The adoption of IFRS in publicly listed enterprises of high and medium capitalization and the impact of the size of the audit firm in Greece

2014 ◽  
Vol 11 (4) ◽  
pp. 707-716 ◽  
Author(s):  
Michail Pazarskis ◽  
Andreas Koutoupis ◽  
George Drogalas ◽  
Konstantinos Tsakiris
Keyword(s):  
Stock Exchange ◽  
Accounting Standards ◽  
Financial Statements ◽  
International Accounting Standards ◽  
Audit Firm ◽  
The Past ◽  
Big 4 ◽  
The Difference ◽  
Athens Stock Exchange ◽  
The Impact

In 2002, developments in the global markets during the past decades have highlighted the need for common accounting standards among companies all around the world so as the financial statements to be comparable. From 2005 onwards the Greek Companies listed on the Athens Exchange was an accounting “revolution” of the 21st century, given the difference in philosophy between the Greek GAAP and the International Accounting Standards-IAS (next, IFRS). This study evaluates the implementation of IFRS on the financial statements of Greek publicly listed companies of high and medium capitalization, which are companies that are included in the FTSE 20 and FTSE 40 indexes of the Athens Stock Exchange-ASE, respectively. Also, for those firms we examined the effect of the size of the audit firm. The research was conducted based on the analysis of thirteen ratios. According to our analysis only few of the ratios have changed significantly. Finally, regarding the impact of the size of the audit firm the results reveal controversy with the present bibliography concerning “Big 4” in comparison with “non-Big 4” firms in Greece

scholarly journals The Effect of Analyst Coverage on the Relationship between Seasoned Equity Offerings and Investment Efficiency From Korea

2018 ◽  
Vol 10 (8) ◽  
pp. 2704 ◽  
Author(s):  
Hyun Oh ◽  
Woo Kim
Keyword(s):  
Earnings Management ◽  
Significant Negative Correlation ◽  
Seasoned Equity Offerings ◽  
Investment Efficiency ◽  
Allocation Of Resources ◽  
Equity Offerings ◽  
Efficient Operation ◽  
Analyst Coverage ◽  
External Auditor ◽  
The Relationship

In order for a firm to remain sustainable, it must establish a strategy that is appropriate to its changing environment. One of these strategies is that the procurement of capital and the efficient operation of the procured capital are directly linked to the sustainability of the firm. This study empirically analyzes the relationship between seasoned equity offerings (hereafter SEO) and investment efficiency. We examine the investment efficiency of firms that have SEO and those that do not, and then analyze the effect of analysts on the relationship between SEO and investment efficiency. The empirical results of this study are as follows. First, there is a significant negative correlation between SEO and investment efficiency, meaning that firms with SEO have lower investment efficiency than firms without SEO. Second, the interaction variable between SEO and analyst participation showed a significant positive correlation with investment efficiency, meaning that the more active the analyst, the more any ineffective investment that is derived from managers’ opportunistic earnings management is suppressed. The results show that the efficient operation of procured capital is important for the sustainability of the firm, and that the analyst plays an important role in monitoring the efficient allocation of resources as an external auditor.

Large institutional investors and the pressure to manage earnings surrounding seasoned equity offerings

2019 ◽  
Vol 61 (2) ◽  
pp. 402-420
Author(s):  
Mouna Njah ◽  
Raoudha Trabelsi
Keyword(s):  
Earnings Management ◽  
Institutional Investors ◽  
Information Quality ◽  
Management Practices ◽  
Seasoned Equity Offerings ◽  
Equity Offerings ◽  
Content Type ◽  
Multivariate Tests ◽  
Regulated Firms ◽  
Investor Activism

Purpose The purpose of this paper is to investigate the monitoring role exerted by large institutional investors and their ability to restrict the earnings management practices conducted around seasoned equity offerings (SEOs). Design/methodology/approach The sample includes 130 French SEOs by non-regulated firms during 2004-2015. The authors used various cross-section, univariate and multivariate tests using several proxies for earnings management. They attempt to highlight that firms issuing SEOs are more able to manage earnings around SEOs owing to the predominance of large speculative institutional investors. Noteworthy, the monitoring role exerted by sophisticated institutional investors turns out to restrict the earnings management opportunities surrounding a SEOs event. Findings The results show that the issuing firms tend to manipulate earnings in an upward trend with respect to the year preceding the SEO offer. Thus, a special attention has been drawn on the fact that the issuing companies strive to prove their ability to manage earnings around SEOs in presence of large speculative institutional investors. Practical implications The results provide useful insights into the role different types of institutional investors play in terms of enhancing both governance and accounting information quality. Originality/value This paper adds to the literature questioning the evidence that institutional investor activism frequently engage in misleading earnings management around corporate events. The authors provide an alternative explanation for earnings management around SEOs in the French context.

scholarly journals Examining the Decision to Opt In versus Opt Out of Section 107 of the JOBS Act of 2012: Determinants and Consequences

2019 ◽  
Vol 8 (2) ◽  
pp. 108
Author(s):  
Jason Bergner ◽  
Marcus R. Brooks ◽  
Binod Guragai
Keyword(s):  
Earnings Management ◽  
Transition Period ◽  
Accounting Standards ◽  
Financial Statements ◽  
Least Square ◽  
Ordinary Least Square ◽  
Big 4 ◽  
Opt Out ◽  
Ordinary Least Square Regression ◽  
Jobs Act

The Jumpstart Our Business Startups Act of 2012 (hereafter, JOBS Act) creates a new category of firms, referred to as “Emerging Growth Companies” (hereafter, EGCs). Section 107 of the JOBS Act, titled “Opt-In Right for EGCs,” gives EGCs the choice to take advantage of an extended transition period for complying with new or revised accounting standards. In other words, an EGC can choose to delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. Using a logistic regression approach with hand-collected data, we examine the underlying firm characteristics associated with EGCs’ choice of opting in or out of the accounting standards exemption, as provided by Section 107 of the JOBS Act. Using additional ordinary least square regression analyses, we further examine whether the choice of opting in or out is associated with earnings management and financial statement restatement behavior. Our results suggest that EGC firms designated as “smaller reporting companies” are more likely to choose to delay the adoption of a new or revised accounting standard (i.e., opt in). Our findings also show that EGCs that employ Big 4 auditors are more likely to opt out. We further find that EGCs that choose to opt out are less likely to engage in earnings management behavior, proxied by the absolute value of abnormal accruals, and are less likely to restate their financial statements. Taken together, our findings suggest that EGCs that choose to opt out of Section 107 produce higher quality financial statements.

The effect of the need for subsequent seasoned equity offerings on earnings management motivation

2019 ◽  
Vol 18 (1) ◽  
pp. 25-52
Author(s):  
Guannan Wang ◽  
Moshe Hagigi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Seasoned Equity Offerings ◽  
Common Stock ◽  
Equity Offerings ◽  
Content Type ◽  
Equity Issues ◽  
Total Magnitude ◽  
Prior Literature ◽  
Reported Earnings

PurposeMost prior literature focuses on how managers’ immediate needs affect their current earnings management. The purpose of this paper is to expand this body of literature by investigating the managerial motivation in a multi-period setting. The authors believe that managers’ incentive to engage in earning management around current equity issues is not only determined by the companies’ immediate need, but that it is also determined by their longer-term financing need.Design/methodology/approachThe authors examine all issuances of common stock, whether they are issued as seasoned equity offerings or whether as a reissuance of previously repurchased stock. They believe that the motivations for earnings management are similar for all these various stock-issuance events, which result in an increase in the number of outstanding common stock items.FindingsThe results of this paper reveal that those firms with less of a need for subsequent equity issuances are more likely to engage in “income- increasing” earnings management before their equity issuances. Conversely, equity issuers with more of a need for subsequent equity issuances would be more concerned about the potential impact of current earnings management on their future reported earnings and, therefore, would be less likely to manage earnings.Originality/valueThis paper contributes to the literature by extending the findings of the prior literature, showing that managerial discretion does not only affect the total magnitude of earnings management, but that it also impacts the timing of the earnings management activities. Insights gained from our research may contribute to the literature and enable a better understanding of firms’ financial reporting strategy from a longer-run view.

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