Management obfuscation through mandatory financial risk disclosure: evidence from European-listed banks

Purpose This study aims to investigate the readability of financial risk disclosure divulged by listed banks of the first five European countries according to gross domestic product. Design/methodology/approach This study adopts the management obfuscation hypotheses and tests data gathered for a sample of 790 observations from listed banks in Europe covering the 2007–2018 period. This study uses a readability index (Gunning’s fog index) as the dependent variable for measuring the readability of banks’ mandatory financial risk disclosures. Moreover, it relies on a completeness index, discretionary accruals and several control variables for identifying the determinants of risk disclosure readability using ordinary least square regression for testing the hypotheses. Findings The findings show the existence of a positive relation\nship between readability and completeness of risk disclosure. In contrast, a negative relationship exists between readability and banks’ discretionary accruals. Originality/value This study expands the stream of accounting literature analyzing the lexical characteristics of narrative risk disclosure, and, by focusing on the financial risk disclosure of banks, it extends the readability-related debate, which has primarily concentrated on other types of disclosure to date. This study is relevant to regulators and policymakers for fostering reflections as actions for improving the financial risk disclosures readability. This study is also of potential interest for investors to better delve into the questions surrounding risk disclosure.

The role of audit committees in mitigating earnings management: evidence from Jordan

PurposeThis study examines the relationship between audit committees (ACs) and earnings management (EM) in the developing country context of Jordan. In particular, it investigates whether audit committee attributes, including their size, independence, expertise and meetings, are able to restrict discretionary accruals as a proxy for EM.Design/methodology/approachThe generalized least square (GLS) regression was used to study the association between audit committee attributes and discretionary accruals, as a proxy of EM, for a sample of industrial firms listed on the Amman Stock Exchange (ASE) during the period 2012–2020. Data were obtained from the firms' annual reports.FindingsThe regression results indicate that audit committee independence is the only audit committee attribute that seems to improve the effectiveness of ACs, in that it is significantly associated with less EM, while other audit committee attributes that were tested do not show statistically significant associations.Research limitations/implicationsIn emerging markets, like Jordan, ACs may not be an efficient monitoring mechanism; therefore, it can be argued that the prediction made by the agency theory about the role of ACs in mitigating opportunistic EM activities does not necessarily apply to all contexts.Practical implicationsA better understanding of audit committee effectiveness in developing countries could help regulators in these countries assess the impact of planned corporate governance (CG) reforms and to better monitor and enhance the performance of ACs.Social implicationsIn a setting characterized by closely held companies, high power distance and low demand for high-quality CG mechanisms, this study contributes to understanding how this business system operates, and how improving CG mechanisms could be successful in such cultures.Originality/valueThis study investigates the under-researched relationship between audit committee characteristics and EM in developing countries. In so doing, it aims to provide new insights into this relationship within the developing context case of Jordan, including if and how the institutional setting influences this relationship.

Overseeing the external audit function: Evidence from audit committees’ reported activities

Recently, in response to calls for more transparency, many firms have begun reporting the activities undertaken by their audit committees in overseeing the work of the external auditor. We use a composite measure of audit committees’ reported oversight activities for a sample of S&P 1500 firms and examine the extent to which these reported activities are associated with audit quality. We find that when firms’ audit committees report exerting strong oversight, they have higher audit quality as proxied by audit fees, discretionary accruals, the likelihood of meeting or beating earnings benchmarks, and restatements. We also find that the market reacts positively to reports indicating strong oversight, consistent with perceptions of higher audit quality. This study extends prior literature on audit committees by introducing a new comprehensive measure of audit committees’ reported oversight activities and sheds light on how these activities map into audit quality.

Audit partner workload, gender and audit quality

PurposeThe paper aims to investigate the relation between the auditor's workload (LogAPW) and audit quality. Further, it explores whether the presence of a female audit partner (hereafter FEM) influences the LogAPW effect on audit quality.Design/methodology/approachA dataset of 1,629 firm-year observations from 181 companies listed in the NASDAQ OMX Stockholm for the years 2010–2018 has been analyzed. The testable hypotheses have been tested using least squares regressions clustered at the Swedish public-listed companies (client-firm) level.FindingsThe research findings first indicate that overburdened audit partners (APS) are associated with lower-quality audits, consistent with the “busyness hypothesis.” Nevertheless, the adverse association turns to be positive for FEMs, supporting the thesis that FEMs have more tendency, as compared to their male counterparts, to preserve their partnership's position in the public-audit firms. Collectively, these results seem sound, as the results hold unchanged after controlling for the endogeneity concerns and provide the same conclusion for a host of additional measures for both the client-firms' discretionary accruals and the LogAPW.Research limitations/implicationsEven though a lower magnitude of the client-firms' discretionary accruals corresponds to a lower-opportunistic behavior of managers, the research is limited to by which lower values of earnings management reflect a better-quality financial reporting. Given that the empirical analysis has been confined to the Swedish Corporation, the regression results might not be generalizable for other countries with different contextual features.Practical implicationsThe study might participate to the ongoing debate about the introduction of more women to the public-audit firms' elite positions (e.g. partnership) by providing evidence for the favorable female auditor effect on the quality of the client-firms' financial reporting.Originality/valueThe regression results provide a preliminary evidence on how does the presence of a FEM mitigate the inverse relation between the LogAPW and audit quality, which is an issue that has not been examined before.

Corporate social responsibility disclosure, CEO integrity and earnings management: Evidence from the Vietnam stock market

This paper investigates the impact of CSR disclosure and CEO integrity on earnings management. Analyzing a dataset of 750 firm-year observations of 150 Vietnam listed firms during the period from 2014 to 2018, the paper shows a significant positive effect of CSR disclosure on earnings management and a significantly negative impact on the CEO integrity on earnings management. The result confirms the previous studies that companies with more CSR disclosure are likely to engage in earnings management through increasing discretionary accruals. This suggests that managers may use CSR reporting to camouflage their earnings-management activities. Furthermore, the findings add to the literature of determinants of earnings management by offering an insight into CEO integrity and come to the proposal of enhancing the CEO role to control the earnings activities.

The impact of audit quality on earnings management and cost of equity capital: evidence from a developing market

Purpose This study aims to examine the effects of audit quality on earnings management and cost of equity capital (COE) considering the impact of two owner types: government ownership and foreign ownership. Design/methodology/approach The study uses a panel data set of 236 Vietnamese firms covering the period 2007 to 2017. Because the two main dependent variables of the COE capital and the absolute value of discretionary accruals receive fractional values between zero and one, the paper uses the generalised linear model (GLM) with a logit link and the binomial family in regression analyses. The paper uses numerous audit quality measures, including hiring Big 4 auditors or the industry-leading Big 4 auditor, changing from non-Big 4 auditors to Big 4 auditors or the industry-leading Big 4 auditor, and the length of Big 4 auditor tenure. Big 4 companies include KPMG, Deloitte, EY and PwC, whereas the non-big 4 are the other audit companies. Findings The study finds a negative relationship between audit quality and both the COE capital and income-increasing discretionary accruals. The effects of audit quality on discretionary accruals and the COE capital depend on the ownership levels of two important shareholders: the government and foreign investors. Foreign ownership is negatively associated with discretionary accruals; however, the effect is more pronounced in the sub-sample of state-owned enterprises (SOEs), the firms where the government owns 50% or more equity, than in the sub-sample of Non-SOEs. Originality/value To the best of the knowledge, no prior similar study exists that used the GLM with a logit link and the binomial family regression. Global investors may be interested in understanding how unique institutional settings and capital markets of each country impact the financial reporting quality and cost of capital. Further, policymakers of developing markets may have incentives to improve the quality of financial reporting and reduce the cost of capital which should result in attracting more foreign investments.

ARE CORPORATE SOCIAL RESPONSIBILITY ACTIVE FIRMS LESS INVOLVED IN EARNINGS MANAGEMENT? EMPIRICAL EVIDENCE FROM CHINA

This paper investigates whether corporate social responsibility active (CSR active) firms operate dissimilarly from other firms in their financial reporting. Specifically, we examine whether the corporate social responsibility (CSR) attitude of a firm sways its reporting incentives, in respect of the extent of earning management. To test our predictions, we use a sample of 25,861 year-company observations, corresponding to 3538 Chinese listed companies, for the period 2009–2019. We find a significant positive association between CSR activity and earning management assessed by the level of discretionary accruals in Chinese listed companies. Moreover, we document that Chinese CSR active firms engage more in earnings management through discretionary accruals than CSR inactive firms. These findings are consistent with the opportunistic financial reporting hypothesis: advances in CSR used by managers to safeguard their position by evading scrutiny from stakeholder activists. This study contributes to the growing awareness among investors, stakeholders and researchers that we should distinguish between CSR active firms and socially responsible firms and that being the latter entail something more than just mechanically produce CSR reports.

The effects of corporate governance mechanisms on earnings management: Empirical evidence from Moroccan listed firms

Purpose: The purpose of the study is to systematically review and examine the effectiveness of corporate governance mechanisms in restraining earnings management among the listed firms of the Casablanca Stock Exchange. Research methodology: In this study, we used the modified Jones model to calculate discretionary accruals. Our sample comprises 27 firms covering the period from 2016 to 2018, analyzed by the EGLS estimator. Results: Our empirical results show that gender diversity, board size, and audit committee independence reduce the managers' discretion. Simultaneously, we found a significantly positive association between earning management and different corporate governance characteristics such as CEO duality, institutional investor ownership, and family ownership. We do not find any evidence that audit committee size, ownership concentration, and managerial ownership significantly influence discretionary accruals. Limitations: This study's main limitation is that we did not address the direction of discretionary accruals, which does not allow us to detect the motivational aspects behind earnings management. Contribution: The results of this study will help Moroccan authorities in their formulation of an appropriate regulatory framework because very few studies have been conducted in this area in the case of the Moroccan listed companies, especially with a large set of governance variables as our empirical model. Keywords Accruals; Board of directors; Corporate governance; Earnings management; Ownership structure

Does the IFRS improve earnings quality? A comparison of Turkish GAAP and IFRS

Purpose The purpose of this study is to reveal the effect on earnings quality of switching to International Financial Reporting Standards (IFRS) from Turkish generally accepted accounting principles (GAAP) by comparing two sets of financial statements based on Turkish GAAP and IFRS. Design/methodology/approach This study is based on mathematical modeling. The variables (total assets, net income, total accruals, cash receivables, return on assets and size) in the models are core to the quantitative research that examines the relationship between them. In this study, the total accruals are computed based on the indirect approach, and the prediction error of the model represents discretionary accruals that reflect earnings management. The data set includes financial data prepared under IFRS and Turkish GAAP. The univariate and multivariate analyses are conducted by SPSS. Findings The results of this study indicate that IFRS does not cause any significant differences in total assets, but the net income under IFRS is larger compared to that under the Turkish GAAP. It is also found that while there is no significant difference in total accruals, there is a difference in discretionary accruals. In other words, Turkish firms use income-reducing discretionary accruals when adopting IFRS. Originality/value This study provides more insights into the effect of IFRS on earnings quality. It also provides evidence of the effect of accounting culture on IFRS adoption. As a code-law country in Turkey, publicly traded firms have to prepare financial statements based on both Turkish GAAP, which is rule-based and restricts management decisions with strict rules, and the principle-based IFRS which leaves more room to manipulate. To the authors’ knowledge, this is the first study that reveals the effect of accounting standards on earnings management by comparing two sets of financials of the same period prepared under different standards.