Earnings Management of Insolvent Firms and the Prediction of Corporate Defaults via Discretionary Accruals

Studies on the characteristics of insolvent firms’ earnings management are critical, as the ripple effects of a firm’s opportunistic accounting and insolvency on society can be widespread and significant. This study divides a dataset of unlisted firms into four groups (large firms that have received external audits; small- and medium-sized enterprises (SMEs) that received external audits; SMES that did not receive external audits; private businesses that did not receive external audits) and analyzes whether there are differences in terms of the discretionary accruals between groups. This study also uses discrete time logit regression to determine if the use of discretionary accruals is predictive of whether unlisted firms would become insolvent. This study used several models (a modified Jones model, a Kothari model, and performance matching model by ROA group) to measure discretionary accruals, which was used as a proxy for earnings management. The results of our study showed that, in the one year prior to insolvency, discretionary accruals were largest among non-externally audited private firms, followed by those of non-externally audited SMEs, externally audited SMEs, and externally audited large firms. The discretionary accruals of non-insolvent firms were larger than those of insolvent firms from the period of one year to three years preceding insolvency, and this difference increased as insolvency approached. The discretionary accruals were shown to have the ability to predict whether or not firms would become insolvent in two to three years before the occurrence of insolvency, but they did not support prediction for one year before the occurrence of insolvency. The findings suggest that additional accounting information should be used together to predict insolvency for unlisted firms.

The Effect of External Audits: Evidence from Voluntary Audits of Hedge Funds

Using the setting of hedge funds, we document two important merits of external audits. We find that incentive fee rates (i.e., performance-based compensation to fund managers) are higher for audited funds than for unaudited funds. In contrast, management fee rates (i.e., fund-size-based compensation to fund managers) do not differ depending on audit status. We also find some evidence that audited funds attract more capital inflows from investors than unaudited funds do after funds report high performance. Our findings indicate that hedge fund investors appreciate the value of external audits.

Procedural Factors Influencing Forest Certification Audits: An Empirical Study in Romania

In the recent decades, forest certification based on third-party external audits has gained momentum. This type of certification has been developed as a monitoring tool aimed at improving governance in corporate environmental management and differentiating products in the increasing environmentally sensitive markets. Although the scholarly literature has extensively analyzed the adoption and dissemination of forest certification, the findings of the external audits and certification practices remain under researched. On the basis of the analysis of 105 audit reports issued by accredited third-party certification bodies in Romania, this article sheds light on procedural factors that have significant influence on the characteristics of non-conformities (NCs) identified by Forest Stewardship Council (FSC) third party audits. Our research offers empirical evidence that certain procedural factors such as the type of assessment, auditing days, number of auditors, or the presence of foreign members in an audit team have a significant influence on the auditing process outcomes: number and grade of non-conformities, standard references, or methods of NC detection. The study opens interesting new lines of research—the influence of procedural or other types of contextual factors on certification outcomes—and provides indications on the effectiveness of the certification procedures and guidelines in certification process quality assurance.

The Effect of Blockchain Technology in the Initial Stages of Auditor Investigation in the Halal Supply Chain

Each country in Asia will apply a halal assurance system (HAS) to get a halal certificate and logo. The problem with HAS in Asia is that every country has its own halal standard rules. This problem raises a trade dispute because imported products cannot enter another state market due to different halal standards. So, we need the same halal standards for every country in Asia, one of which requires transparency in each country's HAS. However, the HAS documentation process currently has several shortcomings, such as document fraud and transparency during internal and external audits. This chapter aims to discuss blockchain technology's development in solving internal audit problems to improve its performance, and blockchain technology can improve efficiency, transparency, and traceability of original documents, thereby enhancing the overall halal certification process. And it is hoped that this research will be taken into consideration for those who will make the same halal standards for every country in Asia.

EXTERNAL AUDIT AND FISCAL TRANSPARENCY: AN EMPIRICAL ANALYSIS

The aim of this study is to examine the socio-economic, institutional, and political factors affecting external audit, with the use of an international comparison. In addition, the effect of external audit on fiscal transparency was analyzed. Although many empirical studies in the literature handle the factors affecting fiscal transparency, there are only a few empirical studies that focus on the factors affecting external audit and the impact of external audits on fiscal transparency. However, there is not one study dealing with the factors affecting external audit through making use of international comparisons. In this study we attempt to discover the factors affecting external audit and examine, using an international comparison, the impact of external audits on fiscal transparency. The Open Budget Survey published by the International Budget Partnership in 2017 was used to measure external audits. In the study, consisting of 115 countries, the effect of democratization level, government debt level, government balance, gross domestic product (GDP) per capita, legislative budget oversight, the SAI's audit diversity and the effect of a judicial model of the SAI on external audit were investigated. The effect of external audit on fiscal transparency is tested for 115 countries using the Two-Stage Least Squares Method (2SLS). According to the analysis, it is determined that the level of democratization, gross domestic product (GDP) per capita, budget oversight of the legislature, audit diversity of supreme audit institution and judicial model of supreme audit institution have significant and positive effects on external audit. It is also determined that external audit has a significant and positive effect on fiscal transparency.

External control mechanisms and red tape: testing the roles of external audit and evaluation on red tape in quasi-governmental organizations

Over the past three decades, red tape has been a significant issue in public administration. Several prior studies have discovered the external origins of red tape, noting the roles of external control on increased red tape. Despite the empirical studies, it remains unclear how the particular tools of external controls, such as external audits and evaluations, are associated with employees’ perception of red tape. To answer this question, we measured different external control mechanisms in quasi-governmental organizations in Korea and investigated their effects on red-tape perception. The results show that external audits increase employees’ red-tape perception, whereas external evaluations decrease their perception. However, the positive function of evaluation disappears under a high level of government control because both external audits and evaluations increase red-tape perception when more government control is perceived. Points for practitioners This study sheds theoretical light on the negative impacts of external control in rule management. The impacts of audit and evaluation on red tape are empirically identified in public organizations. Practitioners need to realize that the use of audit and evaluation may produce unintended effects that increase ineffective rules even though such control mechanisms are designed to check mismanagement in quasi-government organizations.

The Impact of Audit Committees on the Realization of an Integration Relationship between Internal and External Audit when Conducting Audits. A Study on Public Shareholding Corporations

This study aims to investigate methods of achieving an integrating relationship between internal and external audit when conducting audit procedures in Jordanian public shareholding corporations, as well as investigate the impact of audit committees achieving such a relationship since an effective internal audit effective the external auditor`s estimations regarding control risks. The study concludes that all aspects of the realization of an integration relation between internal and external audit have achieved a fair ratio exceeding 60%. Spearman test was used to show the nature of the relationship between the internal and external audit. The test results showed that the relationship between these methods is vulnerable in Jordanian public shareholding corporations, and that audit committees have no statistically significant impact on achieving an integrating relationship between internal and external audits in conducting audit in Jordanian public shareholding corporations, since the ratio of audit committees interpretation (R2) which amounted to (.145) of the dependent variable difference ( achieving an integrating relationship between internal and external audit in conducting audit) is relatively low, and that the P- value derived for this relation amounted to (.615) which is more than (5%) .

Collecting evidence on the use of parliamentary oversight tools: A South African case study

Background: Parliament, through its oversight function, plays a central role in holding the executive to account. In South Africa’s 2014 Defence Review policy document, it was stated that the ‘Defence Force is in a critical state of decline’. This brings about the question whether the South African Parliament effectively held the executive to account regarding developments around defence.Objectives: The article aims to gather evidence on the use of oversight tools by the South African Parliament over a 20-year period, within the post-1994 democratic dispensation, in order to determine the broader trajectory of parliamentary defence oversight.Method: To determine the trajectory of oversight, this article gathered evidence on the use of internationally recognised parliamentary oversight tools by South Africa’s two parliamentary defence committees from 1994 to 2014. The period allows for a 20-year review of oversight of defence, inclusive of four full parliamentary terms. Evidence was collected on parliamentary debates, questions, special inquiries, oversight visits and the use of external audits as oversight tools.Results: The article found that tools were used with varying degrees of success. Results for research on each oversight tool is discussed.Conclusion: Based on evidence on the use of oversight tools, this article concludes that over a 20-year period there was a declining trajectory in parliamentary oversight of the defence portfolio. The proven applicability of the criteria utilised in this article can serve to inform evaluations of the effectiveness of parliamentary oversight, specifically at committee level.