A financial restatement, media attention and stock idiosyncratic risk in the Chinese stock market

PurposeThis paper aims to enrich the scope of the influence of media reports on the stock risk, and it also provides a path to support the research on the relationship between media reports and idiosyncratic risks in the stock market.Design/methodology/approachThe authors select financial restatement samples of listed companies in China from Jan 2015 to Dec 2017 to explore the impact of the financial restatement on the idiosyncratic risk of stocks. Further, the financial restatement that has more media attention may play a more significant role in promoting the idiosyncratic risk.FindingsThe authors found that the financial restatement of listed companies has a significant positive effect on the idiosyncratic risk of stocks. Specifically, the idiosyncratic risk changed five months before the restatement. After the restatement, the idiosyncratic risk increased by 83.47 in five days then decreased slowly, which lasted about one year. The restatement caused by sensitive issues and legal issues has a greater impact on the idiosyncratic risk. Both current restatement and delayed restatements will increase the idiosyncratic risk of stocks, but the impact of the latter is higher than the former.Research limitations/implicationsPossible deficiencies in the paper are that the number of restatements caused by major accounting errors is low. Therefore, no regular conclusions were drawn on the impact of the financial restatement caused by major accounting errors.Practical implicationsThe conclusions provide a basis for targeted supervisory measures on the restatements of listed companies. The increase in financial restatements is closely related to the lack of governance mechanisms in the stock market. For investors, although the mystery of idiosyncratic volatility exists significantly in the market, the company's valuation level will affect the relationship between the idiosyncratic risk and expected return. Investors should pay attention to the intrinsic value of the company and should not blindly pursue stocks with a low idiosyncratic risk.Originality/valueThese conclusions may enrich the scope of the influence of media reports on the stock risk and also provide a path to support the research on the relationship between media reports and idiosyncratic risks in the capital market.

Application of selected data mining techniques in unintentional accounting error detection

Research background: Even though unintentional accounting errors leading to financial restatements look like less serious distortion of publicly available information, it has been shown that financial restatements impacts on financial markets are similar to intentional fraudulent activities. Unintentional accounting errors leading to financial restatements then affect value of company shares in the short run which negatively impacts all shareholders. Purpose of the article: The aim of this manuscript is to predict unintentional accounting errors leading to financial restatements based on information from financial statements of companies. The manuscript analysis if financial statements include sufficient information which would allow detection of unintentional accounting errors. Methods: Method of classification and regression trees (decision tree) and random forest have been used in this manuscript to fulfill the aim of this manuscript. Data sample has consisted of 400 items from financial statements of 80 selected international companies. The results of developed prediction models have been compared and explained based on their accuracy, sensitivity, specificity, precision and F1 score. Statistical relationship among variables has been tested by correlation analysis. Differences between the group of companies with and without unintentional accounting error have been tested by means of Kruskal-Wallis test. Differences among the models have been tested by Levene and T-tests. Findings & value added: The results of the analysis have provided evidence that it is possible to detect unintentional accounting errors with high levels of accuracy based on financial ratios (rather than the Beneish variables) and by application of random forest method (rather than classification and regression tree method).

DETECTION MODELS FOR UNINTENTIONAL FINANCIAL RESTATEMENTS

The aim of manuscript is to analyze and identify determinants of honest accounting errors leading to financial restatements based on data from SEC database and from annual reports. Reason for this study is that accounting errors are expensive for companies that need to change already published financial statements and have impact on company reputation and stock price. Most of authors focus on prediction of accounting frauds and financial restatements remain in the background of research. This study initially tests existing accounting fraud detection model of Beneish on a sample of 40 financial restatement companies over 10 years and develops two new pioneer prediction models, one based on linear discriminant analysis (LDA) and another based on logistic regression. In testing dataset, LDA model has achieved accuracy 70.96%, specificity 25.00% and sensitivity 79.83% and logistic regression model has achieved accuracy 62.22%, specificity 41.66% and sensitivity 66.67%, performance of both models is better than existing Beneish model or other studies in this field. Developed models can be widely used by both internal and external users of financial statements, who would like to determine if financial statements of analyzed company include accounting errors or not, thanks to easily interpretable results in equation form.

Correction of Accounting Errors through Post Balance Sheet Event Analysis for Romanian Companies

The study scope is to present the typology of the events analyzed through our research and their impact on the quality of reported financial data. The objectives of the study are to analyze the vulnerability of enterprises according to methodological criteria such as risks and calculations of the risk profile, as well as to establish the necessary measures for correcting the accounting errors based on the conclusions drawn from the analysis. The method used is prospective, financial analysis of the data taken from the financial statements of the companies included in the sample, dynamic for a period of 6 years (2011–2016). Based on the method used, a risk model has been conceptualized to identify the vulnerabilities and risks reported in the financial statements and to define a company risk profile based on which error correction measures can be adopted. Considering the amplitude of the necessary check-ups and the methodology of the imposed accounting treatments, we believe that the topic addressed is a real area of interest for the professional accountants because it organizes the application procedures and limits the impact of errors on the quality of financial reporting in Romania.

Relationship between legislation and accounting errors from the point of view of business representatives in the Czech Republic

Research background: Previous studies have demonstrated that providing relevant information to users is positively affected by higher quality of accounting standards and adhering to ethical rules and accounting principles by accounting professionals. On the other hand, there are a lot of cases when the law was broken. The most common reason for committing financial statement´s fraud include in-creasing stock prices, getting loans from bank or avoiding payment of taxes. Purpose of the article: The aim of this paper is to evaluate both the relationship between using of legislation and accounting errors rate in the financial statements as well as the possible using of creative accounting from the point of view of enterprises and non-profit organizations in the Czech Republic. Methods: Among the quantitative research methods the questionnaire was used. The questionnaires were sent out to randomly 201 selected enterprises and non-profit organization. The survey was conducted from September 2017 to the end of January 2018. The data were analyzed by means of the tools of descriptive statistics and the chi-square goodness of fit test. The research questions sought to investigate whether Czech Accounting Standards helped in all areas of accounting and reporting and avoiding of errors in financial statements, and whether the respondents encountered fraudulent procedures in compiling financial statements. Findings & Value added: The results indicated that using Czech Accounting Standards was perceived as a useful tool in solving all situations in areas of accounting and avoiding accounting errors. Moreover, it was proved that the volume and frequency of errors were not significant in financial statements.

The role of electronic auditing in the detection of fraud and accounting error the case study of the Bank of Khartoum for the period from 2008 to 2018: دور المراجعة الإلكترونية في الكشف عن الغش والخطأ المحاسبي دراسة حالة بنك الخرطوم للفترة من 2008 – 2018م

This study dealt with the electronic review and its statement in reducing fraud and accounting errors, as well as clarifying how to reduce the chances of committing mistakes and fraud to establish controls and procedures that prevent this, the study of the case of Bank of Khartoum. The problem of the study in the proper role of electronic auditing in reducing fraud and accounting errors, as well as in ignorance of accounting principles and assumptions and the non-use of electronic technology in accounting, which can help to a large extent in reducing fraud and accounting errors and the introduction of electronic technology in the review process. The study followed the historical approach through reviewing the previous studies as well as the inductive method and analytical descriptive approach using the statistical packages of social sciences (SPSS) to achieve the objectives of the study. The study data were collected by questionnaire distributed to the branches of Bank of Khartoum in the capital, and reached a number of results, the most important of which is the existence of an effective system of electronic auditing leads to the discovery of fraud and errors. There is no statistically significant relationship between the effective internal audit system and the degree of fraud and errors detected by the auditor. And that the examination and evaluation of the internal control system has a positive impact on the process of electronic auditing and effectiveness in detecting fraud and accounting error in the bank. Through the results of the study, the researcher reached a number of recommendations, including the need to apply the electronic review because it helps the auditor to expand the sample size, which enhances confidence in his neutral opinion in the financial statements.

The computation of taxable income when accounting numbers are not reliable

Purpose The purpose of this paper is to discuss the causes that justify the application of presumptions in corporate income taxation. The authors focus on motives showing a connection to errors or fraud in the recognition of operations by the financial accounting system. The research question can be framed as follows: How to define the frontier between reliable accounting records and unreliable information, the latter rendering presumptions as an admissible way of taxing income? Design/methodology/approach The research design of this paper rests on two analytical steps based on the legal research method. The first step enquires, at the accounting level, how to define and quantify errors that render accounting statements inappropriate to assess firms’ performance and compute taxable income. The second step explores the practical application of presumptive tax concepts by Portuguese courts, to offer some criteria that can function as guidelines to firms and tax auditors. Findings The judgment about the boundaries of accounting errors that allow the use of presumption-based taxation is often decided by litigation. Portuguese jurisprudence provides strong evidence that presumptions should only be applied if, even by correcting of errors and inaccuracies, corporate real income cannot be obtained. The level of contamination must be obvious, and tax audits must present a strong and documented claim that presumptions are a last-resort mechanism to compute an appropriate tax base. The Supreme Tax Court has been applying a consistent approach characterized by: presumptive taxation is a last-resort mechanism; tax audits must prove that a generalized contamination of accounting data is observed; it is not possible to correct accounting errors, given their extension and depth, and the taxpayer did not submit contradictory solid evidence. Practical implications Applying, in practice, legal criteria to decide that accounting manipulation is so extensive that taxation must be based on presumptions is fraught with subjectivism. However, we offer an analysis where some guidelines to this complex issue are presented in a logical way. Principles-based taxation can, nonetheless, be applied with a significant degree of fairness and consistency. Originality/value The paper contributes to the literature by offering an analysis of the criteria used by Portuguese tax courts when deciding that accounting data can be disregarded and presumptions used as a tax computation tool. Given that the rule, in many countries, is to base taxable income on accounting records (albeit with adjustments established in Corporate Income Tax Codes), presumptions are a notable exception to this well-established rule. As such, taxpayers have a significant interest in knowing how courts rule on tax authorities’ use of presumptions. In this light, the paper has also potential value to professionals in the accounting and tax fields. They are often confronted with tax audits that apply presumptions. Therefore, knowing jurisprudential trends in the judgment of such, usually complex, cases is an important issue.