Early Earnings Releases and the Role of Accounting Quality

More than half of U.S. public companies announce earnings before audit completion. We examine how accounting quality, as a measure of the ex-ante reliability of earnings, affects the decision to release earnings early. Using four proxies for accounting quality, we show that firms with higher accounting quality are more likely to release earnings before a completed audit, and that the association is stronger when market demand for timely earnings is high. We provide evidence that accounting quality remains important in the timing of earnings release even after controlling for other factors which affect earnings reliability, such as managerial ability, auditor tenure, and financial reporting problems in a prior period. Overall we emphasize the role of accounting quality in the complex process of when to release earnings relative to audit completion, and suggest that the importance of the audit in the earnings release decision varies based on firm-specific accounting quality.

Banking Reform, Risk-taking, and Accounting Quality Evidence from Post-Soviet Transition States

The drastic banking reform within Central and Eastern Europe following the collapse of the Soviet Union provides an ideal quasi-experimental design to examine the causal effects of institutional development on accounting quality (AQ). We find that banking reform spurs significant improvement in predictive power of earnings and reductions in earnings smoothing, earnings-inflating discretionary provisions, and avoidance of reporting losses. These effects hold under alternative model specifications and after considering concurrent institutional developments. In contrast, corporate reform shows no such effects, refuting the alternative explanation that unobserved factors affect both reform speed in general and the quality of financial reporting. We further identify four specific reformative actions that are integral to the drastic banking reform process where prudential regulation contributes the most to the observed AQ improvement. It supports the conjecture that banking reform improves AQ by reducing banks’ risk-taking behaviors and, as a result, their motive behind accounting manipulation.

AUDIT QUALITY: TO THE ISSUE OF REFINING THE CONCEPT

The purpose of the article is to systematize and generalize the existing approaches to interpret the audit quality concept and judge it as for its implementation. The strictest demand for high quality audit is one of the important trends, which have become clear recently. The further development of audit at all levels is inextricably linked to improving its quality. Audit information is the basis for management decisions, so improving the audit information quality, and therefore, audit quality, will improve the quality of management decisions, which will inevitably affect the economic and financial situation at all the management levels, and reduce information risk during decision-making by all the financial information users. The importance of the audit information quality in modern economic processes has also been considered. The audit impact on the development of economic processes at the micro- and macro-levels has been studied. Theoretical insights into the issue of determining audit quality have been analyzed, which is crucial both for the methodology of audit performance and audit quality evaluation, and for audit information reliability, thus being useful for all the financial information users. These theoretical insights also have a significant impact on the practical audit activities, the reliability of the information provided, its quality indicators and other factors that are important for audit information users. It has been proven that the main criterion for audit information quality is its reliability and compliance with the actual state of the audited entity. The study of the causes of the global economic crisis, which unfolded in 2008 with all its severity, revealed a range of problems caused by decisions made on the basis of audited financial statements. Among the main causes of this financial crisis, in addition to the general economic ones, is, firstly, accounting quality and audit quality, which significantly contributed to the bankruptcy of key financial institutions, thus leading to the crisis; and secondly, insufficient control over possible fraud by audited enterprises. Both are the result of low quality audit. A new definition of audit quality is given, which differs greatly from most of the current ones. This, in turn, makes it possible to more accurately and correctly identify the directions, methods, principles and other components of audits, considerably improving their quality. In the long run, improving audit quality should significantly reduce the risks of crisis development in the real sector of economy. Keywords: audit quality, audit, audit services, evaluation, control, reliability, actual state, audited object. JEL Classification M42 Formulas: 0; fig.: 0; tabl.: 2; bibl.: 31.

Accounting Quality and its Challenges in 21st Century

This paper describes current research to drive future research challenges in accounting quality. The definition of accounting quality is mainly varying depending on the objective that the study pointed. Previous research revealed that many proxies describe the accounting quality but most of them from the financial perspective. Furthermore, this paper tries to expose this research issue in the behavioural approach and drive future research in the mixed method. It concludes that the behavioural issues can be a research model, triggering future research challenges in accounting quality. The authors support these triggers from the perspectives of political hegemony, bureaucracy ratcheting, cognitive distortion, and international accounting standard. Finally, we infer and simultaneously predict that accounting quality would broaden its concepts and lasting impression in the 21st century.

Can Corporate Social Responsibility Decrease the Negative Influence of Financial Distress on Accounting Quality?

This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management. Based on the existing literature, distressed firms tend to hide their financial crises through earnings manipulation. However, as CSR can positively affect companies in terms of performance, risk reduction, and market response, the better a firm’s CSR is the less managers will attempt earnings management even if they experience temporary distress. Consistent with the literature, test results using Korean-listed companies show that distress increased earnings management, and we confirmed that CSR weakened the positive effect of distress on earnings management. After testing each of the CSR subcategories, significant results were found mainly on environmental performance, reflecting the globally increasing interest in environmental issues. This study contributes to the literature on distress and earnings management, which rarely considers CSR as a moderating factor.

Asset Growth and Future Stock Returns: Insight from International Equity Markets

The main purpose of this research is to examine the cross-sectional connection between asset growth and stock returns in the international equity market during 2016-2020. Firms in international equity markets, subsequently experience lower stock returns with higher asset growth rates, consistent with the United States evidence. If capital markets are well-developed stocks efficiently priced then the negative AG effect on returns is likely to be stronger, but different to country characteristics representing accounting quality, investor protection, and limits to arbitrage. The research is to examine the cross-sectional connection between the asset growth and stock return in the international equity market is likely due to optimal investment effect than due to market timing, overinvestment, or other forms of mispricing. The evidence suggests that the cross-sectional association between the AG effect and stock return is more likely due to an optimal investment effect than due to overinvestment, mispricing or market timing. The findings of the research support Copper et al (2008) however, the weakening of the accounting quality decreases the AG effect magnitude which contradicts the mispricing-based arguments.

Does mandatory corporate social responsibility disclosure affect share price responses to earnings announcements? Evidence from China

We utilize the mandatory corporate social responsibility (CSR) disclosure regulation in China as an exogenous shock to evaluate the impact of such disclosures on investors as end-users of accounting information based on the analysis of share price responses to earnings announcements. Specifically, we observe that firms with mandated CSR disclosure experience an increase in earnings response coefficient and a decrease in post-earnings announcement drift. Furthermore, these effects are greater among CSR-sensitive industries, state-owned enterprises, and lower accounting quality firms. Additional analysis also reveals that these effects vary by the quality of CSR disclosure and CSR performance. These findings suggest that CSR disclosure provides incremental information that are useful for investors to assess firms’ future prospects and uncertainties. A broader implication of our study is that mandating CSR disclosure could improve market information efficiency and benefit outside investors.

The Relation Between Accounting Comparability and Firm Productivity

Using a comprehensive sample of U.S. manufacturing firms from 1992 to 2015, I test for the association between accounting comparability and firm productivity. I posit that increased accounting comparability facilitates learning from peer firms ultimately increasing firm productivity. Results show that accounting comparability is positively related to firm productivity and that one channel for this relation is improvement in inventory management. In cross-sectional analysis, I find that the relation between accounting comparability and firm productivity is stronger when (a) peer firms exhibit higher productivity and provide more informative filings; (b) subject firms exhibit higher product similarity with peer firms and face stiffer competition, and (c) subject firms operate in industries characterized by higher accounting quality.

Auditor tenure, investor protection and accounting quality: international evidence

Purpose This study aims to investigate whether auditor tenure has a significant influence on accounting quality and whether investor protection moderates the effect of auditor tenure on accounting quality. Design/methodology/approach This study uses weighted least squares regression on a sample of 77,855 firm-year observations from 36 countries during the period 2010–2016. This study uses the absolute value of performance-matched discretionary accruals to measure financial reporting quality. Findings This study finds that a longer auditor tenure is associated with higher accounting quality, thus supporting the knowledge effect arguments. The results on the joint effect of investor protection and auditor tenure show evidence of the substitutive effect of investor protection, where the positive impact of auditor tenure on accounting quality is weaker in a high investor-protection environment. Practical implications These findings provide input for policy implications involving the auditing profession. Regulators may need to weigh the costs and benefits of mandatory audit rotation because country-level institutional factors influence auditing regulations and practices, as well as the auditors’ behaviors. Originality/value This study adds to the limited, albeit important, evidence on the joint effect of auditor tenure and country-level governance on accounting quality. The authors respond to the call by Brooks et al. (2017) for more evidence on the role of audits on financial reporting outcomes across various legal institutions for creating effective policies.