Showing papers in "European Accounting Review in 2008"
TL;DR: In this paper, the authors examine corporate responses to climate change in relation to the development of reporting mechanisms for greenhouse gases, more specifically carbon disclosure, and develop a conceptual framework using theories of global governance, institutional theory and commensuration to understand the role of carbon disclosure in the emerging climate regime.
Abstract: This paper examines corporate responses to climate change in relation to the development of reporting mechanisms for greenhouse gases, more specifically carbon disclosure. It first presents some background and context on the evolution of carbon trading and disclosure, and then develops a conceptual framework using theories of global governance, institutional theory and commensuration to understand the role of carbon disclosure in the emerging climate regime. Subsequently, a closer look is taken at carbon disclosure and reporting mechanisms, with a particular focus on the Carbon Disclosure Project (CDP). Our analysis of responses shows that CDP has been successfully using institutional investors to urge firms to disclose extensive information about their climate change activities. However, although response rates in terms of numbers of disclosing firms are impressive and growing, neither the level of carbon disclosure that CDP promotes nor the more detailed carbon accounting provide information that is particularly valuable for investors, NGOs or policy makers at this stage. As a project of commensuration, carbon disclosure has achieved some progress in technical terms, but much less with regard to the cognitive and value dimensions.
516 citations
TL;DR: In this article, Burgstahler et al. examined whether Big 4 audit firms, as high quality auditors, provide a constraint on earnings management in private companies. But they focused on the non-listed companies and did not consider the audit quality of the companies.
Abstract: This paper contributes to the recent literature on financial reporting quality in private (i.e. non-listed) companies (Ball and Shivakumar, 2005; Burgstahler et al., 2006) by examining whether in these types of companies Big 4 audit firms, as high quality auditors, provide a constraint on earnings management. Considering incentives of auditors to supply a high audit quality in private firms, we expect that Big 4 auditors have an incentive to constrain earnings management only in high tax alignment countries, where financial statements are more scrutinized by tax authorities and the probability that an audit failure is detected is higher. Using data on private firms in European countries, this study provides evidence consistent with this expectation.
291 citations
TL;DR: In this article, the authors provide a scientific and policy introduction to carbon markets, and review the accounting issues associated with the valuation of pollution allowances and their identification as assets (and the liabilities that arise if companies pollute beyond allowed).
Abstract: The impetus for this special debating forum arises from the concern about the impact of anthropogenic induced global climate change (GCC) and the assumption that GCC raises issues of significance with respect to the accountability of firms to stakeholders for financial and non-financial performance. Governments and supra-national bodies have sought to respond to GCC in a variety of ways, with the creation of markets in which carbon may be traded being just one manifestation. Carbon markets have the effect of putting a price on what was until very recently free and this change is likely to have financial consequences for firms in the longer term. In order to place the accounting implications of carbon markets in context, the paper provides a scientific and policy introduction to GCC. As regards accounting issues, the paper reviews the problems that are associated with the valuation of pollution allowances and their identification as assets (and the liabilities that arise if companies pollute beyond allowed...
287 citations
TL;DR: In this article, the authors explore the different pressures that are behind the possible standardisation of accounting research, and consider possible opposition and coping strategies to cope with these pressures. But they do not consider the impact of the standardization on the quality of the research.
Abstract: Recognizing that there are increasing concerns about the possible standardisation of accounting research, the paper explores the different pressures that are behind this development. Consideration is also given to possible opposition and coping strategies.
220 citations
TL;DR: For instance, the authors found that analysts prefer DCF to accruals-based methods, and combine it with price to earnings ratios, and they have many reasons for choosing this model, but it is most heavily used on IT and media firms.
Abstract: Purpose - To find out how UK investment analysts use valuation models.
Design/methodology/approach - Cites prior studies using residual income and discounted cash flow (DCF) models, while proposing to interview analysts. Combines content analysis of 98 equity reports by investment bank analysts between 2000 and 2003, and 35 structured interview responses (in the form of Likert scales) about what models they use, why they use them and how.
Findings - Finds that analysts prefer DCF to accruals-based methods, and combine it with price to earnings ratios. Notes they have many reasons for choosing this model, but it is most heavily used on IT and media firms. Adds a distinct preference for DCF among buy-side analysts.
Research limitations/implications - Proposes setting up the discipline of 'sociology of financial accounting'. where sell-side analysts interact with fund managers.
Originality/value - Uses a direct approach to the questgion of how accounts are used by third parties.
178 citations
TL;DR: In this paper, the authors introduce and detail the construction of the academic performer, a representation of identity which is increasingly typical of what it means today to be an actor in academia, in terms of attitudes and behaviour.
Abstract: Journal rankings and performance measurement schemes tend to become increasingly influential within many fields of research, thereby consolidating the prevalence of performativity on the life and research endeavours of many academics. The latter are nowadays often pressured to publish in ‘top’ journals to ensure they have a displayable level of performance. Drawing from literature on identity, this paper introduces and details the construction of the academic performer – a representation of identity which is increasingly typical of what it means today to be an actor in academia, in terms of attitudes and behaviour. Fundamentally speaking, this paper constitutes a critique of a detrimental tendency in academia, that is to say the excessive spread of performance measurement practices and the flow of superficiality and conformity they consolidate.
177 citations
TL;DR: In this article, the authors compare historic cost (HC) and fair value accounting (FVA) for the British real estate and investment fund industries and find that fair value income is considerably more value relevant than historic cost income.
Abstract: We use the British real estate and investment fund industries as experimental settings where historic cost (HC) and fair value accounting (FVA) can be compared. Both industries have the majority of their assets marked to market and hence the difference between the two accounting systems is profound. However, as the valuation of real estate is arguably more subjective than that of investment funds, we are able to contrast fair value accounting in a near ideal setting with one where it remains important, but where valuation difficulties may permit bias. As this distinction is incorporated in the recently issued SFAS 157, which also formed the basis of the IASB's relevant discussion document, the results of our study may be particularly timely. As expected, we find that fair value income is considerably more value relevant than historic cost income. However, in the presence of changes in FVA balance sheet values, income measures become largely irrelevant. This implies that there is no obvious advantage from adopting FVA income accounting if FVA balance sheet values are available to the user. Furthermore, FVA for our real estate sample is considerably less value relevant than for the investment companies and the evidence for this sample, if not conclusive, is consistent with earnings management. We interpret these results as confirming that fair values are highly relevant and largely unbiased where the values are unambiguous. Where valuation is ambiguous, which will normally be the case, value relevance will be lower and biased accounting may be revealed.
164 citations
TL;DR: In this paper, the authors find that Spanish banks use loan loss provisions to smooth earnings but find no evidence that they practice capital management, and they also find that credit risk variables weigh more and net operating income weighs less as determinants of generic and specific loan loss provision after the introduction of the statistical provision than they did before this provision was introduced.
Abstract: Accounting scholars and policy-makers have expressed concern about the quality of accounting data. Because earnings and capital management practices alter the information content of accounting statements, we ask whether a transparent smoothing device such as the statistical provision – a counter-cyclical bank loan loss provision that increases in economic upturns and decreases in downturns, and is reported separately by banks – may contribute to improving quality of accounting data. We find that Spanish banks use loan loss provisions to smooth earnings but we find no evidence that they practice capital management. We also find that credit risk variables weigh more and net operating income weighs less as determinants of generic and specific loan loss provisions after the introduction of the statistical provision than they did before this provision was introduced. Therefore, the quality of banks' accounting statements improves upon use of the new statistical provision.
139 citations
TL;DR: This article conducted a meta-analysis of the association between audit committee independence and financial reporting quality (FRQ) and found that audit committees are more effective at enhancing audit quality than they are at fostering financial statement quality.
Abstract: We conduct a meta-analysis (MA) of the association between audit committee (AC) independence and financial reporting quality (FRQ). Although we cannot reliably aggregate results across studies in a statistical sense because of inconsistencies in defining FRQ and the absence of replication studies, quantitative review techniques yield three conclusions: (1) The use of different FRQ measures in the AC independence literature explains about half of the variation in results across studies. (2) Audit committees are more effective at enhancing audit quality (e.g. through averting going-concern reports and auditor resignations) than they are at fostering financial statement quality (e.g. by making high quality accruals and avoiding restatements). AC independence can even reduce apparent financial statement quality by identifying the need for restatements and remedial, abnormal accruals. (3) Financial statement quality and audit quality are complementary contributors to FRQ. The statistical and methodological dif...
130 citations
TL;DR: In this article, the authors investigate the role of firm-specific incentives and country-level institutional factors in the adoption of International Accounting Standards (IAS) by private enterprises and find that both firm and country factors matter in the voluntary adoption decision.
Abstract: This paper investigates voluntary adoptions of International Accounting Standards (IAS) by private enterprises, and builds on prior research which posits that higher quality financial reports through IAS adoption can reduce information asymmetry and facilitate contracting with external parties. Specifically, we pursue the following questions. First, do firm-specific incentives matter in the IAS adoption decision after controlling for country-level institutional factors? Second, does the relative importance of firm vs. country factors vary across institutional settings? Using a sample of 3,722 small and medium-sized private enterprises from 56 countries, we report two primary findings. First, both firm and country factors matter in the voluntary IAS adoption decision. Second, when we focus on sub-samples of countries partitioned by the level of economic development, we find that firm factors dominate country factors in more developed countries, while in less developed countries, country factors do...
123 citations
TL;DR: In this article, the authors examined the valuation implications of greenhouse gas (GHG) emissions allowances and found that the value of a firm's bank of emission allowances has two components that are likely to be positively valued by the capital market: (1) an asset value component; and (2) real option value component.
Abstract: This paper examines the valuation implications of greenhouse gas (GHG) emissions allowances. We posit that the value of a firm's bank of emission allowances has two components that are likely to be positively valued by the capital market: (1) an asset value component; and (2) a real option value component. Since the necessary data to examine this research hypothesis in the setting of GHG emission allowances is not yet available, we test our conjecture by examining the value relevance of sulfur dioxide (SO2) emission allowances held by US electric utilities. Empirical results reveal that the capital market assigns a positive price to a firm's bank of SO2 emission allowances, consistent with the argument that emission allowances have, at least, an asset value component that is assigned a positive price by the market. We also find weak evidence consistent with the market assigning a real option value to the allowance banks.
TL;DR: In this article, the effect of environmental information disclosure on investment decisions was examined based on an experiment in which groups of investors were asked to make short and long-term investment allocation decisions based on financial information and on supplementary environmental information (varied between cases).
Abstract: This paper examines the effect of environmental information on investment decisions. The results are based on an experiment in which groups of investors (varied by experience) were asked to make short- and long-term investment allocation decisions based on financial information and on supplementary environmental information (varied between cases). The results suggest that environmental information disclosure influences investment allocation decisions. The results also suggest that potentially mitigating factors such as the investment horizon and the experience level of investors affect investment allocation decisions, but the predicted main effect of positive environmental information holds across different investment horizons and investor types. Hence, the results are not attributable to interaction effects. Interestingly, compared to other company information, environmental information is not rated as being very important by participating subjects even though the results suggest that it influences inves...
TL;DR: In this article, the authors argue that this identity discourse may be interpreted as a strategy of Controlling researchers to achieve cognitive and sociopolitical legitimacy of their discipline, and draw on interview material as well as publication and citation analyses, they show how various institutional pressures and constraints not only influenced the institutionalization of controlling as an academic discipline, but also impacted the form and substance of controlling research.
Abstract: The notion of ‘Controlling’, as it is commonly used in German-speaking countries, may be regarded as an equivalent term for management accounting. At the same time, there have been considerable efforts to establish Controlling as a discipline on its own, rather than to regard it simply as the German synonym of management accounting. This is reflected in many writings on Controlling which have tried to identify a possible ‘core’ or ‘essence’ of the subject. In this paper, we argue that this identity discourse may be interpreted as a strategy of Controlling researchers to achieve cognitive and sociopolitical legitimacy of their discipline. Drawing on interview material as well as publication and citation analyses, we show how various institutional pressures and constraints not only influenced the institutionalization of Controlling as an academic discipline but also impacted the form and substance of Controlling research. This raises some important questions for our understanding of academic discip...
TL;DR: The authors used evidence gathered in two perception studies of Australasian and British accounting academics to reflect on aspects of the knowledge production system within accounting academe and provide evidence of the representation of multiple paradigms in many journals that are scored by participants as being of high quality.
Abstract: This paper uses evidence gathered in two perception studies of Australasian and British accounting academics to reflect on aspects of the knowledge production system within accounting academe. We provide evidence of the representation of multiple paradigms in many journals that are scored by participants as being of high quality. Indeed most of the journals we surveyed are perceived by accounting academics as incorporating research from more than one paradigm. It is argued that this ‘catholic’ approach by journal editors and the willingness of many respondents in our surveys to score journals highly on material they publish from both paradigm categories reflects a balanced acceptance of the multi-paradigmatic state of accounting research. Our analysis is set within an understanding of systems of accounting knowledge production as socially constructed and as playing an important role in the distribution of power and reward in the academy. We explore the impact of our results on concerns emerging from the work of a number of authors who carefully expose localised ‘elites’. The possibilities for a closer relationship between research emerging from a multi-paradigm discipline and policy setting and practice are also discussed. The analysis provides a sense of optimism that the broad constituency of accounting academics operates within an environment conducive for the exchange of ideas. That optimism is dampened by concerns about the impact of local ‘elites’ and the need for more research on their impact on accounting academe.
TL;DR: In this paper, the authors discuss the institutional space towards which accounting departments and scholars are increasingly migrating, that is, business schools, and observe changes in academic training regimes which favour the proliferation of opportunistic behaviours.
Abstract: Philosophy and sociology of science have devoted significant attention to processes which define what counts as valid scientific knowledge thus making the producers of such knowledge legitimate academics at the expense of those who do not conform to the cliche. In accounting, too, a vibrant debate has augmented our understanding of the conditions which make certain kinds of accounting knowledge more acceptable than others. The debate included, but was not limited to, issues such as, the institutional arrangements of accounting academic associations and doctoral training regimes and how these shape journals' editorial boards and the selection of published articles. This introduction aims to reopen that debate on the two realms of institutions and practices. In terms of institutional arrangements, we note relevant changes in the forces which contribute to define the quality and relevance of accounting knowledge. We discuss the institutional space towards which accounting departments and scholars are increasingly migrating, that is, business schools. These are often separated from universities and operate under pressures which are sometimes only marginally academic in nature. In terms of practices, we observe changes in academic training regimes which favour the proliferation of opportunistic behaviours. These changes call for a debate on the governance of accounting academia, if academia is to be a knowledge and ethical, and not simply rather a business enterprise.
TL;DR: In this paper, the role of disclosure in attracting PE investments is disentangled and the extent to which a firm's disclosure policy is affected by the changing corporate setting and intensified corporate governance after having received PE is examined.
Abstract: In the current study, we dynamically analyze unlisted firms' voluntary disclosure decisions around private equity (PE) participation. First, we disentangle the role of disclosure in attracting PE investments. In addition, we examine the extent to which a firm's disclosure policy is affected by the changing corporate setting and intensified corporate governance after having received PE. We find no evidence that firms would employ increased disclosure to signal their quality in the years preceding the PE financing. However, we document a significant switch to increased financial disclosure from the PE investment year onwards, consistent with the hypothesis that PE investor presence positively affects portfolio firms' disclosure decisions. Further, we show that the proportional PE ownership stake is positively related to increased disclosure, but only at very high ownership levels. We explain these results in that both internal and external information demands call for higher public disclosure in PE firms. We conclude that the changing information environment resulting from a PE investment stimulates increased public financial disclosure. Our results contribute to illustrate how an indisputable change in governance resulting from a PE investment affects inter-temporal corporate disclosure decisions in unlisted firms.
TL;DR: In this article, the authors analyze the accounting, accountability and disciplinary practices triggered by the Ordinances of 1571 in the feudal State of Abruzzo, whose sovereign was Margaret of Austria, daughter of Emperor Charles V. In a scenario stimulated by the ascent of mercantilist discourse and police schemes, new technologies of government were forged to optimize the State's collection of receipts and to minimize fraud, rendering public officers accountable and their activities visible and controllable "at a distance".
Abstract: This paper analyses the accounting, accountability and disciplinary practices triggered by the Ordinances of 1571 in the feudal State of Abruzzo, whose sovereign was Margaret of Austria, daughter of Emperor Charles V. In a scenario stimulated by the ascent of mercantilist discourse and police schemes, new ‘technologies of government’ were forged to optimize the State's collection of receipts and to minimize fraud, rendering public officers accountable and their activities visible and controllable ‘at a distance’. Using the ‘governmentality’ framework, this paper analyses the Ordinances that disciplined the activities of the primary finance/accounting and police officers in Abruzzo. The paper complements and extends the previous literature by illustrating the wide array of accounting- and non-accounting-based disciplinary techniques enforced by the sovereign in order to shape, align and even seduce the behaviour of officers/functionaries working in the State apparatus, and the general population. The analy...
TL;DR: In this article, the authors examined the relationship between earnings management and auditor behaviour in the prebankrupt client segment of the Spanish audit market and found that discretionary accruals are negatively related to going-concern opinions but are positively related to reports modified for reasons other than going concern problems.
Abstract: This study examines the relationship between earnings management and auditor behaviour in the pre-bankrupt client segment of the Spanish audit market. As proxies for auditor behaviour, we use type of audit firm (Big N/non-Big N) and type of audit report. In contrast to the USA, audit reports in Spain often include modifications other than a going-concern opinion. This allows us to study the relationship in more detail than is possible with US data. The results of our study show that discretionary accruals are negatively related to going-concern opinions but are positively related to reports modified for reasons other than going-concern problems. However, unlike Butler et al. (Journal of Accounting and Economics, 37, pp. 139–165, 2004) the negative relationship is explained not by liquidity survival tactics but by auditor conservatism. We find this conservatism not only in the value of discretionary accruals but also in the qualifications that accompany a going concern. In these cases GAAP violations have ...
TL;DR: In this article, the Big 8/6/5/4 indicator variable has been tested empirically against various measures of client financial reporting quality, including measures to proxy size, visibility and financial health characteristics of an audit-firm portfolio.
Abstract: This paper contributes to the audit quality literature by defining continuous measures of expected future audit-firm losses and testing their association with proxies of financial reporting quality. In prior studies audit-firm size has been used as a proxy for expected future audit-firm losses and hence – following theoretical arguments in DeAngelo (Journal of Accounting and Economics, 3(3), pp. 183–199, 1981) and Dye (Journal of Political Economy, 101(5), pp. 887–914, 1993) – for audit quality. In particular, the Big 8/6/5/4 indicator variable has been tested empirically against various measures of client financial reporting quality. In this paper, we focus on testing various characteristics of an audit firm's client portfolio as drivers of audit quality (and therefore subsequently also client financial reporting quality), including measures to proxy size, visibility and financial health characteristics of an audit-firm portfolio. We test both a disclosure and earnings quality model for that pur...
TL;DR: In this article, the authors investigate the relative quality of Stern Stewart's measure of economic value added (EVA) compared to GAAP (generally accepted accounting principles) earnings, residual income, cash flows and other mandated metrics in the USA and UK.
Abstract: Predictability and variability are two measures commonly used in the empirical literature to gauge the quality of earnings and hence, decision usefulness to investors. We adopt both measures to investigate empirically the relative quality of Stern Stewart's measure of economic value added (EVA) compared to GAAP (generally accepted accounting principles) earnings, residual income, cash flows and other mandated metrics in the USA and UK. We proxy for accounting quality by applying a long-window methodology to obtain hindsight valuation errors based on the difference between ex ante market value and discounted ex post metrics. Decision usefulness, in terms of ease of forecasting, is proxied by differences in valuation errors between the benchmark and alternative accounting methods. Contrary to the Biddle et al. (Journal of Accounting and Economics, 24, pp. 301–336, 1997) finding that mandated earnings were superior to EVA and residual income, we find that EVA and other residual income metrics consistently give rise to lower average valuation errors and thus have higher predictability across a variety of windows and terminal dates. Further, on the basis of our second measure of accounting quality, the variability of valuation errors, EVA performs best in the USA and third in the UK. The results strongly indicate that differences between residual income constructs, including EVA, are generally small but that earnings quality will be improved by recognition of a cost of equity capital in measuring reported income.
TL;DR: The main finding is that firms can use an information security audit along with adjustments to the compensation payments to the agent and the investment decision rules, to mitigate a Chief Information Security Officer's inherent empire building preferences.
Abstract: The design and use of management control systems can play a key role in dealing with cybersecurity issues that have arisen in tandem with the emergence of the Internet. Efficient management control systems will reduce a firm's likelihood of suffering significant losses from cybersecurity breaches. Drawing on and extending the extant agency-based capital budgeting literature, this paper demonstrates the relevance of the study of management accounting controls to problems arising in the cybersecurity setting. The main finding is that firms can use an information security audit (which is an integral part of a management control system) along with adjustments to the compensation payments to the agent and the investment decision rules, to mitigate a Chief Information Security Officer's inherent empire building preferences. The paper also identifies additional research areas where management accountants with expertise in management control systems can contribute to the academic literature and practice surroundi...
TL;DR: In this paper, the authors investigate the incremental information content of a sample of 1,751 quarterly financial reports, issued in Portugal between 1994 and 2004, and conclude that unaudited first and third quarter financial reports that include condensed income statements and balance sheets convey enough new information to the market to spur significant price and trading reactions.
Abstract: In this paper we investigate the incremental information content of a sample of 1,751 quarterly financial reports, issued in Portugal between 1994 and 2004. Specifically, we examine price and volume reactions to financial reports issued in: (1) the first and third quarters, which are unaudited; (2) the second quarter, which is subject to limited audit; and (3) the fourth quarter (the annual report) which is subject to a full audit. We conclude that unaudited first and third quarter financial reports that include condensed income statements and balance sheets convey enough new information to the market to spur significant price and trading reactions. This conclusion holds before and after the first and third quarter reports were made mandatory in 1999. We also found that the incremental information content of the second quarter report dropped after 1999, presumably because part of its information content was usurped by the newly required first quarter reports. Finally, we found evidence that mandatory audited reports announcements spur more significant price reactions than mandatory unaudited financial reports. In contrast to evidence from other countries, we found that smaller firms' disclosures do not generate a larger reaction than large firms' disclosures.
TL;DR: In this paper, the authors examined the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations and found that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction for acquiring firms that announce pooling transactions.
Abstract: This paper examines the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations. Using a sample of 324 recent stock swap acquisitions I find that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction of approximately 4% for acquiring firms that announce pooling transactions. This return differential declines to negative 8% for firms with ineffective corporate governance. These findings are consistent with capital markets interpreting the choice of purchase accounting as a signal of management's confidence in the likelihood of a successful merger. This signal is particularly relevant when corporate governance is considered ineffective.
TL;DR: In this paper, the efficiency of the Groves mechanism and a profit sharing scheme in a corporate budgeting context is explored. But the results show that although the Grove mechanism is analytically superior to the profit sharing, the latter turns out to be advantageous for headquarters in their experiment.
Abstract: This paper experimentally explores the efficiency of the Groves mechanism and a profit sharing scheme in a corporate budgeting context. Specifically, it examines the effects of anonymous communication on both incentive schemes. The results show that although the Groves mechanism is analytically superior to the profit sharing scheme, the latter turns out to be advantageous for headquarters in our experiment. This is essentially due to the effects of communication on both incentive schemes. Under the profit sharing scheme, communication improves coordination and reduces inefficient resource allocation. Under the Groves mechanism, however, it leads to stable collusion strategies of the participants, and thus increases compensation costs.
TL;DR: In this article, the authors provide simple models to analyze the general tendencies of exogenous parameters for such cases and show that audit risk increases with more information if the auditee has a sufficiently strong incentive to commit fraud.
Abstract: It has been reported in the literature on strategic auditing that audit risk (the probability of audit failure) may increase when the auditor obtains information, whereas conditions for such cases have not been identified as yet. This paper provides simple models to analyze the general tendencies of exogenous parameters for such cases. The analysis shows that audit risk increases with more information if the auditee has a sufficiently strong incentive to commit fraud. If the auditee is penalized by auditor rejection even when he does not commit fraud, the detection risk increases with more information. In this case, if the auditor has a sufficiently strong incentive to avoid false rejection, audit risk increases with more information.