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Article
Publication date: 9 May 2013

Sohyung Kim, Cheol Lee and Sung Wook Yoon

The purpose of this paper is to investigate how fair value reporting and increased managerial discretion under the new goodwill accounting affect the asymmetric timeliness of…

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Abstract

Purpose

The purpose of this paper is to investigate how fair value reporting and increased managerial discretion under the new goodwill accounting affect the asymmetric timeliness of earnings;, i.e. accounting conservatism.

Design/methodology/approach

Various empirical models are applied to a sample of 11,034 firms. To capture a cross‐sectional variation in asymmetric timeliness of earnings, Kahn and Watts' C_Score is adopted.

Findings

It is found that financial reporting for firms with purchased goodwill has become more conservative after the enactment of the new standard. However, once an increase in conservatism that is not attributable to new goodwill accounting is controlled for, it is found that accounting earnings for firms with purchased goodwill become less conservative.

Research limitations/implications

The results should be interpreted with caution, because the effect of concurrent events other than the adoption of SFAS 142 on reported earnings is not perfectly controlled.

Practical implications

The results of this paper support Watts' assertion that new goodwill accounting impairs accounting earnings' ability to reflect the economic earnings in a timely manner, but these results should be interpreted with caution, as the main objective of goodwill accounting is not to improve accounting conservatism.

Originality/value

This paper makes a timely contribution to the debate of fair value accounting by focusing on the impact of SFAS 142 on the asymmetric timeliness of earnings. By employing all available firms with purchased goodwill balances rather than relying on firms that report impairment losses, our research design better captures the impact of SFAS 142 on financial reporting.

Details

Review of Accounting and Finance, vol. 12 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 9 June 2020

Afsheena P. and Shijin Santhakumar

The asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This study…

Abstract

Purpose

The asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This study aims to explore cash flow-return association, which provides insight into the accruals’ contribution that traverses through conservatism-earnings persistence liaison and its associated effects on stock returns.

Design/methodology/approach

The study used asymmetric timeliness (AT) model and two firm-year measures, namely, C-Score and conservatism ratio, to capture conservatism. The firm-year measures of conservatism, in addition to the AT measure, facilitate a better understanding of the persistence of reported earnings that branch out the study from the existing literature. Further, the study used panel regression analysis to evaluate the timeliness and persistence of earnings under the conservative approach with a sample of Indian corporate data from 2000 to 2017.

Findings

The findings of the study reveal that conservative earnings are less persistent and the accruals recognize bad news timelier than good news. The unfavorable change in earnings shows a lower earnings response coefficient in contrast to favorable earnings variations. However, the appropriate loss recognition nature of conservative reporting has little or no influence on stock returns in an emerging market such as India.

Research limitations/implications

Accounting conservatism is a captivating feature accounting information, especially pertinent to many decision-makers. Thus, the study has implications for the investors while evaluating the adverse and positive changes in accounting earnings; also, the results are helpful for the standard setters in ongoing debate related to accounting conservatism vs fair evaluation. The present study focuses exclusively on ex-post conservatism, while the ex post and ex ante conservatism are having a significant role in accounting practices. Future research on the differential effects of ex post and ex ante conservatism on accounting information in an emerging market, is worth promising.

Originality/value

The study reveals the first Indian evidence on accounting conservatism and earnings persistence relationship, which would bring a different dimension to investors’ perception in evaluating the characteristic variations of reported earnings. The findings add value to the accounting standard setters concerning the asymmetric verification as Indian Accounting standards are on the verge of convergence with International Financial Reporting Standards (IFRS).

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 3
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 8 January 2020

Hui Li, Darren Henry and Xiaohui Wu

The purpose of this paper is to identify means of better associating executive remuneration with managerial decision making and firm performance.

Abstract

Purpose

The purpose of this paper is to identify means of better associating executive remuneration with managerial decision making and firm performance.

Design/methodology/approach

The authors evaluate the influence of conditional accounting conservatism on CEO compensation. The authors focus particularly on the ex ante pay-for-performance sensitivity (PPS) of CEO stock option grants. The empirical method used is panel data regression.

Findings

The authors find that accounting conservatism is positively related to the PPS of CEO option-based compensation. The effects of accounting conservatism on the PPS of options are more significant for firms with relatively weaker corporate governance and for the period before the introduction of FAS 123R. The findings suggest that directors reward CEOs for adopting accounting conservatism, both in general terms and incrementally, and that rewards are channelled through incentive-linked compensation. The results are also consistent with the view that accounting conservatism compliments other mechanisms, such as corporate governance, in reducing information asymmetry and agency problems between managers and shareholders and other stakeholders.

Originality/value

This paper provides a number of important contributions to the literature. It is the first to identify a relationship between accounting conservatism and option-based CEO compensation, which has important potential contracting and enforcement implications due to the incomplete nature of option contracts and the reward and risk attributes of CEOs. This paper is also the first to analyse the association between conditional accounting conservatism and CEO compensation at the firm–year level, by employing the firm–year conservatism score approach proposed by Khan and Watts (2009). This provides for greater insight regarding the interaction between accounting conservatism and other firm-specific elements than is otherwise obtainable from an overall firm or year interpretations derived from the traditional Basu (1997) asymmetric timeliness model approach. Furthermore, this paper also provides a comparison of the relative association of accounting conservatism on both explicit and implicit forms of CEO compensation for the same firm sample. This allows for the assessment of whether accounting conservatism relates differently to incentive-based CEO remuneration relative to ex post CEO compensation outcomes.

Details

International Journal of Managerial Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 18 April 2023

Essam Elshafie

This study aims to address the following four research questions: first, whether auditors report critical audit matters (CAMs) to shield themselves against possible litigation;…

Abstract

Purpose

This study aims to address the following four research questions: first, whether auditors report critical audit matters (CAMs) to shield themselves against possible litigation; second, whether reporting quality affects auditors’ propensity to report CAMs; third, whether auditors’ tenure length – reflecting familiarity with clients’ financial reporting – affects their likelihood to report CAMs; and fourth, whether auditors’ conservatism increases the likelihood of CAMs reporting.

Design/methodology/approach

Data are manually collected from audit reports including CAMs in 10-K, then financial data are collected from the Capital IQ database, and market data are collected from the CRSP database. Using propensity score matching, the initial sample of companies with CAMs is matched with companies without reported CAMs. Performance adjusted discretionary accruals, real earnings management proxy, Khan and Watts’ (2009) C-score, propensity to issue a going concern opinion, Dechow et al.’s (2011) F-Score, Rogers and Stocken’s (2005) model and Houston et al.’s (2010) model are used to measure reporting quality, auditor conservatism, misstatement risk and litigation risk, respectively.

Findings

The results do not show that auditors report CAMs opportunistically to shield themselves from litigation risk. However, the results do suggest that auditors have a greater tendency to report CAMs when reporting quality is low and when they are more conservative. On the other hand, they have less tendency to report CAMs in their first year of engagement.

Research limitations/implications

The findings of this study have important implications for the auditor behavior literature as it shows that, when it comes to reporting CAMs, auditors actually behave objectively and do not report in a trite way. This study also provides early archival evidence on a standard that relates to the first major change to the auditor’s report in decades. To the best of the author’s knowledge, it is the first to provide evidence on the association between auditor conservatism and auditors tendency to report CAMs and the first to triangulate prior research on auditor litigation risk by providing the first archival evidence on the auditors “litigation-shielding” concern.

Practical implications

This study examines whether auditors attempt to meet the stated objective of reporting CAMs by signaling information about reporting quality. This study demonstrates that reporting CAMs is not a “boilerplate” communication. This study has implications for standards setters, as it shows that CAMs are reported in a way consistent with the objectives of the new standard, namely, via signaling information in the audit report on the quality of the financial statements.

Originality/value

In terms of originality, this paper uses a manually collected sample and, to the best of the author’s knowledge, is the first to focus on auditor’s behavior rather than on investors or clients reactions to CAMs. Also, this paper addresses a recently issued standard using US data and archival approach, rather than experimental. This paper also provides relevant evidence related to concerns raised earlier but were not empirically examined, such as reporting CAMS as “boilerplate” expectations. This paper provides new evidence on the auditors’ behavior with regard to litigation risk.

Details

Review of Accounting and Finance, vol. 22 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Open Access
Article
Publication date: 3 August 2022

Mariem Khalifa and Samir Trabelsi

The purpose of this paper is to examine whether managers of bankrupt firms are more or less conditionally conservative in their financial reporting relative to non-bankrupt firms…

Abstract

Purpose

The purpose of this paper is to examine whether managers of bankrupt firms are more or less conditionally conservative in their financial reporting relative to non-bankrupt firms. The study further examines the cross-sectional differences in conditional conservatism among bankrupt and non-bankrupt firms.

Design/methodology/approach

The study employs a sample of US firms to investigate conditional conservatism in firms that experience financial distress and go bankrupt relative to non-stressed non-bankrupt firms. The study also uses switching regression models to identify the drivers of the cross-sectional difference in conditional conservatism among bankrupt and non-bankrupt firms.

Findings

Empirical results show that bankrupt firms are timelier in recognizing bad news than good news when compared to non-bankrupt firms. The higher level of conditional conservatism in bankrupt firms is mainly driven by their higher levels of leverage and tax-reduction incentives. The cross-sectional analyses show that these results largely hold for more leveraged firms and firms with higher tax costs. Taken together, these results suggest that the conservative tendency of managers of bankrupt firms can stem from the agency problem between lenders and managers and from tax-decreasing motivations.

Originality/value

The novelty of the authors’ research stands in studying the drivers of the cross-sectional differences in conditional conservatism between bankrupt and non-bankrupt firms and specifically, the demonstration that taxation also induces conditional conservatism in the setting of ex post bankrupt firms.

Details

China Accounting and Finance Review, vol. 25 no. 1
Type: Research Article
ISSN: 1029-807X

Keywords

Article
Publication date: 25 June 2021

Garth den Heyer

The purpose of this research was to examine which factors increase the risk of post-traumatic stress in police officers to assist with identifying strategies that will minimize…

Abstract

Purpose

The purpose of this research was to examine which factors increase the risk of post-traumatic stress in police officers to assist with identifying strategies that will minimize its occurrence.

Design/methodology/approach

This study of constabulary and non-constabulary members of the New Zealand Police has been based on an 80-question electronic survey, which was sent to all serving, resigned and retired members of the New Zealand Police Association, which number approximately 18,000. The survey included a series of questions that measured the post-traumatic stress that participants experienced.

Findings

Variables associated with post-traumatic stress were examined using logistic regression modeling techniques. The study found that post-traumatic stress was prevalent among serving, resigned and retired police members and exposure to trauma, especially prolonged exposure, was significantly associated with post-traumatic stress. More than 49% of participants were found to have some post-traumatic stress symptoms and more than 14% of participants indicated a presumptive clinical diagnosis of post-traumatic stress.

Research limitations/implications

The limitations of the research included not include questions relating to the Social Provisions Scale (SPS) and General Health Questionnaire, nor did it include police officer recruits. A further limitation was that it was a cross-sectional study.

Originality/value

An understanding as to which variables influence or increase post-traumatic stress disorder is important for police officers and the police institution. The findings from this study indicate that exposure to trauma is strongly associated with high levels of post-traumatic stress, while good sleep and relaxation decrease the influence of such variables.

Details

Policing: An International Journal, vol. 44 no. 5
Type: Research Article
ISSN: 1363-951X

Keywords

Article
Publication date: 8 February 2016

Chia-Ling Cheng and Fan-Hua Kung

This paper aims to investigate whether government-mandated corporate social responsibility (CSR) engenders conservative financial reporting in emerging markets. It is expected…

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Abstract

Purpose

This paper aims to investigate whether government-mandated corporate social responsibility (CSR) engenders conservative financial reporting in emerging markets. It is expected that CSR plays a substitute role for governance mechanisms in reducing information asymmetry.

Design/methodology/approach

The C-Score developed by Khan and Watts (2007) was adopted to measure the degree of firm-year specific accounting conservatism. This study uses the CSR rating established by the Shanghai National Accounting Institute.

Findings

Empirical evidence indicates that the government-mandated CSR policy may be sufficient to induce conservative financial reporting. However, due perhaps to political affiliations, the evidence to support this claim is weaker for state-owned enterprises (SOEs) than for non-SOEs.

Originality/value

The findings provide a deeper understanding of the potential role of CSR in firms. The results also provide evidence on the dynamics between CSR activities and the reporting behavior of managers. These findings have important implications for investors, analysts and regulators.

Details

Review of Accounting and Finance, vol. 15 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Open Access
Article
Publication date: 10 July 2017

Nan Hu, Rong Huang, Xu Li and Ling Liu

Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning…

12497

Abstract

Purpose

Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning and ethical development. Motivated by these findings, this paper aims to examine whether chief executive officers (CEOs) with accounting backgrounds have an impact on firms’ earnings management behavior and the level of accounting conservatism.

Design/methodology/approach

The authors classify CEOs into those with and without accounting backgrounds using BoardEx data. Using discretionary accruals from several different models, they do not find that CEOs with accounting backgrounds are more likely to engage in income-increasing accruals. However, the authors find that CEOs with accounting backgrounds exhibit lower levels of conservatism, proxied by C-scores and T-scores (Basu, 1997). This finding suggests that CEOs with accounting backgrounds recognize bad news more quickly than good news, consistent with the accounting principle of “anticipating all losses but anticipating no gains”.

Findings

The authors show that firms whose CEOs have accounting backgrounds exhibit lower levels of accounting conservatism. However, these firms do not exhibit higher levels of income-increasing discretionary accruals. This study documents the impact of CEOs’ educational backgrounds on firms’ accounting choices and confirms prior findings in experimental accounting research using large sample archival data.

Originality/value

This paper is the first study that investigates the impact of CEOs’ accounting backgrounds on firms’ financial reporting policy. The findings may have some policy implications. If accounting backgrounds of CEOs can make a significant difference on firms’ behavior, it is reasonable to make CEOs accountable for the quality of financial reporting. This paper is one of the first to empirically test inferences drawn by experimental accounting research. There has been a gap between archival and experimental accounting studies. The authors propose that interesting research questions can be addressed by filling in such a gap.

Details

Journal of Centrum Cathedra, vol. 10 no. 1
Type: Research Article
ISSN: 1851-6599

Keywords

Open Access
Article
Publication date: 28 February 2018

David McBride, Nancy Porter, Kirsten Lovelock, Daniel Shepherd, Maria Zubizaretta and James Burch

The purpose of this paper is to describe risk and protective factors for symptoms of post-traumatic stress disorder (PTSD) experienced over a 1.5-year period among both frontline…

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Abstract

Purpose

The purpose of this paper is to describe risk and protective factors for symptoms of post-traumatic stress disorder (PTSD) experienced over a 1.5-year period among both frontline and “non-traditional” responders to the 2010 and 2011 earthquakes in Christchurch, New Zealand.

Design/methodology/approach

A longitudinal survey administered to Christchurch workers with referents from the city of Hamilton at 6, 12 and 18 months after the 2011 earthquake. Potential risk and protective determinants were assessed by questionnaire items at baseline and over time, the outcome being PTSD as assessed by the PTSD Checklist-Civilian version. A longitudinal latent class analysis identified groups with similar trajectories of PTSD.

Findings

A total of 226 individuals, 140 (26 per cent) from Christchurch and 86 (16 per cent) from Hamilton, participated at baseline, 180 at 12 and 123 at 18 months, non-traditional responders forming the largest single group. Two latent classes emerged, with PTSD (21 per cent) and without PTSD (79 per cent), with little change over the 18-month period. Class membership was predicted by high scores in the Social Support and Impact of Events scale items, Health-related Quality of Life scores being protective. PTSD scores indicative of distress were found in females, and predicted by burnout risk, behavioural disengagement and venting.

Practical implications

Non-traditional responders should be screened for PTSD. Social support should be considered with the promotion of adaptive coping mechanisms.

Originality/value

The strength was longitudinal follow-up over an 18-month period, with demonstration of how the potential determinants influenced the course of PTSD over time.

Details

Disaster Prevention and Management: An International Journal, vol. 27 no. 2
Type: Research Article
ISSN: 0965-3562

Keywords

Article
Publication date: 1 August 2005

Brian McKenzie and Helen Curr

This study examined the ability of the HCR‐20 Scale (version 2) to predict incidents of in‐patient violence during a stay on a medium secure ward. The study was carried out…

Abstract

This study examined the ability of the HCR‐20 Scale (version 2) to predict incidents of in‐patient violence during a stay on a medium secure ward. The study was carried out retrospectively on a sample of 94 admissions, using reports pre‐existing at the time of admission and nursing observations of behaviour in the two weeks that followed admission. The sample group was made up of mentally disordered offenders and patients with challenging behaviour. Their episodes of care averaged two years.The H and C scores, singly or combined, did not show powerful predictive capacity for the sample as a whole, which had a high base rate for violence. Insufficient variance and poor inter‐rater reliability precluded use of the R variable. For purposes of analysis, violent patients were also grouped on the number of incidents committed during their episode of care. Here the C Scale items showed strong predictive capacity for patients with more than 10 incidents during their stay. The paper argues that the latter finding supports a method of predicting admissions at risk of frequent incidents of violence.

Details

The British Journal of Forensic Practice, vol. 7 no. 3
Type: Research Article
ISSN: 1463-6646

Keywords

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