Search results

The purpose of this paper is to examine the requirement that non-profit organizations recognize unconditional promises to give as assets and revenues in the year promises are received as mandated by Statement of Financial Accounting Standards (SFAS) No. 116.

Using the adoption of SFAS No. 116 and financial information reported on Internal Revenue Service Form 990, the study examines the requirement that non-profit organizations recognize unconditional promises to give as assets and revenues in the year promises are received. Combining insights derived from a model developed by Dechow, Kothari and Watts (1998) with the rationale applied by the Financial Accounting Standards Board (FASB) in mandating recognition treatment, it adopts the view that information about promises to give is relevant if it useful in assessing probable future cash inflows. The study also employs relative tests of predictive ability to assess competing specifications.

The study finds that recognizing unconditional promises to give as assets and as revenues in the year received improves predictions of next period’s cash inflows. It also finds that accrual-based contribution revenue consistently provides information content that is incremental to cash-based contribution revenue.

This paper has implications for several other lines of research as well. First, an ancillary concern expressed by many organizations in the non-profit sector was that the recognition of multi-year promises to give would adversely affect trends in long-term giving. In this regard, another promising line of inquiry would be to empirically test the Standard’s impact on the time-series properties of contributions and short- and long-term giving trends. Second, future research might consider conducting tests after partitioning by NTEE/NAICS classification, as well as substituting or supplementing the SOI data with financial statement data. Third, future research might consider applying the approach used in this study to other industries or groups for which market prices are not readily ascertainable. Data constraints, including the calculation of cash flow information indirectly from the balance sheet, impose limitations on this study.

This study documents that by recognizing unconditional promises to give as assets and revenues in the period received, donors, creditors and other users gain useful information about probable future cash inflows – a fundamental element of the accrual process and one of several important factors used to evaluate an organization’s ability to sustain future operations. This information is valuable to stakeholders and practitioners who rely on this information to make informed decisions. It is also helpful to standard setters in establishing guidelines that improve the usefulness of financial reporting for non-profits.

The paper contributes to existing literature by operationalizing, in a non-profit setting, a model that describes the relationship among revenues, accruals and cash flows. It fills a gap in the accrual literature regarding the relevance of non-profit revenue accruals. The study is the first to employ a relative information content approach to assess non-profit standards, which provides useful input to policy makers and end users. It affirms that many of the key conventions and elements embodied in the FASB Concepts Statements apply to non-profits as well, which heretofore has not been studied extensively. The results are also consistent with Accounting Standards Update 958, Not-for-Profit Entities, which requires that non-profits provide users with information about liquidity, including how they manage liquid resources needed to meet cash requirements for general expenditures within one year of the date of the statement of financial position.

The paper aims to examine earnings quality during the post‐acquisition period.

The paper defines earnings quality as an earnings stream more closely associated with future cash flows from operations. It uses the stock market's reaction at the acquisition announcement to infer merger motives and hypothesize that synergy‐motivated acquisitions will produce higher quality earnings than agency‐motivated acquisitions.

The paper finds that synergy‐motivated acquisitions produce higher quality earnings than agency‐motivated acquisitions.

The findings are consistent with this prediction and support the view that managers who pursue synergy or agency‐motivated acquisitions do not face the same economic environment and incentive schemes. The results are also consistent with the notion that incentives for earnings management are greater following agency‐motivated acquisitions when compared to those of synergy‐motivated acquisitions. The authors conjecture that these differences originate from those accounting‐based contracts that are likely impacted by reported post‐acquisition balance sheet and income statement amounts.

The findings of the paper show that the motive for the acquisition has lasting effect, several years post acquisition on the quality of earnings produced by the merged entity; thus furnishing additional importance to identifying the motive for the acquisition.

The paper uses the corporate acquisition setting to examine earnings quality during the post‐acquisition period. This paper should be relevant for researchers studying either the quality of earnings or corporate acquisitions.

The paper aims to examine the relation between fees paid to auditors and audit quality during the period of 2000‐2003.

The paper constructs a measure of auditor profitability that is used as a proxy for auditor independence. The methodology is grounded in the notion that auditor independence is influenced by effort and risk‐adjusted fees, rather than the level of fees received from clients. Since, risk and effort are unobservable, the paper uses proxies based on client size, complexity and risk to estimate abnormal fees. Abnormal fees are derived using a fee estimation model drawn from prior literature. The paper employs two metrics to assess audit quality – the standard deviation of residuals from regressions relating current accruals to cash flows and the absolute value of performance‐adjusted discretionary accruals.

The paper documents a statistically significant negative association between total fees and both audit quality proxies over all years. These findings are robust to a variety of additional tests and several alternative design specifications. The results (pre‐ and post‐SOX) are consistent with economic bonding being a determinant of auditor behavior rather than auditor reputational concerns.

The possibility that the empirical tests do not completely capture the impact of unobserved risk cannot be ruled out, though the paper attempts to do so by employing alternative specifications and sensitivity tests.

Policy makers should note that current restrictions on the provision of non‐audit services may not sufficiently resolve the issue of economic bonding and its impact on auditor independence.

In contrast to previous studies whose results are ambiguous, the paper finds a statistically significant positive association between several measures of total fees (it uses size‐adjusted and abnormal fees) and two metrics of accruals quality in all years (2000‐2003), consistent with economic bonding being a determinant of auditor behavior rather then auditor reputation concerns.

Companies may be defendants in lawsuits that are unresolved at year-end. This paper aims to consider whether the financial statements of companies facing litigation claims (pending litigation) are more time-consuming to audit due to the complexity and subjectivity of contingent liabilities associated with pending litigation. The authors consider whether auditors tailor their approach to pending litigation based on two distinct factors in the Chinese business environment: the client’s government ownership status and the legal development of the region in which the company is based.

Data on litigation against companies and their audit report lags were obtained for 18,029 firm-year observations of Chinese companies from 2008 to 2017. The sample was subsequently divided based on whether the company was a state-owned enterprise (SOE) and based on whether the company was based in a region of China with a more-developed and more market-oriented legal system.

The overall results indicate that audits of companies with pending litigation take 2.9 days longer than those of companies without pending litigation. For companies with multiple pending claims, each additional claim is associated with 1.9 more days of audit report lag. These effects are weaker for SOEs and for companies in regions of China with less developed legal systems. The results are consistent with the idea that auditors tailor their response to pending litigation based on the risk profile of the client, including consideration of SOE status and regional legal development.

This paper is the first to consider the potential effect of pending litigation (including claims not disclosed or recognized in financial statements) on audit report lags and how environmental business factors can influence this relationship.

This paper investigates whether the audit fees of Chinese listed firms are associated with the share pledging practice of the firm’s controlling shareholders.

This study uses the audit pricing model to estimate the association between the share pledging of listed firms and audit fees. Cross-sectional analysis is conducted on a large sample of Chinese listed firms during the period 2004 to 2019. The authors further test the moderating effects of listing on the Main Board, state ownership and abnormal audit report lag on the association between share pledging and audit fees. The results remain robust to various endogeneity tests including two-stage least squares instrumental variable analysis, entropy balancing analysis and difference-in-difference analysis.

The study finds that audit fees are positively associated with the proportion of shares pledged by the listed firm’s controlling shareholder in China. The results also provide new evidence that the positive association between audit fees and the share pledging of controlling shareholders could be mitigated if the firm is listed on the Main Board and/or it is a state-owned enterprise. In contrast, pledged firms with abnormal audit report lag are found to have higher audit fees than their pledged counterparts without the excessively long audit delay.

Findings of this study have important practical implications to those charged with governance, as boards need to comprehensively understand the adverse consequences of share pledging when pursuing it as the firm’s major source of financing. The study also has policy implications for stock market regulators such as the China Securities Regulatory Commission in China. Regulators could consider developing a threshold-based share pledging disclosure and pledge ratio requirements based on factors such as a firm’s listing status and ownership structure.

This study provides new evidence on the audit-related consequences of share pledging in a significant capital market. Findings of this study also enrich the existing audit literature by introducing the share pledging activities of controlling shareholders into the audit pricing decision-making model.