CFO/CEO-Board Social Ties, Sarbanes-Oxley, and Earnings Management

2011 ◽  
Vol 25 (3) ◽  
pp. 537-557 ◽  
Author(s):  
Gopal V. Krishnan ◽  
K. K. Raman ◽  
Ke Yang ◽  
Wei Yu
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Social Ties ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Board Independence ◽  
Sarbanes Oxley ◽  
Time Period ◽  
The Board Of Directors

SYNOPSIS Prior research suggests that the efficacy of a formally independent member of the board of directors could be undermined by social ties with the CEO. In this study, we examine the relation between CFO/CEO-board social ties and earnings management over the 2000–2007 time period. Our results suggest that CFOs/CEOs picked more socially connected directors in the post-Sarbanes-Oxley Act (SOX) time period (possibly as a way out of the mandated independence requirements). Our results also suggest a positive relation between CFO/CEO-board social ties and earnings management. Still, the increase in managerial/board risk aversion since SOX appears to have negated the effect of social ties on earnings management in the post-SOX period. Board independence and financial reporting quality remain topics of ongoing interest. The study is important in advancing our understanding of the role of social ties in earnings management.

scholarly journals The effect of audit committee characteristics on financial reporting quality: The moderating role of audit quality in the Netherlands

2021 ◽  
Vol 18 (3) ◽  
pp. 19-30 ◽  
Author(s):  
Sana Mardessi Masmoudi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Ordinary Least Squares ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
Moderating Role

The purposes of this study are to shed light, on the one hand, on the effect of audit committee characteristics, namely independent members in audit committee, a financial expert in audit committee, frequency of meetings and audit committee size on financial reporting quality proxied by real earnings management. On the other hand, it aims to investigate the moderating role of audit quality in the relationship between audit committee characteristics and financial reporting quality. The objective is to contribute to the new evidence on the role of audit committee characteristics towards the financial reporting quality with audit quality as a moderator, particularly the appointment of Big 4 company. This study uses the ordinary least squares (OLS) regression to achieve the research purpose by evaluating the data collected from 90 public listed companies from 2010 to 2019 in the Dutch context. The results state that audit committee characteristics have a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on abnormal operating cash flow and discretionary expenses is not significant. There is also evidence that audit quality positively moderates the audit committee and real earnings management links. Lastly, the findings of this study will help professional accountancy bodies and governments to highlight the relevance of earnings management in safeguarding trustworthy financial information, owners’ wealth and to enhance audit committee characteristics in improving audit quality, especially after the enforcement of the Dutch Corporate Governance Code in 2016.

scholarly journals The Role of IFRS on Financial Reporting Quality and Global Convergence: A Conceptual Review

2019 ◽  
Vol 3 (1) ◽  
pp. 67
Author(s):  
Auwalu Musa
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Accounting Quality ◽  
Ifrs Adoption ◽  
The World ◽  
Timely Loss Recognition

This study examines the role of International Financial Reporting Standards on financial reporting quality and the global convergence. The IFRS adoption is already an issue of global relevance across countries of the world due to the quest for uniformity, reliability and comparability of financial statements of companies. The adoption of IFRS in Europe is an example of accounting quality across-borders with different institutional frameworks and enforcement rules. This allows investigating whether, and to what extent accounting regulation per se can affect the quality of financial reporting and leads to convergence in financial reporting. Specifically, the study review how the change in the recognition and measurement of firms operating accrual item, the loan loss provision, affects income smoothing behaviour and timely loss recognition. The study found that the IFRS convergence reduces the scope for earnings management, is related to more timely loss recognition and leads to more value relevant accounting measures. Thus, the study reviews background and guidance on the change in financial reporting quality following extensive IFRS adoption around the world countries. The study found that a difference in accounting quality is related to country’s overall infrastructure setting. The study also highlights the importance of investor protection for financial reporting quality and the need for regulators to design mechanisms that limit managers' earnings management practice. The study found from different literatures that the adoption of IFRS leads to higher quality of accounting numbers and improve foreign direct investment across countries.

scholarly journals Does Attestation of the effectiveness of Internal Control over Financial Reporting Discourage Earnings Management? Evidence from China

2018 ◽  
Vol 7 (4) ◽  
pp. 1
Author(s):  
Li Dang ◽  
Qiaoling Fang
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Reporting Quality ◽  
Chinese Government ◽  
Chinese Firms ◽  
Public Firms ◽  
Sarbanes Oxley

To improve financial reporting quality, the Chinese government issued the Basic Standard for Enterprise Internal Control in 2008 and other related guidelines/regulations in the following years (hereafter China SOX). The scope of China SOX is broader but similar to Section 404 of the Sarbanes-Oxley Act (SOX) in the U.S. Formal adoptions of China SOX requires management and external auditor’s report on the effectiveness of internal control over financial reporting (ICFR). A company’s ICFR, if effective, should provide reasonable assurance that the company’s financial statements are reliable and prepared in accordance with the applicable accounting standards. The purpose of this study is to investigate whether China external auditor attestation of ICFR discourage earnings management, an indicator of financial reporting quality. By analyzing a sample of Chinese public firms during 2011 to 2013, we find that: (1) Chinese firms that disclose audited ICFR reports exhibit lower earnings management than firms that do not; (2) Chinese firms that are mandated to disclose audited ICFR reports exhibit lower earnings management than firms that voluntarily disclose audited ICFR reports. Our empirical results seem to suggest that attestation of the effectiveness of ICFR discourages earnings management and therefore improve financial reporting quality. 

scholarly journals Earnings Management Behavior in Malaysia: The Role of Ownership Structure and External Auditing

2020 ◽  
Vol 19 (3) ◽  
pp. 185-221
Author(s):  
Nor Irdawati Mahyuddin ◽  
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
External Control ◽  
Listed Firms

"This paper aims to empirically investigate firms’ earnings management (EM) behaviour, representing an issue in the realm of corporate financial reporting. Specifically, it explores the strategic roles of two common governance elements of ownership (managerial, institutional and family) and external audit in shaping the firms’ EM behaviour based on the two common EM attributes of Discretionary Accruals (DA) and Real Activities EM (REM). The analyses based on 227 survived Malaysian listed firms throughout the sixteen-year period from 2001 to 2016 (3,632 firm-year observations) indicate a dynamic EM behaviour depending on the presence of different ownership structures. Whilst a high percentage of family and institutional ownership mitigates DA, it however does not hold true for REM. Further, this paper also shows that the external control mechanism of audit quality is not significant in mitigating both EM attributes. The empirical results suggest that firms facing different challenges would affect the firms’ financial reporting behaviours in their choice of EM. The paper adds to the growing body of empirical knowledge dealing with the determinants of DA and REM from the lens of an emerging economy like Malaysia. KEYWORDS: Earnings management, discretionary accruals, real earnings management, accrual earnings management, financial reporting quality."

scholarly journals Firm Characteristics and Financial Reporting Quality: The Moderating Role of Malaysian Corporate Governance Index

2018 ◽  
pp. 924-932
Author(s):  
Rokiah Ishak ◽  
Noor Afza Amran ◽  
Kamarul Bahrain Abdul Manaf
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Cash Flow ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Large Firms ◽  
Firm Characteristics ◽  
Big 4

The principle role of financial reporting is to provide investors with useful information for investment decision makings. In this study, we examine whether corporate governance moderates the relationship between firm characteristics and financial reporting quality. We use earnings management as measure for financial reporting quality. This study uses secondary data obtained from Thompson Database. The sample of this study is firms listed on the Main Market of Bursa Malaysia from 2012 to 2015. The results of our study reveal that there is a positive value of abnormal cash flow which indicates that companies do practice earnings management through manipulation of cash flow from operations. Large firms are practicing earnings management. Factors such as many business segments and business complexity have encouraged large firms to manage their earnings by manipulating their cash flow from operation. In contrast, firms with high leverage and firms audited by Big 4 are less likely to involve with earnings management. Interestingly, when corporate governance index is used as moderating variable, our result shows that only firms audited by Big 4 are related to earnings management. In terms of the contribution of the study, this study is important for the development of Malaysian capital market and it help investors to better understand how the impact of corporate governance mechanisms on financial reporting quality varies across firms.

scholarly journals Board characteristics and financial reporting quality: evidence from Jordan

2014 ◽  
Vol 11 (3) ◽  
pp. 8-29 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Board Of Directors ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Financial Reporting Quality ◽  
Board Independence ◽  
Board Characteristics ◽  
Financial Expertise ◽  
The Board Of Directors ◽  
Specific Expertise

This paper aims outspreading preexisting researches by assessing practically and empirically how board characteristics play a vibrant role in magnitude of earning management (EM) for the Jordanian listed companies. In particular, the paper throws its light on the principle features of the board of directors, i.e. board independence, CEO duality, financial expertise, governance expertise, firm-specific expertise and size. In this paper, a cross-sectional version of the Modified Jones Model is applied to ensure the accurate assessment of the key impacts of board characteristics on EM for a sample of 86 industrial listed companies on the Amman Stock Exchange (ASE) for the years 2008 to 2010. Discretionary accruals are used as proxy for EM. This study, on the basis of findings, reveals the significant correlation between salient board features and EM. Findings of this systematic observation demonstrate that board independence, financial expertise, governance expertise and size have a negative relation with EM. It also found that CEO duality and board firm-specific expertise have an obvious positive relation with discretionary accruals. The findings suggested that the board character has an effective role in detecting EM and in turn improve financial reporting quality (FRQ). In real fields, the discoveries of this paper portray valuable information for the regulators in different countries. The results also provide useful information for investors in assessing the impact of board characteristics on FRQ. In fact, previous studies on this very issue in this context do not meet the demand of comprehensive observation appropriately. To make input in this area, particularly among Jordanian companies, this study will extend the scope through providing empirically tested findings of the role of board directors’ characteristics on EM. In addition, this paper is the first empirical study to investigate the relationship between the board of directors’ characteristics and EM in Jordan.

The Impact of Going Concern on Financial Reporting Quality: Evidence from Vietnam

2018 ◽  
Vol 34 (3) ◽  
Author(s):  
Phung Anh Thu ◽  
Nguyen Vinh Khuong
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Viet Nam ◽  
Listed Firms ◽  
Going Concern ◽  
Debt Covenant

The investigation was conducted to contribute empirical evidence of the association between going concern and financial reporting quality of listed firms on the Vietnam stock market. Based on data from 279 companies listed on the HNX and HOSE exchanges in Vietnam for the period 2009-2015, the quantitative research. Results found that the relationship between the going concern and financial reporting quality of listed firms. Research results are significant for investors, regulators to the transparency of financial reporting information. Keywords Going concern, financial reporting quality, listed firms References Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16(5_suppl), 140S-154S.Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.Charitou, A., Lambertides, N., & Trigeorgis, L. (2007a). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271–296.Chen, Y., Chen, C., & Huang, S. (2010). An appraisal of financially distressed companies’ earnings management: Evidence from listed companies in China. Pacific Accounting Review, 22(1), 22–41Dechow, P., & Dichev, I. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77, 35-59.DeFond, M., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1), 145–176.DeFond, M.L., & Park, C.W. (1997). Smoothing income in anticipation of future earnings. Journal of Accounting and Economics, 23(2), 115–139.Dichev, I., & Skinner, D. (2004). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.Đinh Thị Thu T., Nguyễn Vĩnh K. (2016). Tác động của hành vi điều chỉnh thu nhập đến khả năng hoạt động liên tục trong kế toán: Nghiên cứu thực nghiệm cho các doanh nghiệp niêm yết tại Việt Nam, Tạp chí phát triển khoa học và công nghệ, Quí 3, tr.96-108.Đỗ Thị Vân Trang (2015). Các mô hình đánh giá chất lượng báo cáo tài chính, Tạp chí chứng khoán Việt Nam, 200, tr 18-21.Habib, A., Uddin Bhuiyan, B., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155-180.Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324.Kasznik, R., (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), pp.57-81.Lu, J. (1999). An empirical study of earnings management by loss-making listed Chinese companies. KuaijiYanjiu (Accounting Research), (9), 25–35.McNichols, M.F. and Stubben, S.R., (2008). Does earnings management affect firms’ investment decisions?. The accounting review, 83(6), pp.1571-1603.Selahudin, N.F., Zakaria, N.B., & Sanusi, Z.M. (2014). Remodelling the earnings management with the appear- ance of leverage, financial distress and free cash flow: Malaysia and Thailand evidences. Journal of Applied Sciences, 14(21), 2644–2661.Skinner, D.J., & Sloan, R. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2/3), 289–312.Sweeney, A.P., (1994). Debt-covenant violations and managers' accounting responses. Journal of Accounting & Economics, 17(3): 281-308.Trần Thị Thùy Linh, Mai Hoàng Hạnh (2015). Chất lượng báo cáo tài chính và kỳ hạn nợ ảnh hưởng đến hiệu quả hoạt động của doanh nghiệp Việt Nam, Tạp chí phát triển kinh tế, 10, tr.27-50.Trương Thị Thùy Dương (2017). Nâng cao chất lượng báo cáo tài chính công ty đại chúng, Tạp chí tài chính, 1(3), tr.55-56.Uwuigbe, Ranti, Bernard, (2015). Assessment of the effects of firm’s characteristics on earnings management of listed firms in Nigeria, Asian Economic and Financial Review,5(2):218-228.

Labor and Finance: The Role of Financial Reporting Quality

2019 ◽  
Author(s):  
Boochun Jung ◽  
Woo-Jong Lee ◽  
David P. Weber ◽  
Daniel Yang
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Reporting Quality

Did the 1999 NYSE and NASDAQ Listing Standard Changes on Audit Committee Composition Benefit Investors?

2017 ◽  
Vol 92 (6) ◽  
pp. 187-212 ◽  
Author(s):  
Seil Kim ◽  
April Klein
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Research Question ◽  
Reporting Quality ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Difference In Differences ◽  
Listed Firms ◽  
Sarbanes Oxley ◽  
Independent Audit

ABSTRACT In December 1999, the SEC instituted a new listing standard for NYSE and NASDAQ firms. Listed firms were now required to maintain fully independent audit committees with at least three members. In July 2002, the U.S. Congress legislated these standards through the Sarbanes-Oxley Act. Our research question is whether all investors benefited from the 1999 new rule. Using both an event study and a difference-in-differences methodology, we find no evidence of higher market value or better financial reporting quality resulting from this rule.

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