The Market Reaction to SEC IFRS-Related Announcements: The Case of American Depository Receipt (ADR) Firms in the U.S.

2014 ◽  
Vol 28 (3) ◽  
pp. 579-603 ◽  
Author(s):  
Jenice J. Prather-Kinsey ◽  
Paul N. Tanyi
Keyword(s):  
Financial Reporting ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Financial Statements ◽  
The United States ◽  
Equity Market ◽  
Market Reactions ◽  
Market Participants ◽  
Common Basis ◽  
The U.S

SYNOPSIS The objective of our study is to test whether the adoption of International Financial Reporting Standards (IFRS) in the United States (U.S.) is perceived positively by American Depository Receipt (ADR) firms' equity market participants. We conduct our tests by studying market reactions to the Securities and Exchange Commission's (SEC) IFRS-related press releases, between 2007 and 2011, regarding potential adoption of IFRS in the U.S. Using a sample of ADR firms and multivariate regression analyses, we test the 3-day cumulative abnormal returns (CAR) of investors of ADR firms in response to SEC announcements on potential IFRS adoption. We find a significant and positive market reaction to the SEC's announcements related to the potential adoption of IFRS in the U.S. for ADR firms reporting their financial statements using IFRS, especially in the industry where IFRS is the globally predominant accounting standard. Conversely, we find a significantly negative market reaction to SEC-related announcements of potential adoption of IFRS in the U.S. for ADR firms currently reporting their financial statements using U.S. generally accepted accounting principles (GAAP). We conclude that the SEC's adoption of IFRS may benefit global and U.S. equity market participants relative to Local GAAP reporting (reporting using domestic GAAP that is not IFRS or U.S. GAAP) by providing a common basis for investors, issuers, and others to evaluate investment opportunities.

Market Response to Audited Internal Control Weakness Disclosures

2020 ◽  
Vol 5 (1) ◽  
pp. 2-20
Author(s):  
Subash Adhikari ◽  
Binod Guragai ◽  
Ananth Seetharaman
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Market Reaction ◽  
Financial Statements ◽  
Data Availability ◽  
Market Response ◽  
Market Participants ◽  
Sarbanes Oxley ◽  
Time Periods ◽  
First Time

ABSTRACT To help guard against weaknesses in internal control over financial reporting (ICFR), the Sarbanes-Oxley Act of 2002 requires certain filers to have their ICFR assertions audited. Beneish et al. (2008) show that market participants fail to react negatively to adverse ICFR audit opinions. This is puzzling because weak ICFR heightens the risk of fraud or materially misstated financial statements. Our study reexamines this issue for the time periods covered by Auditing Standard No. 2 (AS2) and Auditing Standard No. 5 (AS5). We too find no significant negative market reaction to the disclosure of adverse ICFR audits in the AS2 era. However, we show that markets react negatively for first-time disclosures of adverse ICFR audits after the adoption of AS5. Furthermore, in the AS5 regime, markets seem to differentiate between entity-wide versus account-specific ICFR weaknesses. We also show that correcting previous ineffective ICFR results in a positive market reaction. Data Availability: Data are available from sources cited in the text.

Does Recent Academic Research Support Changes to Audit Reporting Standards?

2016 ◽  
Vol 30 (2) ◽  
pp. 255-275 ◽  
Author(s):  
Jean Bédard ◽  
Paul Coram ◽  
Reza Espahbodi ◽  
Theodore J. Mock
Keyword(s):  
Financial Reporting ◽  
Academic Research ◽  
Financial Statements ◽  
Future Research ◽  
Research Support ◽  
The Public ◽  
Market Participants ◽  
Information Gap ◽  
Public Company ◽  
Reporting Process

SYNOPSIS The Public Company Accounting Oversight Board (PCAOB), the International Auditing and Assurance Standards Board (IAASB), and the U.K. Financial Reporting Council (FRC) have proposed or approved standards that significantly change the independent auditor's report. These initiatives require the auditor to make additional disclosures intended to close the information gap; that is, the gap between the information users desire and the information available through the audited financial statements, other corporate disclosures, and the auditor's report. They are also intended to improve the relevancy of the auditor's report. We augment prior academic research by providing standard setters with an updated synthesis of relevant research. More importantly, we provide an assessment of whether the changes are likely to close the information gap, which is important to financial market participants and other stakeholders in the audit reporting process. Also, we identify areas where there seems to be a lack of sufficient research. These results are of interest to all stakeholders in the audit reporting process, as the changes to the auditor's report are fundamental. Additionally, our summaries of research on the auditor's report highlight where there is limited research or inconsistent results, which will help academics identify important opportunities for future research.

Megascreens USA Inc.—A Foreign Operations Case

2007 ◽  
Vol 22 (4) ◽  
pp. 579-590 ◽  
Author(s):  
Charles A. Carslaw ◽  
S. E. C. Purvis
Keyword(s):  
Financial Reporting ◽  
Foreign Currency ◽  
Financial Statements ◽  
The United States ◽  
Cash Flows ◽  
Consolidated Financial Statements ◽  
Comprehensive Overview ◽  
Financial Reporting Standards ◽  
Foreign Operations ◽  
Statement Of Cash Flows

This relatively short case gives students a comprehensive overview of the steps required to prepare consolidated financial statements under U.S. GAAP when a subsidiary prepares its accounts under a foreign GAAP—in this case, International Financial Reporting Standards (IFRS). While the case is closely based on an actual Australasian company seeking listing in the United States, the product and the exact financial details are disguised. Specifically, the case exposes students to the following: accounting for foreign currency transactions; adjustments to convert foreign GAAP to U.S. GAAP (accounting for license fees); translation of financial statements; change of functional currency; remeasurement of financial statements; and foreign consolidation and statement of cash flows with foreign operations. The case has been field-tested in an advanced accounting course and is also suitable for use in international accounting courses. Both undergraduate and graduate students have profited from the case.

Application of Fuzzy Logic to Fraud Detection

2005 ◽  
pp. 135-139
Author(s):  
Mary Jane Lenard ◽  
Pervaiz Alam
Keyword(s):  
Financial Reporting ◽  
Average Cost ◽  
Medical Insurance ◽  
Financial Statements ◽  
Third Party ◽  
Insurance Fraud ◽  
Fraudulent Financial Reporting ◽  
The Cost ◽  
The U.S ◽  
Financial Reporting Fraud

In light of recent reporting of the failures of some of the major publicly-held companies in the U.S. (e.g., Enron & WorldCom), it has become increasingly important that management, auditors, analysts, and regulators be able to assess and identify fraudulent financial reporting. The Enron and WorldCom failures illustrate that financial reporting fraud could have disastrous consequences both for stockholders and employees. These recent failures have not only adversely affected the U.S. accounting profession but have also raised serious questions about the credibility of financial statements. KPMG (2003) reports seven broad categories of fraud experienced by U.S. businesses and governments: employee fraud (60%), consumer fraud (32%), third-party fraud (25%), computer crime (18%), misconduct (15%), medical/insurance fraud (12%), and financial reporting fraud (7%). Even though it occurred with least frequency, the average cost of financial reporting fraud was the highest, at $257 million, followed by the cost of medical/insurance fraud (average cost of $33.7 million).

Ruckman, Inc.: Converting from U.S. GAAP to IFRS

2011 ◽  
Vol 26 (2) ◽  
pp. 341-360 ◽  
Author(s):  
Rebecca Fay ◽  
John A Brozovsky ◽  
Patricia G Lobingier
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Financial Statements ◽  
The United States ◽  
Securities And Exchange Commission ◽  
High Demand ◽  
Financial Reporting Standards ◽  
Accounting Courses ◽  
Cpa Exam ◽  
Two Phases

ABSTRACT This case is designed as a comprehensive review of significant differences between accounting principles generally accepted in the United States of America (U.S. GAAP) and International Financial Reporting Standards (IFRS) for specific topics covered during most Intermediate Accounting courses. The task requires you to analyze and evaluate a company's significant accounting policies for compliance with IFRS as you plan and conduct the conversion of a firm's financial statements from U.S. GAAP to IFRS. The skills developed throughout this case are currently in high demand as IFRS is quickly becoming the global norm in accounting standards and many multinational companies based in the U.S. are already affected by these standards. The Securities and Exchange Commission (SEC) has developed a roadmap that may require U.S. companies to begin adopting IFRS in 2015. You will be tested on your knowledge of IFRS on the CPA exam. The case is presented in two phases, allowing you to experience the conversion process from planning to execution.

scholarly journals Auditor Litigation and the Penalties on U.S. Client Firms after the Private Securities Litigation Reform Act

2018 ◽  
Vol 1 (25) ◽  
pp. 62 ◽  
Author(s):  
Nana Y. Amoah ◽  
Anthony Anderson ◽  
Isaac Bonaparte ◽  
Kyle Meyer
Keyword(s):  
Financial Reporting ◽  
Abnormal Returns ◽  
Securities Litigation ◽  
Investor Confidence ◽  
Audit Failure ◽  
Market Participants ◽  
Cumulative Abnormal Returns ◽  
Audit Firms ◽  
Client Firm ◽  
Auditor Litigation

This study examines the relation between auditor litigation and the market and legal penalties imposed on sued audit clients after the private securities litigation reform act (PSLRA). A sample of accounting-related lawsuits is used in the regressions of three-day cumulative abnormal returns, settlement amount, and probability of settlement on auditor litigation and other variables. The results indicate a negative relation between auditor litigation and the 3-day cumulative abnormal returns around the announcement of litigation against the client firm. Another result from the study is a positive relation between auditor litigation and the legal penalty on the client firm. Specifically, the results indicate higher likelihood of settlement and larger settlement sizes for securities lawsuits in which the auditor is also sued. Our study contributes to the debate on the merit of litigation against auditors after the PSLRA. The findings imply that lawsuits against auditors appear to be a signal of audit failure and higher financial reporting risk. As audit failures erode investor confidence in the capital markets, the present study provides valuable evidence on the market and legal system’s perception of the merit of auditor litigation. The findings should be of interest to regulators and market participants given the increase in securities lawsuits against audit firms and the substantial reputational consequences of such lawsuits on audit firms and client firms.

scholarly journals Market Reactions to Audit Committee Director’s Gender: Evidence from US-Traded Foreign Firms

2011 ◽  
Author(s):  
Hua-Wei Huang ◽  
Yun-Chia Yan ◽  
James M. Fornaro ◽  
Ahmed Elshahat
Keyword(s):  
Audit Committee ◽  
Gender Diversity ◽  
Market Price ◽  
Abnormal Returns ◽  
Foreign Firms ◽  
Market Reactions ◽  
Market Participants ◽  
Positive Message ◽  
The Us ◽  
The Impact

This study investigates whether the appointment of a female to the audit committee of a foreign issuer in the US is positively associated with subsequent market price reaction. We hypothesize that female members on the audit committee can strengthen corporate governance by their conservative and ethical qualities. Accordingly, such appointments deliver a positive message to capital market participants. In order to observe the impact of audit committee gender diversity on foreign firms, we include all audit committee appointments of US-traded foreign firms from 2002 to 2009. We find that the appointment of female audit committee members has significant positive cumulative abnormal returns compared to the appointment of male audit committee members.  

What Do the Markets Say? Shareholder Wealth Effects of the XBRL Mandate

2017 ◽  
Vol 32 (3) ◽  
pp. 1-21 ◽  
Author(s):  
Gary Chen ◽  
Xiaohong (Sara) Wang ◽  
Jie Zhou
Keyword(s):  
Information Processing ◽  
Stock Returns ◽  
Financial Reporting ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Shareholder Wealth ◽  
Wealth Effects ◽  
Net Benefit ◽  
Accessible Information ◽  
Mandatory Adoption

ABSTRACT We investigate the market reaction to legislative events pertaining to the eXtensible Business Reporting Language (XBRL) mandate. The SEC contends that requiring issuers to adopt XBRL for filing their financial statements would reduce information processing costs and improve market efficiency. In contrast, skeptics argue that the mandatory adoption of XBRL would impose substantial costs while providing few, if any, benefits to investors. Using stock returns from countries that did not mandate the adoption of XBRL to model normal U.S. returns, we provide evidence of a positive market reaction to legislative events related to the XBRL mandate. Moreover, we find that the abnormal returns to these events are increasing for firms with less accessible information, higher information asymmetry, greater information processing costs, and lower financial reporting transparency. Overall, our results suggest an expected net benefit to shareholders from the XBRL mandate. JEL Classifications: M41; K22.

Earnings Management and Stock Market Reaction

2019 ◽  
pp. 32-52
Author(s):  
Antonio Melo Cerqueira ◽  
Claudia Ferreira Pereira
Keyword(s):  
Stock Market ◽  
Earnings Management ◽  
Market Reaction ◽  
Financial Statements ◽  
Negative Consequences ◽  
Accounting Regulation ◽  
Market Participants ◽  
Stock Market Reaction ◽  
Prior Literature ◽  
Entire Economy

This chapter aims to analyze if and the extent to which earnings management activities are detected by market participants. For that purpose, this chapter reviews prior literature on stock market reaction to earnings management and earnings quality. A main conclusion obtained with this approach is that stock market participants are to some extent misled by earnings management activities consistent with those activities making the firm's information environment more opaque, thus increasing the difficulty for investors to interpret financial statements. Both the theoretical and empirical contributions provided in such works are relevant given the potential negative consequences of earnings management for stakeholders, firms, and even for the entire economy. In addition, it must be emphasized that accounting regulation is fundamental to balance the trade-off between more informative financial statements and reducing the level of managers' opportunistic choices.

Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches

2007 ◽  
Vol 26 (1) ◽  
pp. 19-45 ◽  
Author(s):  
W. Robert Knechel ◽  
Vic Naiker ◽  
Gail Pacheco
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Brand Name ◽  
Market Reactions ◽  
Industry Specialization ◽  
Big 4 ◽  
Audit Firms ◽  
Auditor Switches ◽  
Differential Costs

Numerous capital market studies have investigated the stock market's reaction to firms switching to and from brand name auditors (Big 8/6/5/4 auditors). However, audit firm brand name is only one possible indication of the quality of an auditor. This study contributes to the existing literature on auditor switching, by examining how the market reacts to auditor switches to or from audit firms that are considered to be industry specialists. Consistent with our hypotheses, we find that firms switching between Big 4 auditors experience significant positive abnormal returns when the successor auditor is an industry specialist, and they experience significant negative abnormal returns when the successor auditor is not a specialist. We also find that these market reactions are more likely to be due to changes in perceived audit quality rather than differential costs of using specialist auditors. In supplemental analysis of switches involving non-Big 4 auditors, we find that firms that switch from a specialist Big 4 auditor to a non-Big 4 auditor suffer the largest negative market reaction. Surprisingly, we also observe that the market reacts most positively when a company switches from a non-Big 4 auditor to a Big 4 auditor who is not a specialist. These results suggest that the market does perceive audit quality differences based on industry specialization to be relevant to the valuation of a company's market value.

Sign in / Sign up

Export Citation Format

Share Document