Institutionally Speaking, are Global Standards Adoptable in a Given Jurisdiction? A Critical Analysis of the IFRS's Use in Ukraine through the Lens of New Institutional Accounting

This paper examines the consequences of International Financial Reporting Standards (IFRS) adoption in Ukraine through the lens of New Institutional Accounting theory. IFRS adoption's effects on management's reporting incentives, enforcement and institutional complementarities are analysed. I find that adoption at a technical level is not enough to be called "adoption" as profound changes at the institutional level are also required. Adopted IFRS are subjected to the same type of institutional and market pressures that gave rise to the old set of standards and as a result, the practice of financial reporting is unchanged at its core while only new technical rules apply. Hence, jurisdictions should not pursue only technical adoption but should also try their best to align as close as possible all institutional aspects of this issue. The best advice for all jurisdictions with an institutional infrastructure similar to Ukraine's is to strengthen management's reporting incentives and enforcement mechanisms.

Debt financing and classification shifting of private firms

Purpose This study aims to examine whether debt financing creates incentives for private firms to engage in earnings management via classification shifting. Especially, the authors examine whether debt-induced financial reporting incentives differ depending on the type of debt (i.e. public bonds versus private loans) and whether such incentives are influenced by the characteristics of external auditors (i.e. initial audits and auditor size). Design/methodology/approach The study uses data on 93,427 Korean private firms from 2001 to 2016. Classification shifting is measured by the positive correlation between non-core expenses and unexpected core earnings estimated with ordinary least squares. Findings The empirical analyses reveal that private firms engage in classification shifting as do public firms. Importantly, classification shifting is observed only in private firms that have outstanding debt, but not in private firms without debt. Among debt-financing private firms, classification shifting is more prevalent for firms that issue public debt than for firms that only use private debt. In addition, classification shifting of debt-financing private firms is more successful when they are audited by new auditors that are one of the non-Big 4 firms. Research limitations/implications The study provides evidence of classification shifting in private firms, which is novel to the literature. However, the inferences in the study depend on the validity of the model for detecting classification shifting. Practical implications This study helps lenders enhance their understanding on the financial reporting behaviors of borrowing firms. The results in this study suggest that lenders should be cautious in using core earnings for their investment decisions. Originality/value This study contributes to the literature by providing novel evidence of classification shifting in private firms. In addition, the authors contribute to the literature on debt-induced incentives for financial reporting.

Accounting Standards, Reporting Incentives, and Earnings Management

In this study, we examine which factor, firms’ accounting standards or firms’ reporting incentives, has a greater impact on firms’ earnings management behavior. To answer this question, we utilize unique hand-collected data that consists of foreign firms cross-listed in the U.S. using U.S. GAAP. This interesting setting allows us to control for differing accounting standards and external monitoring from the SEC between foreign firms and their U.S. domestic counterparts. Therefore, if there is any observed difference in the level of firms’ earnings management, that difference can be mainly attributed to firms’ reporting incentives rather than firms’ accounting standards. Our findings suggest that cross-listed foreign firms using U.S. GAAP exhibit more accruals-based and real activities earnings management relative to domestic firms. The results suggest that accounting standards, regulations, and enforcement is not enough to eliminate opportunistic reporting behavior. Firm incentives will still impact the magnitude of earnings management. This finding is particularly important given the hot debate regarding whether the U.S should adopt IFRS or not. No matter what accounting standards firms choose, U.S GAAP or IFRS, firms’ earnings quality can still vary with differing reporting incentives.

Board ethnic diversity and goodwill impairment decisions: longitudinal analysis of energy firms in Malaysia

The present study investigates whether ethnic diversity among firms’ directors influences the decision to take goodwill write-offs, after considering the economic factors of impairment (measured in terms of the market capitalization indicator), reporting incentives, and firms’ internal governance. The analysis focuses on energy firms in Malaysia from 2006 to 2018. The regressions results based on binary logistics show that energy firms are less likely to take goodwill write-offs even when the market indicates the possibility for the write-offs. The results also show the absence of the direct relationship between goodwill impairment decisions and ethnic diversity of the board of directors. Nevertheless, the results reveal that board ethnicity moderates the relationship between firms’ goodwill impairment decisions and the market capitalization indicator, suggesting that as firms encounter increasing market indicator of impairment losses, the board with diverse ethnicity positively influences firms in taking goodwill write-offs. The results of the present study add to the literature on board diversity and firms’ decisions with regard to goodwill impairment by highlighting the beneficial roles of having ethnically diverse board of directors, in that they use the market indicator that goodwill may be impaired in their monitoring role on the goodwill impairment decisions. The results offer input to the policymakers by suggesting that to strengthen the monitoring roles of the board of directors, they need to be diverse and equipped with indicators that would assist them in their monitoring decisions. AcknowledgementThe author acknowledges’ the research funding (i.e., FRGS grant 13591 provided via Universiti Utara Malaysia) from the Ministry of Higher Education in Malaysia.

Financial reporting incentives: Taxation and external financing need

Earnings management literature extensively explores tax regime and debt contracting as possible incentives in financial reporting. Firms engage with aggressive financial reporting to bias earnings in periods when the need for external financing increases. Contrary to this, the tax burden represents incentive for more conservative reporting. We argue that the level of firm's financial reporting aggressiveness is not constant but rather floating from period to period, directly affecting the quality of financial reports. We assume that firm's management on its own discretion determines the level of conservatism, balancing between these two incentives. The prevailing of two incentives, the need for external financing and the tax burden, determines the level of conservatism in particular reporting period. We hypothesised that the reduction in tax burden incentive overcomes the debt contracting incentive in the years of decreasing external financing need, implying more conservative accounting to balance between economic and taxable income. The total accruals are used as a measure of earnings management reflected to working capital accruals. The data analysis conducted on financial reports of 297 firms in the time-series of five years shows a significant correlation between total accruals, external financing needs and difference between economic and taxable income.

Do Political Connections Affect the Conservative Financial Reporting of Family Firms?

This paper investigates the effect of political connections on the association between family firms and conservative financial reporting. While family firms have incentives to reduce agency and litigation-related costs by means of conservative reporting, firms with political connections tend to have opaque financial reporting, which enable them to engage in rent-seeking activities. Using data for Taiwanese listed firms between 1996 and 2012, the final sample observations were 13,877 firm-year observations from a population of 21,393 firm-year observations. We found that political connections weaken the positive relationship between family ownership and conservative financial reporting. This suggests that politically connected family firms make fewer demands for conservative financial reporting. This study contributes to the literature on how political connections affect the family owners’ reporting incentives. Policy makers may consider political connections as an essential factor with respect to establishing governance practice in family firms.

Reporting and Non-Reporting Incentives in Leasing

ABSTRACT This study sheds light on the extent to which the use of operating leases depends on reporting incentives, such as understating liabilities, and non-reporting incentives that partly arise from the overlap between accounting, bankruptcy, and tax laws, such as increasing financing capacity and flexibility. We provide evidence that expanding financing capacity, accommodating volatile operations, and maximizing the present value of tax deductions are all important drivers of leasing decisions. Our findings suggest that capital markets and contracting-based reporting incentives have little influence on operating lease use. In particular, we find weak evidence that firms increase operating leases in advance of issuing equity, and no evidence that firms use operating leases to window-dress in advance of issuing debt, to avoid debt covenant violations, for compensation purposes, or to paint a better picture on an ongoing basis. These findings are consistent with reporting incentives playing a second-order role in leasing decisions. JEL Classifications: G32; G33; K34; M41.