Search Results (53)

As emerging economies expedite their integration into global capital markets, comprehending the implications of voluntary International Financial Reporting Standards (IFRS) adoption has become increasingly critical for regulators, investors, and corporations. This study examines the influence of voluntary IFRS adoption on the quality of financial reporting and the value of firms in Vietnam, a transitional economy characterized by a unique code-law legal tradition, a substantial disparity between domestic accounting standards and IFRS, and a government-mandated adoption roadmap that establishes a distinctive quasi-voluntary adoption phase. The study utilizes a panel dataset of 562 firms listed on the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) from 2019 to 2022, employing a fixed-effects regression model with robust standard errors to account for unobservable firm heterogeneity. Utilizing agency theory and signaling theory, the research anticipates and validates that voluntary IFRS adoption correlates positively with diminished discretionary accruals (serving as an indicator of financial reporting quality) and elevated Tobin’s Q (acting as a measure of firm value). The estimated effect corresponds to a 10.7% reduction in discretionary accruals and a 13.1% increase in Tobin’s Q relative to sample means—magnitudes that are both statistically and economically significant. Unlike prior studies that rely exclusively on archival data, this study employs a survey-based measure of voluntary IFRS adoption activity to capture preparatory behaviors that are not yet observable in public financial disclosures, representing a methodological contribution to the literature. The results have useful implications for policymakers in Vietnam and other developing countries that are considering adopting IFRS on either a voluntary or mandatory basis. They show that taking the initiative to follow international reporting standards makes reports more trustworthy and the market more valuable. Full article

The joint influence of digital adoption in corporate governance and its impact on external assurance is a critical and emerging nexus in the literature concerning auditing and technological innovation, especially in volatile markets. Building on agency theory and resource dependence theory, this study investigates the nexus between corporate digital transformation (DT) and audit quality (AQ), while examining the moderating role of AC characteristics—specifically size, gender diversity, expertise, and activity—within the Egyptian context. Utilizing a sample of 120 non-financial firms listed on the Egyptian Exchange (EGX) from 2022 to 2024 (360 firm-year observations), the analysis employs Robust Least Squares (M-estimation) and Panel EGLS to ensure resilience against outliers and heteroscedasticity. The empirical findings provide robust evidence that digital transformation significantly enhances audit quality by constraining discretionary accruals, supporting the premise that technological integration improves monitoring and transparency. Moreover, the results reveal that the audit committee acts as a pivotal positive moderator, strengthening the digitalization-audit quality relationship; this impact is most pronounced in firms with larger, more gender-diverse, and financially expert audit committees. While audit committee activity shows a reactive correlation with accruals, its interaction remains essential for continuous monitoring in digital environments. Ultimately, this study offers novel insights for regulators and firms in emerging economies, highlighting that the benefits of technological adoption in financial reporting are maximized only when complemented by robust internal governance mechanisms, necessitating simultaneous investment in digital infrastructure and the fortification of audit committee attributes to ensure sustained audit market efficiency. Full article

This study examines the determinants of goodwill impairment recognition under IFRS 3 in the context of Moroccan listed firms. Using an unbalanced panel covering the period of 2006–2024 and comprising 862 firm-year observations, we employ a three-stage empirical strategy that integrates a Probit model to estimate the likelihood of impairment, a Tobit model to assess the magnitude of the loss, and a Heckman two-step procedure to correct for potential self-selection. The results show that goodwill impairment reflects key economic and financial fundamentals, including revenue growth, book-to-market ratios, and operating performance. However, both real and accrual-based earnings management significantly influence the probability and intensity of impairment, particularly through abnormal cash flows and income-smoothing behavior. Discretionary accruals become significant only after correcting for selection bias, indicating that they do not drive the recognition decision but contribute to determining the size of the impairment once it has been recorded. The findings are robust across multiple specifications and contribute to the broader literature on financial reporting quality under IAS/IFRS, while enriching empirical evidence on managerial discretion and earnings management in emerging-market environments. Full article

This study examines how inventory management influences accrual-based earnings management in emerging markets. Specifically, it analyzes the effect of three inventory performance indicators—Inventory Turnover Ratio (ITR), Inventory Service Level (ISL), and Inventory Coverage Rate (ICR)—on discretionary accruals (AVDA), measured as the absolute value of discretionary accruals estimated using the Kothari model. The Moroccan context offers a relevant setting due to the scarcity of research linking operational supply-chain metrics to financial reporting practices in emerging economies. The empirical analysis relies on 321 firm-year observations from 41 non-financial companies listed on the Casablanca Stock Exchange between 2016 and 2023. A panel fixed-effects regression model is employed to assess the association between inventory indicators and AVDA. Results show a significant negative relationship between ISL and discretionary accruals, while ITR and ICR exhibit no significant effects. These findings indicate that higher inventory service reliability is associated with reduced earnings management, highlighting the governance role of inventory-related SCM practices in Morocco. Full article

Accounting manipulation undermines the integrity of financial reporting and can distort key performance indicators, yet its quantitative effects on accounting quality (AQ) and value-related metrics remain underexplored. This study analyses U.S. publicly traded firms involved in accounting manipulation between 2017 and 2019, comparing them with matched non-manipulative industry peers to assess differences in AQ. It also examines potential links between manipulation-related AQ distortions and changes in Economic Value Added (EVA), stock prices, trading volumes, and dividend payouts. The sample includes 57 manipulation-affected firms and 57 matched controls, identified through SEC enforcement filings and the Violation Tracker database. Financial and stock data were sourced from EDGAR, ORBIS, and Morningstar. AQ was measured using discretionary accruals estimated via the Kasznik model. Correlation analysis tested associations between AQ and the selected performance indicators. Results show that firms involved in accounting manipulations had significantly lower AQ than their peers. However, no consistent correlations were found between AQ and EVA, dividends, stock prices, or volumes during the manipulation period. These findings suggest that the performance effects of manipulations are case-specific and shaped by additional factors, underscoring the importance of strong regulatory oversight and high-quality accounting practices. Ethically, our evidence underscores that misreporting corrodes investor trust and the public-interest mandate of financial reporting; accordingly, we stress the duties of boards, executives, auditors, and regulators to uphold faithful representation and timely disclosure, and to remediate misreporting when detected. Full article

This study examines the influence of employee tenure on earnings management and the moderating role of foreign investors in Korean listed firms. Drawing on agency theory and entrenchment perspectives, we argue that longer employee tenure, while fostering stability and firm-specific expertise, can entrench practices that enable opportunistic reporting. In contrast, consistent with resource dependence theory, foreign investors act as effective external monitors who can mitigate such behavior, particularly in emerging markets with weaker governance institutions. Using 11,381 firm-year observations from 2011 to 2019, we estimate discretionary accruals with the modified Jones model and performance-matched model. The results indicate that employee tenure is positively associated with accrual-based earnings management, but this effect is significantly reduced in firms with higher foreign investor ownership. Robustness tests, including instrumental variable estimation, confirm the validity of these findings. This study’s main contributions are introducing employee tenure as an underexplored governance factor, integrating internal and external monitoring perspectives, and showing that foreign investors moderate workforce-related risks. Practically, it highlights that investors can use tenure as a reporting risk signal, managers should complement workforce stability with strong governance, and policymakers should promote tenure disclosure and foreign participation to enhance transparency. Full article

Many companies engage in earnings manipulation that obscures their actual financial condition and sustainability efforts, undermining the credibility of financial reports and eroding stakeholder trust. To address these concerns, the United Kingdom has strictly adhered to International Financial Reporting Standards (IFRS), enhancing financial transparency and reducing the risk of manipulation. This study applies agency theory to examine the effects of earnings management and IFRS adoption on corporate sustainability performance, while also assessing the moderating roles of institutional ownership and board independence. Data were drawn from 248 companies listed on the London Stock Exchange between 2002 and 2024, using purposive sampling and sourced from Thomson Reuters Eikon DataStream. Advanced estimation techniques, specifically the Augmented Mean Group (AMG) and fixed effects models with Driscoll-Kraay standard errors, were employed to address cross-sectional dependence and slope heterogeneity. The results indicate that earnings management, as measured by discretionary accruals, has a significant negative impact on sustainability performance. In contrast, the adoption of IFRS has a positive and significant influence on sustainability outcomes. Additionally, institutional ownership and board independence significantly moderate the adverse effects of earnings management, leading to improved sustainability performance. The findings suggest that managers should enhance the clarity and accountability of financial reporting by implementing robust internal systems aligned with IFRS, conducting regular compliance audits, and training finance staff on current disclosure standards. Full article

This study investigated the effects of firm characteristics (external investment and co-CEO structures), managerial characteristics (CEO’s experience and age), and COVID-19 on earnings management in small- and medium-sized enterprises (SMEs). Examining the data of 18,873 Korean SMEs between 2015 and 2020, this study determined the factors influencing discretionary accruals in SMEs. Discretionary accruals were estimated using firms’ financial statements, and the effects of firm and CEO characteristics on the magnitude of the absolute value of discretionary accruals were estimated using random effects panel regression models. The results revealed that SMEs with co-CEO structures (vs. those with single-CEO structures), those led by more experienced CEOs (vs. those with less experienced CEOs), and those led by older CEOs (vs. those with younger CEOs) engage in less earnings management. Conversely, SMEs with external investors engage in greater earnings management than those without external investors. The results also showed that SMEs engaged in less earnings management during the COVID-19 period than during non-COVID-19 periods. Overall, this study is significant because it focuses on SMEs, a group often overlooked in earnings management research, and provides empirical evidence of how COVID-19, a global economic shock, influenced SMEs’ earnings management practices. Full article

This study investigates whether audit tenure mandates—designed to curb managerial discretion—may unintentionally enable disguised opinion shopping. Specifically, it examines whether firms benefit from observed mandates that align with their unobservable preferences, despite appearing to comply with mandatory audit firm rotation or retention rules. A counterfactual framework is developed to estimate firms’ preference for switching or retention in the absence of regulation, allowing identification of strategic alignment under constraint. Empirical analysis using Korean data from 2000 to 2009 reveals that firms classified as disguised opinion shoppers are more likely to receive unmodified audit opinions and exhibit lower audit quality, as indicated by higher discretionary accruals and more frequent reporting irregularities. These effects are concentrated under mandatory retention and not observed under rotation, suggesting that forced auditor turnover weakens firms’ ability to secure favorable outcomes. Additional evidence shows that these firms are more likely to retain the same auditor after mandates expire, consistent with a reward-for-accommodation mechanism. Thus, this study not only provides empirical evidence that opinion shopping can persist under auditor tenure mandates, but also introduces a novel method for identifying such behavior when traditional signals—such as voluntary dismissals—are unavailable. These findings inform ongoing regulatory debates on the effectiveness of tenure-based reforms. Full article

This study investigates why firms with large book–tax differences (BTDs) exhibit lower earnings persistence, particularly during periods of revenue declines. While prior literature has linked BTDs, especially large positive BTDs (LPBTDs), to earnings management, we propose an alternative explanation rooted in operational disruptions. Using a large panel of U.S. firms from 1995 to 2016, we examine whether short-term earnings persistence is affected by sales trends and the direction of BTDs. Our findings reveal that both large positive and large negative BTDs are significantly associated with reduced earnings persistence when sales decline. The effect is pronounced in both accrual and cash flow components of earnings. We develop and test a framework based on “operations theory,” which attributes this reduction to real business shocks, such as asset write-downs, facility closures, and reserve adjustments, that arise during sales decline periods. These results highlight the importance of distinguishing operationally driven BTDs from those arising through discretionary accruals. Our findings have implications for investors, regulators, and researchers seeking to interpret BTDs more accurately in volatile economic environments. Full article

Performance evaluation systems serve as a crucial governance mechanism in enhancing operational efficiency and ensuring sustainable growth for state-owned enterprises (SOEs). Despite their significance, the effectiveness of these evaluation systems has received limited academic attention. This study examines how performance evaluations address earnings manipulation issues, focusing specifically on both accrual-based and real activity-based earnings management. Our empirical findings indicate that SOEs with higher accrual-based earnings management receive significantly lower ratings in performance evaluations. However, no significant relationship is observed between real activity-based management and performance evaluation ratings. These results suggest that while performance evaluations effectively account for accrual-based earnings manipulation, they fail to capture real activity-based earnings management. Our study emphasizes the need for a more nuanced approach to performance evaluation that not only detects accrual manipulation but also considers operational adjustments made by managers. Furthermore, these findings imply that performance evaluation committees and government regulators should integrate industry-specific expertise into the evaluation process to enhance the detection of real earnings manipulation, thereby strengthening governance tools in SOEs. This research contributes to the broader discourse on improving effectiveness in public sector performance assessments. Full article

This study introduces the Audit Risk Sentiment Value (ARSV), a novel audit risk proxy that leverages sentiment analysis to address limitations in traditional audit risk measures such as audit fees (LNFEE), audit hours (LNHOUR), and discretionary accruals (|MJDA|). Traditional proxies primarily capture quantitative dimensions, overlooking qualitative insights embedded in audit report narratives. By systematically analyzing sentiment and tone, ARSV captures nuanced audit risk dimensions that reflect the auditor’s risk perception. The study validates ARSV using a dataset of South Korean firms listed on the KOSPI from 2018 to 2023. The results demonstrate the ARSV’s superior explanatory power, as confirmed through the Vuong test, showing consistent performance across binary and continuous measures of explanatory language. ARSV bridges the gap between qualitative and quantitative audit risk assessments, offering significant benefits to auditors, regulators, and investors. Its ability to enhance the interpretability of audit reports improves transparency and trust in financial reporting, addressing stakeholder demands for actionable, forward-looking information. Furthermore, ARSV aligns with global trends emphasizing sustainability and accountability by integrating qualitative insights into audit practices. While this study provides robust evidence supporting ARSV effectiveness, its focus on South Korean firms may limit its generalizability. Future research should explore ARSV application in diverse regulatory and cultural contexts and refine the sentiment analysis tools using advanced machine learning techniques. Expanding ARSV to include other unstructured data, such as management commentary, could further enhance its applicability. This study marks a significant step toward modernizing audit methodologies, aligning them with evolving demands for comprehensive and transparent financial reporting. The empirical analysis reveals that ARSV outperforms traditional audit risk proxies with significantly higher explanatory power. Specifically, ARSV achieved a pseudo R² of 0.786, compared to 0.608 for LNFEE, 0.604 for LNHOUR, and 0.578 for |MJDA|. The Vuong test results further validate ARSV superiority, with Z-statistics of −12.168, −12.492, and −9.775 when compared against LNFEE, LNHOUR, and |MJDA|, respectively. The model incorporating ARSV demonstrated a 62.454 F-value and an Adjusted R² of 0.599, highlighting its robustness and reliability in audit risk assessment. These quantitative metrics underscore ARSV’s effectiveness in capturing qualitative audit risk dimensions, offering a more precise and informative measure for stakeholders. Full article

In 2006, the PCAOB implemented new restrictions on the auditor provision of some tax and contingent fee services provided to issuer audit clients. These restrictions were implemented to reduce auditor conflicts of interest inherent when the auditor provides any of these specific services and a financial statement audit. Subsequent research found that these tax service restrictions did not impact audit quality, measured as the probabilities of going concern opinions or financial statement restatements. We reexamine this research question in the context of the regulation’s earnings management effects. Our investigation of this question uses a difference-in-difference regression approach and 20,043 issuer company fiscal year observations from 2002 to 2009, consistent with that used in prior studies, and four measures of earnings management (discretionary accruals, abnormal working capital accruals, current accruals, and the likelihood of meeting or slightly beating the zero earnings change benchmark) to proxy for audit quality. We find, consistent with findings in prior studies, no detectable effects of the 2006 PCAOB tax service restrictions. These null results persist through a series of robustness tests that include re-estimating our primary regressions on a Big 4 subsample, adding multiple alternative treatment variable definitions, generating a propensity-score-matched sample, and adding a control for internal control weakness. These findings raise further doubt about the need for these non-audit service restrictions. Full article

This study investigates the impact of enterprise digital transformation through information and communication technology (ICT) on auditing fees. Based on data from publicly listed companies in China and employing information asymmetry theory, the research finds that the adoption of three factors associated with digital transformation—artificial intelligence (AI), cloud computing (CC), and big data technologies (BD)—exhibits a significant inverted U-shaped effect on auditing fees. Further analysis reveals that this effect is moderated by the quality of internal controls, the level of corporate governance, and discretionary accruals. These findings underscore the necessity for a nuanced understanding of the relationship between technology and auditing, as well as the importance for audit organizations to integrate new technologies into their practices to effectively respond to the rapid adoption of digital technologies by enterprises. Full article

The purpose of this study is to examine the influences of external auditor firm type, auditor tenure, and external auditor changes on the quality of Saudi Arabian financial reports. In particular, this study examines the quality of financial reports of companies listed on the Saudi Stock Exchange using a widely accepted evaluation model modified by JonesThis study aims to determine whether Big Four and non-Big Four audit firms, auditor tenures of three or more years, and external auditor changes have any impact on the quality of financial reports of Saudi-listed companies. This study uses 175 firm-year observations of 35 companies listed on the Tadawul Saudi Stock Exchange between 2017 and 2021. Using discretionary accruals (DACC) as modified by Jones to measure the quality of financial reports, the findings illustrate that there is a significant negative relationship between Big Four audit firms and DACC. However, the study also shows a significant positive correlation between auditor tenure and DACC. The research revealed that there is no significant relationship between auditor change and DACC. These results have practical implications for policy development. According to the outcomes of this research, there are numerous ramifications for both companies and the government in Saudi Arabia in terms of enhancing the relationship between companies and audit firms and determining the most suitable auditor tenure to improve the quality of financial reports. Full article