Download or read book Conditional Conservatism and Audit Fees written by Hye Seung (Grace) Lee and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, we examine the impact of conditional conservatism on audit fees and, more importantly, the influence of corporate governance on this relationship. Prior literature presents evidence regarding explanations for the existence and pervasiveness of accounting conservatism such as compensation and debt contracting, shareholder litigation, taxation, and accounting regulation. However, there is very limited evidence or discussion of the potential benefit of accounting conservatism on audit risk and thus audit fees, and how the potential benefit can be attenuated by corporate governance quality. Using a sample of firm-year observations over the period of 2004-2009, we provide evidence consistent with conditional conservatism and firms' commitment to such conservatism reducing their audit fees. However, our evidence shows that this reduction in audit fees is moderated by higher corporate governance quality. These results have implications for auditors, regulators, standard setters, and firms' managers. In addition, our study extends the literature on the determinants of audit fees.
Download or read book Conditional and Unconditional Conservatism written by Julia Nasev and published by Springer Science & Business Media. This book was released on 2009-12-28 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: Julia Nasev examines the impact of conservative accounting numbers on valuation estimates and on real economic decisions such as cost stickiness.
Download or read book Conditional Conservatism in Accounting written by Giorgio Gotti and published by . This book was released on 2007 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt: Accounting standards mandate different, more conservative, rules for the recognition of unrealized gains than unrealized losses in reported earnings. Conditional conservatism, defined as asymmetric timeliness in the recognition of unrealized losses vs. gains in reported earnings has, since its origins, been a peculiar characteristic of the accounting system. Understanding conservatism's role, its determinants, and its variations across firms is important for interpreting the nature, purposes, and valuation implications of accounting. Basu (1995; 1997) proposed a model to detect accounting conditional conservatism and provided empirical evidence that bad news is recognized more quickly than good news in earnings for a sample over the period 1963-1991. Following his seminal work1, accounting literature adopted the Basu single-period model to measure conditional conservatism (Ball et al. 2000; Ball et al. 2005; Ball and Shivakumar 2005; Lobo and Zhou 2006). However, Basu's proxy for measuring the arrival of good/bad news, the price of the firm's stock, may be influenced, in part, by factors that will never be recorded in a firm's reported earnings. This introduces inaccuracy in the measure of conditional conservatism. To address the problems, I introduce a new measure of conditional conservatism, which results from a Least Absolute Deviation (LAD) piecewise regression and adopts the number of changes in financial analysts' EPS forecasts as a proxy for good/bad news. Then, I use this new measure to test the determinants, suggested by previous literature, of conditional conservatism in accounting. Results show that companies with (1) lower debt-to-assets ratio, (2) large proportion of executives' annual compensation independent of the firm's accounting performance, (3) one of the big 4/big 7 audit firms as auditor, and a auditor opinion qualified with a going concern assumption the previous year exhibit a greater timeliness in the recognition of bad news than good news in annual earnings.
Download or read book Conditional Conservatism and the Cost of Equity Capital written by Gary C. Biddle and published by . This book was released on 2017 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior studies report negative or insignificant relations between conditional conservatism and the cost of equity capital, arguing that conservatism reduces information risk. Using accounting-based conditional conservatism proxies, however, we find a significantly positive association between conditional conservatism and the cost of equity. This positive relation operates via improving information precision about negative earnings shocks and generally inflating information asymmetry among investors, both of which increase the cost of equity. We further find that the cost of equity effect of conditional conservatism disappears in the period after the enactment of the Sarbanes-Oxley Act (SOX), consistent with the notion that nationwide improvement of information precision about negative news and diminished information asymmetry are engendered by the SOX regulation. This study adds to researches on conditional conservatism, SOX, and the cost of equity, and also has policy implications.
Download or read book Accounting Conservatism Quality of Accounting Information and Crash Risk of Stock Prices written by Dimitrios V. Kousenidis and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: From an information perspective, sources of risk should be reflected in accounting fundamentals. However, asymmetry in disclosure generated from a decrease in information flow to users of financial statements may lead to a stock price crash when the news is eventually disclosed. The present study examines the impact of a number of accounting and auditing attributes that have been found to improve reporting efficiency on the prediction of stock price crash risk. The results indicate a negative relation between conditional conservatism and future stock price crash risk, which supports evidence in the existing literature but more importantly provide new evidence by showing that unconditional conservatism is also negatively related to future stock price crash risk. In addition some evidence shows that the level of unconditional conservatism affects the relation between conditional conservatism and future stock price crash risk. On the other hand, auditing attributes do not seem to have predictive ability for stock price crash risk while in consistency with the literature the relation between lagged earnings opacity and stock price crash risk is positive. Taken together, the results imply that researchers should disentangle the effects of the two forms of conservatism when assessing the likelihood of a future stock price crash and that the beneficial role of conservatism in reducing stock-crash risk should not be overlooked.
Download or read book Accounting Conservatism and the Cost of Capital written by Li, Xi and published by . This book was released on 2015 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the role of conditional accounting conservatism in mitigating the cost of equity and debt capital in an international setting. I find that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. I further explore the cross-sectional variation of the above relations. I find that the negative association between conditional conservatism and the cost of equity and debt capital is more pronounced in countries with stronger legal enforcement, suggesting a complementary role between conservatism and legal institutions in capital markets. I also find that conservatism only reduces the cost of debt in countries where accounting-based covenants are widely used, consistent with the argument that conditional conservatism improves the efficiency of debt contracts via accelerating covenant violations.
Download or read book Conditional Conservatism in Accounting written by Giorgio Gotti and published by . This book was released on 2008 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following Basu's (1995, 1997) seminal work, accounting literature adopted the Basu coefficient to measure conditional conservatism (among others, Ball et al. 2003; Ball et al. 2000; Ball et al. 2005; Ball and Shivakumar 2005; Lobo and Zhou 2006; Chandra et al. 2004). However, Basu's choice of proxy for measuring the arrival of good/bad news, stock returns, introduces inaccuracy in the measure of conditional conservatism (Dietrich et al. 2007; Roychowdhury and Watts 2007; Givoly et al. 2007). To address the problem, I introduce a new measure of conditional conservatism, which results from a Least Absolute Deviation (LAD) piecewise regression and adopts the number of changes in financial analysts' EPS forecasts as a proxy for good/bad news about future earnings and extends the analysis to two-year and three-year time horizons. I use this new measure to test three determinants that prior literature suggested to explain the presence of accounting conservatism. Results show that companies with high debt-to-assets ratio - closer to default on their debt covenants, with large portion of executives' compensation tied to the firm's performance, and in the year prior to a going concern opinion from their auditors report aggressively, recognizing future good news in annual earnings more quickly than bad news.
Download or read book Accounting Rule Reform and Conditional Conservatism written by Juan Zhang and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates how accounting rule reform affects the usage of conditional conservatism in the property-liability (P&L) insurance industry. More specifically, whether the accounting rule changes that strengthen the internal control over financial reporting and improve the financial reporting transparency reduce insurers' incentives for conservatively reserving. The P&L insurance industry is a perfect setting for studying accruals and accounting conservatism because it has specific and detailed firm-year level data about loss accrual development. We develop a new method of assessing conditional conservatism, measuring it as the concavity of an insurer's loss development curve. We study the U.S. domiciled P&L insurance companies from 1995 to 2015. Using a diff-in-diff identification strategy, we find that the level of conditional conservatism is significantly reduced after the enactment of the Sarbanes-Oxley Act (SOX) Section 404 and the Model Audit Rule (MAR), both of which increased board oversight of internal risk management. Our result indicates that complying with additional disclosure requirements reduces P&L insurers' incentives to use conditional conservatism to mitigate regulatory monitoring costs. With fewer reserves, insurers may become less resistant to unexpected or catastrophic losses and face greater insolvency risk. The paper's results also shed light on the question of which should be an appropriate measure of financial reporting quality given a goal of reducing bankruptcy risk: transparency and accuracy or conservatism.
Download or read book Determinants and Consequences of Auditor Conservatism written by Essam Elshafie and published by . This book was released on 2016 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Lu and Sapra (2009) provide a theoretical framework to investigate the causes and effects of auditor conservatism. They refer to the attestation of an auditor who, when in doubt, disapproves a favorable client report as auditor conservatism. In this paper I examine several factors that affect auditor conservatism. The majority of the extant research in this area uses accounting conservatism measures, such as the level of discretionary accruals or the Basu (1997) model to measure auditor conservatism. In this paper I use a new measure of auditor conservatism based on issuing an adverse internal control report for clients with no financial statements restatements, and I examine the effect of client's business risk, litigation risk, and client pressure on auditor conservatism. In addition, I examine the effect auditor conservatism has on information risk and audit fees. Data are collected over the period of 2004 to 2012, from Audit Analytics, Compustat, the Stanford Securities Class Action Clearinghouse website, and CRSP. The results show that auditor conservatism is positively affected by client business risk and the litigation risk, and negatively affected by client pressure. In addition, the results show that auditor conservatism reduces the information asymmetry and leads to an increase in audit fees.
Download or read book Essays on Accounting Conservatism written by Bong Hwan Kim and published by . This book was released on 2010 with total page 157 pages. Available in PDF, EPUB and Kindle. Book excerpt: I examine the role of accounting conservatism in the debt market and equity market. In the first essay I examine whether post-borrowing accounting conservatism is related to initial debt-covenant slack. I find firms with low debt-covenant slack display a smaller increase in conservatism after borrowing compared to firms with high debt-covenant slack. I further find that this relation is more pronounced when the cost of debt-covenant breach is greater and is less pronounced when lenders have stronger monitoring incentives. This study supports the debt covenant hypothesis. The second essay investigates the impact of financial market competition on a firm's choice regarding accounting quality (co-authored). The estimates indicate that foreign bank entry is associated with improved accounting quality among firms, and this improvement is positively related to a firm's subsequent debt level. The increase in accounting quality is also greatest among private firms, smaller firms, less profitable firms, and firms more dependent on external financing. The third essay investigates whether conditional accounting conservatism has informational benefits to shareholders (co-authored). We find some evidence that higher current conditional conservatism is associated with lower probability of future bad news. We also find weak evidence that the stock market reacts stronger (weaker) to good (bad) earnings news of more conditionally conservative firms. Thus, we provide additional evidence that conditional conservatism affects stock prices.
Download or read book Corporate Governance Conservatism and Auditor Resignation written by Jiahui Liang and published by . This book was released on 2017 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the influence of conditional conservatism on the auditor resignations, and more importantly, the impact of corporate governance on this relationship. The existing literature has provided evidence on the existence and pervasiveness of accounting conservatism, such as compensation and debt contracts, shareholder litigation, taxation and accounting supervision. However, there is very limited evidence and discussion on the potential impact of accounting conservatism on audit risk and auditor resignation. Furthermore, research on how effective corporate governance affects the relationship is rarely covered.We select the firm-year observations from 2005 to 2015. We find that the conditional conservatism reduces the auditor resignations by reducing the expected audit risk. However, further empirical results show that this reduction in auditor resignations is attenuated by higher corporate governance quality. That is, effective corporate governance will moderate the negative correlation between conservatism and auditor resignations. The empirical results of this paper are of value to firms, auditors, regulators, standard-setters and corporate managers. In addition, this paper expands the literature on the influencing factors of auditor resignations.
Download or read book ESSAYS ON LOSS RESERVING AND ACCOUNTING CONSERVATISM written by Juan Zhang and published by . This book was released on 2020 with total page 147 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation has three chapters studying accounting conservatism in the property-liability (P&L) insurance industry. There are two types of accounting conservatism - ex-ante (unconditional) conservatism and ex-post (conditional) conservatism. The former means that firms over-report liabilities initially, before more detailed information becomes available. The latter means that firms respond to this new information asymmetrically by recognizing expected losses more quickly than expected gains. My analysis throughout the dissertation focuses on the loss reserve accruals since it is the most significant accruals on the balance sheet. One benefit of studying the P&L insurance industry is that we have specific and detailed information regarding the development of loss reserve accruals over time. Chapter 1 is an executive summary of the next two chapters, highlighting the key results, the policy implications, and the contributions of the dissertation. Chapter 2 studies the two types of accounting conservatism and explore three research questions: (1) whether ex-ante and ex-post conservatism prevails in the P&L insurance industry; (2) what the relations are between ex-post conservatism and other managerial incentives including ex-ante conservatism; and (3) how much the opportunity cost is for being conservative. I study all U.S. domiciled P&L insurance companies from 1996 to 2012 and follow the previous literature to measure accounting conservatism in Chapter 2. I find that both types of accounting conservatism prevail in the insurance industry. Besides, the back-of-the-envelope estimates based on the industry average insurer indicate that their opportunity costs are trivial compared to the amounts of net income and total assets. Chapter 2 also shows that the practices of ex-ante and ex-post conservatism exhibit a nonlinear, U-shape relationship. This finding supports the view that the two types of conservatism can be compliments because they can serve for different purposes. Ex-ante conservatism is mainly used to create a cushion against future unexpected losses, whereas ex-post conservatism can reduce informational frictions. In Chapter 3, I develop a new method of assessing conditional conservatism using more detailed data from the insurance industry. I look at how conditional conservatism affects insolvency risk and the financial strength rating of P&L insurance companies. I also investigate how a change to accounting rules affects conditional conservatism. The new method of measuring conditional conservatism is based on the concavity of the loss development curve. I study all U.S. domiciled P&L insurance companies from 1995 to 2015 and find that the greater the degree of conditional conservatism, the lower is insolvency probability, and the better is the financial strength rating, with other things being constant. The result indicates that regulators and rating agencies do reward insurers that voluntarily utilize conditional conservatism accounting strategy. Moreover, I find that the level of conditional conservatism is reduced after the enactment of the Model Audit Rule (MAR). MAR, like the Sarbanes-Oxley Act Section 404, increased board oversight of internal risk management. The result suggests that complying with additional disclosure requirements provides a "safe harbor" for insurance companies so that they have fewer incentives to be conditionally conservative.
Download or read book Product Differentiation in Auditing written by Dan A. Simunic and published by Canadian Certified General Accountants' Research Foundation = Fondation de recherche de l'Association des comptables généraux licenciés du Canada. This book was released on 1987 with total page 90 pages. Available in PDF, EPUB and Kindle. Book excerpt: A fundamental question with respect to the market for audit services is whether or not such services are homogeneous across suppliers ... In this monograph, we review the basic principles and findings concerning differentiated product markets as they have been developed in the economic literature. Using Lancaster's characteristics framework, we posit that the audit service contains several attributes which are valued by top management. A key attribute is "credibility", which is communicated by an audit firm's brand name and is identified with the power of an auditor's test ... We posit that, along with other product characteristics, the power of test varies systematically across audit firms. Hypotheses concerning the demand for different audit service specifications (qualities) are developed in a context where companies are changing their capital structure through an initial public offering of common shares. These hypotheses are tested using a sample of 469 U.S. corporations which first "went public" during 1981. The results are consistent with the existence of differential audit services.
Download or read book Accounting Conservatism and the Stock Market written by Carlo D’Augusta and published by Springer Nature. This book was released on with total page 89 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Truth in Accounting written by Kenneth MacNeal and published by University of Pennsylvania Press. This book was released on 2016-11-11 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a volume in the Penn Press Anniversary Collection. To mark its 125th anniversary in 2015, the University of Pennsylvania Press rereleased more than 1,100 titles from Penn Press's distinguished backlist from 1899-1999 that had fallen out of print. Spanning an entire century, the Anniversary Collection offers peer-reviewed scholarship in a wide range of subject areas.
Download or read book Management Through Accounts written by James Harris Bliss and published by . This book was released on 1924 with total page 880 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The RISE and RISE of NON GAAP DISCLOSURE written by Jeff Coulton and published by . This book was released on 2016-11-24 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
