Were regulatory changes in reporting "abnormal items" justified? : evidence of intra-period classificatory earnings management practices in Australia

Purpose Managers generally have discretion in determining how components of earnings are presented in financial statements in distinguishing between ‘normal’ earnings and items classified as unusual, special, significant, exceptional or abnormal. Prior research has found that such intra-period classificatory choice is used as a form of earnings management. Prior to 2001, Australian accounting standards mandated that unusually large items of revenue and expense be classified as ‘abnormal items’ for financial reporting, but this classification was removed from accounting standards from 2001. This move by the regulators was partly in response to concerns that the abnormal classification was being used opportunistically to manage reported pre-abnormal earnings. This study extends the earnings management literature by examining the reporting of abnormal items for evidence of intra-period classificatory earnings management in the unique Australian setting. Design/methodology/approach This study investigates associations between reporting of abnormal items and incentives in the form of analyst following and the earnings benchmarks of analysts’ forecasts, earnings levels, and earnings changes, for a sample of Australian top-500 firms for the seven-year period from 1994 to 2000. Findings The findings suggest there are systematic differences between firms reporting abnormal items and those with no abnormal items. Results show evidence that, on average, firms shifted expense items from pre-abnormal earnings to bottom line net income through reclassification as abnormal losses. Originality/value These findings suggest that the standard setters were justified in removing the ‘abnormal’ classification from the accounting standard. However, it cannot be assumed that all firms acted opportunistically in the classification of items as abnormal. With the removal of the standardised classification of items outside normal operations as ‘abnormal’, firms lost the opportunity to use such disclosures as a signalling device, with the consequential effect of limiting the scope of effectively communicating information about the nature of items presented in financial reports.

Determinants and market impact of seasoned equity offerings : the case of A-REITs

The paper examines the decision by Australian Real Estate Trusts (A-REITs) to issue seasoned equity offerings from 2000 - 2008 and stock market reaction to the offerings. The findings reveal that highly leveraged A-REITs with variable earnings are less likely to issue seasoned equity offerings. Inconsistent results for structure and type of properties held by the A-REIT do not allow for inference to be drawn. Similar to previous studies of seasoned equity offerings, we find a significant negative abnormal return associated with their announcement and no evidence of excessive leakage of information. Furthermore, market reaction differences to announcements of SEOs for the pre-global financial crisis (GFC) (2000-2006) and GFC eras (2007-2008) are noted with GFC era shareholders incurring larger abnormal return losses at 1.13% in comparison to the pre-GFC era shareholder loss of 0.34% on the SEO announcement day. Cross-sectional regressions show that the issued amount, leverage and profitability are significant factors affecting abnormal returns. Growth opportunities, tangibility, operating risk, size of A-REIT and other variables capturing A-REIT structure and property types held do not have an impact on abnormal returns

The role of the audit committee and institutional investors in constraining earnings management : evidence from Chinese firms listed in Hong Kong

Using data from 2004 to 2008, we find that an audit committee is an important monitoring mechanism as audit committee independence, expertise and size are associated with reduced levels of abnormal accruals, our measure of earnings management. This study also attempts to discern when the monitoring role of the audit committee is more salient for the firm. We find that ownership concentration and the presence of government officials on the audit committee are important determinants of the negative association between audit committee characteristics and earnings management. In contrast, we find no significant associations between the audit committee and abnormal accruals for Chinese firms listed only on the Chinese domestic Stock Exchanges. The paper contributes to the corporate governance literature in a transitional economy. Identifying the role of audit committees of firms listed on markets other than the domicile market demonstrates the importance of considering the institutional setting in governance research.

Can an effective audit committee help to mitigate earnings management in Chinese firms listed in Hong Kong?

This paper attempts to determine whether the adoption of recommended corporate governance practices by Chinese firms is associated with less earnings management proxied by abnormal accruals. We examine the role of the audit committee and ownership concentration in preventing earnings management using Chinese firms listed in Hong Kong. The results of this preliminary analysis show that the frequency of audit committee meetings is associated with reduced levels of abnormal accruals, our measure of earnings management. We conclude that audit committee activity is an important factor in constraining the propensity of managers to engage in earnings management. In contrast, we find that the size of the audit committee is associated with increased levels of abnormal accruals and suggest that increasing the size of the audit committee creates information asymmetry between the audit committee and management that reduces the monitoring capacity of the audit committee. We do not find any association between audit committee independence, financial and industry experience, or ownership concentration and abnormal accruals.

Corporate governance mechanisms and earnings management in transitional countries – evidence from Chinese listed firms

The objective of this thesis is to investigate whether the corporate governance practices adopted by Chinese listed firms are associated with the quality of earnings information. Based on a review of agency and institutional theory, this study develops hypotheses that predict the monitoring effectiveness of the board and the audit committee. Using a combination of univariate and multivariate analyses, the association between corporate governance mechanisms and earnings management are tested from 2004 to 2008. Through analysing the empirical results, a number of findings are summarised as below. First, board independence is weakened by the introduction of government officials as independent directors on the boards. Government officials acting as independent directors, claim that they meet the definition of independent director set by the regulation. However, they have some connection with the State, which is the controlling shareholder in listed SOEs affiliated companies. Consequently, the effect of the independent director’s expertise in constraining earnings management is mitigated as demonstrated by an insignificant association between board expertise and earnings management. An alternative explanation for the inefficiency of board independence may point to the pre-selection of independent directors by the powerful CEO. It is argued that a CEO can manipulate the board composition and choose the "desirable" independent directors to monitor themselves. Second, a number of internal mechanisms, such as board size, board activities, and the separation of the roles of the CEO and chair are found to be significantly associated with discretionary accruals. This result suggests that there are advantages in having a large and active board in the Chinese setting. This can offset the disadvantages associated with large boards, such as increased bureaucracy, and hence, increase the constraining effects of a large and resourceful board. Third, factor analysis identifies two factors: CEO power and board power. CEO power is the factor which consists of CEO duality and turnover, and board power is composed of board size and board activity. The results of CEO power show that if a Chinese listed company has CEO duality and turnover at the same time, it is more likely to have a high level of earnings management. The significant and negative relationship between board power and accruals indicate that large boards with frequent meetings can be associated with low level of earnings management. Overall, the factor analysis suggests that certain governance mechanisms complement each other to become more efficient monitors of opportunistic earnings management. A combination of board characteristics can increase the negative association with earnings management. Fourth, the insignificant results between audit committees and earnings management in Chinese listed firms suggests that the Chinese regulator should strengthen the audit committee functions. This thesis calls for listed firms to disclose more information on audit committee composition and activities, which can facilitate future research on the Chinese audit committee’s monitoring role. Fifth, the interactive results between State ownership and board characteristics show that dominant State ownership has a moderating effect on board monitoring power as the State totally controls 42% of the issued shares. The high percentage of State ownership makes it difficult for the non-controlling institutional shareholders to challenge the State’s dominant status. As a result, the association between non-controlling institutional ownership and earnings management is insignificant in most situations. Lastly, firms audited by the international Big4 have lower abnormal accruals than firms audited by domestic Chinese audit firms. In addition, the inverse U-shape relationship between audit tenure and earnings quality demonstrates the changing effects of audit quality after a certain period of appointment. Furthermore, this thesis finds that listing in Hong Kong Stock Exchanges can be an alternative governance mechanism to discipline Chinese firms to follow strict Hong Kong listing requirements. Management of Hong Kong listed companies are exposed to the scrutiny of international investors and Hong Kong regulators. This in turn reduces their chances of conducting self-interested earnings manipulation. This study is designed to fill the gap in governance literature in China that is related to earnings management. Previous research on corporate governance mechanisms and earnings management in China is not conclusive. The current research builds on previous literature and provides some meaningful implications for practitioners, regulators, academic, and international investors who have investment interests in a transitional country. The findings of this study contribute to corporate governance and earnings management literature in the context of the transitional economy of China. The use of alternative measures for earnings management yields similar results compared with the accruals models and produces additional findings.

Modelling the interaction of keratinocytes and fibroblasts during normal and abnormal wound healing processes

The crosstalk between fibroblasts and keratinocytes is a vital component of the wound healing process, and involves the activity of a number of growth factors and cytokines. In this work, we develop a mathematical model of this crosstalk in order to elucidate the effects of these interactions on the regeneration of collagen in a wound that heals by second intention. We consider the role of four components that strongly affect this process: transforming growth factor-beta, platelet-derived growth factor, interleukin-1 and keratinocyte growth factor. The impact of this network of interactions on the degradation of an initial fibrin clot, as well as its subsequent replacement by a matrix that is mainly comprised of collagen, is described through an eight-component system of nonlinear partial differential equations. Numerical results, obtained in a two-dimensional domain, highlight key aspects of this multifarious process such as reepithelialisation. The model is shown to reproduce many of the important features of normal wound healing. In addition, we use the model to simulate the treatment of two pathological cases: chronic hypoxia, which can lead to chronic wounds; and prolonged inflammation, which has been shown to lead to hypertrophic scarring. We find that our model predictions are qualitatively in agreement with previously reported observations, and provide an alternative pathway for gaining insight into this complex biological process.

Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee

This paper extends research on the corporate governance practices of transitional economies by examining whether the ability of the audit committee to constrain earnings management in Chinese firms is associated with the listing environment and the presence of government officials on the audit committee. Despite considerable regulatory reforms by the Chinese Securities Regulatory Commission, there remain incentives for Chinese firms to manage earnings. However, government initiatives to encourage domestic firms to cross-list on the Hong Kong Stock Exchange are accompanied by improved governance. We find that the expertise and independence of the audit committee for cross-listed (CL) Chinese firms are associated with lower abnormal accruals, our measure of earnings management. Both domestic only listed firms and CL Chinese firms appoint government officials as independent members on the audit committee. However, due to the political connection between government officials and the controlling shareholder (the State), these appointments can severely mitigate audit committee independence. Subsequently, we find a significant and positive association between audit committee independence and experience and earnings management when there are government officials on the audit committee.

RNA interference silencing of CHS greatly alters the growth pattern of apple (Malus x domestica)

Plants produce a vast array of phenolic compounds which are essential for their survival on land. One major class of polyphenols are the flavonoids and their formation is dependent on the enzyme chalcone synthase (CHS). In a recent study we silenced the CHS genes of apple (Malus × domestica Borkh.) and observed a loss of pigmentation in the fruit skin, flowers and stems. More surprisingly, highly silenced lines were significantly reduced in size, with small leaves and shortened internode lengths. Chemical analysis also revealed that the transgenic shoots contained greatly reduced concentrations of flavonoids which are known to modulate auxin flow. An auxin transport study verified this, with an increased auxin transport in the CHS-silenced lines. Overall, these findings suggest that auxin transport in apple has adapted to take place in the presence of high endogenous concentrations of flavonoids. Removal of these compounds therefore results in abnormal auxin movement and a highly disrupted growth pattern. © 2013 Landes Bioscience.

Overexpression of the kiwifruit SVP3 gene affects reproductive development and suppresses anthocyanin biosynthesis in petals, but has no effect on vegetative growth, dormancy, or flowering time

SVP-like MADS domain transcription factors have been shown to regulate flowering time and both inflorescence and flower development in annual plants, while having effects on growth cessation and terminal bud formation in perennial species. Previously, four SVP genes were described in woody perennial vine kiwifruit (Actinidia spp.), with possible distinct roles in bud dormancy and flowering. Kiwifruit SVP3 transcript was confined to vegetative tissues and acted as a repressor of flowering as it was able to rescue the Arabidopsis svp41 mutant. To characterize kiwifruit SVP3 further, ectopic expression in kiwifruit species was performed. Ectopic expression of SVP3 in A. deliciosa did not affect general plant growth or the duration of endodormancy. Ectopic expression of SVP3 in A. eriantha also resulted in plants with normal vegetative growth, bud break, and flowering time. However, significantly prolonged and abnormal flower, fruit, and seed development were observed, arising from SVP3 interactions with kiwifruit floral homeotic MADS-domain proteins. Petal pigmentation was reduced as a result of SVP3-mediated interference with transcription of the kiwifruit flower tissue-specific R2R3 MYB regulator, MYB110a, and the gene encoding the key anthocyanin biosynthetic step, F3GT1. Constitutive expression of SVP3 had a similar impact on reproductive development in transgenic tobacco. The flowering time was not affected in day-neutral and photoperiod-responsive Nicotiana tabacum cultivars, but anthesis and seed germination were significantly delayed. The accumulation of anthocyanin in petals was reduced and the same underlying mechanism of R2R3 MYB NtAN2 transcript reduction was demonstrated.

Evaluation of growth and changes in body composition following neonatal diagnosis of cystic fibrosis

Early deficits in nutritional status that might require specific treatment and early response to nutritional therapy were studied longitudinally in 25 infants with cystic fibrosis (CF) diagnosed by neonatal screening, using anthropometric and research body composition methodology, and evaluation of pancreatic function. At the time of confirmed diagnosis (mean 5.4 weeks), body mass, length, total body fat (TBF), and total body potassium (TBK) were all significantly reduced. Following diagnosis and commencement of therapy there was a normalization of weight, length, and TBK by 6-12 months of age, indicating catch-up growth. But in some individuals the response was incomplete, and as a group, mean total body fat remained significantly lower than normal at 1 year of age. Seven of 25 (28%) were pancreatic sufficient at diagnosis, and all but one had evidence of declining pancreatic function requiring the institution of pancreatic enzyme therapy during the next 1-9 months. The median age of commencement of enzyme therapy was 10 weeks (range 5 weeks to 11 months). These longitudinal assessments emphasize the dynamic changes occurring in absorptive function, body composition, and nutritional status following neonatal diagnosis of cystic fibrosis and may reflect previously described abnormalities of energy metabolism in this age group. Abnormal body composition is evident in most CF infants following diagnosis by neonatal screening but pancreatic damage may still be evolving. We suggest that early active nutritional therapy and surveillance for changes in pancreatic function are warranted in CF infants diagnosed by neonatal screening.