Initial losses, corporate governance and earnings management

This thesis examines the relationship between initial loss events and the corporate governance and earnings management behaviour of these firms. This is done using four years of corporate governance information spanning the report of an initial loss for companies listed on the UK Stock Exchange. An industry- and sizematched control sample is used in a difference-in-difference analysis to isolate the impact of the initial loss event during the period. It is reported that, in general, an initial loss motivates an improvement in corporate governance in those loss firms where a relative weakness existed prior to the loss and that these changes mainly occur before the initial loss is announced. Firms with stronger (i.e. better quality) corporate governance have less need to alter it in response to the loss. It is also reported that initial loss firms use positive abnormal accruals in the year before the loss in an attempt to defer/avoid the loss — the weaker corporate governance the more likely is it that loss firms manage earnings in this manner. Abnormal accruals are also found to be predictive of an initial loss and when used as a conditioning variable, the quality of corporate governance is an important mitigating factor in this regard. Once the loss is reported, loss firms unwind these abnormal accruals although no evidence of big-bath behaviour is found. The extent to which these abnormal accruals are subsequently unwound are also found to be a function of both the quality of corporate governance as well as the severity of the initial loss.

Criticisms of auditors and earnings management during the Asian economic crisis

Auditors were criticised during and after the Asian economic crisis for supplying variable quality across global audit markets. This study examines
the level of earnings management as measured by discretionary accruals in the pre-crisis compared to the post-crisis periods as they impacted Malaysia. Both the Jones (1991) and earnings per share frequency distribution methods are used to examine earnings management behaviour. As hypothesised, the pre-crisis period is associated with significantly higher levels of absolute discretionary accruals and increased propensity to meet or beat the prior year earnings per share, whereas the post-crisis period is not. This finding is consistent with auditors responding to the criticisms that were made. However, the propensity to avoid losses is found to be higher in the post-crisis period, indicating that earnings management is not fully constrained.

Audit quality : earnings management in the context of the Asian crisis

This study assumes that evidence regarding audit quality can be derived from the level of earnings management reflected in reported abnormal or discretionary accruals. Given this assumption, audit quality is examined in the context of the 1997 Asian financial crisis using data from Malaysia. Examining audit quality in its association with earnings management across differential macroeconomic periods provides insights that may be otherwise masked. The period of the crisis is partitioned between pre-crisis (1994-1996), crisis (1997-1998) and post-crisis (1999). Using a robust approach to the measurement of abnormal accruals, the association of Big 5/non-Big 5 and Industry Specialist/Industry non-specialist auditors with both the levels of, and change in levels of, abnormal accruals is investigated across and within the crisis sub-periods from 1994-1999. Audit quality is found to be associated with abnormal accruals, and differentially so across macroeconomic period with greater constraint evident post-crisis.

Audit quality : earnings management in the context of the 1997 Asian crisis

This study assumes that evidence regarding audit quality can be derived from the level of earnings management reflected in reported abnormal or discretionary accruals. Given this assumption, audit quality is examined in the context of the 1997 Asian financial crisis using data from Malaysia. Examining audit quality in its association with earnings management across differential macroeconomic periods provides insights that may be otherwise masked. The period of the crisis is partitioned between pre-crisis (1994-1996), crisis (1997-1998) and post-crisis (1999). Using a robust approach to the measurement of abnormal accruals, the association of Big 5/non-Big 5 and Industry Specialist/Industry non-specialist auditors with both the levels of, and change in levels of, abnormal accruals is investigated across and within the crisis sub-periods from 1994-1999. Audit quality is found to be associated with abnormal accruals, and differentially so across macroeconomic period with greater constraint evident post-crisis.

Relationship between corporate governance initiatives and earnings management

This cross-sectional study investigates the contribution of Australian listed companies’ compliance levels with Australian Corporate Governance Principles and Recommendations (CGPR) towards explaining the level of discretionary accruals. The findings will be of interest to CG regulators, as they contribute empirical evidence of the CGPR collective and individual role on mitigating earnings management practices.

Property portfolio composition and earnings management for listed property portfolios

In this paper, we investigate how real estate portfolio composition impacts earnings management (EM) of New Zealand listed property portfolios (NZ-LPPs). We employ a panel dataset containing accounting and property data for NZ-LPPs. The findings include: (1) the office property ratio of the real estate portfolio provides the highest incentive for LPPs to engage in EM; (2) LPPs with a higher ratio of industry are less likely to use accrual EM and real EM approaches based on property transactions; and (3) LPPs with a hospital focus prefer accrual EM, while LPPs with a retail focus prefer long-term accrual EM and sales manipulation.

Earnings management in response to the introduction of the Australian gold tax

Earnings from gold mining in Australia remained tax-exempt for almost seven decades until January 1, 1991. In the early 1980s, rapid economic prosperity induced by escalated gold prices brought the Australian gold-mining industry under intense political scrutiny. Using a variant of the modified Jones model, this paper provides evidence of significant downward earnings management by Australian gold-mining firms, which is consistent with their attempts to mitigate political costs during the period from June 1985 to May 1988. In contrast, test of earnings management over a similar period in a control sample of Canadian gold-mining firms produced insignificant results. Further, empirical results are robust to several sensitivity tests performed. During the period from June 1988 to December 1990, the Australian firms were found to have engaged in economic earnings management. This is consistent with the sample firms' incentive of maximizing economic earnings immediately prior to the introduction of income tax on gold mining. The findings of this study help to understand the impact of earnings management on the efficient resource allocation in an economy. They also contribute toward understanding the linkage between regulation of accounting for special purposes and general-purpose financial. reporting.

Earnings management using estimates and the timing of adoption of accounting standards: An empirical examination of pensions

This study investigates the relationship between adoption timing of Statement of Financial Accounting Standards 87 and earnings management after adoption. Earnings management, defined consistent with Schipper (1989), is tested through hypotheses using (1) a portfolio approach and (2) pension rates. One Hypothesis uses a Modified Jones (1991) Model as a proxy for discretionary accruals and the other uses pension rate estimates.^ Statistically significant relationships are found between adoption timing and (1) discretionary accruals and (2) estimated rate-of-return (ROR) on pension plan assets. Early adopting firms tend to have lower discretionary accruals after adoption than on-time adopters. They also tend to use higher ROR estimates which are not supported by higher actual returns. Thus, while early adopters may be using ROR to manage income, this tends to not result in higher discretionary accruals. ^

Fragment-based version management for repositories of business process models

As organizations reach higher levels of Business Process Management maturity, they tend to accumulate large collections of process models. These repositories may contain thousands of activities and be managed by different stakeholders with varying skills and responsibilities. However, while being of great value, these repositories induce high management costs. Thus, it becomes essential to keep track of the various model versions as they may mutually overlap, supersede one another and evolve over time. We propose an innovative versioning model and associated storage structure, specifically designed to maximize sharing across process model versions, and to automatically handle change propagation. The focal point of this technique is to version single process model fragments, rather than entire process models. Indeed empirical evidence shows that real-life process model repositories have numerous duplicate fragments. Experiments on two industrial datasets confirm the usefulness of our technique.

Fragment-based version management for repositories of business process models

As organizations reach higher levels of Business Process Management maturity, they tend to accumulate large collections of process models. These repositories may contain thousands of activities and be managed by different stakeholders with varying skills and responsibilities. However, while being of great value, these repositories induce high management costs. Thus, it becomes essential to keep track of the various model versions as they may mutually overlap, supersede one another and evolve over time. We propose an innovative versioning model, and associated storage structure, specifically designed to maximize sharing across process models and process model versions, reduce conflicts in concurrent edits and automatically handle controlled change propagation. The focal point of this technique is to version single process model fragments, rather than entire process models. Indeed empirical evidence shows that real-life process model repositories have numerous duplicate fragments. Experiments on two industrial datasets confirm the usefulness of our technique.

Loculus : an ontology-based information management framework for the motion picture industry

"How do you film a punch?" This question can be posed by actors, make-up artists, directors and cameramen. Though they can all ask the same question, they are not all seeking the same answer. Within a given domain, based on the roles they play, agents of the domain have different perspectives and they want the answers to their question from their perspective. In this example, an actor wants to know how to act when filming a scene involving a punch. A make-up artist is interested in how to do the make-up of the actor to show bruises that may result from the punch. Likewise, a director wants to know how to direct such a scene and a cameraman is seeking guidance on how best to film such a scene. This role-based difference in perspective is the underpinning of the Loculus framework for information management for the Motion Picture Industry. The Loculus framework exploits the perspective of agent for information extraction and classification within a given domain. The framework uses the positioning of the agent’s role within the domain ontology and its relatedness to other concepts in the ontology to determine the perspective of the agent. Domain ontology had to be developed for the motion picture industry as the domain lacked one. A rule-based relatedness score was developed to calculate the relative relatedness of concepts with the ontology, which were then used in the Loculus system for information exploitation and classification. The evaluation undertaken to date have yielded promising results and have indicated that exploiting perspective can lead to novel methods of information extraction and classifications.

Mindfulness-based stress management: Findings from randomized controlled trials

The use of Mindfulness has become increasingly popular in the field of psychotherapy and counselling, and is now finding application in unexpected places. Is it just another therapeutic fad or an evidence-based intervention with lasting value? ROBERT KING provides a timely review of the research literature to provide a summary of the findings of randomised control trials of the clinical efficacy or effectiveness of Mindfulness as a stress reduction intervention.

Ontology-based knowledge management for enterprise systems

Companies face the challenges of expanding their markets, improving products, services and processes, and exploiting intellectual capital in a dynamic network. Therefore, more companies are turning to an Enterprise System (ES). Knowledge management (KM) has also received considerable attention and is continuously gaining the interest of industry, enterprises, and academia. For ES, KM can provide support across the entire lifecycle, from selection and implementation to use. In addition, it is also recognised that an ontology is an appropriate methodology to accomplish a common consensus of communication, as well as to support a diversity of KM activities, such as knowledge repository, retrieval, sharing, and dissemination. This paper examines the role of ontology-based KM for ES (OKES) and investigates the possible integration of ontology-based KM and ES. The authors develop a taxonomy as a framework for understanding OKES research. In order to achieve the objective of this study, a systematic review of existing research was conducted. Based on a theoretical framework of the ES lifecycle, KM, KM for ES, ontology, and ontology-based KM, guided by the framework of study, a taxonomy for OKES is established.

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.