nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2009‒01‒10
three papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Earnings Management and Audit Adjustments: An Empirical Study of IBEX 35 Constituents By Oriol Amat; Oscar Elvira; Petya Platikanova
  2. Acerca de la responsabilidad contractual del auditor externo de estados contables By Collacciani, Hugo; Carrica, Juan Manuel; López Aranguren, Jorge Luis
  3. Formula Apportionment: Is it better than the current system and are there better alternatives? By Rosanne Altshuler; Harry Grubert

  1. By: Oriol Amat; Oscar Elvira; Petya Platikanova
    Abstract: Doubts about the reliability of a company's qualitative financial disclosure increase market participant expectations from the auditor's report. The auditing process is supposed to serve as a monitoring device that reduces management incentives to manipulate reported earnings. Empirical research confirms that it could be an efficient device under some circumstances and recognizes that our estimates of the informativeness of audit reports are unavoidably biased (e.g., because of a client's anticipation of the auditing process). This empirical study supports the significant role of auditors in the financial market, in particular in the prevention of earnings management practice. We focus on earnings misstatements, which auditors correct with an adjustment, using a sample of past and current constituents of the benchmark market index in Spain, IBEX 35, and manually collected audit adjustments reported over the 1997-2004 period (42 companies, 336 annual reports, 75 earnings misstatements). Our findings confirm that companies more often overstate than understate their earnings. An investor may foresee earnings misreporting, as manipulators have a similar profile (e.g., more leveraged and with lower sales). However, he may receive valuable information from the audit adjustment on the size of earnings misstatement, which can be significantly large (i.e., material in almost all cases). We suggest that the magnitude of an audit adjustment depends, other things constant, on annual revenues and free cash levels. We also examine how the audit adjustment relates to the observed market price, trading volume and stock returns. Our findings are that earnings manipulators have a lower price and larger trading volume compared to their rivals. Their returns are positively associated with the magnitude of earnings misreporting, which is not consistent with the possi- ble pricing of audit information.
    Keywords: Audit adjustments, earnings management, market pricing of audit information
    JEL: M41 M42
    Date: 2008–12
  2. By: Collacciani, Hugo; Carrica, Juan Manuel; López Aranguren, Jorge Luis
    Abstract: This paper has the following aims: - To display the nature of the contractual civil responsibility to wich is potentially exposed the external auditor of financial statements; - To determine its practical consequences; and - To contribute to accomplish a link between the legal knowledge and the audit and accounting traditions. Knowing this subjects would allow the auditor to be free of responsibility if he has work in accordance with professional standards. This paper deals with this problem analyzing the contractual and obligational level. In fact, identifying the precise contract and the nature of the bonds it creates is and inescapable way to fulfill the aims announced.
    Keywords: Audit; Responsibility; Contractual Responsibility; Financial Statements; Law; Audit Contract
    JEL: M42
    Date: 2008–10–08
  3. By: Rosanne Altshuler (Rutgers University); Harry Grubert (U.S. Treasury Department, Office of Tax Analysis)
    Abstract: This analysis of formula apportionment compared to the current system is based on the observation that income shifting has two sources, intangible income and debt. The analysis also recognizes that a major goal of the transfer pricing or income allocation system is to preserve the tax neutrality between arm’s length and related party transactions and between multinational and single jurisdiction companies. It therefore develops a model that highlights these features. Both separate accounts (SA) and formula apportionment (FA) distort behavior but along different margins. Under SA, companies have an incentive to shift high-tech activities and to manipulate transfer prices. Under FA, companies do not manipulate transfer prices but they have an incentive to shift routine activities abroad and to change the degree to which they depend on outside suppliers. Simulations based on the model indicate that FA has no clear advantage over SA even when the model assumes that an unrealistically large amount of resources are devoted to tax planning under SA. Furthermore, straightforward changes could be made in SA that would result in substantial improvements without resorting to full-fledged FA. We also examine the complicating role of financial assets under FA and how ongoing R&D is implicitly allocated. The conceptual basis for the conventional formulas are discussed, particularly ones based on sales. Finally, a static, no behavioral change, estimate of the effect of FA on the tax liabilities of US multinational corporations is presented for 1996 and 2004. The static estimate for 2004 suggests a potentially large revenue gain, but the simulations show that tax revenues under FA and SA are similar when behavioral responses are taken into account.
    Keywords: Corporate taxation; Separate Accountin; Formula Apportionment
    Date: 2009

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