nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2023‒04‒03
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Empirical Studies on Auditor Independence and Audit Quality By Pappert, Nicolas
  2. Corporate Governance: Compliance with the Selection Criteria of Board of Directors in Public Sector Companies By Anjeela Khurram
  3. Investigating Tax Compliance with Mixed-Methods Approach: The Effect of Normative Appeals Among the Firms in Latvia By Saulitis, Andris; Chapkovski, Philipp
  4. The surplus-value rate and the structure of the tax system By Ferran Sancho
  5. Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities By Mario Mansour; Eric M. Zolt
  6. Defining and comparing SICR-events for classifying impaired loans under IFRS 9 By Arno Botha; Esmerelda Oberholzer; Janette Larney; Riaan de Jongh

  1. By: Pappert, Nicolas
    Abstract: The key function of the statutory audit is to enhance the credibility of financial information by giving an opinion on whether the financial statements of an audited company convey a true and fair view in accordance with the generally accepted accounting principles. In order to fulfill this function, appropriate audit quality is necessary. Audit quality is determined by the probability that the auditor will detect material misstatements in the client’s annual financial statements (i.e., competence) and report on them (i.e., independence). Consequently, high-quality audits secure trust and market confidence, contribute to investor protection and reduce companies’ cost of capital. However, auditing is a credence good, meaning that essential elements of the underlying services are not observable to the addressees of audited financial statements. Therefore, it is not sufficient that the auditor provides a high factual audit quality; it must also be perceived as high by the users of audited financial statements. Accounting scandals, such as the recent ones involving Wirecard in Germany or Carillion in the United Kingdom, lead to a loss of confidence in the statutory audit. Consequently, regulatory interventions are undertaken, such as under Regulation (EU) No. 537/2014 in the EU or the Financial Market Integrity Strengthening Act of 2021 in Germany. Although numerous measures have already been implemented, such as mandatory audit firm rotation, banning the provision of certain non-audit services (NAS), or extending the auditor’s report, the latest precedents once again demonstrate the need for further reforms. Moreover, many of the measures discussed and already implemented lack empirical evidence of their impact. Against this background, this dissertation identifies, on the one hand, further potential and innovative instruments, and examines their suitability for strengthening auditor independence and increasing audit quality. On the other hand, the effects of already implemented measures are examined. The findings are set out in five empirical studies, summarized in eight articles. The first study is a survey of auditors, non-professional investors, and bankers, on potential measures for fostering statutory auditor independence for audits of public interest entities (PIEs) and non-PIEs. Survey participants were asked to assess the suitability of different instruments for strengthening auditor independence. The results are published in four articles and reveal that auditors are particularly in favor of establishing audit committees, improvements in professional supervision, and stricter sanctions for violating the principle of independence. Non-professional investors and bankers also advocate the latter two categories. In addition, both groups are also in favor of increased auditor liability. Concerning the differences in the perceptions of measures for PIE and non-PIE audits, the patterns are similar for all three subject groups. On an experimental basis, the second study examines how non-professional investors and bankers evaluate potential instruments for increasing audit quality perceptions. These are a non-provision of NAS (either by pure audit firms, or a non-provision of NAS to audit clients) and a statutory fee schedule for audit services. The results indicate that the non-provision of NAS and a statutory fee schedule for audit services significantly positively affect participant audit quality perceptions. This finding is also revealed for perceived auditor independence, although no effect on the participants’ perceived competence can be determined. Furthermore, the results indicate that a complete non-provision of NAS (both for audit and non-audit clients; pure audit firms) seems unnecessary. The third study addresses whether the mandatory audit firm rotation of PIEs introduced by Regulation (EU) No. 537/2014 affects the audit quality of engagements in the first year, during the transition period from a voluntary to a mandatory audit firm rotation system. The results, based on a regression analysis of German listed companies, illustrate that anticipated rotations in the transition period between 2014 (enactment of the regulation) and 2020 (start of mandatory rotations for non-financial companies) lead to higher factual audit quality, but only for companies that are not listed in the CDAX. These findings are crucial for assessing the effects of the regulation, both before the actual application and for pending analyses during the application period that is now beginning. Whether there are similarities and “boilerplates” in the disclosure of key audit matters (KAMs) in the auditor’s reports of German DAX 30 companies is the subject of the fourth study. The auditor’s report was fundamentally revised and expanded with the EU audit market reform in 2014. The primary objective of the reform was to increase the quality of the statutory audit. Therefore, the information content of the auditor’s report, and thus audit transparency was increased. The results show that although auditor’s reports are more client-specific, similar wording is often used. Exceptionally high text similarities are found for KAMs on the same issue, reported by the same auditor on a client level. For some KAMs, there is even 100% text similarity. For different clients of the same auditor, the similarity rate decreases significantly, although high levels of similarity can be found in some cases. The similarity rate is lowest when there is an auditor change. Therefore, it is questionable whether this reporting practice really improves the informational value of the auditor’s report and, accordingly, addressee perceptions of audit quality. The fifth and final study builds on the findings of the fourth study. It examines the KAM sections in the auditor’s reports of German HDAX companies between 2017 and 2019, focusing on text similarities for KAMs on the same issue reported in consecutive periods by the same or a different auditor at a client level. Furthermore, potential determinants of resulting text similarities are investigated using a regression analysis. In terms of text similarity, it is found that auditors often use similar wording when disclosing a KAM on the same issue at the client level in consecutive years. These results confirm the findings of the fourth study. Furthermore, the similarity rate is found to be significantly negatively correlated with a change of audit firm, and positively correlated to companies that have a stable financial position measured by a high portion of equity. Again, whether this reporting practice is appropriate for increasing information value and audit quality perceptions of relevant addressees is questionable.
    Date: 2023
  2. By: Anjeela Khurram (Pakistan Institute of Development Economics)
    Abstract: Safeguarding the interests of shareholders and stakeholders from managerial misconduct and fraud is one of the core domains of corporate governance. Corporate governance activities can be classified into five broad areas: Board Effectiveness, Audit and Risk/External Accountability, Remuneration and Reward, Shareholder Relations and Stakeholder Relations. Adhering to the Code of Corporate Governance (CCG) can facilitate the success of the company by achieving effective and prudent management.
    Date: 2022
  3. By: Saulitis, Andris; Chapkovski, Philipp
    Abstract: This study employs a field experiment and qualitative content analysis to examine the effect of various behaviourally-informed messages on increasing tax compliance in Latvia. In a field experiment, more than 3, 000 businesses received a message with a normative appeal to increase the relatively low salaries compared to firms operating in the same industry and region. Other treatment groups received the same message with an additional paragraph that varied audit probabilities or included prosocial messages. All treatments effectively increased the average declared salaries in the enterprises relative to not sending a message. Even though the overall fiscal effect was positive, the qualitative analysis of the feedback by the firms indicates that messages, particularly those that did not state the future actions of the tax administration, provoked discontent and distrust between the taxpayer and the tax administration. Our findings demonstrate that clear communication of the intended actions of the tax administration is the most effective approach to promoting tax compliance. Furthermore, our research indicates that a relatively small audit probability (5%) is as effective as a larger probability (66%), implying that there is no need to carry out audits on a large scale to address tax evasion.
    Keywords: tax collection; shadow economy; prosocial behaviour; tax audits; mixed-methods
    JEL: C93 D03 H26 H32 H83
    Date: 2023–03–01
  4. By: Ferran Sancho
    Abstract: We explore the relationship between the tax system and the surplus-value rate. Since government policy directly conditions the economic environment, any variations in the tax rates will affect disposable income. This, in turn, translates to consumption adjustments that give rise to changes in the surplus-value rate. For the evaluation of changes from the baseline figure, we argue that the correct data set needs to be more comprehensive than the input-output and national accounts data. The reason is that they do not include, in a coherent and integrated manner, all the tax flows taking place in the economy. A Social Accounting Matrix (SAM), however, does include all the tax flows affecting households (indirect taxes on consumption, direct taxes on income, and personal labour taxes). Therefore, the SAM provides the basis for counter-factual calculations of the surplus-value rate that a standard input-output table, for example, cannot provide. We illustrate the possibilities of the analysis using a recent SAM of Spain.
    Keywords: Surplus-value rate, Social Accounting Matrix, Taxation and consumption, Policy indicators.
    JEL: B51 C54 H22
    Date: 2023–03–21
  5. By: Mario Mansour; Eric M. Zolt
    Abstract: Personal income taxes (PITs) play little or no role in the Middle East and North Africa, often yielding less than 2 percent of GDP in revenue—with the exception of few North African countries. This paper examines how PITs have evolved in recent decades, and what they might look like in the next 20 years. Top marginal tax rates on labor and business income of individuals have declined substantially, a trend that mirrors reductions in advanced and developing economies. Taxation of passive capital income has changed very little, and the revenue intake from this source remains low throughout the region (less than 1 percent of GDP on average and concentrated in oil-importing non-fragile states). Social security contributions (SSC) have increased in importance in nearly all MENA countries, and some countries have introduced additional payroll taxes. The combination of reduced marginal tax rates, light taxation of income from capital and business activities, and increase of SSC, have resulted in income tax systems that create disincentives to work and incentives for informality, and contribute little to government revenue and income redistribution. Given differences in economic and political structures, demographics, and starting points, the path to PIT/SSC reforms will vary across the region. Countries with relatively mature PIT/SSC systems, where revenue performance has improved in the past two decades, will increasingly need to balance the revenue and equity objectives against effciency objectives (in particular labor market incentives and infromality). Countries with no PITs will have to weigh whether a consumption tax/SSC system that mimic a flat tax on labor income is sufficient to diversify revenue away from oil and whether to adopt PITs to address rising income and wealth inequality. Finally, fragile states, who face more political volatility and weaker fiscal institutions, will have to focus on simplicity of tax design and collection to be able to raise revenue from PITs.
    Keywords: Personal income taxes; social security contributions; payroll taxes; fragile and conflict states; Middle East and North Africa; Gulf-Cooperation Council; SSC reform; SSC system; revenue performance; PIT objective; PIT revenue; Personal income tax; Income tax systems; Income; Income and capital gains taxes; Corporate income tax; North Africa; Middle East; East Africa; Global
    Date: 2023–02–17
  6. By: Arno Botha; Esmerelda Oberholzer; Janette Larney; Riaan de Jongh
    Abstract: The IFRS 9 accounting standard requires the prediction of credit deterioration in financial instruments, i.e., significant increases in credit risk (SICR). However, the definition of such a SICR-event is inherently ambiguous, given its reliance on comparing two subsequent estimates of default risk against some arbitrary threshold. We examine the shortcomings of this approach and propose an alternative framework for generating SICR-definitions, based on three parameters: delinquency, stickiness, and the outcome period. Having varied these parameters, we obtain 27 unique SICR-definitions and fit logistic regression models accordingly using rich South African mortgage data; itself containing various macroeconomic and obligor-specific input variables. This new SICR-modelling approach is demonstrated by analysing the resulting portfolio-level SICR-rates (of each SICR-definition) on their stability over time and their responsiveness to economic downturns. At the account-level, we compare both the accuracy and flexibility of the SICR-predictions across all SICR-definitions, and discover several interesting trends during this process. These trends form a rudimentary expert system for selecting the three parameters optimally, as demonstrated in our recommendations for defining SICR-events. In summary, our work can guide the formulation, testing, and modelling of any SICR-definition, thereby promoting the timeous recognition of credit losses; the main imperative of IFRS 9.
    Date: 2023–03

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