International Journal of Accounting and Information Management

Sun, Li; Zhang, Joseph H.

2017 International Journal of Accounting and Information Management

doi: 10.1108/IJAIM-02-2016-0014

PurposeThe purpose of this study is to examine the impact of goodwill impairment losses on bond credit ratings.Design/methodology/approachThe authors use regression analysis to examine the relationship between goodwill impairment losses and bond credit ratings.FindingsThe empirical results show a negative relationship between the amount of goodwill impairment losses and bond credit ratings, suggesting that firms with goodwill impairment losses receive lower credit ratings. The authors perform various additional tests, including subsamples in good or bad market time, changes analysis, first time goodwill impairment firms vs subsequent impairment and the two-stage least squares regression analysis to address potential endogeneity issues. The main results persist.Originality/valueThis paper links and contributes to two streams of literature: goodwill impairment in accounting literature and bond credit ratings in finance literature. Whether a firm’s goodwill impairment losses affect the firm’s bond credit rating remains an interesting question that has not been examined previously. To the best of the authors’ knowledge, this is the first study that directly examines the relationship between goodwill impairment losses and bond ratings at the firm level.

Astami, Emita W.; Rusmin, Rusmin; Hartadi, Bambang; Evans, John

2017 International Journal of Accounting and Information Management

doi: 10.1108/IJAIM-05-2016-0059

PurposeThe purpose of this paper is to examine the effect of culture and audit quality on managers’ decisions regarding accounting accruals. It focuses on companies experiencing excessive free cash flow, as these companies have been associated with an agency problem.Design/methodology/approachThis study measures the magnitude of discretionary accruals as a proxy for earnings management using the cross-sectional modified Jones model. Excessive free cash flow is scrutinized by the method used by Chung et al. (2005). Listed companies in nine countries in the Asia-Pacific region are represented in this study. The statistical analyses are used to examine the influence of cultural aspect, the role of external monitoring by high-quality auditors and the earnings management practice in the companies with excessive free-cash-flow.FindingsThe empirical results presented in this paper provide support for the proposition that managers of companies with excessive free-cash-flow will make investment decisions that are not always in the best interest of the shareholders and use accounting discretion to increase reported earnings. This study provides empirical evidence that these companies have been associated with an agency problem and the role of external auditor persists in a setting, where cultural differences prevail in across countries.Practical implicationsIn cross-border trade and investment, the findings provide the opportunity to exploit a setting, where cultural differences prevail, whereas other potentially influential variables, including the role of external monitoring by high-quality auditors, are relatively constant across countries.Originality/valuePrevious studies (Leuz et al., 2003; and Enomoto et al., 2015) examine factors influencing earnings management internationally have concentrated on legal institutions and investor protection. Han et al. (2010) completed a cross-country study on the effects of national culture on earnings management. This study focuses on companies across countries experiencing with excessive free cash flow and examines the cultural aspect and the effectiveness of external monitoring by high-quality auditors operating in different countries in mitigating managerial opportunism.

Bepari, Md Khokan; Mollik, Abu Taher

2017 International Journal of Accounting and Information Management

doi: 10.1108/IJAIM-02-2016-0018

PurposeThis study aims to examine the impact of the recent regime change in accounting for goodwill, from the systematic periodic amortisation to the impairment testing, on the frequency and the extent of goodwill write-offs in the context of Australia. It also examines the impact of the change from the amortisation approach to the impairment approach on the value relevance of older goodwill.Design/methodology/approachThe authors approach the first research question by comparing the actual amount of goodwill impairment charge by the sample firms with the minimum “as if” amortisation charge that would have been required under the amortisation regime. The authors approach the second question using a modified Ohlson model (1995), similar to Bugeja and Gallery (2006). The sample consists of 911 firm-year observations with the number of observations in the particular year being 238, 242, 220 and 211 in 2009, 2008, 2007 and 2006, respectively.FindingsThe findings suggest that the adoption of the impairment approach has decreased the frequency and the amount of goodwill write-off. The goodwill impairment amount is substantially less than the “as if” amortisation amount that would have been required under the amortisation regime. The results also suggest that older goodwill is now value-relevant, whereas goodwill purchased during the current year is not value-relevant. One reason for this may be that AASB 3: Business Combination allows for the provisional allocation of the purchase price to goodwill to be allocated to other identifiable intangible assets latter on. Hence, during the year of business combination, investors do not form a firm view of the amount of goodwill arising out of the business combination.Research limitations/implicationsThis study uses data for the first four years since the inception of the impairment approach.Practical implicationsThe findings of this study have important implications for the fair value accounting debate. The discretions allowed the managers under the impairment approach to improve the information content of goodwill. The relatively low levels of goodwill impairment even during the 2008-2009 global financial crisis contradict to the apprehensions found in the literature that managers will use the goodwill write-off as a tool for downward earnings management. The findings also imply that if managers are allowed with adequate flexibility through accounting standards rather than stipulating some systematic and mechanistic rules, the information value of the accounting measurement may improve.Social implicationsThe findings feed into the debate of “rule-based” versus “principle-based” accounting standards and favours the “principle-based” accounting standards. The findings also contribute to the accounting measurement literature by concluding that if allowed with discretionary choices, managers may not always opt for the conservative accounting measurements (such as, recording goodwill write-offs).Originality/valueAdopting an alternative approach, this study shows that the fair value accounting for goodwill has resulted in an optimistic approach to goodwill write-offs. It has also improved the information content of reported goodwill. This is the first known study addressing the research questions in consideration after the adoption of the goodwill impairment approach.

Bozec, Richard; Dia, Mohamed

2017 International Journal of Accounting and Information Management

doi: 10.1108/IJAIM-05-2016-0054

PurposeThe aim of this paper is to revisit the board independence–audit fees (BI–AF) relationship while taking into account the ownership structure of the firm. Two effects are unfolding along the ownership concentration spectrum: separation of ownership and control (principal–agent problems) and separation of voting and cash flow rights (principal–principal problems).Design/methodology/approachThe study is conducted over a seven-year period (2002-2008) using panel regressions on a sample of Canadian publicly traded companies. The authors use a moderated regression analysis incorporating two-way interactive terms (ownership × BI) and a sub-group analysis.FindingsThe results show a positive and significant relationship between BI and AF when ownership is concentrated in the hands of a dominant/controlling shareholder. The higher the gap between voting and cash flow rights of the ultimate owner, the stronger the relationship between BI and AF. Overall, evidence supports both the demand-based perspective on AF and the expropriation effect argument.Practical implicationsResults support a one-size-fits-all approach to governance despite growing concerns from academics and interest groups about the appropriateness of pursuing such strategy when ownership is concentrated in the hands of a dominant/controlling shareholder.Originality/valueBy taking the excess voting rights into account (difference between voting rights and cash-flow rights of the ultimate owner), the authors propose a refined classification of the sample firms along the ownership concentration spectrum.

Jagoda, Kalinga; Samaranayake, Premaratne

2017 International Journal of Accounting and Information Management

doi: 10.1108/IJAIM-04-2016-0038

PurposeThe purpose of this paper is to propose an alternative integrated approach based on the stage-gate method to implement enterprise resource planning (ERP) systems which will enhance the effectiveness of ERP projects.Design/methodology/approachA literature review was conducted on ERP system implementation and its effectiveness. The need for improving implementation approaches and methodologies was examined. Based on the insights gained, a conceptual framework for ERP system implementation is presented by combining the state-gate approach with the pre-implementation roadmap.FindingsThe proposed framework aims to enhance the overall ERP implementation outcomes, ensuring critical success factors and eliminating common causes of failures. A pre-implementation roadmap is identified as a key element for eliminating many causes of failure including lack of organisations’ readiness for ERP. The post-implementation stage can be used for further improvements to the system through internal research and development.Research limitations/implicationsThe development of the framework is an attempt to contribute to improving ERP implementation. This research is expected to motivate researchers to work in this area, and it will be beneficial to practicing managers in the identification of opportunities for improvements in ERP systems. Case studies will be valuable to refine and validate the proposed model.Originality/valueThis paper explores research in a needy area and offers a framework to help researchers and practitioners in improving ERP implementation. This framework is expected to reduce the implementation project duration, strengthen critical success factors and minimise common problems of ERP implementation projects.

Noh, Minyoung; Park, Hyunyoung; Cho, Moonkyung

2017 International Journal of Accounting and Information Management

doi: 10.1108/IJAIM-11-2015-0077

PurposeThis paper aims to examine the effect of audit quality of consolidated financial statements on the accuracy of analysts’ earnings forecasts from the viewpoint of users of financial statements.Design/methodology/approachThis paper investigates the effect of dependence on the work of other auditors on error in analysts’ earnings forecasts based on samples from 2011 to 2012 (the period since implementation of the International Financial Reporting Standards in Korea). In addition, this paper examines the effects of use of Big 4 auditors, use of auditors with industry expertise and the proportion of overseas subsidiaries in relation to all subsidiaries on the association between dependence on the work of other auditors and error in analysts’ earnings forecasts.FindingsThis paper finds a positive relation between dependence on the work of other auditors and error in analysts’ earnings forecasts, suggesting that more dependence on the work of other auditors decreases the quality of the audit of consolidated financial statements; thus, to the extent that low-quality audits decrease reporting reliability, analysts’ forecasts are less likely to be accurate. This paper also finds that the positive relationship between dependence on the work of other auditors and error in analysts’ earnings forecasts is weakened when the principal auditor is a Big 4 auditor or one with industry expertise, because such auditors provide higher-quality audit services. However, the positive relationship between dependence on the work of other auditors and error in analysts’ earnings forecasts is further strengthened in cases where the proportion of overseas subsidiaries to all subsidiaries is higher. These results suggest that the complexity of the consolidation process increases as the proportion of overseas subsidiaries increases.Originality/valueThe findings are useful in analyzing the effects of adoption of the New ISA, implemented in 2014, which does not allow the division of audit responsibilities between principal auditors and other auditors. This paper also provides insights for regulators and practitioners to improve the auditor appointment system in the future.