Abu Taher Mollik

Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing

Purpose - – The purpose of this paper is to examine the effect of audit quality on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Differences in the compliance among the clients of Big-4 auditors and between the clients of Big-4 and non-Big-4 auditors are examined. This study also examines the effect of audit committee (AC) members’ accounting and finance backgrounds on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Design/methodology/approach - – Different univariate tests, multivariate regressions and fixed effect panel regressions have been used to examine the hypotheses. The sample includes 911 firm-year observations for the period of 2006-2009. Findings - – A statistically significant difference in compliance levels has been found between the clients of Big-4 and non-Big-4 auditors. The compliance levels of the clients of Big-4 auditors have also been found to be significantly different. The findings also suggest that AC members’ accounting and finance backgrounds are positively associated with firms’ compliance with IFRS for goodwill impairment testing and disclosure. Research limitations/implications - – The single country context and the single standard context limit the generalizability of the findings. Practical implications - – The findings of this study have important implications for researches in accounting, finance and corporate governance that usually consider Big-4 auditors vs non-Big-4 auditors as a proxy for audit quality. The results also reinforce the importance of developing institutional mechanisms such as high-quality auditing or corporate governance (AC members’ expertise) to encourage firms’ compliance with IFRS. Originality/value - – Firms’ compliance with IFRS for goodwill impairment testing is not essentially the same for the clients of all Big-4 auditors in Australia, suggesting that the quality of services provided by Big-4 auditors significantly differ from one another in enforcing their clients to compliance with IFRS. The lax enforcement on the part of auditors and the regulatory inaction in this regard may point to teething difficulties and systematic deficiencies in the move towards the impairment regime and fair value accounting. The findings also bear an important message for the move towards the harmonization of accounting practices.

Instability of stock beta in Dhaka Stock Exchange, Bangladesh

Purpose - The purpose of this paper is to examine the nature and extent of instability of capital asset pricing model (CAPM) beta in a small emerging capital market. Design/methodology/approach - Inter-period as well as intra beta instability are examined. Inter-period instability is examined by Mann-Whitney z-scores and Blumes regressions. Intra-period beta instability is examined using Bruesch-Pagan LM test and Chow break point test. Robustness tests are performed applying time-varying parameter models. Findings - Beta instability increases with increase in holding (sample) periods. There is evidence of inter-period as well as intra-period beta instability. Analysis of the full eight-year interval reveals a very high incidence of beta instability, namely, about 26 per cent of the individual stocks tested and about 31 per cent of individual stocks have structural break. The extent of beta instability does not significantly decline when corrected for non-synchronous trading and thin trading as represented by Dimson beta. However, the extent of beta instability is similar to that of developed market. Time-varying parameter model under Kalman filter approach using AR(1) specification performs better than any other models in terms of in-sample forecast errors. Dominance of AR(1) approach suggests that stock betas in DSE are time varying, and shocks to the conditional beta have some degree of persistence which ultimately reverts to a mean. This result is in contrast to the findings of Faff Research limitations/implications - This study covers only 110 stocks of Dhaka Stock Exchange. It can be extended to include more stocks. The study can also be done in other developing markets. Originality/value - While the issues of beta instability have been extensively explored for developed markets, evidence for emerging markets is less readily available. The present study contributes to the emerging market literature on beta instability by investigating the extent of beta instability and its time-varying properties in Dhaka Stock Exchange (DSE), Bangladesh. Understanding the systematic risk behaviour of individual stocks in DSE is important for both local and international investors. With the saturation of investment opportunities in developed markets due to their high integration, and with the enhanced deregulation and liberalization of emerging economies, emerging financial markets like DSE provide suitable and a relatively safe investment environment for international investors and fund managers seeking global diversification for better risk-return trade-offs. When most of the world markets declined during the recent global financial crisis, stock prices in DSE experienced a continuous rise. This makes it more interesting as an emerging market to study beta instability.

Regime change in the accounting for goodwill: Goodwill write-offs and the value relevance of older goodwill

Purpose - This 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/approach - The 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 Findings - The 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/implications - This study uses data for the first four years since the inception of the impairment approach. Practical implications - The 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 implications - The 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/value - Adopting 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.

Stakeholders’ interest in sustainability assurance process

Purpose - This paper aims to critically analyse the content of the assurance statements of corporate sustainability reports to examine the degree to which assurance statements enhance and uphold organisational transparency and accountability to stakeholders. Design/methodology/approach - This framework of content analysis draws on a research instrument developed by O’Dwyer and Owen (2005), as well as the most recent assurance guidelines (Global Reporting Initiative) and standards AA1000AS, 2008 and ISAE 3000. Findings - Due to the lack of stakeholders’ engagement in the assurance process, due to the scope limitation placed on the assurance engagement and due to the reluctance of the assuror to address the assurance statements to the stakeholders groups, sustainability assurance practice cannot be considered as the accountability enabler. With persistent focus on internal systems, process, data generation and data capture, assurance practice is serving more as an internal control tool than as a social accounting/auditing instrument. Research limitations/implications - A single country context is studied. However, to the extent that assurances are conducted using common sets of assurance standards and guidelines, there is external validity of the findings. Practical implications - Despite the institutional initiatives by the global and local institutions regarding social and environmental sustainability reporting and assurance, the assurance practice has not yet emerged as a tool of social accountability. Originality/value - This study provides a comprehensive and up-to-date empirical assessment of the degree to which the sustainability assurance practice encompasses the issue of stakeholders’ interests and forms the potential basis for policy implications to the assurance practice and to the assurance standard setting process.