Jayne M. Godfrey

Reputation costs: the impetus for voluntary derivative financial instrument reporting

The purpose of this study is to investigate managers’ responses to derivative financial instrument disclosure requirements proposed by the Australian accounting standard setting bodies and the Australian Society of Corporate Treasurers (ASCT). Confronted with societal pressures to make derivative activities more transparent, managers responded in a manner that can be explained by legitimacy and institutional theories and the maintenance of the managers’ and their firms’ financial reporting reputations. Discretionary reporting is predicted to be positively related to the magnitude of reputation costs confronting managers and firms. While the desire for legitimacy is unobservable, financial reporting reputation is proxied by the following attributes—ASCT, auditor, and Group of 100 (G100) affiliations. With the exception of auditor affiliation, results from the analysis are consistent with the hypotheses. Alternative explanations of the results may be possible. However, the consistency and significance of the results implies that legitimacy and institutional theories provide a plausible explanation as to what impulse prompted managers’ responses. (The plausible explanations provided are morally based [Louch (1966). Explanation and human action. Berkeley: University of California Press].) We are grateful to an anonymous referee for this insight into our explanation). Further research to investigate managers’ reporting incentives is recommended.

Changes in value relevance of accounting information upon IFRS adoption: Evidence from Australia

We investigate whether the adoption of IFRS increases the value relevance of accounting information for firms listed on the Australian Securities Exchange. Using a longitudinal study that covers pre-IFRS and post-IFRS periods during 1990–2008, we find that earnings become more value-relevant whereas the book value of equity does not. This impact is concentrated in the subsamples of industrial firms, both large and small, and firms reporting an AGAAP-IFRS accounting reconciliation upon IFRS adoption. Consistent with an increase in the value relevance of earnings, earnings also become more persistent around IFRS adoption. Our study suggests that even for a country categorized by strong investor protection and high-quality financial reporting and enforcement, IFRS adoption affects the associations between accounting information and market value. JEL Classification: M40, M41

Intangible assets, IFRS and analysts’ earnings forecasts

We investigate whether the adoption of IFRS in 2005 by Australian firms has been associated with a loss of potentially useful information about intangible assets, as conjectured by Matolcsy and Wyatt (2006). We find that the negative association between analyst forecast error magnitude/dispersion and aggregate reported intangibles previously documented becomes stronger subsequent to IFRS adoption, primarily for firms with high levels of underlying intangible assets. This is contrary to Matolcsy and Wyatt (2006)’s conjecture. Our result is largely due to reported goodwill, rather than other intangible assets, suggesting that the impairment approach to goodwill valuation required by IFRS conveys more useful information than does the former straight-line amortisation approach. When we investigate a sub-sample of firms that report lower intangibles under IFRS than under the prior Australian GAAP, we do find evidence consistent with the Matolcsy and Wyatt (2006) conjecture.

Regulatory capture in the globalisation of accounting standards

The Australian Financial Reporting Council recently shocked the world business community by unexpectedly announcing a change in the nations approach to global-accounting-standards development. The change involved switching from ensuring consistency of Australian accounting standards with International Financial Reporting Standards (IFRSs) developed by the International Accounting Standards Board to outright adoption of IFRSs by 2005. At the time of the announcement, Australia had the most developed international harmonisation programme of any country with a well-developed financial reporting system. Events surrounding the change demonstrate how political the accounting standard-setting process can be as it continues to receive front-page media attention, and as it provides a platform in parliamentary and electoral debate. In the meantime, the US role in the global accounting standard-setting arena has moved through phases of indifference to potential active dominance, and European influences have waxed and waned. We examine whether swings in political and regulatory influences that occur when globalisation becomes a national and international goal are explained by regulatory capture theory. We also address the extent to which a subset of a single nations regulatory system plays a key role in a series of larger national and international games. Drawing upon experiences in Australia, the United States, and the European Union, we identify political influences on initiatives to reform accounting-standard-setting environments, policies, and processes.

The Association between Client-Specific Investment Opportunities and Audit Fees of Industry Specialists

Audit clients’ investment opportunity sets (IOS) include firm-specific opportunities that are unique to the client, as well as opportunities generalizable to the client’s industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm-specific IOS nor how firm-specific IOS affects the premiums charged by industry specialist auditors. We find that firm-specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for the investment in firm-specific knowledge necessary to conduct the audit or for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm-specific IOS. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade-off between firm- and industry-specific knowledge.