Judy S.L. Tsui

Discretionary Accounting Accruals, Managers' Incentives, and Audit Fees*

This paper examines the linkages between discretionary accruals (DAs), managerial share ownership, management compensation and audit fees. It draws on the theory that managers of firms with high management ownership are likely to use DAs to communicate value relevant information while managers of firms with high accounting-based compensation are likely to use DAs opportunistically to manage earnings to improve their compensation. OLS regression results of 648 Australian firms show that (1) there is a positive association between DAs and audit fees, and (2) managerial ownership negatively affects the positive relationship between DAs and audit fees, and 3) this negative impact is further found to be weaker for firms with high accounting-based management compensation.

Some Cross-Cultural Evidence on Ethical Reasoning

This study draws on Kohlbergs Cognitive Moral Development Theory and Hofstedes Culture Theory to examine whether cultural differences are associated with variations in ethical reasoning. Ethical reasoning levels for auditors from Australia and China are expected to be different since auditors from China and Australia are also different in terms of the cultural dimensions of long term orientation, power distance, uncertainty avoidance and individualism. The Defining Issues Tests measuring ethical reasoning P scores were distributed to auditors from Australia and China including Hong Kong and The Chinese Mainland. Results show that auditors from Australia have higher ethical reasoning scores than those from China, consistent with Hofstedes Culture Theory predictions.

The impact of culture on the relationship between budgetary participation, management accounting systems, and managerial performance: An analysis of Chinese and Western managers

Abstract This study tests the hypothesis that the behavior and attitudes of Chinese and Western managers to budgetary participation will be different because of cultural differences. Chinese managers are used to represent managers from a high-collectivist, large-power distance, and long-term orientation culture while Caucasian expatriate managers are used to represent a culture that is low-collectivist, small-power distance, and short-term orientation. Data were collected from 51 Chinese subunit managers in Xian, China and 38 Caucasian expatriate subunit managers in Hong Kong who were requested to respond to questionnaires designed to measure the ‘availability’ of broad scope and timely management accounting systems (MAS), budgetary participation, and their managerial performance. Multiple regression analysis showed that the three-way interaction term was significant, thus, suggesting that the interaction effects of MAS and budgetary participation on managerial performance were different, depending on the cultural background of the managers. More specifically, the relationship between MAS information and managerial performance of Chinese managers was negative for high levels of participation but positive for Caucasian managers. These results have implications for the design of effective control subsystems and suggest that the management accounting theories developed in the context of Western economies may not be generalizable to the Chinese environment.

Auditors' ethical reasoning: Some audit conflict and cross cultural evidence

Abstract This study examines the relationship between different levels of ethical reasoning and ethical behavior of Hong Kong auditors in an audit conflict situation. It tests the hypothesis that ethical reasoning scores for Hong Kong auditors will be lower than USA auditors on the basis of Hofstedes theory of cultural differences. Fifty experienced auditors from four Big Six CPA firms in Hong Kong who were administered the Defining Issues Test (DIT) participated in an experiment requiring them to make a decision on an auditor-client conflict situation. It was found that the higher the level of ethical reasoning, the lower the likelihood that the auditor would respond as acceding to the clients request. Higher levels of ethical reasoning were thus associated with more independent behavior. It was also found that P scores were significantly lower than the sample in USA thus suggesting that cultural differences could affect levels of ethical reasoning.

Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong Firms

We document positive association between earnings management and insider selling after the fiscal year-end for Hong Kong firms. This positive association is especially evident before the 1997 Asian Financial Crisis. Our findings suggest that Hong Kong executives manage reported earnings to maximize their private benefits from insider selling. Additionally, we find that a higher proportion of independent directors (INED) on corporate boards moderate the positive association between insider selling and earnings management. Stricter monitoring of earnings management by INED is especially evident when no member of the family with majority ownership is present on corporate boards as a director. This suggests that the presence of family members with majority ownership on corporate boards significantly reduces INEDs monitoring effectiveness. Our findings suggest that strict regulations are needed to control insider trading, and independence of corporate boards is important for monitoring of earnings management associated with insider trading. Furthermore, appointment of family members with majority shareholdings should be avoided to enhance independence and to monitor effectiveness of corporate boards.

Decentralisation as a Moderating Factor in the Budgetary Participation-Performance Relationship: Some Hong Kong Evidence

Abstract This study tests the contingency or ‘fit’ hypothesis that the effects of budgetary participation on managerial performance will be positive in decentralised organisations and negative in centralised organisations. The responses of 37 managers from a cross-section of Hong Kong manufacturing companies to a questionnaire survey designed to measure the variables were analysed by examining the interaction term in a multiple regression equation. The results supported the interaction hypothesis and found that at high levels of decentralisation there is a positive relationship between budgetary participation and managerial performance but at low levels of decentralisation this relationship is negative. These findings have implications for the design of effective control subsystems.

TRACKS: audit quality, earnings, and the Shanghai stock market reaction

This study examines whether audit quality in the Shanghai Stock Exchange affects the positive association between change in earnings per share and cumulative abnormal return (CAR). Regression results using 659 Shanghai listed company observations in 1996 and 1997 show that the positive market reaction to increase in earnings is stronger for firms audited by high quality auditors. A broad conclusion of the study is that audit quality is playing an important role in China and that investors in the Shanghai market differentiate between high quality versus low quality auditors.