Marco Trombetta

Does graph disclosure bias reduce the cost of equity capital

Abstract Firms widely use graphs in their financial reports. In this respect, prior research demonstrates that companies use graphs to provide a favourable outlook of performance, suggesting that they try to manage the impression created in users’ perceptions. This study tests whether by means of distorted graphs managers are able to influence users’ decisions in the capital market. By focusing on the effects of distorted graphs on the cost of equity capital, we provide preliminary evidence on one of the possible economic consequences of graph usage. The results of this investigation suggest that graph disclosure bias has a significant, but temporary, effect on the cost of equity. Moreover, our results highlight the important role played by the overall level of disclosure as a conditioning factor in the relationship between graphs and the cost of equity. Consequently, the results of the current study enhance our understanding of the complex interactions that take place in the stock market between information, information intermediaries and investors.

The Usefulness of Academic Research in Understanding the Effects of Accounting Standards

This paper provides an overview of why, and how, academic research can assist regulators and standard setters in evaluating ex ante and ex post the effects of standardization and regulation of corporate financial reporting and disclosure. We argue that academic research is a valuable and often underutilized resource that can help standard setters and policymakers understand the possible effects of accounting standards and regulations. We give an overview of approaches that can, and are, used for this objective and provide selected examples to illustrate how academic research can inform standard setters and regulators.

Disclosure indices design: does it make a difference?

Measurement of information disclosed by companies is a complex task. Accounting research usually relies on disclosure indices to obtain a proxy for the information disclosed by companies. However, there is no consensus about the best design for these indices. The purpose of this paper is to investigate if there are significant differences among the indices that are used in disclosure studies. Three indices that measure disclosure of forward-looking information are compared: A “quality index” of a multidimensional nature; a “scope index” designed specifically to measure the scope of information, and a “quantity index” that measures information disclosed exclusively in terms of quantity. Results of the empirical analysis indicate that although the indices are correlated, they have a big impact in the rankings of companies. Evidence against the idea of the irrelevance of the particular index chosen is provided.

Mandatory Audit Firm Rotation and Audit Quality

Abstract In a setting where mandatory audit firm rotation has been effective for more than 20 years (i.e. Italy), we analyse changes in audit quality during the auditor engagement period. In our research setting, auditors are appointed for a three-year period and their term can be renewed twice up to a maximum of nine years. Since the auditor has incentives to be re-appointed at the end of the first and the second three-year periods, we expect audit quality to be lower in the first two three-year periods compared to the third (i.e. the last) term. Assuming that a better audit quality is associated with a higher level of accounting conservatism, and using abnormal working capital accruals as a proxy for the latter, we find that the auditor becomes more conservative in the last three-year period, i.e. the one preceding the mandatory rotation. These results are confirmed using Basus [1997. The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37] timely loss recognition model. In an additional analysis, we use earnings response coefficients as a proxy for investor perception of audit quality, and we observe results consistent with an increase in audit quality perception in the last engagement period.

Disclosure theories and disclosure measures

ABSTRACT Theories have been developed in the disclosure literature to explain the reasons behind the decision to disclose more information. Empirical evidence does not consistently support disclosure theories and results found are contradictory. The difficulty in measuring voluntary disclosure might be one of the reasons influencing on these divergences. In this paper, we investigate two key questions related to disclosure measurement. First, we aim to empirically test if use of disclosure indices that measure different information attributes determines validity of disclosure theories. Second, we investigate how disclosure indices design influences results. Results show that determinants of more specific information attributes are different than those that influence less specific attributes. Furthermore, independently of the information attribute that is measured, disclosure measure design influences results.

International regulation of audit quality: full harmonization or mutual recognition? An economic approach

The market for audit services is modelled as a market with vertical product differentiation, rigid demand, third-party externalities and a liability rule. This framework is used to choose between full harmonization and mutual recognition as possible international regulatory regimes for audit quality. It is shown that if third-party externalities are zero, then full harmonization is at least as good as mutual recognition. If, however, externalities are not zero, then mutual recognition can yield a higher level of social welfare than full harmonization. These results are relevant for the debate on the international regulation of the provision of audit services, especially within the EU, and show that full harmonization is not necessarily the best option.

Response of the EAA Financial Reporting Standards Committee to the IASB Discussion Paper A Review of the Conceptual Framework for Financial Reporting

Abstract The European Accounting Association (EAA) Financial Reporting Standards Committee (FRSC) provided a response to the International Accounting Standards Boards (IASBs) 2013 Discussion Paper (DP) on completing and revising its Conceptual Framework. The response consisted of a literature-based discussion of the issues raised in the IASB paper and responses to the questions asked. The following paper has omitted the responses to specific questions but otherwise sets out the arguments made to the IASB, together with introductory material to indicate the context. The FRSC paper follows the order of the IASB DP.

Measurement Issues in Financial Reporting

The common wisdom about financial reporting very often assumes certain characteristics for accounting numbers. In particular, accounting numbers are seen as ‘measures’ of the financial performance and of the financial situation of a company. Given that the concept of ‘measure’ in other contexts is associated with neutrality and objectivity, the balance sheet value of assets and liabilities and the earnings figure from the income statement are consequently trusted as value-free. However, the situation is far from being so simple and a lively debate exists on how and when accounting numbers can be considered as objective ‘measures’. This Special Section of the European Accounting Review contains seven papers that consider measurement issues in financial reporting, using a variety of research methods. The purpose of this research is to provide evidence on the implications of measurement choices for accounting research and accounting practice. This introduction summarizes certain key aspects of the papers included in the Special Section. The grouping of the papers provides links to the overall purpose of the Special Section.

A pequena vira grande! O papel das “pequenas” auditorias no estudo do mercado de auditoria

Studying history will not be complete if the focus lies only on the most powerful and rich segments of society. In order to fully understand historical facts, it is crucial to gather data on and analyze ordinary people, which constitute the vast majority of the population. Something similar is true for studying the audit services market. If we only focus on the so-called Big N audit rms and their large, listed, clients, we do not have an in-depth understanding of the market. By 2014, in the 28 countries of the European Union (EU), 92.98% of the enterprises were microenterprises, i.e. they had less than 10 employees. If we restrict our attention to the ‘accounting, bookkeeping, auditing, and tax services’ market, the percentage grows up to 95.63% (Eurostat, 2017). In other jurisdictions, the percentages are similar or even higher. It is a fact, therefore, that the vast majority of audit rms and their current and potential clients are small and medium-sized enterprises (SMEs). Despite the importance of SMEs for the audit market, only quite recently the academic literature has given the attention they deserve. Lack of accessible and reliable data is likely to be one of the reasons why many studies in the past have neglected this segment of the market and have focused on large audit rms. In this Editorial we focus on the insights generated by recent literature examining SMEs in the audit market, both from the supply and demand side. We highlight how this strand of the literature has improved our understanding of how the audit services market works and how it provides many opportunities for further research.