Richard D. Morris

The Influence of U.S. GAAP on the Harmony of Accounting Measurement Policies of Large Companies in the U.K. and Australia

U.S. GAAP has increasingly become an influence on accounting practices in other countries, even aside from those traditionally considered under direct U.S. influence. The change arises from the large number of U.S. accounting standards, non‐U.S. companies listing on U.S. stock exchanges, and the amount of U.S. direct investment abroad. As the impact of U.S. GAAP varies across countries, it may affect international accounting harmony. This idea is tested by examining the level of international harmony for eleven accounting measurement policies in matched pairs of large companies from Australia and the U.K., two countries with historically strong cultural and economic links. It is argued that, in recent decades, accounting practice in Australia, more so than in the U.K., has become increasingly U.S.‐oriented. The concepts of harmony of Tay and Parker (1990) and Archer et al. (1996) are employed. International harmony is measured by the between‐country C index and chi‐square test; national harmony by van der Tas’s (1988) H index. While considerable national harmony is found in the U.K. for seven and in Australia for five accounting policies, there is considerable or complete international harmony for only three policies. Evidence is presented of the influence of U.S. GAAP as one factor explaining the poor degree of U.K./Australia international harmony. Australian companies appear to follow U.S. GAAP to a greater extent than do U.K. companies. The state of partial harmony thus existing restricts international comparability of accounting reports and may cause problems for regulators.

International harmony measures of accounting policy: comparative statistical properties

Abstract Van der Tass (1988) I index and the between-country C index introduced by Archer et al. (1995) are competing measures of international harmony. We present comparative statistical properties of these indices, via a simulation study covering three accounting methods in 10 countries, with uniform, bimodal and unimodal distributions of companies across accounting methods. The indices are also adjusted for non-disclosures using techniques developed by Archer and McLeay (1995) and Archer et al. (1995). The I index and the between-country C index are mathematically equivalent in the two-country case even in the presence of non-disclosures. As more countries are compared, the two indices diverge. The means and standard deviations of the I index, with a correction proposed by Archer and McLeay (1995), decrease and there is little skewness or kurtosis. In contrast, as more countries are compared, the between-country C index exhibits more stability in means, lower standard deviations, higher skewness and k...

The Value Relevance of Transparency and Corporate Governance in Malaysia Before and after the Asian Financial Crisis

This paper investigates whether the value relevance of financial reporting transparency and corporate governance in Malaysia increased after the Asian financial crisis of 1997. Our sample comprised 94 companies listed on the Kuala Lumpur Stock Exchange in both 1996 and 2001. The disclosure indexes were significantly value relevant for 2001 but not for 1996. Our corporate governance measure was also significantly value relevant for 2001 but not for 1996. Accordingly, it would appear that after the Asian financial crisis, investors have become more sensitized to transparency and corporate governance issues.

Financial reporting practices of Indonesian companies before and after the Asian financial crisis

Abstract This study investigates the extent to which corporate transparency in Indonesia has increased following the Asian financial crisis. The financial reports of 99 Indonesian companies listed on the Jakarta Stock Exchange are examined before and after the crisis. As expected, there is a significant increase in the level of transparency, measured by reference to key items from Indonesian accounting standards, IASs and US GAAP, between 1996 and 2000, though overall levels of transparency are low. Transparency is divided into mandatory compliance with Indonesian accounting standards (or PSAK), and voluntary adoption of items from IASs and US GAAP. Factors most consistently associated with transparency are firm size, and the relative interest of outside shareholders. After controlling for these and other factors, the Asian financial crisis appears to have some association with increased compliance with PSAK, although the association is not strong. However, voluntary adoption of IASs or US GAAP items seems unaffected by the crisis.

Audit Firm Lobbying on Proposed Disclosure Requirements

This study investigates incentives of audit firms to lobby on proposed disclosure requirements. The results are consistent with the proposition that higher expected costs of non-compliance with statutory disclosure requirements compared to professional standards provide less incentives for audit firms to lobby in favour of increased statutory disclosure requirements and more incentives to lobby in favour of increased professional disclosure requirements. Their lobbying in favour on either source of proposed disclosure requirements is not associated with increasing size of the audit firm, the amount of new auditing to be generated by the disclosure requirements or by whether they are specialised in the proposed requirements.

Distributable profit in nineteenth-century British regulated industries

In a recent paper, Parker (1990) proposed that corporate financial reporting and auditing regulation in major nineteenth-century British industries was associated with concerns about monopoly powers, privileges granted by the State and financial and physical safety. This paper examines whether these factors can explain variation in the use of distributable profit for regulating dividends in special legislation and private acts of Parliament in four of the nineteenth-century industries covered by Parker, namely banking, railways, gas and insurance. It is argued that the use of dividend restrictions based on distributable profit was associated with concerns about monopoly power in these industries, but was not associated with issues of privilege or safety. Other explanations, including agency theory, are considered and rejected.

The split equity reform and corporate financial transparency in China

Purpose - The purpose of this paper is to report the impact of the Chinese capital market split equity (SE) reform in 2005 on the corporate financial transparency of Chinese listed companies. Design/methodology/approach - Using an International Financial Reporting Standards-based checklist, the paper investigates whether the post-reform 2005 annual reports of reformed companies improved transparency compared to pre-reform 2004 reports. The transparency of the reformed companies was also compared to a control group of companies unreformed on December 31, 2005. Findings - Results indicate that the SE reform increased corporate disclosures. Reformed companies had higher mandatory and voluntary disclosures in their post-reform 2005 annual reports compared to their pre-reform 2004 annual reports. In addition, the improvement in mandatory and voluntary disclosures for reformed companies is greater than that of the unreformed control group. Research limitations/implications - The SE reform provides a unique natural experimental setting in which to examine the impact of the SE reform, with its associated change in ownership structure and corporate governance, on corporate disclosure. Practical implications - The results of this paper suggest that the SE reform has had a positive effect on corporate financial transparency in China, thereby indicating the positive response to regulation in this emerging market. Further, the results suggest that as the proportion of government ownership falls, management has increased incentive to voluntarily supply additional information to the market. Originality/value - The SE reform is unique to China and this paper is the first to report on financial reporting disclosure implications of this reform.

Information Asymmetry of Fair Value Accounting and Loan Loss Provisions During the Global Financial Crisis

This paper investigates whether U.S. banks’ assets and liabilities, reported using Fair Value Accounting (FVA) under SFAS 157 Fair Value Measurement, are associated with information asymmetry among equity investors during the 2008 Global Financial Crisis. Using bid-ask spread as a proxy for information asymmetry, and controlling for bank size, profitability, default risk and capital adequacy, we find that bid-ask spread is positively and significantly associated with total fair value net assets and net assets measured using inputs of fair value Level 1, Level 2, and Level 3, as specified in SFAS 157. We also examine whether banks’ loan loss provisions are associated with information asymmetry, since the U.S. Securities and Exchange Commission (2008) has alleged that large loan loss provisions, determined based on managerial internal information and discretion, played a significant role in bank failures in the Global Financial Crisis. We find that loan loss provisions are also positively and significantly associated with bid-ask spread. In summary, our findings show that both FVA and loan loss provisions are associated with information asymmetry among equity investors during the 2008 Global Financial Crisis, with loan loss provisions being the stronger of the two effects.

The persistence of international accounting differences as measured on transition to IFRS

The international accounting classification literature emphasises the importance of understanding how institutional factors shape accounting regulations and practices. With the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union and Australia in 2005, our empirical study examines whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems. Using IFRS as the yardstick, we find statistically significant differences in the measurement of shareholders’ equity as between strong (Class A) versus weak (Class B) equity financing systems, common law versus code law systems and cultural systems based on ‘Anglo’, ‘Nordic’ and ‘More Developed Latin’ cultural groups. With regard to the measurement of net income, however, we find statistically significant differences only in respect of strong (Class A) versus weak (Class B) equity financing systems. Our findings demonstrate that traditional international accounting system differences still persisted at the time of IFRS adoption even after long periods of harmonisation and growing international accounting convergence.