Samir M. El-Gazzar

An Examination of the Determinants and Contents of Corporate Voluntary Disclosure of Management's Responsibilities for Financial Reporting

The Sarbanes-Oxley Act (SOX) of 2002 requires principal officers to certify under oath to the veracity of information contained in Securities and Exchange Commission (SEC) filings and opine on the effectiveness of the internal control system. This study examines the determinants and contents of corporate voluntary disclosure of managements responsibilities during the five-year period preceding the SOX Act. We predict that the voluntary disclosure of managements responsibilities for financial information signals certain incentives and characteristics of the reporting firm that are relevant to financial statement users and regulators. Consistent with our predictions, our findings reveal significant differences between issuing and nonissuing firms as to the effectiveness of the firms internal control system, access to capital markets, audit committee characteristics, and ownership structure. An empirical analysis of the contents of these assertions also reveals different areas of emphasis and selectivity by management, which represents an informative link to existing disclosure mandates. The results of this study contribute to our knowledge of managements motivations for voluntary disclosure and lend credence to the mandatory certification requirements and related disclosure reforms established in the post-Enron era.

The valuation effects of embedded value disclosure by life insurers

Many life insurance companies outside the US disclose embedded value (EV), an actuarial estimate of the present value of the future net cash flows arising from the companys in-force life insurance business. Industry surveys have shown that EV is used by analysts for valuation purposes. However, there is little empirical research of EV disclosures. This study fills that void by testing the valuation relevance, information content and reduction in information asymmetry associated with the reporting of EV. We provide evidence supporting the premise that the market prefers EV to traditional accounting metrics in assessing security prices. This study advances our understanding of the valuation effects of corporate voluntary disclosures, and should be of interest to financial reporting standard setters such as the IASB and the FASB who are currently working on harmonizing financial reporting in the insurance industry.

Economic implications of proposed accounting for stock-based compensation

This article examines the market expectations of the proposed accounting changes for stock-based compensation in the exposure draft that preceded the Statement of Financial Accounting Standards No. 123. The exposure draft made recommendations that significantly differed from current practice. Affected firms expressed concern that the proposed changes would drastically reduce their reported earnings. This could lead to firms becoming less attractive to capital sources (resulting in higher costs of capital) and firms refraining from using stock options to attract talented managers and entrepreneurs. The market test shows that affected firms experienced negative security market prices contemporaneous with issuance of the exposure draft. Cross-sectional analyses indicate that the magnitude of price decline is associated with measures of high risk and less mature firms.

Restatements and accounting quality: a comparison between IFRS and US-GAAP

Purpose This paper aims to examine whether sanctioning adoption of IFRS for US firms would produce accounting information of the same quality as those produced under US Generally Accepted Accounting Principles (GAAP). This is a timely research since the Securities and Exchange Commission (SEC; 2014) has asked for further review. Design/methodology/approach This study uses restatements of financial statements made by a sample of foreign firms listed on US stock exchanges using International Financial Reporting Standards (IFRS) in comparison to a control sample of US firms using US GAAP during the period of 2001to 2010. Statistical analysis of the frequency, sources and magnitude of the restatements and market revaluations to the announcement of the restatements are examined. Cross-country differences are also examined. Findings The results indicate that IFRS firms have a lower rate of restatements than US GAAP firms but with no significant differences in terms of sources of restatements and the impact on net income or shareholders’ equity. The market revaluations to restatement announcements show no significant differences between the two accounting regimes. Cross-sectional analyses indicate IFRS firms are on average from countries characterized by weak rule of law, ineffective corruption controls and lower efforts to promote private sector advancement. Research limitations/implications The sample size in the paper is relatively small. To increase validity of the inferences from the Results, this issue should be readdressed with larger sample. Practical implications Results are important to accounting practitioners and policymakers. Social implications Results are contributing in clarifying the SEC’s concerns of adopting the IFRS by US-based firms; thus, saving the investors the additional efforts and costs in comparing financial statements prepared under different accounting regimes. Originality/value This research is the first to use restatements as accounting quality criteria. The results suggest that adoption of IFRS by US-based firms would not produce accounting information that is significantly different in quality from those generated under US GAAP. This result should be of interest to the SEC in clarifying its concerns.

Evolution of financial reporting of life insurers: The predominance of unregulated embedded value disclosure

Purpose - This paper examines the capital market effects and predominance of unregulated embedded value (EV) financial reporting in the life insurance industry in foreign domestic markets, and US markets for foreign firms that cross-list in the US. Design/methodology/approach - Recent empirical archival data is analyzed and evaluated to determine the incremental and relative value relevance of an unregulated valuation metric that is disclosed by life insurers. Findings - Our findings support the proposition that embedded value is valuable supplemental information in foreign domestic markets, as well as US markets for foreign life insurers that cross-list in the US. Given that IASB and the FASB are engaged in projects to improve accounting standard for insurance companies, and have faced criticism with the existing drafts on this issue, the two institutions ought to consider the valuation relevance of EV disclosures. Moreover, our analysis strongly suggests that financial analysts in the US should consider EV in valuing life insurers’ stocks. Practical implications - The findings discussed in this paper are of special interest to financial reporting policy makers, financial analysts, firm compensation committees and managers, and academics. Originality/value - We contribute to the extant literature by providing recent evidence that suggests that embedded value, an unregulated fair value market driven metric, is more value relevant than traditional earnings metrics such as earnings and book value. It’s the only study that we are cognizant of that critically examines the recent empirical literature on this evolving issue.

Compliance and determinants of US-listed foreign firms’ 20-F filings under the new Securities and Exchange Commission accelerated deadline

Purpose - – The purpose of this paper is to investigate the impact of the US Securities and Exchange Commission (SEC) accelerated deadline on foreign firms, and the 20-F filing practices and factors relating to the filing lags. Design/methodology/approach - – The authors identified 338 firms that file 20-F reports with the SEC during the period of 2010 and 2011. The authors then used multivariate regressions to examine the effects of the shortened deadline on foreign firms’ filing practices and the factors associated with these practices. In the regression models, the authors also control for other firm characteristics that have shown to affect the filing lags of US firms such as firm performance, size, mergers and restructures, audit firm, compliance with internal control requirements under Sarbanes Oxley Act, internal control weaknesses, going concern audit opinion and operating complexity. Findings - – Based on a sample of 338 US-listed foreign firms, the results indicate that there is a significant reduction in the filing lags and a change in their distribution for fiscal year 2011, as compared to the preceding year, and as intended by the SEC. The authors also find that 20-F filing lags are negatively related to the use of International Financial Reporting Standards (IFRS) or US-GAAP in 20-F reports and use of the English language in foreign firms’ home countries. Practical implications - – The findings of this paper are of interest to accounting regulatory bodies including the SEC, US Financial Accounting Standards Board and the International Accounting Standards Board by showing that registrants respond positively to regulations intending to promote timeliness of accounting disclosures and reporting, although many firms may oppose them in the due process stage. Originality/value - – The authors contribute to the extant literature by providing new evidence that 20-F filing lags are negatively related to the use of IFRS or US-GAAP in 20-F reports, and the use of English language in foreign firms’ home countries.