Stuart McLeay

The European IFRS experiment: objectives, research challenges and some early evidence

This paper provides an academic perspective on the development of the EUs harmonisation project based on International Financial Reporting Standards (IFRS), on the costs and benefits of IFRS adoption in Europe, and on the research challenges that arise. The paper reviews the accumulating academic evidence, emphasizing the effectiveness and transparency of the enforcement framework, and documenting the main lessons to be learned from the research programme on EU IFRS implementation conducted within the INTACCT network. Results on the consequences of IFRS adoption and the quality of implementation are far from uniform across Europe, and depend on factors reflecting preparer incentives and the effectiveness of local enforcement. The paper also outlines a possible alternative proposal for the organisation and development of enforcement activities in Europe.

The Measurement of Harmonisation and the Comparability of Financial Statement Items: Within-Country and Between-Country Effects

Abstract This paper reports on an analysis of accounting policy choices made by European companies with an international shareholding. The accounting policies analysed in depth in this paper comprise the treatment of goodwill and accounting for deferred taxation. In the paper, the van der Tas comparability index is developed by separating the index into two components relating to the within-country (intra-national) effects of domestic standardisation and the between-country (inter-national) effects of harmonisation. It is shown in this paper that the value of the index may be interpreted as the probability that two companies selected at random will report financial information that is comparable, and that the lowest level of comparability exists when the accounting methods are assumed to be distributed equiprobably over the companies, the outcome of a random selection of accounting policies. The paper also considers the problems of non-disclosure, and a comprehensive ‘disclosure-adjusted’ comparability in...

Accounting for good news and accounting for bad news: Some empirical evidence from the Czech Republic

Abstract This paper is motivated by the links that continue to be forged between security pricing and accounting, building on recent findings that firms tend to be asymmetrically conservative in the timeliness of earnings recognition. The evidence is that firms in the European Union tend to recognise unrealised losses more quickly in their earnings than unrealised gains (Giner and Rees, 2001; Raonic et al., forthcoming), and there is evidence of even greater accounting conservatism in the USA (Basu, 1997; Ball et al., 2000; Givoly and Hayn, 2000). This paper investigates whether the Czech market exhibits conformity with the behaviour that has been documented elsewhere by examining the earnings/returns relationship, focusing to begin with on the impact of losses on earnings response coefficients and then considering the asymmetric timeliness of income recognition in the Czech market. The findings indicate that the Czech market is similar to more developed markets, at least in one respect: there is statistically significant evidence of different market effects of profits and losses, in that profits are more persistent than losses. However, contrary to the findings in more developed markets, there is no statistically significant evidence of earnings conservatism in the Czech market. These results are most probably due to the continuing influence of restrictive tax regulations that mitigate any tendency towards conservatism, as well as the transitional nature of the economy. A further reason is likely to be that the regulatory environment in the Czech Republic is close to the kind of stakeholder corporatism that is described by Ball et al. (2000), who show that conservatism tends to be less pronounced in such regimes where there are fewer managerial incentives to bias current earnings. In conclusion, if changes in market prices signal good news and bad news about future risky outcomes, there is no evidence of asymmetry in the Czech market in accounting for such risks.

Constituent lobbying and its impact on the development of financial reporting regulations: evidence from Germany

Abstract This paper examines the impact of constituent lobbying activity on accounting regulators during the transformation of the Fourth European Company Law Directive into German accounting law. Using detailed published commentaries prepared by representative organisations on draft accounting legislation, we provide evidence concerning the preferences of the three primary German constituencies—preparers, auditors, and academic experts. Initially, a model that merely distinguishes between the three constituencies suggests that the industry lobby group representing preparers exerts the greatest influence on the decisions of the German legislature. However, when the empirical model is extended to include all two-way interaction effects, the relative power of preparers is seen to be far lower, with the influence exerted by industry depending crucially on the support of at least one of the remaining lobby groups.

Impression Management and Retrospective Sense-Making in Corporate Narratives: A Social Psychology Perspective

Purpose - Prior accounting research views impression management predominantly though the lens of economics. Drawing on social psychology research, this paper seeks to provide a complementary perspective on corporate annual narrative reporting as characterised by conditions of “ Design/methodology/approach - A content analysis approach pioneered by psychology research is used, which is based on the psychological dimension of word use, to investigate the chairmens statements of 93 UK listed companies. Findings - Results suggest that firms do not use chairmens statements to create an impression at variance with an overall reading of the annual report. It was found that negative organisational outcomes prompt managers to engage in retrospective sense-making, rather than to present a public image of organisational performance inconsistent with the view internally held by management (self-presentational dissimulation). Further, managers of large firms use chairmens statements to portray an accurate (i.e. consistent with an overall reading of the annual report), albeit favourable, image of the firm and of organisational outcomes (i.e. impression management by means of enhancement). Originality/value - The approach makes it possible to investigate three complementary scenarios of managerial corporate annual reporting behaviour: self-presentational dissimulation, impression management by means of enhancement, and retrospective sense-making.

Country Effects and Sector Effects on the Harmonization of Accounting Policy Choice

This study assesses the extent of accounting harmony in Europe prior to the recent switch to IFRS, by presuming that accounting is harmonized when ‘all firms operating in similar circumstances adopt the same accounting treatment for similar transactions regardless of their domicile’. The policies studied concern inventory, depreciation and goodwill, and the odds of using alternative accounting methods are predicted by logistic regression. The empirical results suggest that, while international exposure and firm size are significant factors, country effects are considerably greater than sector effects, which is inconsistent with harmonized accounting.

The distribution of earnings relative to targets in the European Union

Abstract This paper provides evidence on the distribution of reported earnings relative to targets in the Member States of the European Union (EU). For a large sample of over 60,000 firm-years between 1986 and 2001, we find that more firms than expected (i) report small positive earnings, (ii) report small positive earnings changes and (iii) have zero or small positive forecast errors. These discontinuities are much more pronounced in the EU compared to the US, and the distributions of reported earnings and earnings changes are characterised by lower dispersion and more clustering around zero, consistent with higher income smoothing in Europe. Across the EU, we find that the avoidance of a loss or an earnings decrease is more common in those Member States which do not have a long history of accounting standard setting, and particularly in those which, until recently, were almost entirely law-based. The earnings distributions and earnings change distributions of UK firms resemble more those of their counterparts in the US. and differ from the rest of the EU. despite the various EU harmonisation efforts that have taken place.

Ownership, Investor Protection and Earnings Expectations

This study examines the interactive influence of corporate ownership, corporate governance and investor protection on the incorporation of current value shocks in the accounting earnings of European companies. This influence is investigated not only by means of the association between current news and current earnings but also with respect to the association of the same news with expected future earnings, and its persistence. Consistent with the contractual explanation of accounting conservatism, it is shown that the accounting behaviour examined is a function of the demand created by shareholders, and that the institutional arrangements in force are of lesser significance in the presence of widely held ownership. On the other hand, greater separation between supervision and management and stronger investor protection are seen to be influential under close ownership, as these are shown to curb aggressive accounting in the form of a persistently lower recognition of bad news in earnings. Evidence is also provided that stricter corporate governance practices in Europe can substitute for weaknesses in investor protection provisions in law.

International Standardisation and Harmonisation: a New Measurement Technique

We argue in this paper that it is the availability of alternative accounting treatments and the use by individual firms of the appropriate method that produces financial statements which are comparable. Accordingly, international harmony in accounting should be seen as a state in which firms throughout the world are able to use an internationally-recognised accounting treatment that is appropriate to their circumstances without being constrained to do otherwise by local accounting regulations or other requirements to adopt practices confined to particular nations. The paper distinguishes harmonisation from standardisation and presents a method for measuring harmonisation which allows for choice between alternative accounting treatments. The statistical model also takes account of the stylised fact that accounting treatments are not mutually exclusive, and the method is illustrated by an analysis of goodwill accounting practices in Europe.

Value added: A comparative study

Abstract This article reports on an investigation into the relationship between corporate value added and its macroeconomic counterparts. The first part demonstrates the effect on macroaccounting identities of conflicting value systems and differing perceptions of wealth creation. Subsequently, these issues are reconsidered in the context of corporate value added measurement. The comparative method is employed to test whether or not current practice is consistent with a model of social consolidation whereby reporting firms, regardless of their location, would disclose their contribution to societal value added.