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Whether audit firm tenure affects audit quality is a question of longstanding regulatory and scholarly interest. While this question centers on how audit quality changes over time within client-audit firm relationships (longitudinal variation), prior studies tend to instead compare audit quality across relationships of different lengths (cross-sectional variation). We show that conventional pooled cross-sectional tests are subject to selection bias: client-auditor pairs that select into longer versus shorter relationships differ systematically in a variety of ways that also relate to measures of audit quality. These differences exist at the outset of relationships and thus are not attributable to tenure but rather predict the ultimate length of relationships. We then re-examine models of audit quality and tenure after including client-audit firm relationship fixed effects, moving the level of analysis from between clients (cross-sectional) to within client-auditor pairs (longitudinal). We find no evidence that audit quality changes with tenure over time within client-audit firm relationships. The combined evidence suggests that the previously documented association between audit firm tenure and audit quality is likely attributable to selection bias and cannot be taken as evidence of a causal link. More broadly, our results highlight the importance of a design perspective that isolates variation tightly linked to the research question being examined. [ABSTRACT FROM AUTHOR]

Empirical studies on the relationship between shareholder litigation and corporate disclosure obtain mixed results. We develop an economic model to capture the endogeneity between disclosure and litigation. Equilibrium disclosure is determined by two countervailing effects of litigation, a deterrence effect and an insurance effect. We derive four key results. (i) Decreasing litigation risk leads to less disclosure of very bad news, due to a weakening of the deterrence effect, but to more disclosure of weakly bad news, due to a weakening of the insurance effect. (ii) Given a sufficiently large information asymmetry, litigation risk dampens (boosts) overall disclosure of bad news for low (high) litigation risk firms. (iii) Capital markets respond more to the disclosure of bad news than of good news if the deterrence effect is strong, which arises if both insiders' penalties and litigation risk are high. (iv) In an extension, we highlight real effects of litigation on corporate innovation and establish that innovation first decreases and then increases (strictly decreases) with litigation risk if insiders' penalties are small (large). We reconcile our findings with results from a large set of U.S.-based empirical studies and make several novel predictions. [ABSTRACT FROM AUTHOR]

Purpose: Previous studies on the relationship between corporate social responsibility (CSR) and tax avoidance (TA) have found inconclusive results. Academics have suggested deepening our understanding of this relationship. Although a few studies have responded to this call, research toward moderating variables is still nascent. The purpose of this study is to analyze the moderating role of economic freedom (EF) and its interaction with power distance (PD) on the relationship between CSR and TA. Design/methodology/approach: Based on a sample of 3,866 publicly listed firms from 44 countries over the period 2010–2018, the authors use multivariate regressions techniques to investigate whether and how EF moderates the relationship between CRS and TA and how PD influences this effect. Findings: Findings indicate that the potentially positive relationship between CSR and TA is weaker for firms in institutional environments with higher EF. Moreover, we find that this moderating effect is stronger when PD is lower. Practical implications: This study has important implications. It offers insights for managers to reflect on their CSR and taxation practices, and for policymakers to consider the institutional conditions that facilitate corporations' social and tax-responsible behavior. These findings indicate the necessity of integrating cultural, regulatory and collaborative elements to observe corporations engaged in social and tax-responsible behavior. Originality/value: To the best of the authors' knowledge, this is the first study to investigate the moderating effect of EF on the relationship between CSR and TA, and its interaction with PD. Moreover, our sample includes firms based in Europe, North and South America, Asia and Oceania, facilitating the study of EF and PD's broad diversity. [ABSTRACT FROM AUTHOR]

The term “sustainable development” is an omnipresent expression reaching the dimension of a command in the EU under the leadership of Ursula von der Leyen. However, this is an ephemeral term with ambiguous and contradictory meanings which is employed in a particular manner by current EU policies.

We show that analyst behavior changes in response to a randomly assigned shock that exogenously varies the timeliness and cost of accessing mandatory disclosures in the cross-section of investors: analysts reduce coverage and issue less optimistic, more accurate, less bold, and less informative forecasts. Our evidence indicates that analysts reduce a strategic component of their behavior: the changes are stronger among analysts with more strategic incentives like affiliated or retail-focused analysts. We conclude that mandatory disclosure can substitute for analyst information production, which is constrained by investors' ability to verify forecasts using corporate filings. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

This study examines whether qualitative disclosure in tax footnotes affects the market valuation of tax avoidance activities. We predict that more disclosures in tax footnotes mitigate investors' concerns over the agency risk of managers engaging in potentially illegal tax avoidance and improve the transparency of firm performance, thus increasing firm valuation. Consistent with the prediction, we find that the market valuation of tax avoidance increases when firms' tax footnotes disclose more qualitative information related to their tax avoidance activities. We provide several tests to show mechanisms underlying our main findings and mitigate concerns about alternative explanations. Overall, our study suggests that the tax-related disclosures in tax footnotes are useful for investors assessing the value of tax avoidance. [ABSTRACT FROM AUTHOR]

AbstractThe International Financial Reporting Standard (IFRS) 15, ‘Revenue from Contracts with Customers’, became effective for National Health Service (NHS) bodies from the annual period beginning 1 April 2018. NHS Foundation Trusts, as part of UK public sector organisations, adopted IFRS for their 2009/2010 financial statements to improve the consistency and comparability of financial reports globally and to follow best practices from the private sector. The implementation of new or revised accounting standards can have both intended and unintended effects. Understanding these effects is essential for healthcare policymakers and managers to navigate the changes this standard brings. This study analyses the impact of IFRS 15 on the financial performance of University and Teaching Hospitals Foundation Trusts, considering both financial and management accounting perspectives. The research initially outlines the expected effects of the new revenue recognition standard. It then addresses unique considerations within the healthcare sector before empirically evaluating the significance of annual financial performance changes after IFRS 15 implementation, specifically in terms of accounting effects. This exploration paves the way for discussions on further anticipated effects. The article uses Friedman’s test to analyse the impact of IFRS 15 on total operating income for a sample of 33 University and Teaching Hospitals Foundation Trusts and finds that the adoption of the new revenue recognition standard had a significant impact on this item, i.e. financial performance was affected, which is classified as an unintended effect.

Research on the impact of the International Financial Reporting Standard (IFRS) mandate on the quality of financial reporting produced mixed findings. Several researchers showed that the IFRS mandate depresses earnings management since it improves comparability, and the principle-based approach offers limited alternatives for managers in reporting. Others have shown that it provides flexibility for managers in institutionally and legally weak countries. We examine whether the IFRS mandate depresses earnings management practices in South Africa. Using a sample of 206 firms listed on the Johannesburg Securities Exchange (JSE) from 2000 to 2010, our findings show that the IFRS mandate significantly reduces earnings management. Our findings contribute to the ongoing discussion about whether high-quality standards effectively mitigate earnings management practices and protect stakeholder rights in developing countries.

The sustainability concept embraces a wide scope of linked practices: green thinking, sustainability informational and management assurance, ESG reporting and scoring, responsible and impact investment, stability measurements, and others. Significantly expanding beneficiary's and stakeholders' circle needs information to build and implement a policy providing ESG values creation and meeting their requirements in relevant sustainable agenda. This is why it is important to create a transparent information landscape and to shape new highlights in management and decision-making. The article is aimed at exploring specific ways to transform information and management practices, primarily accounting, ESG-reporting, analysis, and assurance to create a transparent information environment for sustainability.

This article aims to analyse the asset-backing risk of stablecoins, focusing on international accounting standards, classification criteria, and auditing standards and using Tether as a case study. It examines Tether’s issuance, backing, controls, ratios, and regulations to assess risk transmission and mitigation. The results suggest a need for unified and strengthened accounting and auditing standards to enhance user confidence. Liquidity, solvency, and debt ratios were applied to Tether’s balance sheets; while Tether has made efforts to increase its transparency, and although it possesses highly liquid assets, challenges remain regarding its liquidity, solvency, and debt. An independent auditors’ valuation is crucial for investor confidence, demonstrating that more specific regulations are required for stablecoins. Future research should explore other stablecoins to comprehensively understand the accounting and auditing challenges in the field.

The complexity of taxes has been widely discussed in the literature and can be defined and measured in various ways depending on one’s perspective. Institutions play a crucial role in shaping the strategic environment and understanding them is crucial in understanding the policy process. When designing taxes, it is vital to consider how institutions influence tax complexity. In this empirical study, we take an institutional approach to examine what extent the institutional quality supports the tax simplification process. Using the system generalised method of moments (system GMM) for a dynamic panel of 88 countries, we show that higher institutional quality seems to be associated with a lower degree of tax complexity, regardless of income levels and legal origins. These findings are robustly consistent across a variety of specifications and institutional measurements. To that end, we make policy recommendations on tax administration. [ABSTRACT FROM AUTHOR]

Purpose: Today, with the increasing involvement of the environment and human beings business units, paying attention to fulfilling social responsibility obligations while making a profit has become increasingly necessary for achieving sustainable development goals. Attention to profit by organizations should not be without regard to their social and environmental performance. Social responsibility accounting (SRA) is an approach that can pay more attention to the social and environmental performance of companies, but it has many barriers. Therefore, the purpose of this study is to identify barriers to SRA implementation and provide strategies to overcome these barriers. Design/methodology/approach: In this study, the authors identify barriers to social responsibility accounting implementation and provide strategies to overcome these barriers. By literature review, 12 barriers and seven strategies were identified and approved using the opinions of six academic experts. Interpretive structural modeling (ISM) has been used to identify significant barriers and find textual relationships between them. The fuzzy technique for order performance by similarity to ideal solution (TOPSIS) method has been used to identify and rank strategies for overcoming these barriers. This study was undertaken in Iran (an emerging market). The data has been gathered from 18 experts selected using purposive sampling and included CEOs of the organization, senior accountants and active researchers well familiar with the field of social responsibility accounting. Findings: Based on the results of this study, the cultural differences barrier was introduced as the primary and underlying barrier of the social responsibility accounting barriers model. At the next level, barriers such as "lack of public awareness of the importance of social responsibility accounting, lack of social responsibility accounting implementation regulations and organization size" are significant barriers to social responsibility accounting implementation. Removing these barriers will help remove other barriers in this direction. In addition, the results of the TOPSIS method showed that "mandatory regulations, the introduction of guidelines and social responsibility accounting standards," "regulatory developments and government incentive schemes to implement social responsibility accounting," as well as "increasing public awareness of the benefits of social responsibility accounting" are some of the essential social responsibility accounting implementation strategies. Practical implications: The findings of the study have implications for both professional accounting bodies for developing the necessary standards and for policymakers for adopting policies that facilitate the implementation of social responsibility accounting to achieve sustainability. Social implications: This paper creates a new perspective on the practical implementation of social responsibility accounting, closely related to improving environmental performance and increasing social welfare through improving sustainability. Originality/value: Experts believe that the strategies mentioned above will be very effective and helpful in removing the barriers of the lower level of the model. To the best of the authors' knowledge, for the first time, this study develops a model of social responsibility accounting barriers and ranks the most critical implementation strategies. [ABSTRACT FROM AUTHOR]

The US Securities and Exchange Commission's mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages were previously disclosed and when the pay ratio disclosure adds little new information. Disclosures by firms with a high ratio contain more discretionary language to explain the ratio or portray employee relations positively and are more likely to be covered by the media. However, neither information source substantially alters the employee response to a salient ratio. Our work illustrates that requiring firms to disclose a salient metric can have unintended consequences on employees and suggests caution in requiring firms to report simplified Environmental, Social, and Governance (ESG) metrics that are inherently multifaceted. [ABSTRACT FROM AUTHOR]

This study examines how regulatory policy impacts the complex relationship between bank risk-taking and the predicted probability of a systemic banking crisis in 54 African countries for the period, 2004–2020. The empirical evidence is based on the instrumental variable probit panel regressions. The study found a non-linear U-shaped relationship between bank risk-taking and the probability of a systemic banking crisis. The study shows that a systemic banking crisis is likely to occur when the monotonically increasing levels of risk-taking of banks exceed thresholds of 0.015 and 0.79. The study also found that the thresholds of risk-taking in countries with stringent regulatory policies are relatively greater in countries operating in low regulatory policy regimes. In light of the conditional marginal effects, the study provides evidence to support that regulatory policy amplifies and augments the negative linear impact of risk-taking on the predicted probability of a systemic banking crisis. This is relevant to policymakers because the established conditional effects imply that regulatory policy is a sufficient complementary condition for shaping the negative effect of bank risk-taking and systemic banking crises. [ABSTRACT FROM AUTHOR]

Purpose: Exploiting a unique measure of hostile takeover exposure principally based on the staggered adoption of state legislations, the authors investigate how external audit quality is influenced by the discipline of the takeover market. External auditors and the takeover market both function as important instruments of external corporate governance. Design/methodology/approach: The authors execute a standard regression analysis and run a variety of robustness checks to minimize endogeneity, namely, propensity score matching (PSM), entropy balancing, an instrumental-variable analysis, Generalized method of moment (GMM) dynamic panel data analysis and Lewbel's (2012) heteroscedastic identification. Findings: The authors' immense sample spans half a century, encompassing nearly 180,000 observations and 17 takeover-related state legislations, one of the largest samples in the literature in this area. The authors' results suggest that firms with more takeover exposure are significantly less likely to use Big N auditors. Therefore, a more active takeover market results in poorer external audit quality, corroborating the substitution hypothesis. The discipline of the takeover market substitutes for the necessity for a high-quality external auditor. Specifically, a rise in takeover susceptibility by one standard deviation lowers the probability of using a Big N auditor by 4.29%. Originality/value: The authors' study is the first to examine the effect of the takeover over market on audit quality using a novel measure of hostile takeover susceptibility mainly based on the staggered implementation of state legislation. Because the enactment of state legislation is beyond the control of any firm individually, it is plausibly exogenous. The authors' results therefore probably reflect a causal influence rather than merely a correlation. [ABSTRACT FROM AUTHOR]

Purpose: The current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion. Design/methodology/approach: The study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables. Findings: The paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors' risk assessments. Research limitations/implications: The authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006. Practical implications: The study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow's recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change. Originality/value: The study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow's recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards. [ABSTRACT FROM AUTHOR]