Volume 37 Number 1
Volume 37 Number 2
Volume 37 Number 3
Volume 37 Number 4

Volume 37 Number 1 2002 

ARTICLES

Measurement of formal harmonization progress: The IASC experience
by Pascual Garrido, Ángel León, Ana Zorio

Keywords: Formal harmonization; International accounting; IASC; IAS; Euclidean distance

Abstract:  As a result of globalization, the accounting profession has become increasingly aware of the need to establish a single set of accounting standards that would be valid in the international arena. Recent events highlight the timeliness of this study, which provides an empirical measurement of International Accounting Standards Committee (IASC) progress throughout its harmonization history. The purpose of this article is twofold: first, a new measure of the advances achieved through formal harmonization and second, to use this methodology to evaluate the IASC achievements all through its standard-setting activity. Our results prove that the IASC has made great progress in regard to the level of harmony achieved through the accounting standards it has issued or revised. Nevertheless, we conclude that the IASC needs to continue working towards greater formal harmonization. Our study also indicates research directions that could advance the study of formal harmonization. This specific area of research has generally been disregarded in the existing literature, a trend we would like to see reversed, considering that its application can provide valuable insight for standard-setting processes, especially now that the accounting community is so conscious of the need to advance the harmonization process.  © 2002 University of Illinois. All rights reserved.

Are recent segment disclosures of Japanese firms useful?  Views of Japanese financial analysts
by Vivek Mande, Richard Ortman 

Keywords: Segment disclosures; Japanese financial reporting; Financial analysts; Segment reporting

Abstract: Since 1990, the Japanese Ministry of Finance (MOF) has required Japanese firms to disclose segment data in annual financial statements. Using a survey instrument, we examine whether Japanese analysts find these segment disclosures to be useful. Our study finds that analysts perceive that segment data aid them in forecasting consolidated sales and net income. However, results also show that analysts are concerned that Japanese firms do not define segments meaningfully and consistently and are arbitrary in the allocation of common costs. Further, the analysts do not believe that the usefulness of segment data improves when it is audited. These results have implications for investors in Japanese stocks and accounting policy bodies, such as the US Securities and Exchange Commission (SEC). ©2002 University of Illinois. All rights reserved.

Additional analyses of recent segment disclosures of Japanese firms
by Vivek Mande, Richard Ortman

Keywords: Segment reporting; Japanese accounting

Abstract: This paper discusses additional issues concerning segment reporting in Japan. Specifically, it discusses what the relevant segment reporting standards are, enforcement issues, the interaction of consolidation standards with segment disclosures, survey biases and response rates and the implications of segment disclosures in Japan for global investors and accounting standard setting bodies. ©2002 University of Illinois. All rights reserved.

Earnings management of seasoned equity offering firms in Korea
by Soon Suk Yoon, Gary Miller

Keywords: Seasoned equity offering; Earnings management; Cash from operations; Discretionary accruals; Operating performance around seasoned equity offerings; Earnings management inducement factors; Association test

Abstract: We investigated 249 Korean seasoned equity offering (SEO) firms during the period 1995–1997 to determine if the SEO firms manage earnings in the year before a planned issue of seasoned equity stocks. Using three test methods (accrual difference, correlation, and sign-change), we found that the Korean firms contemplating SEOs in the following year do manage earnings particularly when their relative performances have been poor. The results are robust irrespective of control samples. Analysis of operating performances around SEOs shows that SEO firms tend to increase reported earnings in the year immediately preceding and the year of SEOs, but no differences were found in operating cash flows between the SEO firms and the control firms. By using a regression analysis for discretionary accruals, we found that SEO firms are more likely to manage earnings if the operating performances are poor and if the offer sizes are relatively large. Association tests between stock returns and discretionary accruals indicate that the market reacts positively to net income but negatively to discretionary accruals. The results indicate that the market correctly analyzes the cash flow implications of the SEO firms’ opportunistic use of discretionary accruals. ©2002 University of Illinois. All rights reserved.

The changing nature of financial disclosure in Japan
by W.R. Singleton, Steven Globerman

Keywords: Empirical study; Financial disclosure; Japanese companies

Abstract: This paper investigates whether Japanese companies listed on the Tokyo Stock Exchange (TSE) altered their voluntary accounting disclosure behavior over the period of the 1990s. It implicitly tests for whether the collapse of Japan’s ‘‘Financial Bubble’’ in the late 1980s altered the incentives of Japanese managers to be more forthcoming about corporate information. Previous research on Japanese disclosure practices highlights the ‘‘secretive’’ nature of Japanese managers and suggests that cultural preferences strongly discourage disclosure. Our findings suggest that Japanese disclosure practices are sensitive to economic conditions. ©2002 University of Illinois. All rights reserved.

BOOK REVIEWS

The Value Reporting Revolution: Moving Beyond the Earnings Game
by Philip Brown

Corporate Financial Accounting and Reporting
by Anatoli Bourmistrov

Contemporary Issues in Accounting Regulation
by Christopher Nobes

Reporting on solvency and cash condition
by Geoff Everingham

Volume 37 Number 2 2002

ARTICLES

A test of the Ohlson (1995) model: Empirical evidence from Japan
by Koji Ota

Keywords: Ohlson (1995) model; Information dynamics; Other information nt; Serial correlation; Durbin’s alternative test; GLS

Abstract: This paper investigates the validity of the Ohlson [Contemp. Account. Res. 11 (1995) 661] information dynamics (Linear Information Model: LIM) and attempts to improve the LIM. The difficulty concerning the empirical tests of the LIM lies in identifying nt, which denotes information other than abnormal earnings. Recent papers, such as those of Myers [Account. Rev. 74 (1999) 1], Hand and Landsman [The pricing of dividends in equity valuation. Working paper, University of North Carolina, 1999], and Barth et al. [Accruals, cash flows, and equity values. Working paper (January) (July), Stanford University, 1999], all try to specify nt by using various accounting information. Instead of tackling this difficult task, this paper focuses on serial correlation in the error terms caused by omitting the necessary variable nt from the regression equation. The  results indicate that adjustment for serial correlation leads to an improvement of the LIM. ©2002 University of Illinois. All rights reserved.

Global expectations and their association with corporate social disclosure practices in Australia, Singapore, and South Korea
by Marc Newson, Craig Deegan

Keywords: Culture; Global; Expectations; Society; Accountability; Legitimacy

Abstract: This paper explores the social disclosure policies of large Australian, Singaporean, and South Korean multinational corporations. The researchers advanced arguments about why large multinational corporations respond to ‘‘global expectations’’ rather than simply to the expectations of those people residing in the corporation’s ‘‘home’’ country. Two large international surveys conducted in 1998 and 1999 are used to determine global expectations. The results of the testing indicate a minimal association between global expectations, as represented by the two surveys, and social disclosure policies of large multinational corporations. Consistent with previous research, country of origin and industry of operation appear to significantly influence disclosure practices. ©2002 University of Illinois. All rights reserved.

Timeliness of corporate and audit reports: Some empirical evidence in the French context
by Bahram Soltani

Keywords: Timeliness; French corporate reporting; Delay of annual and consolidated reports; Delay of audit report; Audit qualifications

Abstract: The issue of timeliness of financial reporting, an important qualitative characteristic of accounting information, has received much attention from regulatory and professional bodies in France in recent years. The increasing presence of international investors, particularly from the US, on the Paris Stock Exchange adds to the importance of this issue. The timeliness of corporate and audit reports in the French context is analyzed by examining the trend in reporting delay of companies, the effect that qualified reports have on the timeliness of corporate reporting, and the relationship between reporting behavior and types of audit reports over a 10-year period. The data are taken from more than 5000 annual reports of French publicly held companies for the years 1986–1995. These bear witness to an improvement in timeliness of corporate and audit reports. This improvement is greater for reports from consolidated accounts of groups than those from annual accounts of companies. There is also evidence that qualified audit opinions were released later than unqualified opinions and that, in general, the more serious the qualification, the greater the delay. ©2002 University of Illinois. All rights reserved.

Ownership structure and corporate voluntary disclosure in Hong Kong and Singapore
by Gerald K. Chaua, Sidney J. Gray

Keywords: Voluntary disclosures; Agency theory; Hong Kong; Singapore

Abstract: Drawing on prior empirical research based on disclosure behavior in developed western markets, this study examines the association of ownership structure with the voluntary disclosures of listed companies in the Asian settings of Hong Kong and Singapore. An analysis of annual reporting practices shows that the extent of outside ownership is positively associated with voluntary disclosures. In particular, the results also indicate that the level of information disclosure is likely to be less in ‘‘insider’’ or family-controlled companies, a significant feature of the Hong Kong and Singapore stock markets. ©2002 University of Illinois. All rights reserved.

BOOK REVIEWS

International Accounting: A Global Perspective
by Carol Olson Houston

Financial Accounting, An International Introduction
by Jan Marton

Volume 37 Number 3 2002

ARTICLES

Empires of the sky: Determinants of global airlines’ accounting-policy choices
by Chyi Woan Tan, Greg Tower, Phil Hancock, Ross Taplin

Keywords: International accounting; Accounting-policy choice; Determinants; Airline industry; Measurement and disclosure practices

Abstract: This study quantifies the current level of diversity observed in airline accounting and examines possible determinants that explain accounting-policy choices by the global airline industry. Airlines’ accounting-measurement policy for unrealized foreign-exchange differences and their disclosure of frequent-flyer information remains diverse. Inferential statistics shows that larger airlines tend to take unrealized foreign-exchange differences directly to equity and tend to disclose frequent-flyer accounting policy, while airlines with lower leverage tend to disclose frequent-flyer accounting.

Ownership structure and earnings informativeness Evidence from Korea
by Kooyul Jung, Soo Young Kwon

Abstract: This paper examines the relationship between corporate ownership structure in Korea and the informativeness of earnings. Korean ownership structure is characterized by the dominance of one primary owner who also participates in firm management. Existing literature offers two alternative perspectives on the behavior of such owner–manager firms, convergence of interests, and management entrenchment hypotheses. We tested the alternative views to see how they are reflected in earnings informativeness. The results show that earnings are more informative as holdings of the owner increase, supporting the convergence of interest explanation for the owner–manager structure.

Second, we examine the role of institutional investors and blockholders. On the one hand, institutions/blockholders have incentives to actively monitor management. However, on the other hand, institutions/blockholders may not render effective monitoring because they lack expertise, suffer from freerider problems, or strategically ally with management. These opposing views predict conflicting signs on the relation between the earnings informativeness and holdings of institutions/blockholders.  We find that earnings informativeness increases with the holdings of institutions and blockholders.

This supports the active monitoring role of institutions/blockholders. Finally, we test the relationship between earnings informativeness for chaebol (Korean business group)-affiliated companies vs. that for nonchaebol-affiliated companies, and find no significant relationship between the owner–largest shareholder’s holdings and earnings informativeness. This provides evidence that for chaebol companies, the negative effect of management entrenchment/expropriation of minority shareholders 0020-7063/02/$ – see front matter ©2002 University of Illinois. All rights reserved.  PII: S0 0 2 0 - 7 0 6 3 (0 2) 0 0173-5

Harmonization of the auditor’s report
by Jagdish S. Gangolly, Mohamed E. Hussein, Gim S. Seow, Kinsun Tam

Keywords: Harmonization; Auditor’s report; Auditing standards; International Federation of Accountants; International Standard on Auditing (ISA) 13

Abstract: International efforts to harmonize the audit report, spearheaded by the International Auditing Practices Committee of the International Federation of Accountants (IFAC), culminated in the issuance of International Standard on Auditing (ISA) 13 in 1983. The stated purpose of ISA 13 was to: ‘‘provide guidance to auditors on the form and content of the auditor’s report issued in connection with the independent audit of the financial statements of any entity.’’ The purpose of this paper is to assess whether ISA 13 has resulted in greater international harmonization of audit reports. We assess the level of harmonization both by examining the extent to which countries have adopted ISA 13 and by the extent to which the content of the auditor’s report has changed. A survey of IFAC’s member organizations in 86 countries netted 50 responses. Eighty-six percent of respondents (and 93% of respondents from developing and emerging economies) said they have achieved harmonization with ISA 13. We compared the auditor’s reports (in financial reports) of 450 companies in 33 IFAC member countries on two different dates (a pre-ISA 13 date and a post-ISA 13 date). The results suggest a higher degree of conformity with the standard for the post-ISA 13 reports. Finally, cluster analysis was conducted to explore the dynamics of clustering from pre-ISA 13 to post-ISA 13 regimes. A slight drop in the divisiveness coefficient (DC) was observed for the total audit report elements as well as for the form elements, suggesting a less cohesive cluster structure for the post-ISA 13 regime. The empirical evidence, taken as a whole, shows reduced diversity of practices and standards involving the 0020-7063/02/$ – see front matter ©2002 University of Illinois. All rights reserved. PII: S0 0 2 0 - 7 0 6 3 (0 2) 0 0172-3 ©2002 University of Illinois. All rights reserved.

The effect of cash flow statement format on lenders’ decisions
by Helen Kwok

Keywords: Statement of cash flow; Statement of changes in financial position; Fund flow statement; Verbal protocol analysis; Lending decision

Abstract: This study investigates bank loan officers’ use of financial information and reports, in particular, cash flow information and the statement of cash flow (SCF), in making lending decisions. Subjects were drawn from four groups of frequent users of financial reports–bank loan officers, auditors, financial analysts and accounting academics. Each subject was presented with the annual reports of two loan applicant companies to make two independent lending decisions based on the information provided. The SCF of one of the companies was presented in the direct format, while the other was presented in the indirect format. The indirect format of SCF was used as a surrogate for the funds flow statement. Results show that, while cash flow was the second most used financial information, the majority of the subjects obtained this information from financial statements other than the SCF, notably, the balance sheet. In terms of financial report usage, notes to the financial statements, rather than the SCF, was most frequently used. No subject made use of the incremental information provided in the SCF presented in the direct format. The results suggest that loan officers do not use the cash flow information provided by the SCF, but rely on the accounting information provided in the FFS and accrual-based financial reports.  ©2002 University of Illinois. All rights reserved.

BOOK REVIEWS

Asset measurement bases in UK and IASC standards
by Chris Warrell

The Professional Accountancy Bodies and the Provision of Education and Training in Relation to Environmental Issues
by Nola Buhr

Volume 37 Number 4 2002

ARTICLES

Analysts’ forecasts of Japanese firms’ earnings: Additional evidence
by Huong Ngo Higgins

Keywords: Analyst ability; Earnings-forecast error; Economic downturns; Forecast accuracy; Japanese analyst; Japanese economy; Japanese forecast

Abstract: This article examines analysts’ forecasts of Japanese firms’ earnings during Japan’s economic burst period in the 1990s. Using the evidence of analyst earnings forecasts in the United States as a benchmark, the article documents the following three findings. First, whereas the forecast accuracy of U.S. analysts following U.S. firms improves over time, the forecast accuracy of U.S. and Japanese analysts following Japanese firms does not. Second, whereas decreases in forecast errors of U.S. analysts following U.S. firms are best explained by decreases in forecast bias of the analysts, increases in forecast errors of U.S. and Japanese analysts following Japanese firms are best explained by increases in the frequency of losses experienced by Japanese firms. Third, Japanese analysts forecast earnings less accurately than do U.S. analysts. These findings reflect the difficulty of producing accurate earnings forecasts during economic downturns. They also suggest that Japanese analysts are more bound than their U.S. counterparts by cultural ties that impede forecast accuracy. 

Cash from operations and earnings management in Korea
by Soon Suk Yoon, Gary A. Miller

Keywords: Earnings management; Cash from operations; Total accruals; Discretionary accruals; Korean accounting practices.

Abstract: Our study investigates the relationship between the operating performances of Korean industrial firms and the behavior of discretionary accruals during the period 1994–1997. We hypothesize that the degree of earnings management will depend on the firm operating performances. We construct 10 ‘‘cash from operations (CFO)’’ portfolios to test if there are systematic differences in discretionary accruals across portfolios.

Four test methods (a mean accrual test, a correlation test, a regression analysis, and a sign-change test) are used to investigate if operating performances affect discretionary accruals differently. We compare three accrual estimation approaches (two discretionary accruals and total accruals) in testing the earnings management hypotheses.  The results support the hypothesis that Korean industrial firms manage earnings. When operating performance is poor, the firms tend to choose income-increasing strategies. In addition, when operating performance is extremely poor, some firms tend to take a big bath, while some of the exceptionally well-performing firms tend to select income-decreasing strategies. 

Level of multinationality as an explanation for post-announcement drift
by Ahmed Riahi-Belkaoui

Keywords: Multinationality; Post-announcement drift; Earnings predictability

Abstract: This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the level of multinationality, a variable used to proxy for earnings predictability. Our findings show that the level-of-multinationality variable is negatively correlated with the observed post-announcement abnormal returns. The findings suggest that the level of multinationality as a proxy for earnings predictability underlies the predictability of stock returns after earnings announcements.

Fiscal year-end choice: determinants and dynamics
by Bart Kamp

Keywords: Fiscal year-end choice; International diversity; Comparability

Abstract: The international diversity of firms’ fiscal year-end is relatively unknown. However, this diversity has practical implications for both accounting research and business comparability. In this study, we examine the backgrounds of the diversity. We found that differences in tiny, supposedly unimportant details in national legislation on fiscal year-end have a much stronger impact on fiscal year-end choice than the generally assumed cause of seasonality. In the last decade of international harmonization, we found only a few instances of fiscal year-end changes motivated by enhancing comparability.

Worldwide, a weak drift towards December was found.

BOOK REVIEWS

Accounting in China in Transition: 1949-2000
by Jason Zezhong Xiao

Observance of International Accounting Standards: Factors Explaining Noncompliance
by David Cairns

Corporate Financial Reporting
by Malcomb C. Miller

Global Financial Reporting
by Pontus Troberg