Resumo:
Propsito do Trabalho:
This study analyzes the influence of country-level and firm-level incentives in the level of earnings management of foreign firms with American Depositary Receipts (ADR) in the U.S. market, highlighting the role of corruption as a determinant of accounting quality.
The wide-ranging negative effects of corruption are legion. They include constrained economic growth, decreased trust in government and reduced legitimacy of market economy and democracy (Branco and Delgado, 2012). Given its detrimental effects, corruption is considered by many as a cancer in society (Everett et al., 2007).
Although this may well be true, accounting researchers have left the relation between accounting and corruption almost untouched. About ten years ago, Riahi-Bealkaoui (2004, p. 74) asserted that ?one consequence largely ignored in the economic and accounting literature is the impact of corruption on the quality of accounting?. This consequence has remained largely unexplored in said literature. Few studies have explored the relation between the level of corruption and accounting quality (Kimbro, 2002; Riahi-Belkaoui, 2004; Wu, 2005; Riahi-Belkaoui and AlNajjar, 2006; Malage?o et al., 2010; Houqe and Monem, 2013).
We add to this literature, in particular to the studies of Riahi-Belkaoui (2004) and Riahi-Belkaoui and AlNajjar (2006), by analyzing the relation of earnings management (a measure of accounting quality) with countries? corruption levels.
The empirical study relies on foreign firms with ADR in the U.S. market that apply International Financial reporting Standards (IFRS). We thus guarantee the homogeneity of the sample, which is based on firms with greater incentives to transparency that apply a set of high quality accounting standards.
Base da plataforma terica:
We were able to identify only five studies in this area: Kimbro (2002), Riahi-Belkaoui (2004), Wu (2005), Riahi-Belkaoui and AlNajjar (2006), Malague?o et al. (2010) and Houqe and Monem (2013).
Kimbro (2002) performed a cross-country analysis of corruption on the basis of a model exploring the effects of economic, cultural, and monitoring/institutional variables on corruption. Regarding the relations between the quality of the accounting and legal systems and corruption, Kimbro (2002) found that countries with good laws enforced by more effective judiciary, good financial reporting standards, and a higher concentration of accountants are likely to be less corrupt.
Wu (2005) used cross-country firm-level data from Asian countries and found that although better accounting practices are helpful in reducing both the incidence of bribery and the amounts of bribe payments, merely conforming to high quality accounting standards alone does not necessarily bring down the incidence of bribery.
Malague?o et al. (2010) performed a cross-country analysis using data from 57 countries to examine the relation between corruption and two measures of accounting quality: the increased presence of BIG4 firms and perceived accounting quality (PAQ) from World Economic Forum. They found evidence of negative relationships between the perceived level of corruption and both the increased presence of BIG4 firms in countries and the PAQ.
Houqe and Monem (2013) used data from 166 countries, over the period 1996-2011, to investigate the role of accounting information in reducing corruption after controlling for the effects of political institutions and economic development. Their findings suggest that although the accounting environment has some positive effect in the control of corruption, its role is relatively minor and secondary to the effect of political institutions.
Riahi-Belkaoui?s (2004) results suggest the existence of a negative relationship between earnings opacity and the lack of corruption after controlling for economic development, human development, size of government and economic freedom. Based on an explanation resting on the impact of corruption as it uses the lack of accounting quality to ?camouflage? the ill-gained results, Riahi-Belkoui (2004, p. 82) concludes that ?corruption creates a climate conducive to a low quality accounting.?
The findings of Riahi-Belkaoui and AlNajjar (2006) indicate that earnings opacity is negatively related to the level of economic freedom and the level of quality of life and positively related to the rule of law, economic growth and the level of corruption.
Following these two latter articles, the study reported in this paper is premised on the idea that lower levels of corruption will be associated with lower levels of earning management, used as a measure of accounting quality. There is ?the need for a lower quality accounting for manufacturing a higher level of corruption" (Riahi-Belkaoui, 2004, p. 74). Also, high levels of corruption create an unethical atmosphere that leads individuals to have high levels of acceptance regarding such rent-seeking behaviour. These attitudes extend easily to other activities, including those pertaining to the collection and dissemination of accounting information. Therefore, the hypothesis to be tested is one of a positive association between the countries? level corruption and the level of earnings management.
Mtodo de investigao:
This study aims to analyze the influence of country-level and firm-level incentives in the level of earnings management of foreign firms with ADR in the U.S. market, highlighting the role of corruption as a determinant of accounting quality.
In order to achieve this goal, we first establish a measure for earnings management and then built an empirical model that associates this measure with the two sets of variables, country and firm-level.
Our sample comprises firms from 33 countries from 2011 to 2013 (to comprise the largest number of countries applying IFRS) with ADR in the U.S. market that report their financial statements under IFRS. The empirical study is thus conducted in a setting of relatively stable accounting environment, without the need of controlling for the use of more developed accounting standards.
We use the magnitude of absolute discretionary accruals as a proxy for earnings management. Greater magnitude of discretionary accruals reflects difficulties in accounting numbers in effectively measuring economic performance (Warfield et al., 1995). As income-increasing accruals and income-decreasing accruals can be used in earnings management, it is common to use the magnitude of absolute discretionary accruals.
Discretionary (abnormal) accruals can be measured as the total accruals minus estimated non-discretionary (normal) accruals. Several models can estimate normal accruals. This study uses a modified version of the model proposed by Jones (1991).
As a measure of corruption we use the Corruption Perceptions Index, which is a leading measure of perceptions regarding corruption that ranks countries by perceived levels of corruption among public officials. A higher index indicates lower levels of perceived corruption. It has been launched in 1995 by Transparency International (a civil society organization founded in 1993 that has as its main purpose to combat corruption). Since then, it has been published annually. Hereafter the word corruption will be used to refer to perceptions of corruption.
Empirical model used in this paper considers
|DA|=f(corruption index, country level variables, firm level variables)
Resultados, concluses e suas implicaes:
We observe in Table 1, Column I, that the CORR variable interaction with the dummy for emerging countries is negative (-0.0035), indicating a lower level of earnings management among emerging countries with lower perception of corruption. We interpret these results as consistent with the argument that favorable institutional factors create a supportive financial environment that reduces managerial incentives to manipulate earnings. It is interesting to note, however, that this effect only hold for the emerging countries, once the coefficient for general countries is not statistically significant.
We surprisingly find that a higher level of minority investors? protection in emerging countries is associated with a higher level of earnings management of (PMI_E 0.0003). We interpret these results as a potential impact of corruption level and legal enforcement over the effectiveness of laws protecting minor investors in emerging countries. For example, countries might determine particular laws to guarantee specific rights to minor shareholders. However, its effective application relies upon enforcement and Government conduct.
We find that the inclusion of EC and EC_E (in Table 1, Column III) turn PMI to be relevant, as the later ones are themselves not significant for the model. The results regarding these two variables show interesting differences between developed and emerging countries. For emerging countries, the corruption perception index remains negatively associated with the level of earnings management (CORR_E -0.0037), which means that the level of corruption is positively associated with earnings management. However, for emerging countries the effect is again the opposite, once PMI_E (0.0005) is positive and higher than PMI (-0.0001). As in Table 4, Columns I and II, we interpret these results as a potential impact of corruption and rules? enforcement over the effectiveness of minor investors? rights.
We also analyze the influence of bankruptcy laws and insolvency process of each country over the level of earnings manipulation with variable RINS. Table 1, Column IV, indicates that, when considering all firms in the sample, the variable is positively associated with the level of earnings management. However, it is negative for the emerging markets, once the coefficient of RINS_E (-0.0002) is negative when compared with the coefficient of RINS (0.0002). This result indicates that high quality of insolvency laws is associated with lower levels of absolute discretionary accruals, for firms located in emerging countries. . The positive RINS for general firms, however, is intriguing. We understand that, because the related variable includes measures of firms? recovery rate and easiness of proceedings, it might indicate that affirmative procedures to resolve bankruptcy issues incite earnings management, or firms are more comfortable to manipulate earnings when laws promote easy and rapid recovery process.
Hence, we observe that firms? characteristics are relevant to determine the level of earnings management for ADR issuing firms, regardless firms? location. The role of country-level variables, otherwise, appears to be conditioned to the firms? country, being developed or emerging. The results indicate that corruption perception reduce firms? incentives to manipulate earnings for firms located in emerging countries, while such results are not identified in developed countries. For the particular case of the level of minor shareholders rights, a potential relation between this variable and corruption perception might affect its effectiveness over earnings management for firms located in emerging countries. At last, general firms from countries with agile and plain insolvency regulation tend to present higher level of earnings management.
The findings confirm results of previous studies pertaining to the impact of corruption on accounting quality (Riahi-Belkaoui, 2004; Riahi-Belkaoui and AlNajjar, 2006). In addition, the study suggests the existence of threshold level of corruption, below which the effects on earnings management are no longer significant. This possibility shall be further examined.
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