Drawing on agency theory and obfuscation hypothesis, the main focus of this thesis is on the readability of annual reports. It comprises three empirical chapters which examine the readability of annual report and the possible association with the audit function. The effect of auditing on the lexical content of annual report, is to be studied in three different, yet interrelated, auditing topics, namely, audit fees, audit firm tenure, and auditor switching. The results in the first empirical chapter which investigates the association between annual reports readability and audit fees suggests that audit fees is highly statistically associated with the readability of the annual report and this association holds after controlling for different firm specific and financial characteristics. This suggests that high levels of audit fees, measured as fees paid for statutory audit services, may partially explain the quality of the annual report. Contrary to expectations, there is little evidence that non-audit fees, measured as the fees paid for consultancy and other services, have an effect on the readability of the annual report. Nevertheless, this chapter documents a strong statistical association which indicates that total audit fees, measured as the sum of audit and non-audit fees, can capture the economic bond between auditing firms and client management and that higher levels of total audit fees have negative effects on readability. Moreover, I document strong joint relationship between the three measures of fees and firm performance affecting annual report readability and that these interactions show that audit, non-audit and total fees exhibit greater effects in poorly performing firms. The second empirical chapter which investigates the association between the readability of annual reports and audit firm tenure suggests that audit firm tenure has a statistically significant relationship with the readability of annual reports and that longer tenure has a negative relationship with readability. Moreover, I document that, on average, the effect of audit tenure is stronger when the levels of audit fees are low. Finally, the analysis shows that the relationship between audit firm tenure and readability is relatively stronger in firms with weaker solvency levels. The third empirical chapter investigates the association between the readability of annual reports and auditor switching. The analysis suggests that the relationship between annual report readability and auditor switching in general is insignificant. However, after including the interaction term of switching and performance, the regression analysis suggests that when well performing firms switch their auditor they are more likely to disclose difficult-to-read annual report. Moreover, the mitigating effects of audit fees is insignificant in altering the relationship between switching and readability. The interactive relationship between switching and tenure is highly significant which indicates that, within this context, the effect of switching on readability is negative and that this relationship becomes stronger as the tenure increases. In other words, those firms with longer audit tenure are more likely to produce difficult-to-read annual reports than short-tenured clients. Moreover, the analysis of the short-term effects of switching suggests a negative and highly significant relationship between short-term switching and readability. This indicates that switching firms discloses difficult-to-read annual reports during the three years following auditor switching. Similarly, the regression results of the association between annual report readability and auditor switching within a five-year window (long-term) come in line with expectations, the relationship is highly significant and the sign is negative. This implies that firms that switch their auditor will have difficult-to-read annual reports within five years following the switch. However, it has been documented in the analysis that the effect of switching is stronger over a five-year window than short-term (that is three years following the auditor switching), which signifies delayed switching effects on readability. In both models, the mitigating effects of firm performance and audit tenure are statistically significant. In summary, the findings of this thesis suggest that firms utilise the readability of annual report, and that such practice depends on the audit function. Regulators are urged to examine the impact of client/auditor relationship and its influence on the quality of annual report.

This thesis examines the impact of audit committee characteristics on financial reporting quality in the context of a large sample of UK companies over the period 2007-2010. The notion of financial reporting quality is assessed by looking at the audit quality and earnings quality of the firms. This study utilises the audit fee and non-audit fee ratio as its proxies for audit quality and accruals based earnings management models as its proxies for earnings quality. The findings from the multivariate analysis show that audit committee meetings and financial expertise exert a significant positive impact on audit fees. Investigating expertise further, this study finds no support for the notion that accounting expertise influences audit fees, however a significant positive influence on audit fees is recorded for the non-accounting financial expertise. However, the holding of additional directorships has a significant negative impact on audit fees. This study also finds that audit committee members' financial expertise has a negative and significant impact on non-audit fee ratio suggesting a strong support of members with financial expertise on issues relating to auditor independence. The study also documents that audit committee members serving longer on the boards do not prefer to purchase high amount of non-audit services from the incumbent auditor. This study also records a significant positive impact of the holding of additional directorships on the provision of non-audit fee ratio, thus signifying a profound support for the busyness hypothesis which argues that overstretched directors are not very good monitors of financial reporting quality. Furthermore, this study finds broadly consistent evidence that audit committees meeting three or more times per year and fully independent audit committees exert a significant positive impact on the quality of reported earnings. This study also finds some evidence (depending on the earnings model used) that the level of ownership of audit committee members also exerts a positive impact on the quality of reported earnings, highlighting the fact that audit committee members with an equity stake in their companies are considered more effective in their oversight of the financial reporting process. On the other hand, this study finds evidence that the busyness of audit committee members (busyness defined in terms of the holding of board seats in other companies) has a significant negative impact on the quality of reported earnings. The composite variables (i.e. ACE1, ACE2, ACE3 and ACE4) representing those companies that satisfy all aspects of current best practice in terms of audit committee composition and operation, has a positive impact on the quality of reported earnings. This study covers the period 2007 to 2010 and therefore offers a contemporary analysis of the influence of audit committee characteristics on financial reporting quality. The study is very comprehensive in its scope not only in the selection of audit committee characteristics and methods employed to quantify these characteristics, but also in the use of various proxies developed to capture the true essence of financial reporting quality. The choice of multiple measurement methods both for the dependent and independent variables facilitates a much richer investigation into the relationship between governance and financial reporting quality variables. Therefore this study makes a major contribution to our understanding of the association between the various audit committee characteristics and financial reporting quality in the wake of recently introduced regulatory recommendations. These findings will also have policy implications as regulators around the world continue to define and refine the desired characteristics and behaviour of audit committees. Therefore, the findings of this study will ensure future policy changes regarding audit committees are adequately informed.

The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have recently proposed to mandate the use of direct cash flow statements as part of their project to harmonise accounting standards. Despite the magnitude of the proposed change to cash flow reporting, to date, the IASB and FASB have provided no empirical evidence under International Financial Reporting Standards (IFRS) to support their assertion that direct cash flow statements provide financial statement users with useful information. Given the growing evidence that adopting IFRS significantly changes the quality of financial reporting information, the usefulness of direct cash flow statements may have also changed. This thesis, therefore, examines the usefulness of reporting direct cash flow statements under IFRS in Australia. Australia is specifically examined because it was one of the few countries where all firms were mandated to report direct cash flow statements, and which prohibited the early adoption of IFRS. The findings of this research show that, relative to Australian Generally Accepted Accounting Principles (AGAAP), direct cash flow statements are more value relevant after the adoption of IFRS. Moreover, the results demonstrate that direct cash flow statements provide financial analysts with useful information for their cash flow forecasts, and this information is more useful under IFRS compared to AGAAP. Finally, this thesis provides evidence that, while financial analysts use information from direct cash flow statements when issuing stock recommendations, buy-and-hold investors are better off identifying mispriced stocks by using analysts’ cash flow forecasts in discounted cash flow valuation models. In sum, these results provide strong support for the current IASB/FASB proposal to mandate the use of direct cash flow statements and are consistent with IFRS improving the information set of investors.

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This research examines accounting reform within the United Kingdom (UK) central government, with particular emphasis on the introduction of Resource Accounting and Budgeting (RAB), the adoption of Whole of Government Accounts (WGA), the transition from UK Generally Accepted Accounting Practice to International Financial Reporting Standards (IFRS) and the Clear Line of Sight Alignment Project (CLOS). Utilising document content analysis and semi-structured interviews, this research sought to: identify the intended benefits and drawbacks claimed by successive UK governments for introducing RAB, WGA, IFRS and CLOS; ascertain the principal benefits and drawbacks experienced following the implementation of RAB, WGA, IFRS and CLOS, including the reasons why each was introduced; and examine the implications of the research findings for theory and practice. Through the employment of Institutional Theory, Isomorphism, responses to institutional pressure and Legitimacy Theory, the findings indicate that government publications are used to document institutional compliance with what is considered acceptable and, despite evidence suggesting that the reforms may not achieve their intended benefits, successive UK governments continue to promote rhetorical themes which are considered legitimate. These findings also provide evidence to support the view that accounting reforms are used as a way of legitimising how governments plan, manage and control public expenditure. While the accounting reforms continue to be perceived as legitimate, they will be employed as a means to satisfying external requirements to modernise, rather than for internal decision making. This research develops our understanding into the way in which the implementation of accounting reform is communicated through government publications and the possible reasons why, despite being considered appropriate for the UK public sector, the accounting reforms have not delivered the benefits to the extent envisaged.

In this thesis, I examine financial reporting issues in the Chinese context, with a particular focus on the effect of political forces. The thesis consists of three essays.In the first essay, I examine whether the earnings properties and share price anticipation of earnings of Chinese firms changed following the mandatory adoption of Chinese IFRS in 2007. Using a set of IFRS “early adopters” as a control group, I find that the earnings persistence and other measures of earnings properties, among the treatment group of firms adopting Chinese IFRS in 2007, do not change significantly. However, I do find that share price anticipation of earnings improves for the treatment group relative to the control group, consistent with the improved transparency associated with Chinese IFRS adoption making it easier for investors to forecast future earnings. Particularly, I find that the improvement in the share price anticipation of earnings is confined to firms that are not state controlled or subsidized, and so largely rely on capital markets to supply most of their financial needs.In the second essay, I examine the value relevance of government subsidies for Chinese listed companies. My exploration of the valuation consequences of state support is structured around three questions. First, are the government subsidies received by Chinese listed companies value relevant? Second, does the value relevance of government subsidies depend on the purpose for which the subsidies are used? Third, does the value relevance of government subsidies depend on the channel through which the subsidies are granted? I motivate these research questions through interviews of accountants, managers, academics and government officials. Through large sample analyses, I confirm that subsidies are positively related to firm value, but less so for distressed firms and subsidies granted through non-tax channels. My study contributes to the understanding of a Chinese-style capitalism that is driving China towards becoming the largest economy in the World.In the third and final essay, I examine whether state subsidies influence the voluntary corporate social responsibility (CSR) disclosures of Chinese listed firms. Focusing on Chinese manufacturing industries for the period 2006-2009, I find that a well established model of CSR disclosures that was designed for Western companies produces similar results in China. I then go on to exploit the additional unique institutional features of China that have material implications for disclosure choice over and above the variables that commonly figure in Western models. In particular, I focus on the influence of state subsidies on the CSR disclosure choices of Chinese firms, taking care to distinguish between state-owned enterprises (SOEs) and non-state owned enterprises (NSOEs). I find that state subsidies do (do not) significantly affect the CSR disclosure choices of NSOEs (SOEs). I also find a significant difference between the influence of tax-based subsidies and non-tax based subsidies on NSOEs. My findings are consistent with the political cost hypothesis that firms receiving state subsidies, especially those not under state control, are pressured to disclose CSR activities due to political cost concerns associated with public demand as well as government scrutiny.

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International Accounting Standards/International Financing Reporting Standards (IAS/IFRS) were developed with a view to harmonizing accounting practices. Despite the fact that several papers have examined the effect of IAS/IFRS on equity and debt markets, only few have focused on Greece. The present thesis uses both polled and panel data (fixed and random effects techniques) analysis techniques. Using data from 181 Greek companies listed on the Athens Stock Exchange, the results show that firstly, IAS/IFRS adoption and earnings management are negatively related suggesting that Greek companies tend to use fewer discretionary accruals after IAS/IFRS adoption as a way of earnings management. Secondly, the adoption of IAS/IFRS lowered the cost of debt of Greek companies implying that the increased quality as well as quantity of accounting disclosures reduces the uncertainty regarding a company‟s default risk and the mis-coordination between companies and suppliers, which in turn enables companies to borrow at better terms. Finally, the results indicate that IAS/IFRS adoption increased the gearing level of Greek companies, implying that the decreased uncertainty and risk of a company through IAS/IFRS adoption, enhances the company‟s borrowing bargain power and subsequently its gearing level.

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