The practice of earnings management not only adversely affects the long-term economic prospects of a particular business enterprise by eroding public confidence in the company, but also may severely undermine the reputation of Hong Kong as an international financial and trading centre. Given the devastating effects of such practices resulting from corporate scandals such as Enron and WorldCom, earnings management has received unprecedented attention in the past decade. The incommensurability between the far-reaching effects of ethical issues relating to earnings management and the paucity of prior research on the subject in Hong Kong triggers my interest to study this topic. The study examines the influence of organizational ethical climate and the perceived importance of corporate ethics and social responsibility on practicing accountants’ ethical decisions regarding accounting and operating earnings management. Structural equation modeling (SEM) is used to test the hypotheses. Based on 206 survey responses from practicing accountants, the models for both accounting and operating earnings management provide general support for the hypotheses. The results indicate that participants’ perceptions of the ethical climate in their organization influence their attitudes toward the perceived importance of corporate ethics and social responsibility, which in turn influence ethical decisions (judgments and intentions) regarding earnings management.

Timeliness is an essential attribute of corporate financial reporting as it affects the usefulness of information made available to external investors. The recognition that the length of audit is the single most important determinant influencing the timeliness of earnings announcements has motivated investigations on audit reporting lags in different countries. Nevertheless, there is a lack of research on this issue in China where the institutional environment for accounting and auditing practices is different from that of other countries. The growing interest in the Chinese stock market from domestic and international investors further increases the importance of this research. In this study, I first explore the determinants of audit reporting lags in China based on the characteristics of the Chinese audit market and business environment. I then examine the implications of long audit reporting lags. The findings of this paper indicate that audit risk, audit complexity, and auditor expertise are all associated with the length of audit reporting lags in China. Firms with long audit reporting lags are more likely to have adverse consequences such as non-standard opinions and financial statement restatements in subsequent periods.

Prompted by the recent statutory corporate income tax-rate reduction in China, in this study I investigate whether the constraining effect that quality auditors have on tax-related discretionary current accruals (DCA) differs for two sub-groups of listed firms with tax incentives to manage earnings upward versus downward. I also explore whether the effectiveness of tax authority scrutiny (i.e. tax enforcement) on DCA differs for the same two groups. I find that the firms’ two external monitors are sensitive to the direction of managerial incentives for earnings management. Specifically, higher-quality auditors are associated with smaller amounts of reported DCA and this association is stronger for firms with incentives to manage earnings upward and weaker for those with incentives to manage earnings downward, although the accrual decisions for all of the firms are driven by the same tax reporting incentives. The results are consistent with the notion that due to concerns with legal liability and reputation loss, auditors have incentives to ensure that firms report earnings conservatively. I also find a significantly positive association between tax enforcement and reported DCA for firms with incentives to manage earnings downward. This suggests that tax authorities constrain corporate accruals management that is likely to result in tax revenue loss. Taken together, my results suggest that a spillover effect exists between auditors and tax authorities, such that the two monitoring bodies compensate for each other’s lack of monitoring in one direction of accruals management. My results are robust to a set of sensitivity tests and have implications for academic researchers, policy makers, and capital market investors.

Motivated by recent studies documenting inconsistent results regarding the benefits of adopting International Financial Reporting Standards (IFRS), the objective of this thesis is to examine the information value of firms’ earning reported focusing on IFRS 3 (Business Combination). IFRS 3 aims at providing systematic guidelines for acquirers of a business combination transaction to properly report identifiable assets and liabilities, to fairly measure goodwill and to disclose relevant information for investors’ evaluation. IFRS 3 was revised and became effective in July 2009. Opponents of the revised IFRS 3 (IFRS 3R) criticized the guidelines to have broadened the disconnection between current earnings and future cash flows and they argued against the widened implementation of fair value measurement by IFRS 3. This thesis covers European Union’s mandatory adoption of IFRS in 2005 along with the revision of IFRS 3 in 2009. The examination period is split into two time periods: Period 1 is from the mandatory adoption of IFRS to the eve of policy change, and Period 2 is from the policy change to the end of 2013. Sample in this study comprises of 374 firms involved in merger and acquisition (M&A) transactions in both time periods which results in 13,464 firm-quarterly observations drawn from 20 out of 28 European Union member countries. This study finds the association between current earnings and future earnings as well as future cash flows has been weakened since the adoption of IFRS 3R which implies the information value of current earnings has receded. In addition, quarterly earnings reported under IFRS 3 appear to be more volatile after controlling for factors influencing earnings volatility such as size, economic shocks and managers’ income smoothing behavior. Moreover, this study suggests that earnings volatility has a negative effect on earnings persistence over the whole testing period. In addition, such effect has amplified since the introduction of IFRS 3R. Following Mishkin’s (1983) method of testing market efficiency, this study supports that capital market impounds attenuated degree of earnings volatility effect on earnings predictability since the application of IFRS 3R. These results should draw the attention of both standard setters and public users as the convergence to IFRS from domestic GAAP has been a globally debating topic. Thus, standard setters should balance the benefits such as improved relevance, reliability and comparability of financial reports and costs such as the information loss of earnings when making IFRS adoption decisions. Meanwhile, public users should use the financial statements with caution, especially when M&A transaction involves.

External auditor is an independent agent to provide assurance about the validity of financial statements prepared by management to enhance the reliability of information in financial reports. As such, audit quality has long been a concern for all stakeholders and is a topic of on-going research interest. In China, the dual audit requirement for AB share companies and AH share companies started in 2001 was abolished in 2007 and 2010 respectively. This study attempts to examine whether there are dual audit effect and contagious effect on the audit quality of non-Big N audit firms for A share companies in different markets. I focus on non-Big N audit firms since the audit quality of these firms are of greater concern. Using data from 2001 to 2012, I compare the audit quality of A share companies that also have B (or H) shares ((AB/H) with the audit quality of pure A share companies to test whether there is a dual audit effect on the audit quality of A-share financial statements. I also compare AB/H share companies which hire only non-Big N auditors with those ABIH share companies who hire non-Big N domestic auditors and Big N international auditors to test the existence of contagious effect on the audit quality of A-share companies. My findings indicate that dual audit does improve the audit quality of non-Big N audit firms for A share companies. However, there was mixed evidences on the contagious effect using different measures of audit quality. This study contributes to the literature on enhancing our understanding of the determinants of audit quality in China. It can also provide policy makers in emerging economies some useful evidence on ways to improve audit quality.

Research on fraud detection in accounting has long focused primarily on financial statement fraud and responsibilities of auditors and company management relating to such frauds. While tax fraud is also clearly significant, and tax professionals have responsibilities relating to fraud detection, little prior research has addressed this issue. The current research examines the impact of quantitative materiality, perceived responsibility (based on the triangle model of responsibility) and Machiavellianism on several aspects of tax professionals’ decision making regarding fraud detection and reporting. I surveyed all tax professionals in the People’s Republic of China working for one of the Big 4 public accounting firms. The results indicate that, as anticipated, Machiavellianism had significant negative associations with tax professionals’ perceived responsibility to detect fraud, and high Machiavellians judged fraudulent actions to be less unethical and socially irresponsible. A composite measure of the triangle model of responsibility was positively associated with participants’ perceived professional obligation for fraud detection as well as the estimated likelihood of discovering and reporting fraud. In contrast, quantitative materiality was not associated with perceived responsibility for fraud detection, ethical judgments or the likelihood of detecting or reporting fraud.

Corporate tax noncompliance is a serious problem in many developed and developing countries. My PhD thesis is composed of two essays to investigate various factors that mitigate corporate tax noncompliance by listed Chinese firms. The first essay examines whether a firm’s corporate tax noncompliance can be constrained by auditor quality. Past studies have shown that high-quality auditors are effective in reducing earnings management, which mainly involves overstatements of earnings. In this essay, I find that high-quality auditors are associated with better overall tax compliance by their client firms. In particular, high-quality auditors are effective in constraining book-tax-conforming noncompliance, which mainly involves understatements of both book and taxable income. The second essay examines the tax noncompliance behavior of firms since the adoption of International Financial Reporting Standards (IFRS) in China, taking into account the influences of lower tax rates and more stringent tax enforcement. In recent years, many countries have moved away from tax-based accounting and toward adopting IFRS which increase tax noncompliance. At the same time, there has been a general reduction of corporate income tax rates as a means to increase tax competitiveness. Lower tax rates should be associated with decreases in tax noncompliance. Similarly, firms should be more tax compliant under a more stringent tax enforcement regime. In this essay, I find that the negative effect of book-tax delinking on tax noncompliance is significantly attenuated for firms that are subject to lower tax rates or more stringent tax enforcement measures. This essay also provides evidence that the effects of tax rates and of tax enforcement measures are more pronounced in the lower book-tax conformity period.

The study focuses on the audit quality issue in three culturally and commercially highly connected jurisdictions with very different legal systems which affect auditors. Hong Kong practices common law, Taiwan practices civil law, and the People’s Republic of China (Mainland China) practices a socialist legal system. Taiwan adopts a civil law system with heavy influence by common law countries. It is therefore motivating to assess how auditors in each of the three connected jurisdictions with distinctive legal environments handle the audit quality for important clients. Accounting scandals and auditing frauds are perceived to be driven by aggressive companies and misrepresentation of audit reports. However, a locale’s legal system and law enforcements should affect the services auditors provide to their clients, particularly ‘important’ clients. I find that in all three jurisdictions, the more important the client to its auditor, the lower the audit quality as measured by restatement of financial statements. However, I find mixed results when using other measures of audit quality.

The role of independent auditors is to ensure the accuracy and the credibility of the financial statements. Independent auditors help in reducing agency costs and serve as a monitoring function for creditors. A change in an auditor–client relationship may provide useful information to creditors. Creditors may consider the signal of auditor changes, which affects information risks, as a factor in determining the terms of debts. After several major audit scandals, awareness of the importance of audit quality has increased. Audit partner changes and audit firm changes have been implemented in some jurisdictions to enhance the audit quality. Since China requires disclosure by signing partners’ names on audit reports, audit partner rotations can be identified. The direction of audit firm changes can be downward, lateral, and upward audit firm changes. In this thesis, the effects on debt financing of auditor changes at both audit firm and audit partner levels in different directions are comprehensively investigated. This thesis addresses the importance of understanding the association between audit firm/ partner changes and debt financing. I find that, overall, auditor changes worsen debt financing in various situations. The findings of this thesis should have important implications for investors, corporate financial managers, and regulators.

I examine whether managers are more likely to meet-or-beat earnings benchmarks when firms experience natural disasters. When a natural disaster strikes and causes significant damages, it could negatively affect a firm’s financial performance, potentially resulting in firms missing earnings targets. In this type of situation, incentives for managers to meet static earnings benchmarks (i.e., zero or last year’s earnings) might weaken because they can shift the blame for poor performance to natural disasters. On the other hand, managers may have stronger incentives to meet dynamic earnings benchmarks (i.e., analyst forecasts) because analysts take into consideration the effect of disasters and missing this benchmark could signal that the effect of disasters was worse than expected. In addition, subjective estimation of losses or charges related to disasters may enable managers to more easily engage in non-GAAP exclusions management to increase the likelihood of meeting analysts’ estimates. Using a comprehensive dataset of natural disasters occurring in the U.S. since 1989, I find that firms affected by natural disasters are more likely to meet-or-beat analyst forecasts through non-GAAP exclusions management. This paper extends the earnings benchmark literature by providing evidence that, when facing unexpected external shocks such as natural disasters, managers could utilize a crisis to make opportunistic accounting choices. / A Dissertation submitted to the Department of Accounting in partial fulfillment of the requirements for the degree of Doctor of Philosophy. / Spring Semester 2019. / March 27, 2019. / Includes bibliographical references. / Tianming Zhang, Professor Directing Dissertation; Yingmei Cheng, University Representative; Bruce Billings, Committee Member; Spencer Pierce, Committee Member.