Asia-Pacific Journal of Accounting & Economics
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Volume 10, Issue No. 1, June 2003

Table of Contents

Main Articles

Research Note

  • Gil S Bae and Joonwha Rho , Asset size management by small private firms in response to the mandatory audit requirement in Korea


The role of accounting and auditing in corporate governance and the development of financial markets around the world

Jere R Francis, Inder K Khurana and Raynolde Pereira
University of Missouri-Columbia


For a sample of 31 countries, we document that financial disclosures are more transparent and national accounting standards require timelier (accrual based) reporting in countries with stronger investor protection. These countries also spend more on auditing enforcement and the Big Five accounting firms audit proportionately more companies in these countries. These results indicate that higher quality accounting standards and the enforcement of such standards through higher quality auditing are more likely to exist in corporate governance in countries with strong investor protection. Higher quality accounting and auditing are also positively associated with financial market development in countries whose legal systems are conducive to the protection of investors. However, we are unable to find systematic evidence that higher quality accounting and auditing alone - independent of a country's underlying investor protection regime - affects the development of financial markets. © City University of Hong Kong.

JEL classifications: G28, G34, K22, M41 and O10

Keywords : accounting; auditing; corporate governance; investor protection; financial markets


Client characteristics, abnormal accruals and auditor switches: An empirical study

Ho Young Lee a , Terry O'Keefe b and Mike Stein c
a University of Nebraska at Omaha
b University of Queensland
c University of Oregon


This paper investigates the associations among client characteristics, abnormal accruals and auditor switches. Working within a framework that categorises switches as resulting from auditor-client realignments, disagreements over accounting decisions, or dissatisfaction with auditor/client service quality, we find that auditor switches are associated with smaller, higher risk clients. Several other factors such as the issuance of securities and the existence of a modified opinion also increase the probability of an auditor switch. Notably, testing a subsequent time period to DeFond and Subramanyam (1998), we do not replicate their findings that clients with negative prior year abnormal accruals are more likely to switch auditors once other controls are in place. Further, our evidence suggests that clients that switch auditors move closer to the industry norm abnormal accruals in the subsequent period than non-switching clients, regardless of the sign of the prior period abnormal accruals. This result differs from DeFond and Subramanyam (1998) who report larger income increasing abnormal accruals for switchers. In general, we find that abnormal accruals add little explanatory power to models of auditor switching in our sample. © City University of Hong Kong.

JEL classifications: L84, M40 and M41

Keywords : auditor switching ; client risk; opinion shopping; discretionary accruals


Investment opportunity set influence on goodwill amortisation

Michael Bradbury a , Jayne M Godfrey b and Ping-Sheng Koh c
a UNITEC Institute of Technology
b Monash University
c University of Queensland


Using an institutional setting where GAAP is relatively unconstrained, we examine whether managers use their goodwill accounting discretion to reflect firms' growth options that are not otherwise captured in reported identifiable assets. We employ a continuous dependent variable to find that accounting discretion is exercised through estimates of goodwill's economic life (amortisation period) in a manner that reflects the firms' underlying growth options. These results are consistent with managers using accounting techniques to reflect firms' investment investment opportunity sets (IOS). We find that the goodwill accounting decision has a stronger association with IOS variables than with traditionally applied contracting variables. Also, the IOS variables make a greater marginal contribution to the explanatory power of models of goodwill amortisation periods than do traditional contracting or opportunism variables. © City University of Hong Kong.

JEL classifications: M41, C21 and D23

Keywords : investment opportunity set; growth options; contracting; accounting choice


Disclosure versus recognition: The case of asset revaluations

Julie Cotter a and Ian Zimmer b
a University of Southern Queensland
b University of Queensland


Australian GAAP requires firms to either disclose or recognise the current values of real estate in their financial statements . Given recognition criteria related to reliable measurement, the propensity to recognise an upward revaluation is subject to the inherent uncertainty of the assessed increase in value. Accordingly we predict and find that managers are more likely to recognise (rather than just disclose) revaluations when the revaluation estimate is more reliable. The recognition criteria contained in Australian GAAP implies that market participants will rationally infer that revaluations recognised in the balance sheet are more reliably measured than those disclosed in footnotes. An analysis of share market effects finds that the market discounts disclosure compared to recognition of real estate revaluations. This effect becomes insignificant when controls for the reliability of revaluations are included in the analysis, and we therefore conclude that the value relevance of recognised revaluations is not due to recognition per se , but rather to the fact that the assets being revalued are more reliably measured. © City University of Hong Kong.

JEL classification: M41

Keywords : recognition ; disclosure; revaluation; reliability


Asset size management by small private firms in response to the mandatory audit requirement in Korea

Gil S Bae a and Joonwha Rho b
a Korea University
b Chungnam National University


We investigate whether small private firms manage assets downward to avoid the mandatory audit required by the Audit Requirement Law in Korea . The law requires that firms with assets larger than 6 billion won file audited financial statements regardless of the listing status. Since most private firms in Korea have concentrated ownership by individual owners who are also managers, the agency problem for these firms is small and, therefore, external audits are less likely to be beneficial , as the agency theory suggests. Consequently, small private firms may have little incentive to have external audits. Using both univariate and multivariate analyses, we find evidence that small private firms manage assets downward to avoid the regulation. Our finding is consistent with the predictions of agency theory that external audits are more beneficial when information asymmetry is large. © City University of Hong Kong.

JEL classifications: M41 and L84

Keywords : small private firms; information asymmetry; agency cost; mandatory audit; asset size reduction