Asia-Pacific Journal of Accounting & Economics
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Volume 11, Issue No. 2, June 2004

Table of Contents

Main Articles


Audit quality and earnings management by seasoned equity offering firms

Jian Zhou a and Randal Elder b
a State University of New York at Binghamton
b Syracuse University


We investigate the relationship between audit quality as measured by audit firm size and industry specialisation, and earnings management as measured by discretionary current accruals, for companies making seasoned equity offerings (SEOs). Earnings management in the SEO process is of concern because of the underperformance of seasoned equity offering firms. We find evidence that Big 5 auditors are associated with lower earnings management in the years before, during, and subsequent to the SEO. Industry specialist auditors are associated with lower earnings management only in the year of the SEO. Our study contributes to the literature by demonstrating that audit quality reduces earnings management by SEO companies, and that industry specialisation, as a measure of audit quality, also constrains earnings management. © City University of Hong Kong.

JEL classifications: M42

Keywords : audit quality; industry specialisation; earnings management; seasoned equity offerings


Audit quality and post earnings announcement drift

Andrew Ferguson a and Zoltan Matolcsy b
a University of New South Wales
b University of Technoloy, Sydney


This study examines the value of audit quality in the capital markets setting. We argue that higher quality auditors are associated with lower post-earnings announcement drift (PEAD). Results show that clients of brand name auditors exhibit lower PEAD than small auditors, but only weak auditor industry specialist effects are identified. PEAD also differs for clients of individual Big 6/5 auditors, with clients of the smaller Arthur Andersen and Deloittes exhibiting greater PEAD, consistent with the DeAngelo (1981) size hypothesis. Finally, PWC exhibits higher PEAD in 1998, suggesting market uncertainty about quality implications of audit market structural change. © City University of Hong Kong.

JEL classification: M40

Keywords : audit quality; post-earnings announcement drift; audit firm mergers


Are big four audits in ASEAN countries of higher quality than non-big-four audits?

Inder K. Khurana a and K. K. Raman b
a University of Missouri-Columbia
b University of North Texas


We investigate whether reputation concerns provide sufficient incentive for Big Four auditors to provide higher quality audits in ASEAN countries where litigation exposure is low or nonexistent. We proxy audit quality based on the quality of reported earnings (earnings conservatism) to examine whether Big Four auditors provided higher quality audits (relative to non-Big Four auditors) during 1990-96. To neutralise the potential confounding effects of cross-border differences, we investigate the relative quality of Big Four vs. non-Big Four audits within each country separately so that each country serves as its own control.

Our results suggest that although both Big Four and non-Big Four auditees report conservative earnings in all countries, only in the US do Big Four auditees report more conservative earnings than non-Big Four auditees. Thus, although the World Bank and UNCTAD (1999) did not express concerns about Big Four audit quality in emerging markets until 1999, the evidence suggests that the Big Four were not providing higher quality audits in ASEAN countries even prior to the 1997 Asian financial crisis. Our findings are interesting in the context of the ongoing globalization of capital markets in which cross-border investors in emerging markets, separated from corporate management not only geographically but often culturally and linguistically, are presumed to rely on a brand name Big Four audit to provide enhanced assurance on financial statements. © City University of Hong Kong.

JEL classifications: D82, G15, M42

Keywords : Big Four audits; audit quality; ASEAN countries


Management earnings forecasts and the market's reaction to predicted bias in the forecast

Jong-Hag Choi a and David A. Ziebart b
a Hong Kong University of Science and Technology
b University of Illinois at Urbana-Champaign


Prior research regarding management earnings forecasts has failed to reject the null hypothesis that the forecasts are not biased. In this study, we find that short-term forecasts are pessimistically biased, while long-term forecasts are optimistically biased. When we pool the forecast observations, consistent with prior studies, we are not able to find the existence of bias. In addition, our evidence suggests that the magnitude of the bias is associated with ex ante information !V the unexpected portion of the forecast, firm size, forecast horizon, firm performance, and growth potential of the firm. Since this information is publicly available when a forecast is announced, investors may use it to estimate the bias component included in the management earnings forecast. Our results indicate that while the bias component is predictable, the market still significantly responds to the predicted bias when the forecast is released. In addition, we find that the market!|s response to the predicted bias decreases as investors!| private information search activity increases. © City University of Hong Kong.

JEL classifications: M41, G12, G14

Keywords : management earnings forecast; bias; private information search


Financial reporting practices of Indonesian companies before and after the Asian financial crisis

Richard D. Morris a , Beauty Utama Setiadi Ho b , Tam Pham c ,
and Sidney J. Gray d
abc University of New South Wales
d University of Sydney


This study investigates the extent to which corporate transparency in Indonesia has increased following the Asian financial crisis. The financial reports of 99 Indonesian companies listed on the Jakarta Stock Exchange are examined before and after the crisis. As expected, there is a significant increases in the level of transparency, measured by reference to key items from Indonesian accounting standards, IASs and US GAAP, between 1996 and 2000, though overall levels of transparency are low. Transparency is divided into mandatory compliance with Indonesian accounting standards (or PSAK), and voluntary adoption of items from IASs and US GAAP. Factors most consistently associated with transparency are firm size, and the relative interest outside shareholders. After controlling for these and other factors, the Asian financial crisis appears to have some association with increased compliance with PSAK, although the association is not strong. However, voluntary adoption of IASs or US GAAP items seems unaffected by the crisis. © City University of Hong Kong.

JEL classifications: D82, G15, M41

Keywords : transparency, disclosure, Indonesia, Asian financial crisis