Management disclosure bias and audit services

Hartnett, Neil

doi:10.1007/s11156-006-7438-y

Cited by 6 publications

(3 citation statements)

References 23 publications

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“…First, we examine whether the results of our regression analysis are sensitive to using alternative measures of forecast bias and accuracy. We consider five different ways to calculate FE and AFE by using (1) absolute actual earnings (Cheng & Firth, 2000), (2) total assets (Hartnett, 2006), (3) sales, (4) book value of common equity, or (5) market value of common equity as the denominator in the formulae of FE and AFE, respectively. Table 6 reports the results on the alternative measures of forecast reliability.…”

Section: Additional Analysesmentioning

confidence: 99%

The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts

Sun

Liu

2009

Global Finance Journal

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No. 12-1996). The Regulation No. 12-1996 (thereafter "the Regulation") imposes penalties on firms whose IPO earnings forecasts are significantly overestimated in their IPO prospectuses.Specifically, the Regulation requires that IPO firms and their auditors must explain and apologize to the public in a CSRC designated newspaper if predicted earnings are overestimated by 10 -20% compared to actual earnings. IPO firms will be penalized if earnings forecasts are overestimated by more than 20% and the overestimation is deemed to be a fraudulent activity. Auditors will also be penalized if they issue an inappropriate audit opinion on a client company's IPO earnings forecasts. The Regulation also prohibits IPO firms from using earnings forecasts as a basis for setting issuance price.Although the Regulation was promulgated to improve the reliability of earnings forecasts in Chinese IPO prospectuses, it remains an empirical question because the legal enforcement infrastructure is weak in China. Moreover, Chinese IPO firms are closely connected with the government, which may provide opportunities for them to override the Regulation. Hence, whether the Regulation can enhance the reliability of earnings forecasts is an empirical question. This study examines whether the Regulation has achieved its initial 2 IPO earnings forecasts from some Commonwealth countries seem less accurate than Chinese IPO earnings forecasts. For example, the mean absolute forecast error is 289% for the Australian forecasts (Hartnett, 1993), 100% for the New Zealand forecasts (Mak, 1989), and 88% for the Canadian forecasts (Pedwell, Warsame, & Neu, 1994).3 objective. We find that the Regulation has been efficacious in reducing the overestimation of IPO earnings forecasts after it was promulgated on December 26, 1996. We also document a significant improvement in earnings forecast accuracy resulting from the promulgation of the Regulation.This study contributes to the literature in the following ways. First, to the best of our knowledge, this is the first study to investigate whether a securities regulation in an emerging market can enhance the reliability of corporate financial disclosure. Since there is rare research into the effects of securities regulations on corporate disclosure, the promulgation of the CSRC Regulation No. 12-1996 provides us an opportunity to enrich this research topic.Second, we document evidence on the efficacy of the CSRC Regulation No. 12-1996. Our findings may provide implications for future regulation promulgation to the CSRC and other securities regulators of emerging markets. Third, this study adds to prior research on the economic determinants of forecast accuracy. Our study suggests some ex ante criteria for evaluating Chinese earnings forecast accuracy.The remainder of the paper is organized as follows. Section 2 introduces institutional background. The third section develops hypotheses. Section 4 discusses research design.

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Section: Additional Analysesmentioning

confidence: 99%

The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts

Sun

Liu

2009

Global Finance Journal

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“…Prior research suggests that Big5 auditors are less likely to allow earnings management than non-Big5 auditors (Frankel et al 2002;DeFond et al 2002;Craswell et al 2002;Ashbaugh et al 2003). Using the forecast earnings data contained in the IPO prospectuses of Australian companies, Hartnett (2006) finds a negative association between audit firm size (Big5 versus nonBig5) and the upward bias of management's forecasts. Thus, our study includes a Big4 indicator variable (labeled as Big4).…”

Section: Methodsmentioning

confidence: 99%

Non-audit service and auditor independence: an examination of the Procomp effect

Duh

Lee

Hua

2007

Rev Quant Finan Acc

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“…The result of contrasting the variables between high-and low-reputed VCs after including a medium reputation category remains intact. 4Hartnett (2006) indicate that a level of 'disclosure management' regarding company IPO forecasts and normalized historic accounting data, with forecast overestimation and error size more extreme when the monitoring expertise and/or reputation of auditors is lower.…”

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confidence: 99%