A Comparison of Between-Country Measures of Legal Setting and Enforcement of Accounting Standards

63 Pages Posted: 24 Apr 2014

See all articles by John P. Preiato

John P. Preiato

The University of Western Australia

Philip R. Brown

UWA Business School, M250; Financial Research Network (FIRN)

Ann Tarca

University of Western Australia

Multiple version iconThere are 2 versions of this paper

Date Written: April 24, 2014

Abstract

Academics and practitioners agree that the enforcement of accounting standards has an important role in promoting high quality financial reporting and favourable capital market outcomes. Researchers have used a range of proxies to capture differences between countries in the extent of enforcement, usually based on aspects of the legal system or laws in place, rather than the activities of auditors and independent enforcement bodies. We assess the merits of eight proxies that have been used to distinguish between countries’ institutional settings, including three recently-available indices (AUDIT, ENFORCE and their summation, AETOTAL) that focus specifically on auditing and accounting enforcement. We examine firms’ information environments, represented by the error in analysts’ consensus forecasts and the extent of disagreement among analysts, as indicated by forecast dispersion. For financial years ending from 2003 to 2009, we construct a sample of 357,034 firm-month observations on the errors and dispersion of analysts’ earnings forecasts for 10,769 firms domiciled in those 39 countries, where a variety of accounting standards have been followed and institutional settings have varied. While the results for forecast dispersion are equivocal, those for forecast accuracy are clear. AETOTAL has the strongest association with forecast accuracy, and AUDIT, ENFORCE and AETOTAL have additional explanatory power in models including more general legal enforcement (‘rule of law’) measures. We conclude accounting enforcement may be more important in securing favourable economic outcomes than has been realised, because researchers commonly have used noisier, more general legal proxies for enforcement that understate its marginal effects.

Keywords: legal system, enforcement of accounting standards; auditors; regulation; rule of law; International Financial Reporting Standards; IFRS; analysts’ forecasts; forecast error; forecast dispersion

JEL Classification: M41, M42, M48, K20

Suggested Citation

Preiato, John P. and Brown, Philip R. and Tarca, Ann, A Comparison of Between-Country Measures of Legal Setting and Enforcement of Accounting Standards (April 24, 2014). Available at SSRN: https://ssrn.com/abstract=2428603 or http://dx.doi.org/10.2139/ssrn.2428603

John P. Preiato

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Philip R. Brown

UWA Business School, M250 ( email )

Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ann Tarca (Contact Author)

University of Western Australia ( email )

Business School
35 Stirling Highway
Crawley WA 6009
Australia
+61 8 6488 3868 (Phone)
+61 8 6488 1047 (Fax)

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