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

50 Pages Posted: 26 Feb 2015

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: January/February 2015

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. We test three new enforcement proxies from Brown, Preiato and Tarca (2014) 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. We find that higher scores for all three proxies are associated with lower error and less disagreement in forecasts. In addition, we find that the indices have significant explanatory power when previously used enforcement proxies (such as Kaufmann et al.'s 2010 rule of law measure) are included in the regression models, pointing to the importance of specific measures of accounting enforcement. We conclude that accounting enforcement may be more important in securing favourable economic outcomes than has been previously 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

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 (January/February 2015). Journal of Business Finance & Accounting, Vol. 42, Issue 1-2, pp. 1-50, 2015. Available at SSRN: https://ssrn.com/abstract=2570636 or http://dx.doi.org/10.1111/jbfa.12112

John P. Preiato (Contact Author)

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

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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