DOCSLIB.ORG

Earnings Quality Full Text Available At

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Earnings Quality Full Text Available At Full text available at: http://dx.doi.org/10.1561/1400000004 Earnings Quality Full text available at: http://dx.doi.org/10.1561/1400000004 Earnings Quality Jennifer Francis Duke University Durham, NC USA [email protected] Per Olsson Duke University Durham, NC USA [email protected] Katherine Schipper Duke University Durham, NC USA [email protected] Boston – Delft Full text available at: http://dx.doi.org/10.1561/1400000004 Foundations and Trends R in Accounting Published, sold and distributed by: now Publishers Inc. PO Box 1024 Hanover, MA 02339 USA Tel. +1-781-985-4510 www.nowpublishers.com [email protected] Outside North America: now Publishers Inc. PO Box 179 2600 AD Delft The Netherlands Tel. +31-6-51115274 The preferred citation for this publication is J. Francis, P. Olsson and K. Schipper, Earnings Quality, Foundation and Trends R in Accounting, vol 1, no 4, pp 259–340, 2006 ISBN: 978-1-60198-114-1 c 2008 J. Francis, P. Olsson and K. Schipper All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, mechanical, photocopying, recording or otherwise, without prior written permission of the publishers. Photocopying. In the USA: This journal is registered at the Copyright Clearance Cen- ter, Inc., 222 Rosewood Drive, Danvers, MA 01923. Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by now Publishers Inc for users registered with the Copyright Clearance Center (CCC). The ‘services’ for users can be found on the internet at: www.copyright.com For those organizations that have been granted a photocopy license, a separate system of payment has been arranged. Authorization does not extend to other kinds of copy- ing, such as that for general distribution, for advertising or promotional purposes, for creating new collective works, or for resale. In the rest of the world: Permission to pho- tocopy must be obtained from the copyright owner. Please apply to now Publishers Inc., PO Box 1024, Hanover, MA 02339, USA; Tel. +1-781-871-0245; www.nowpublishers.com; [email protected] now Publishers Inc. has an exclusive license to publish this material worldwide. Permission to use this content must be obtained from the copyright license holder. Please apply to now Publishers, PO Box 179, 2600 AD Delft, The Netherlands, www.nowpublishers.com; e-mail: [email protected] Full text available at: http://dx.doi.org/10.1561/1400000004 Foundations and Trends R in Accounting Volume 1 Issue 4, 2006 Editorial Board Editor-in-Chief: Stefan J. Reichelstein Graduate School of Business Stanford University Stanford, CA 94305 USA reichelstein [email protected] Editors Ronald Dye, Northwestern University David Larcker, Stanford University Stephen Penman, Columbia University Stefan Reichelstein, Stanford University (Managing Editor) Full text available at: http://dx.doi.org/10.1561/1400000004 Editorial Scope Foundations and Trends R in Accounting will publish survey and tutorial articles in the following topics: • Auditing • Financial Reporting • Corporate Governance • Financial Statement Analysis and • Cost Management Equity Valuation • Disclosure • Management Control • Event Studies/Market Efficiency • Performance Measurement Studies • Taxation • Executive Compensation Information for Librarians Foundations and Trends R in Accounting, 2006, Volume 1, 4 issues. ISSN paper version 1554-0642. ISSN online version 1554-0650. Also available as a combined paper and online subscription. Full text available at: http://dx.doi.org/10.1561/1400000004 Foundations and Trends R in Accounting Vol. 1, No. 4 (2006) 259–340 c 2008 J. Francis, P. Olsson and K. Schipper DOI: 10.1561/1400000004 Earnings Quality Jennifer Francis1, Per Olsson2 and Katherine Schipper3 1 Fuqua School of Business, Duke University, Durham, NC 27708, USA, [email protected] 2 Fuqua School of Business, Duke University, Durham, NC 27708, USA, [email protected] 3 Fuqua School of Business, Duke University, Durham, NC 27708, USA, [email protected] Abstract This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earn- ings quality research. Throughout, we focus on a capital markets set- ting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of provid- ing a basis for other uses, such as stewardship. Because resource alloca- tions are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource alloca- tion decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with steward- ship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic Full text available at: http://dx.doi.org/10.1561/1400000004 economic role in capital allocation decisions for accounting informa- tion; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assess- ment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically con- textual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship. Full text available at: http://dx.doi.org/10.1561/1400000004 Contents 1 Introduction 1 2 Component of Information Quality in Capital Markets 7 2.1 Quality as an Attribute of Information in the Capital Markets 8 2.2 Financial Reporting Quality 10 2.3 Summary Indicator of Financial Reporting Quality 13 3 Determinants of Earnings Quality 17 3.1 Separating Innate and Discretionary Sources 19 3.2 Reporting (Discretionary) Determinants of Earnings Quality 24 4 Measures of Earnings Quality 37 5 Earnings Quality and Market Outcomes 53 5.1 Market Outcomes 53 5.2 Earnings Quality and Expected Returns 56 5.3 Earnings Quality and Abnormal Return 65 5.4 Earnings Quality and Other Market Outcomes 68 ix Full text available at: http://dx.doi.org/10.1561/1400000004 6 Concluding Remarks 71 Acknowledgments 73 References 75 Full text available at: http://dx.doi.org/10.1561/1400000004 1 Introduction This discussion review aims to provide insights on earnings quality. We describe and analyze several determinants and measures of earn- ings quality, and we discuss both research which uses those determi- nants and measures and research which provides evidence on the capital markets consequences of earnings quality. In discussing earnings quality research, we focus both on the question addressed and the researcher’s design choices. In our view, an examination of earnings quality and its determinants or consequences must address crucial research design issues, including the definition and measurement of both earnings qual- ity itself and the construction of tests for its capital market effects (such as the cost of capital). Our perspective, which is described in more detail in Section 2, can be summarized as follows. First, we associate earnings quality with precision, in the sense that higher quality earnings are more precise with respect to an underlying valuation-relevant construct that earn- ings is intended to describe. Differences in the construct chosen as the benchmark for earnings quality imply differences in the research ques- tion posed, and therefore also imply differences in how earnings qual- ity is measured. Researchers have proposed distinct constructs against 1 Full text available at: http://dx.doi.org/10.1561/1400000004 2 Introduction which earnings quality is measured,1 as well as different approaches to measurement. Second, we take a capital allocation view of earnings quality, as opposed to a contracting or stewardship view, and there- fore we are concerned with the capital market consequences of earn- ings quality. Third, we view earnings quality as comprising both an innate, relatively stable component that is driven by factors intrinsic to business models and operating environments and a relatively more discretionary and fluctuating component that is driven or influenced by management’s financial reporting decisions. We do not view earnings quality as only, or even primarily, the outcome of a period-by-period management choice; rather, we view the precision of earnings as arising from both reporting decisions and long-run strategic decisions about, for example, what should be the firm’s lines of business. Earnings quality is of considerable interest to participants in the financial reporting process, including standard setters, preparers, audi- tors, regulators, analysts, and financial press commentators. It is also of interest to accounting educators and accounting researchers. As evidence of this interest, we point to several analyses of earnings quality, including
Load more

Recommended publications
  • Eamings, Book Values, and Dividends in Equity Valuation*
    Eamings, Book Values, and Dividends in Equity Valuation* JAMES A. OHLSON Columbia University Abstract. The paper develops and analyzes a model of a firm's market value as it relates to contemporaneous and future eamings, book values, and dividends. Two owners' egui- ty accounting constructs provide the underpinnings of the model: the clean surplus rela- tion applies, and dividends reduce current book value but do not affect current eamings. The model satisfies many appealing properties, and it provides a useful benchmark when one conceptualizes how market value relates to accounting data and other infonnation. Resume. L'auteur 6Iabore et analy.se un modele dans lequel il conceptualise la relation entre Ia valeur marchande d'une entreprise et ses benefices, ses valeurs comptables et ses dividendes actuels et futurs. Deux postulats de la comptabilisation des capitaux propres servent de charpente au module : a) la relation du resultat global s'applique et b) les div- idendes reduisent la valeur comptable actuelle sans influer, cependant, sur les benefices actuels. Le modele prfisente de nombreuses proprietes interessantes et il peut, fort utile- ment, servir de repere dans la conceptualisation de la relation entre la valeur marchande et les donnees comptables et autres renseignements. Accounting assigns an important integrative function to the statement of changes in owners' equity. The statement includes the bottom-line items in the balance sheet atid income statement—^book value and eamings— and its format requires the change in book value to equal earnings minus dividends (net of capital contributions). We refer to this relation as the clean surplus relation because, as articulated, all changes in assetsAiabil- ities unrelated to dividends must pass through the income statement.' Accounting theory generally embraces this scheme without connecting it to a user's perspective on accounting data.
    [Show full text]
  • The Impact of Accounting Research in Management: Analysis of Past and Future
    JOURNAL OF CRITICAL REVIEWS ISSN- 2394-5125 VOL 7, ISSUE 10, 2020 The Impact of Accounting Research in Management: Analysis of Past and Future Ms. Smita Barik1, Ms. Namrata Singh2 12Dept. of Management Noida Institute of Engineering and Technology, Greater Noida, Uttar Pradesh Email Id- [email protected], [email protected] Received: 6 February 2020 Revised and Accepted: 21 May 2020 ABSTRACT: The aim of this paper is to investigate the influence of management accounting research on issues associated with this subject, by reviewing the literature and finding some new ways of study. The paper supports both theory and praxis in this way. This actually supports work in the emerging areas of research that has so far been focused mainly on the determinants of effect loss rather than on the essence of the effects of management accounting study and its assessment. It aims to analyze how studies have so far progressed in management accounting with regard to the issue at stake and to suggest at the same time possible avenues for future research. This work also aims to encourage new research focusing on management accounting research instruments or methods for measuring the impact of management research; such instruments may be useful for funding institutions and assessment agencies that may be more equipped to bring out an ex-ante and an ex-post assessment of the influence of management accounting research projects on society. KEYWORDS: Literature Review, Management Accounting, Research Impact, Research Relevance I. INTRODUCTION The discussion on the importance of scientific research has increased considerably in recent years. Academics are under pressure as they are increasingly called upon to show the social effects of their research.
    [Show full text]
  • Line-Item Analysis of Earnings Quality Contents
    Foundations and TrendsR in Accounting Vol. 3, Nos. 2–3 (2008) 87–221 c 2009 N. D. Melumad and D. Nissim DOI: 10.1561/1400000010 Line-Item Analysis of Earnings Quality By Nahum D. Melumad and Doron Nissim Contents 1 Introduction 88 2 Overview of Earnings Quality 91 3 Overview of Earnings Management 96 4 Revenue 107 5 Accounts Receivable 124 6 Inventory 131 7 Property, Plant and Equipment 142 8 Intangible Assets 153 9 Investments in Debt Securities 160 10 Debt 164 11 Leases 168 12 Income Taxes 172 13 Pension and Other Post-Retirement Benefits 179 14 Contingencies 184 15 Other Liabilities 187 16 Derivatives 190 17 Investment in Equity Securities and Variable Interest Entities 195 18 Shareholders’ Equity 203 19 Concluding Comments 213 References 214 Foundations and TrendsR in Accounting Vol. 3, Nos. 2–3 (2008) 87–221 c 2009 N. D. Melumad and D. Nissim DOI: 10.1561/1400000010 Line-Item Analysis of Earnings Quality∗ Nahum D. Melumad1 and Doron Nissim2 1 Columbia Business School, Columbia University, New York, NY 10027, USA, [email protected] 2 Columbia Business School, Columbia University, New York, NY 10027, USA, [email protected] Abstract In this paper, we discuss earnings quality and the related concept of earnings management, focusing on the primary financial accounts. For each key line-item from the financial statements, we summarize accounting and economic considerations applicable to that item, dis- cuss implications for earnings quality, evaluate the susceptibility of the item to manipulation, and identify potential red flags. The red flags and specific issues discussed for the individual line-items provide a frame- work for fundamental and contextual analysis by academic researchers and practitioners.
    [Show full text]
  • Accounting Consistency and Earnings Quality†
    Accounting consistency and earnings quality† Kyle Peterson University of Oregon [email protected] Roy Schmardebeck University of Arkansas [email protected] T. Jeffrey Wilks Brigham Young University [email protected] August 2013 Abstract: We specify measures of accounting consistency based on the textual similarity of accounting policy footnotes both across time and within industry and we examine how these measures relate to earnings quality. Consistency over time is positively associated with earnings quality, as proxied by earnings persistence, predictability, smoothness, accrual quality, and absolute discretionary accruals. We also find a positive association between accounting consistency within industry and accrual quality and absolute discretionary accruals proxies, but this positive association stems from measurement error in the earnings quality proxies. Our results suggest that accounting consistency is an important factor in the measurement of earnings quality. JEL classification: M41 Keywords: accounting policies, comparability, consistency, earnings quality, accrual estimation, accrual quality † We appreciate the helpful comments of Bob Bowen, Cory Cassell, Michael Drake, Adam Esplin, Dave Folsom, Steve Matsunaga, Rick Mergenthaler, Ken Merkley, James Myers, Linda Myers, Gary Taylor, Jenny Tucker, Rodrigo Verdi, Peter Wilson, and workshop and conference participants at the Brigham Young University Accounting Symposium, the 2010 UBCOW Conference, the 2011 AAA Annual Meeting, and the University of Arkansas. 1. Introduction Earnings quality is a frequently studied, albeit elusive, construct in accounting research. The large surge of research on earnings quality has prompted some recent reflection about what earnings quality is and the importance of measurement in this research. Dechow et al. (2010) note that various proxies are used for earnings quality and that each of these proxies capture different aspects of quality.
    [Show full text]
  • Financial Accounting & Reporting I
    Financial Accounting & Reporting I Spring 2021 (ACCTNG3401-001) Syllabus About the Instructor Dr. Jennifer (He) Wen Phone:314-516-7187 Email: [email protected] Campus office: 210 Anheuser-Busch Hall Virtual Office Hours: Thursday 8-9pm or by appointment In-Person Office Hours: To be determined Welcome to ACCTNG 3401! This is a one semester course that advance your knowledge about financial accounting. You may have heard “Accounting is the language of business”. In this course, you will strengthen your mastery of the fundamental concepts of this language and the preparation process of financial statements. Building on your knowledge of the fundamentals, this course introduces you to in-depth discussion of financial accounting focusing on the perspective of preparers of financial reports. You will not only learn about the accounting methods for the accounting items covered this class and prepare the reporting of these items, but also analyze how different methods affect financial statements differently. Thus, this class will be the foundation for all your other upper- level accounting classes. Becoming a fluent speaker of a new language requires commitment of time and efforts. This course is very rigorous. You will want to devote a couple of blocks of time (8-9 hours in total per week) to read the material and complete online activities and homework. To optimize knowledge retention and your performance in the class, it is recommended that you study in a period of about a couple of hours each time for several days a week. Please avoid spending all the hours once in a week. To commit yourself to make time to study several times per week, it also requires a lot self-discipline.
    [Show full text]
  • Earnings Quality White Paper
    Corporate Earnings: It’s not just a question of quantity September 30, 2007 Introduction outline the findings of our own research and illustrate They say beauty is only skin-deep. Investors would be how we have incorporated earnings quality analysis into wise to remember this aphorism when choosing stocks our investment process. since a company’s stated earnings, though eagerly watched by the market, are only ink-deep. To truly un- Background derstand a firm’s financial situation, it is important to The success Smith Group has achieved over the years consider the quality of a firm’s earnings, not just the is attributable to our ability to control portfolio risk and quantity. invest in companies whose earnings grow faster than the market expects. Because reported earnings are so The Basics... important to our process, and because managements have so many accounting tools available to them to Understanding the quality of earnings is important to forecasting the quantity and credibility of fu- manipulate earnings, it is important that we assess the ture earnings. credibility of earnings for every company we invest in our clients’ portfolios. Level of accruals, operating margins, asset turnover and expense exclusions are significant indicators of the degree of earnings quality. The foundations of our earnings quality model rest on a large array of research generated both externally and Earnings quality measures differ by industry, making internally. We have studied numerous academic papers customization of rankings models necessary. from some of the leading minds in the field. The out- Companies with high earnings quality have a come of this review was a confirmation of the primary higher likelihood of reporting positive earnings measures that we already use, but with some enhance- surprises in the future.
    [Show full text]
  • THE REAL LIFE GUIDE to ACCOUNTING RESEARCH a BEHIND-THE-SCENES VIEW of USING QUALITATIVE RESEARCH METHODS Elsevier Related Books
    THE REAL LIFE GUIDE TO ACCOUNTING RESEARCH A BEHIND-THE-SCENES VIEW OF USING QUALITATIVE RESEARCH METHODS Elsevier Related Books: Advances in Accounting – http://www.elsevier.com/locate/series/aa Advances in International Accounting – http://www.elsevier.com/locate/series/aia Advances in Accounting Behavioral Research – http://www.elsevier.com/locate/series/aabr Advances in Management Accounting – http://www.elsevier.com/locate/series/advma Studies in the Development of Accounting Thought – http://www.elsevier.com/locate/series/sdat Related Journals: Accounting, Organisations and Society – http://www.elsevier.com/locate/aos British Accounting Review – http://www.elsevier.com/locate/bar Critical Perspectives on Accounting – http://www.elsevier.com/locate/jnlabr/ycpac International Journal of Accounting – http://www.elsevier.com/locate/intacc International Journal of Accounting Information Systems – http://www.elsevier.com/locate/accinf Journal of Accounting and Public Policy – http://www.elsevier.com/locate/jaccpubpol Journal of Accounting Education – http://www.elsevier.com/locate/jaccedu Management Accounting Research – http://www.elsevier.com/locate/jnlabr/ymare The Journal of Accounting and Economics – http://www.elsevier.com/locate/jacceco THE REAL LIFE GUIDE TO ACCOUNTING RESEARCH A BEHIND-THE-SCENES VIEW OF USING QUALITATIVE RESEARCH METHODS EDITED BY CHRISTOPHER HUMPHREY Manchester School of Accounting & Finance, University Manchester, UK BILL LEE Sheffield University Management School, Sheffield, UK 2004 Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo ELSEVIER B.V. ELSEVIER Inc. ELSEVIER Ltd ELSEVIER Ltd Sara Burgerhartstraat 25 525 B Street, Suite 1900 The Boulevard, Langford 84 Theobalds Road P.O. Box 211 San Diego Lane, Kidlington London 1000 AE Amsterdam CA 92101-4495 Oxford OX5 1GB WC1X 8RR The Netherlands USA UK UK © 2004 Elsevier Ltd.
    [Show full text]
  • ACCOUNTING and ECONOMICS by Joel S. Demski University of Florida
    ACCOUNTING AND ECONOMICS by Joel S. Demski University of Florida prepared for The New Palgrave Dictionary of Economics, 2nd edition August, 2005 Helpful comments by Haijin Lin and David Sappington are gratefully acknowl- edged. ACCOUNTING AND ECONOMICS abstract Accounting provides an important source of economic measures, yet consistently falls short of the economist’s conceptual ideal. This shortfall is fodder for economic research, is the result of economic forces, and is the key to making the best possible use of these measures. Broadly viewed, economics is concerned with production and allocation of resources and accounting is concerned with measuring and reporting on the production and allocation of resources. Corporate financial reporting, income tax reporting, and product cost analysis at the firm level are familiar accounting activities. Of course, accounting itself is a production process and the production and allocation of its output is even regulated, e.g., how a firm measures and reports its financial progress, how a firm communicates with outsiders, and mandatory auditing of a firm’s public financial state- ments. This suggests two interrelated themes: accounting is useful in a wide variety of activities, including economics research, and accounting itself is a fascinating and important area of economics research. Using or researching the accountant’s products, however, rests on an un- derstanding of what those products are and how they are produced. Ac- counting, in fact, uses the language of economics (e.g., value, income and debt) and the algebra of economic valuation (as income is change in value adjusted for dividends and stock issues). But it falls far short of how an economist would approach these matters.
    [Show full text]
  • Earnings Quality As Measured by Predictability of Reported Earnings
    Holt Advances in Business Research 2013, Vol. 4, No. 1, 49-5343-48 Earnings Quality As Measured By Predictability of Reported Earnings Paul Holt, Texas A&M University, Kingsville The study selected a single normative criterion related to earnings quality, that current and prior years’ earnings per share (eps) should be reasonable predictors of future eps. Correlations between one year’s eps and the following year’s eps were sometimes much higher than expected. A surprise was that the second prior year’s eps was a slightly better predictor of the current year’s eps than the immediate prior year. Performing multivariate regressions with an additional prior year dependent variable provides an improvement in the residual sum of squares (two independent variables predict better than three, etc). But with the addition of each additional prior year the percentage improvement in the residual sum of squares declines. Further, starting with the sixth prior year, adding an additional dependent variable makes no noticeable impact on prediction. The quality of earnings is a concept that has received much attention in recent years by accountants and users of financial statements. It is clearly an important concept, yet there is no precise definition of the term. More precisely, there are many definitions, but none that is universally accepted. Earnings quality can be reduced by errors and by management manipulation. Aside from honest errors, reported earnings can be manipulated by recording revenues too early or too late, a violation of the recognition principle, and by recording expenses too early or too late, a violation of the matching principle.
    [Show full text]
  • Accounting Research: a Critical View of the Present Situation and Prospects
    ACCOUNTING RESEARCH: A CRITICAL VIEW OF THE PRESENT SITUATION AND PROSPECTS INVESTIGACIÓN EN CONTABILIDAD: UNA VISIÓN CRÍTICA DE LA SITUACIÓN ACTUAL Y PERSPECTIVAS JOSEP M. ARGILÉS, Departament of Accounting, Universitat de Barcelona JOSEP GARCIA-BLANDON, Departament of Business, IQS (Faculty of Economics) ABSTRACT In this study we critically review the internal procedures of the accounting community for generating and disseminating knowledge. We contend that academic journals on accounting research are scarce, publish few articles and apply high rejection rates, and the review process is lengthy and expensive. Additionally, an academic elite has unparalleled predominance in comparison to other business disciplines, reflected in an unusual share of published articles with authors affiliated to a small number of academic institutions, and the predominance of certain topics and methodologies. The discipline does not allow the collaborative, iterative and flexible features of innovative knowledge communities. The discipline’s internal procedures favour restriction, control, slowness, and expiration, rather than participation, speed and renewal. They are ill suited for advancing knowledge and bode badly for successful research. As a result, accounting academics present low research performance and the discipline is facing steady decline. More importantly, the discipline is handicapped in producing innovative knowledge able to contribute to critical research and long term social well-being. We also focus on the Spanish institutional situation, arguing that Spanish requirements for reaching tenured positions are difficult for accountants to meet. We highlight the need to raise awareness of the problem and change the procedures. KEY WORDS: accounting research, critical research, accounting journals, publishing in accounting, accounting elite, research performance, journal rejection.
    [Show full text]
  • Positive and Normative Accounting Theory: Definition and Development
    International Journal of Economics, Management, Business and Social Science (IJEMBIS) Peer Reviewed – International Journal Volume 1, Issue 2, May 2021 E-ISSN: 2774-5376 https://cvodis.com/ijembis/index.php/ijembis Positive And Normative Accounting Theory: Definition And Development Thadeus Fransesco Quelmo Patty1), Paulus Libu Lamawitak2), Emilianus Eo Kutu Goo3), Henrikus Herdi4) Nusa Nipa Indonesia University 1234 E-mail: [email protected] Abstract: This study aims to explain the definition rather than accounting theory, in this case, it is more focused on normative accounting theory and positive accounting theory. The author uses various sources, both from previous research journals and from articles on the internet. The conclusion of this research is that theory is often used as the basis for an action or practice. The development of accounting theory was initiated by the writings of Patton and Littleton (1940) entitled An Introduction to Corporate Accounting Standards. The result of normative accounting theory is a statement or proposition that requires or requires in accounting practice, normative accounting theory focuses on prescriptions (norms) and is not intended for theory development. While positive accounting theory seeks to explain and predict phenomena related to accounting. By using an approach that comes from positivism, empirical accounting research is developed to support and justify various accounting methods or practices in the real world. There are four periods of accounting theory, starting with the Pre-Theory period from 1492-1800. Then continued with the Pragmatic accounting period (general scientific period) from 1800-1955. The period 1956-1970 is labeled the 'normative period'. The last is the period of positive accounting theory from 1970 to the present.
    [Show full text]
  • The Relationship Between Earnings Quality and Audit Quality: an Iranian Angle
    Journal homepage: https://ijaaf.um.ac.ir DOI: 10.22067/ijaaf.2020.39281 Research Article The Relationship between Earnings Quality and Audit Quality: An Iranian Angle Mohammad Seddigh Ansari Qeshmi* Economics and Administrative Sciences, Payamenoor University, Tehran, Iran Hamideh Nazaridavaji Faculty of Economics and Administrative sciences, Ferdowsi University of Mashhad, Mashhad, Iran Abstract The present study is concerned about the relationship between earnings quality and audit quality of audit firms to figure out whether the earnings quality of firms audited by larger audit firms is more than that of the smaller firms or the earnings quality of firms audited by longer tenure audit firms is more than that of the shorter tenure firms or not. The study's hypotheses were tested using a sample of 129 year-company listed on the Tehran Stock Exchange during 2012-2016 and by using the multiple regression pattern based on the data integration technique. Hence, the multivariable regression model is used for testing the hypotheses. The obtained results show that the earnings quality of firms audited by small audit firms outweighs that of the large audit firms. Moreover, the findings indicate that those firms audited by longer tenure audit firms, compared with those audited by shorter tenure audit firms, enjoy a better earnings quality. Keywords: Earnings Quality, Audit Firms’ Tenure, Mandatory Rotation, Audit Quality. *Corresponding Author: Department of Accounting, Email: [email protected] 1. Introduction Iranian An audit firm's income is one of the items of financial statements that are of great Journal of importance for all users. According to declaration No. 1 of financial accounting concepts, Accounting, financial reports are on firm performance information, presented through earnings Auditing & calculation and its constituent components.
    [Show full text]