Earnings management during the COVID-19 crisis: evidence from the Brazilian and American capital markets

PurposeThe main purpose of this study is to evaluate whether the COVID-19 pandemic has stimulated earnings management among publicly traded companies in Brazil and the USA.Design/methodology/approachThe authors analyzed the above-mentioned effects based on 22,244 observations of Brazilian companies and 139,856 observations of American companies from 1998 to 2020. The proxy used to detect earnings management based on discretionary accruals (DAC) was obtained by using the Modified Jones Model (MJM) (Dechow et al., 1995), with adjustments suggested by Kothari et al. (2005). In accordance with previous studies (e.g. Brown et al., 2015;Enomoto et al., 2015;Galdi et al., 2020;Huang and Sun, 2017;Roychowdhury, 2006), the authors also employed a second proxy to detect earnings management through real activities associated with unusual losses for fixed assets (property, plant and equipment (PPE)).FindingsThe study's findings indicate that the discretionary accruals of Brazilian companies varied in a more accentuated manner during the COVID-19 pandemic, making it possible to deduce that a recent history of economic depression may entail greater incentives for earnings management in an emerging economy. In addition, the authors verified that the effects of the current crisis on earnings management proxies denote a signal that is distinct from previous economic crises, which may be interpreted as an attempt to postpone the effects of the pandemic on financial statements, especially those of the Brazilian capital markets.Originality/valueUnlike previous crises, this pandemic has led to direct restrictions on a wide variety of economic segments rather than indirect contagion due to anomalies in the financial markets, making it a phenomenon with the characteristics of a quasi-natural experiment for studies related to the quality of accounting information. Considering that both Brazil and the USA provide an opportune economic contrast, given their discrepancies in terms of economic growth over the past two decades, the researchers believe that there is an unusual opportunity to understand how earnings management can be an incentive for managers in environments where crises arose from natural causes.

Audit quality and independence concerns after major audit reforms within a developing country: stakeholder perceptions from Vietnam

PurposeThe purpose of this exploratory study is to investigate the perceptions of key stakeholders in Vietnam on the impact on audit quality and independence after major reforms to audit. Design/methodology/approachUsing new institutional sociology, this study seeks to explain how Vietnamese external auditors and accountants have responded to audit reforms and provides perceptions on how audit quality and independence may have been impacted. This study draws on semi-structured interviews conducted with 33 highly experienced participants, representing various stakeholder groups in Vietnam. FindingsThe findings indicate that after almost a decade since the full implementation of the Law of Independent Audit (2011) in Vietnam, the audit and assurance market in Vietnam is characterised by low quality audits, a lack of compliance with standards and auditor independence concerns, specifically amongst the smaller audit practitioners. Participants indicated that competition for new audit clients or retaining existing clients is a priority over improving audit quality and independence. Originality/valueBy examining a combination of different factors relating to audit quality and independence, the authors further demonstrate the impact of these factors in Vietnam, helping audit professionals and regulators to have a better and more meaningful understanding of that state of the audit profession. This study also considers audit concerns or issues arising because of the COVID-19 pandemic in Vietnam.

COVID-19 Disclosures and Market Uncertainty: Evidence from 10-Q Filings

We examine whether the quarterly filing COVID-19 disclosures reduce uncertainty for investors and analysts. We find a negative relationship between COVID-19 disclosure and return volatility, suggesting COVID-19 disclosure reduces investor uncertainty. This reduction effect concentrates mainly during the short window following 10-Q releases and phases out over time. We then detect that industry-wide COVID-19 disclosure dispersion is positively associated with return volatility, suggesting high variation of industry-wide COVID-19 disclosures reduces information comparability across firms, resulting in increased investor uncertainty. Moreover, we find that COVID-19 disclosures are positively associated with analysts? downward earnings forecast revisions and negatively associated with analyst forecast dispersion after 10-Q releases, suggesting the disclosures reduce information risk even for sophisticated market participants. Further analyses show that COVID-19 disclosures are negatively associated with future financial and operational performances (i.e., sales, operating cash flow, operating income and ROA). Lastly, we find that the low readability of COVID-19 disclosure attenuates the negative relation between COVID-19 disclosure and market volatility. Collectively, our findings suggest that 10-Q COVID-19 disclosures contain value-relevant information that temporarily assists market participants in evaluating the changes in firms? values in the time of a crisis.