The role of the Big Four audit firms and the legal system in non-GAAP comparability

Titolo Rivista FINANCIAL REPORTING
Autori/Curatori Riccardo Macchioni, Alessandra Allini, Martina Prisco
Anno di pubblicazione 2022 Fascicolo 2022/1
Lingua Inglese Numero pagine 38 P. 79-116 Dimensione file 273 KB
DOI 10.3280/FR2022-001003
Il DOI è il codice a barre della proprietà intellettuale: per saperne di più clicca qui

Qui sotto puoi vedere in anteprima la prima pagina di questo articolo.

Se questo articolo ti interessa, lo puoi acquistare (e scaricare in formato pdf) seguendo le facili indicazioni per acquistare il download credit. Acquista Download Credits per scaricare questo Articolo in formato PDF

Anteprima articolo

FrancoAngeli è membro della Publishers International Linking Association, Inc (PILA)associazione indipendente e non profit per facilitare (attraverso i servizi tecnologici implementati da CrossRef.org) l’accesso degli studiosi ai contenuti digitali nelle pubblicazioni professionali e scientifiche

The purpose of this paper is to investigate whether the firms with the same Big Four audit firm and from the same legal system disclose more comparable non-GAAP measures. Using 23,436 pairs of European firms, we hand-collected infor-mation on the non-GAAP measures disclosed in the statement of comprehensive income. The results showed that the firms with the same Big Four audit firm or from the same legal system are positively and significantly associated with non-GAAP comparability. Our work adds to the studies on accounting comparability. Furthermore, it provides fresh insights that support the latest IASB activity on the Primary Financial Statement project, under which the standard setter has en-dorsed ED/2019/7 General Presentation and Disclosures.

Keywords:financial statement comparability, Big Four audit firms, legal system, non-GAAP measures, IAS 1.

Jel codes:M40, M41

  1. Agostini M. and Marcon C. (2013), Comprehensive Income (CI) Statement’s Compliance with International Accounting Standard (IAS) 1 (Revised 2007 and 2011): Evidence From Italian Listed Corporate Groups, Journal of Modern Accounting and Auditing, 9(1), pp. 1-19.
  2. Ahn H. and Sonu C.H. (2020), The effect of audit partner style on financial statement comparability, Asia-Pacific Journal of Accounting & Economics, pp. 1-27, DOI: 10.1080/16081625.2020.1844999
  3. Asper S., McCoy C. and Taylor G.K. (2019), The Expanding Use of Non-GAAP Financial Measures, The CPA Journal, 89(7), pp. 28-31.
  4. Audit Analytics (2018), Long-Term Trends in Non-GAAP Disclosures: A Three-Year Overview. Sutton.
  5. Australian Securities and Investment Commission (2011), Regulatory Guide 230: Disclosing non-IFRS financial information.
  6. Bag S., Kumar S.K. and Tiwari M.K. (2019), An efficient recommendation generation using relevant Jaccard similarity, Information Sciences, 483, pp. 53-64,
  7. Ball R., Robin A. and Wu J.S. (2003), Incentives versus standards: Properties of accounting income in four East Asian countries, Journal of Accounting and Economics, 36(1-3), pp. 235-270,
  8. Barone E. and Teodori C. (2019), The standard setters’ approach to the non-GAAP measures, in Moscariello N. and Pizzo M. (Eds.), Reporting Non-GAAP Financial Measures: A Theoretical and Empirical Analysis in Europe, pp. 94-116. (Newcastle upon Tyne, UK: Cambridge Scholars Publishing).
  9. Barth M.E. (2013), Global Comparability in Financial Reporting: What, Why, How, and When?, China Journal of Accounting Studies, 1(1), pp. 2-12,
  10. Barth M.E., Gow I.D. and Taylor D.J. (2012), Why Do Pro Forma and Street Earnings not Reflect Changes in GAAP? Evidence from SFAS 123R, Review of Accounting Studies, 17(3), pp. 526-62,
  11. Baumane I. (2018), The methodology of the statement of comprehensive income and its impact on profitability: The case of Latvia, Entrepreneurship and Sustainability Issues, 6(1), pp. 77-86,
  12. Bhattacharya N., Black E.L., Christensen T.E. and Mergenthaler R.D. (2007), Who Trades on Pro Forma Earnings Information?, The Accounting Review, 82(3), pp. 581-619,
  13. Bini L., Dainelli F. and Giunta F. (2017), Is a loosely specified regulatory intervention effective in disciplining management commentary? The case of performance indicator disclosure, Journal of Management & Governance, 21, pp. 63-91,
  14. Bini L., Giunta F. and Miccini R. (2019), The reliability of non-GAAP disclosure in Europe: An examination of presentational aspects, in Moscariello N. and Pizzo M. (Eds.), Reporting Non-GAAP Financial Measures: A Theoretical and Empirical Analysis in Europe, pp. 242-286. (Newcastle upon Tyne, UK: Cambridge Scholars Publishing).
  15. Black D.E., Christensen T.E., Ciesielski J.T. and Whipple B.C. (2018), Non-GAAP reporting: Evidence from academia and current practice, Journal of Business Finance & Accounting, 45(3-4), pp. 259-294,
  16. Black D.E., Christensen T.E., Ciesielski J.T. and Whipple B.C. (2020), Non-GAAP Earnings: A Consistency and Comparability Crisis?, Available at SSRN Electronic Journal, pp. 1-46,
  17. Bradshaw M.T. and Sloan R.G. (2002), GAAP Versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings, Journal of Accounting Research, 40(1), pp. 41-66, DOI: 10.1111/1475-679X.00038
  18. Brown L.D. and Sivakumar K. (2003), Comparing the value relevance of two operating income measures, Review of Accounting Studies, 8(4), pp. 561-572, DOI: 10.1023/A:102732841857
  19. Brown P., Preiato J. and Tarca A. (2014), Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy, Journal of Business Finance & Accounting, 41(1-2), pp. 1-52.
  20. Brown S. and Knechel W. (2016), Auditor-client compatibility and audit firm selection, Journal of Accounting Research, 54(3), pp. 725-775, DOI: 10.1111/1475-679X.12105
  21. Bushman R.M. and Piotroski J.D. (2006), Financial Reporting Incentives for Conservative Accounting: The Influence of Legal and Political Institutions, Journal of Accounting and Economics, 42(1-2), pp. 107-148,
  22. Cairns D., Massoudi D., Taplin R. and Tarca A. (2011), IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia, The British Accounting Review, 43(1), pp. 1-21,
  23. Calcbench (2016), Measuring Non-GAAP Metrics: A Look at Adjusted Net Income.
  24. Cascino S. and Gassen J. (2015), What drives the comparability effect of mandatory IFRS adoption?, Review of Accounting Studies, 20(1), pp. 242-282,
  25. Chartered Financial Analyst (2016), Investor uses, expectations, and concerns on Non-gaap financial measures.
  26. Chen J.J. and Zhang H. (2010), The Impact of Regulatory Enforcement and Audit upon IFRS Compliance. Evidence from China, European Accounting Review, 19(4), pp. 665-692, DOI: 10.1080/09638180903384684
  27. Choi F.D.S., Frost C. and Gary K. (Eds.) (2002), International Accounting. (Upper Sadle River: Prentice Hall).
  28. Christensen H.B., Hail L. and Leuz C. (2013), Mandatory IFRS Reporting and Changes in Enforcement, Journal of Accounting and Economics, 56(2-3), pp. 147-177,
  29. Ciesielski J.T. (2016), Wonder Bread: Non-GAAP Earnings Keep Rising in the S&P 500, Analyst’s Accounting Observer, 25(4), pp. 1-5.
  30. Cimini R. (2013), Reporting Comprehensive income issues: empirical evidence from France, Germany and Italy, Economia Aziendale Online, 4(1), pp. 1-17,
  31. Clinch G., Tarca A. and Wee M. (2018), The value relevance of IFRS earnings totals and subtotals and non-GAAP performance, SSRN Electronic Journal, pp. 1-37,
  32. Cole V., Branson J. and Breesch D. (2012), The uniformity‐flexibility dilemma when comparing financial statements: Views of auditors, analysts and other users, International Journal of Accounting & Information Management, 20(2), pp. 114-141, DOI: 10.1108/18347641211218443
  33. Committee of European Securities Regulators (2005), CESR Recommendation on Alternative Performance Measures.
  34. Coulton J., Ribeiro A., Shan Y. and Taylor S. (2016), The rise and rise of non-gaap disclosure. A survey of Australian practice and its implications, University of New South Wales.
  35. Cuijpers R. and Buijink W. (2005), Voluntary Adoption of Non-Local GAAP in the European Union: A Study of Determinants and Consequences, European Accounting Review, 14(3), pp. 487-524, DOI: 10.1080/0963818042000337132
  36. Curtis A.B., McVay S.E. and Whipple B.C. (2014), The disclosure of non-GAAP earnings information in the presence of transitory gains, The Accounting Review, 89(3), pp. 933-958.
  37. D’Arcy A. (2001), Accounting classification and the international harmonisation debate - an empirical investigation, Accounting, Organizations and Society, 26(4-5), pp. 327-349.
  38. D'Este C. and Fellegara A.M. (2009), Valore economico, fair value e redditi non realizzati. Prime evidenze empiriche della rendicontazione del comprehensive income in Italia, Financial Reporting, 1(4), pp. 9-34.
  39. Dayanandan A., Donker H., Ivanof M. and Karahan G. (2016), IFRS and accounting quality: legal origin, regional, and disclosure impacts, International Journal of Accounting & Information Management, 24(3), pp. 296-316.
  40. De Cristofaro T. and Falzago B. (2014), What trend for Comprehensive Income Presentation? Evidence from Italy, International Journal of Accounting and Taxation, 2(3), pp. 17-40,
  41. De Franco G., Kothari S.P. and Verdi R.S. (2011), The benefits of financial statement comparability, Journal of Accounting Research, 49(4), pp. 895-931,
  42. Deloitte Touche Tohmatsu (2019), iGAAP. In focus. (London: Croner-i).
  43. Ding Y., Richard J. and Stolowy H. (2007), Towards an Understanding of the Phases of Goodwill Accounting in Four Western Capitalist Countries: From Stakeholder Model to Shareholder Model, Accounting, Organizations and Society, 33(7-8), pp. 718-755.
  44. Doyle J.T., Lundholm R.J. and Soliman M.T. (2003), The predictive value of expenses excluded from pro forma earnings, Review of Accounting Studies, 8(2- 3), pp. 145-174.
  45. Ege M., Kim Y.H. and Wang D. (2018), Do Global Audit Firm Networks Apply Consistent Audit Methodologies Across Jurisdictions? Evidence from Financial Reporting Comparability, The Accounting Review, pp. 1-49,
  46. Elliott W.B. (2006), Are investors influenced by pro forma emphasis and reconciliations in earnings announcements?, The Accounting Review, 81(1), pp. 113-133,
  47. Ernst & Young (2020), IFRS Core Tools. Disclosure Checklist Based on International Financial Reporting Standards in issue at 29 February 2020.
  48. European Financial Reporting Advisory Group (2017), Primary Financial Statements. Issues Paper – Use of additional subtotals in the Statement of Financial Performance.
  49. European Securities and Market Authorities (2015), ESMA Guidelines on Alternative Performance Measures.
  50. Ferraro O. (2012), Comprehensive income disclosures: Evidence from Italy, Accounting & Taxation, 4(2), pp. 65-76.
  51. Francis J.R. and Wang D. (2008), The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality around the World, Contemporary Accounting Research, 25(1), pp. 157-191,
  52. Francis J.R., Pinnuck M.L. and Watanabe O. (2014), Auditor Style and Financial Statement Comparability, The Accounting Review, 89(2), pp. 605-633,
  53. Francis T. and Linebaugh K. (2015), U.S. Corporations Increasingly Adjust to Mind the GAAP, The Wall Street Journal online.
  54. Gad J. (2016), Information transparency of the statement of comprehensive income: The Reporting practice of WIG30 and DAX Companies, Journal of Entrepreneurship and Innovation, 12(3), pp. 113-134, DOI: 10.7341/20161235
  55. Gao Z. and Liu J. (2018), Comparability of Street Earnings and Its Economic Consequences, SSRN Electronic Journal, pp. 1-39,
  56. Gordon E.A., Henry E., Jorgensen B.N. and Linthicum C.L. (2017), Flexibility in cash-flow classification under IFRS: determinants and consequences, Review of Accounting Studies, 22(2), pp. 839-872,
  57. Gross C. and Perotti P. (2017), Output-Based Measurement of Accounting Comparability: A Survey of Empirical Proxies, Journal of Accounting Literature, 39, pp. 1-22,
  58. Guermazia W. and Haliouib K. (2020), Do differences in national cultures affect cross-country conditional conservatism behavior under IFRS?, Research in International Business and Finance, 52(101171), pp. 1-13,
  59. Guillamon‐Saorin E., Isidro H. and Marques A. (2017), Impression Management and Non‐GAAP Disclosure in Earnings Announcements, Journal of Business Finance & Accounting, 44(3-4), pp. 448-479,
  60. Holthausen R.W. (2003), Testing the relative power of accounting standards versus incentives and other institutional features to influence the outcome of financial reporting in an international setting, Journal of Accounting and Economics, 36(1-3), pp. 271-283,
  61. Hoitash R. and Hoitash U. (2018). Measuring accounting reporting complexity with XBRL, The Accounting Review, 93(1), pp. 259-287,
  62. International Accounting Standard Board (2018), Conceptual Framework for Financial Reporting.
  63. International Accounting Standard Board (2019), ED/2019/7 General Presentation and Disclosures.
  64. International Accounting Standard Board (2007), IAS 1 Presentation of Financial Statements.
  65. International Accounting Standard Board (2017), IASB Agenda ref 21A: Earnings before finance income/expenses and tax (EBIT) – approaches for describing capital structure.
  66. International Accounting Standard Board (2018), IASB Agenda ref 21A: Descriptions of subtotals.
  67. International Organization of Securities Commissions (2016), Statement on Non-GAAP Financial Measures.
  68. Jaafar A. and McLeay S. (2007), Country Effects and Sector Effects on the Harmonization of Accounting Policy Choice, Abacus, 43(2), pp. 156-189,
  69. Jaggi B. and Low P.Y. (2000), Impact of culture, market forces and legal system on financial disclosures, International Journal of Accounting, 35(4), pp. 495-519, DOI: 10.1016/S0020-7063(00)00076-5
  70. Johnston J.A. and Zhang J.H. (2020). Auditor Style and Financial Reporting Similarity, Journal of Information Systems, pp. 1-50,
  71. Jordan C.E. and Clark J. (2002), Comprehensive income: how is it being reported and what are its effects?, The Journal of Applied Business Research, 18(2), pp. 1-8,
  72. Joshi M.C. (2015), Divergence between Operating Profit and EBIT, SSRN Electronic Journal,
  73. Kawada B. (2014), Auditor Offices and the Comparability and Quality of Clients’ Earnings, SSRN Electronic Journal, pp. 1-59,
  74. Kim S., Kraft P. and Ryan S.G. (2013), Financial statement comparability and credit risk, Review of Accounting Studies, 18(3), pp. 783-823,
  75. Kothari S.P., Ramanna K. and Skinner D.J. (2010), Implications for GAAP from an Analysis of Positive Research in Accounting, Journal of Accounting and Economics, 50(2-3), pp. 246-286,
  76. KPMG (2019), Insights into IFRS: KPMG’s Practical Guide to International Financial Reporting Standards 16th ed. (London: Thomson Reuters).
  77. KPMG and von Keitz I. (2006), The application of IFRS: choices in practice. (London: KPMG).
  78. Kvaal E. and Nobes C. (2010), International differences in IFRS policy choice: A research note, Accounting and Business Research, 40(2), pp. 173-187, DOI: 10.1080/00014788.2010.9663390
  79. Kvaal E. and Nobes C. (2012), IFRS Policy Changes and the Continuation of National Patterns of IFRS Practice, European Accounting Review, 21(2), pp. 343-371, DOI: 10.1080/09638180.2011.611236.
  80. La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R.W. (1998), Law and finance, Journal of Political Economy, 106(6), pp. 1113-1156.
  81. Leuz C. (2010), Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why, Accounting and Business Research, 40(3), pp. 229-256,
  82. Leuz C., Nanda D. and Wysocki P. (2003), Earnings Management and Investor Protection. An International Comparison, Journal of Accounting and Economics, 69, pp. 505-27.
  83. Leuz C. and Wysocki P.D. (2016), The economics of disclosure and financial reporting regulation: evidence and suggestions for future research, Journal of Accounting Research, 54 (2), pp. 525-622, DOI: 10.1111/1475-679X.12115
  84. Malone L., Tarca A. and Wee M. (2016), IFRS non‐GAAP earnings disclosures and fair value measurement, Accounting and Finance, 56(1), pp. 59-97,
  85. Moody’s (2010), Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations. New York.
  86. Moscariello N. (2018), Gli indicatori di performance Non-GAAP. Contenuto informativo e ipotesi di standardizzazione. (Torino: Giappichelli).
  87. Moscariello N. (2019), The economics of non-GAAP measures and regulation, in Moscariello N. and Pizzo M. (Eds.), Reporting Non-GAAP Financial Measures: A Theoretical and Empirical Analysis in Europe, pp. 18-37. (Newcastle upon Tyne, UK: Cambridge Scholars Publishing).
  88. Neel M. (2017), Accounting comparability and economic outcomes of mandatory IFRS adoption, Contemporary Accounting Research, 34(1), pp. 658-690, DOI: 10.1111/1911-3846.12229
  89. Niwattanakul S., Singthongchai J., Naenudorn E. and Wanapu S. (2013). Using of Jaccard Coefficient for Keywords Similarity, Proceedings of the International MultiConference of Engineers and Computer Scientists. Hong Kong.
  90. Nobes C. (2006), The survival of international differences under IFRS: towards a research agenda, Accounting and Business Research, 36(3), pp. 233-245, DOI: 10.1080/00014788.2006.9730023
  91. Petaibanlue J., Walker M. and Lee E. (2015). When Did Analyst Forecast Accuracy Benefit from Increased Crossborder Comparability Following IFRS Adoption in the EU?, International Review of Financial Analysis, 42, pp. 278-91.
  92. Pizzo M. (2019), Definitions and Trends in non-GAAP measures and disclosure in Moscariello N. and Pizzo M. (Eds.), Reporting Non-GAAP Financial Measures: A Theoretical and Empirical Analysis in Europe, pp. 2-17. (Newcastle upon Tyne, UK: Cambridge Scholars Publishing).
  93. Preiato J., Brown P. and Tarca A. (2015), A Comparison of Between‐Country Measures of Legal Setting and Enforcement of Accounting Standards, Journal of Business Finance & Accounting, 42(1-2), pp. 1-50,
  94. Prewysz-Kwinto P. (2020), Geographical and Sectoral Diversity of the Statement of Comprehensive Income with IAS, European Research Studies Journal, XXIII(1), pp. 507-525,
  95. PricewaterhouseCoopers LLP. (2016), Building Confidence in Non-GAAP Measures and Other KPIs: A Path Forward. New Zealand.
  96. PricewaterhouseCoopers LLP. (2019), Manual of accounting. IFRS supplement 2020.
  97. Quagli A. (2009), Il prospetto del comprehensive income nel nuovo IAS 1, Pratica Contabile, 12, pp. 26-30.
  98. Quagli A. (2019), Gli standard dello IASB nel sistema contabile italiano. (Torino: Giappichelli).
  99. Ross J., Shi L. and Xie H. (2019), The determinants of accounting comparability around the world, Asian Review of Accounting, 28(1), pp. 69-88,
  100. Securities and Exchange Commission (2003), Final Rule: Conditions for use of Non-GAAP financial measures. Washington.
  101. Sek J. and Taylor S. (2011), Profit or Prophet? A Case Study of the Reporting of Non-GAAP Earnings by Australian Banks, Australian Accounting Review, 21(4), pp. 327-339,
  102. Standard & Poor’s (2008), Corporate Ratings Criteria. (New York, NY: S&P).
  103. Taplin R.H. (2004), A unified approach to the measurement of international accounting harmony, Accounting and Business Research, 34(1), pp. 57-73, DOI: 10.1080/00014788.2004.9729951
  104. Tarca A. (2020), The IASB and Comparability of International Financial Reporting: Research Evidence and Implications, Australian Accounting Review, 30(4), pp. 231-242,
  105. The Center for Audit Quality (2016), Questions on Non-GAAP Measures: A Tool For Audit Committees. Washington, DC.
  106. Yip R.W.Y. and Young D. (2012), Does mandatory IFRS adoption improve information comparability?, The Accounting Review, 87(5), pp. 1767-1789,
  107. Van Der Tas L.G. (1992), Measuring International Harmonization and Standardization: A Comment, Abacus, 28(2), pp. 211-216.
  108. Wong J. and Wong N. (2010), Voluntary disclosure of operating income, Accounting & Finance, 50(1), pp. 221-239,
  109. Zeff S.A. (2007), Some obstacles to global financial reporting comparability and convergence at a high level of quality, British accounting review, 39(4), pp. 290-302,
  110. Zhang J.H. (2018), Accounting Comparability, Audit Effort, and Audit Outcomes, Contemporary Accounting Research, 35(1), pp. 245-276. DOI: 10.1111/1911-3846.12381
  111. Taplin R.H. (2011), The Measurement of Comparability in Accounting Research, Abacus, 47(3), pp. 383-409,

Riccardo Macchioni, Alessandra Allini, Martina Prisco, The role of the Big Four audit firms and the legal system in non-GAAP comparability in "FINANCIAL REPORTING" 1/2022, pp 79-116, DOI: 10.3280/FR2022-001003