کیفیت حسابرسی در قانون مشترک و بازارهای نوظهور قانون ـ کد : شواهد محافظه کاری سود، هزینه های آژانس و هزینه حقوق صاحبان سهام

This study focuses on firms that are audited by a big auditor and examines the differentiation in the earnings management potential and the level of conservatism. It also investigates whether being audited by a big auditor would lead to lower agency costs and lower cost of equity. The study focuses on emerging common-law South Africa and code-law Brazil, and seeks to identify whether there are material differences given their dissimilar institutional characteristics. The study reports that even though firms may be audited by high quality auditors, their institutional differences influence significantly firms' earnings conservatism, agency costs and cost of equity. Client firms of big auditors in both common-law South Africa and code-law Brazil exhibit lower discretionary accruals. The study has found evidence of more conservative earnings for South Africa but insufficient levels for Brazil. For common-law South Africa, the presence of effective corporate governance mechanisms reduces agency costs. For code-law Brazil, the corporate governance mechanisms generally display an insignificant impact on reducing agency costs. For common-law South Africa, firm-level performance, growth and market determinants tend to lead to a lower cost of equity. For code-law Brazil, it is found that significant discretionary accruals, market beta and analyst forecast dispersion would result in higher uncertainty and would consequently raise the cost of equity.

In light of the recent global financial crisis and the collapse of large financial institutions, such as Lehman Brothers, as well as the audit scandals with worldwide impact, such as Enron and WorldCom, this study seeks to determine the quality of auditing as captured by earnings conservatism, agency costs and the cost of equity, which influence managerial behaviour and reported earnings. Managerial opportunism is associated with the private information that managers possess and which they might use for their own benefit (Easley and O'Hara, 2004). The use of earnings management to increase managerial compensation, to avoid debt covenant violation, to influence investors' expectations and to obtain external capital on better terms would lead to a conflict between managers and shareholders and would give rise to agency costs, thereby making not optimal or suboptimal decisions and harming the long-term financial prosperity of the firm (Fields et al., 2001 and Jensen, 1986). For example, managers may manipulate their financial numbers by altering their accounting methods, influencing the estimates and assumptions of key accounting figures, misappropriating assets, misrecording revenues, influencing provisions for bad debts, etc. (Beasley et al., 1999). Efficient corporate governance mechanisms, such as the existence of an audit committee, of a nomination committee, the presence of independent and non-executive directors on the board of the company, and managerial and institutional ownership, would act as devices for monitoring managers' decision-making process (LaFond and Watts, 2008). For example, a high percentage of outside directors onboard the audit committee would reduce the probability of accounting fraud (Xie et al., 2003). Also, earnings management is less frequent when boards are dominated by company outsiders or when independent nominating and compensation committees are in place (Epps and Ismail, 2009). In a similar vein, auditing reports on the validity of reported financial numbers, assesses the extent to which managers maintain financial reporting integrity and reinforces the company's monitoring structures and effectiveness. The implications of good corporate governance are similar to the implications of a good audit report in the sense that they discourage earnings management and enhance investors' trust and firm value (Balasubramanian et al., 2010, Black, 2001 and Borokhovich et al., 2004). High quality auditing would provide investor protection and would enhance firm value (Black et al., 2006). Auditors would seek to assess managers' stewardship and to examine how well they look after the interests and needs of shareholders. Audit controls that are independent and comply with the code of ethics would reduce the possibility of audit failure and would enhance auditors' reputation. It follows that it would be in the economic self interest of auditors to carry out independent and transparent audit procedures. Conservatism is defined as “the accountant's tendency to require a higher degree of verification to recognise good news as profits than to recognise bad news as losses” (Basu, 1997, p. 7). Earnings conservatism would reduce uncertainty, managerial discretion over overstating earnings as well as the resulting agency costs, investors' scepticism and the cost of equity (LaFond and Watts, 2008). Conservatism would imply that firms provide stakeholders with difficult-to-verify accounting information, such as losses, which would be less prone to manipulation (Basu, 2005). It follows that if auditing increases the level of earnings conservatism and confirms the accuracy of difficult-to-verify items or of judgmental and subjective areas, then, it would provide market participants with higher assurance about the quality of financial reporting. However, the quality of audit practices as well as the independence of audit firms varies significantly. High quality accounting disclosures verified by good audit reports would reduce information asymmetry between users of accounting information and would subsequently lead to lower cost of equity and better terms of financing (Ashbaugh-Skaife et al., 2006 and Botosan and Plumlee, 2002). In contrast, information asymmetry would make investors reluctant to invest their capital and might also lead to situations of market illiquidity, more dispersed financial analyst forecasts, higher bid–ask spreads and higher cost of equity (Healy et al., 1999 and Lang and Lundholm, 1996). Being audited by a big 4 auditor would reflect company's determination to commit to high quality financial reporting and to provide stakeholders with proprietary and private information, thereby reducing the scope for accounting manipulations (Palea, 2007). The level of investment in emerging markets has increased significantly. Emerging markets have liberalised and give substantial expected returns attracting global investors (Harvey, 1995). This study focuses on two emerging markets, namely Brazil and South Africa, which display significantly different institutional characteristics. In particular, South Africa is a common-law country, while Brazil is a code-law country. Both countries are IFRS users and belong to the advanced emerging markets category of the 2010 FTSE Global Equity Index. South Africa was the only common-law country in this category. South Africa and Brazil exhibit a comparable GDP at purchasing power parity per capita. Ball et al. (2000) suggest that common-law countries are characterised by active stock markets, a diverse base of investors, strong investor protection and corporate governance mechanisms and high litigation risks, and are shareholder-oriented. Code-law countries are characterised by less active stock markets, are lender-oriented and call for less public disclosure. In code-law countries, the litigation risks are relatively lower. Coppens and Peek (2005) and Daske et al. (2006) show that discrepancies in earnings reporting are more evident in code-law countries, implying that earnings management would be more pronounced in code-law countries. A major research question is whether being audited by a big 4 auditor increases earnings quality and conservatism regardless of the respective national institutional differences. Alternatively, it would be expected that audit firms that operate in strict regulatory environments improve the quality of financial reporting irrespective if they are big or not (see Maijoor and Vanstraelen, 2006). The quality of reported financial numbers and the legal protection of property rights are significantly lower in emerging markets compared to developed markets (Ball et al., 2003 and Morck et al., 2000), implying that stocks in emerging markets are likely to carry higher information risk and be less decision-useful. La Porta et al. (1999) and Claessens et al. (2000) argue that the main corporate governance problem in emerging markets is the expropriation of minority shareholders by controlling shareholders. These considerations would suggest that firms that operate in emerging markets and increase the level and the quality of disclosure would be valued more positively than companies that operate in developed markets, where the requirements for disclosure are standardised and stricter (Chen et al., 2009). Indeed, Khanna and Palepu (2000) and Patel et al. (2002) show that firms with sound corporate governance in emerging markets tend to display higher market valuation and profitability. Chen et al. (2009) argue that, especially in emerging markets, investors would be willing to pay more for companies that use effective corporate governance structures and provide valid accounting disclosures. Berkowitz et al. (2003) argue that, in emerging markets, firms may provide market participants with different levels of investor protection and corporate governance mechanisms, which could encourage the adoption of earnings management or income-smoothing policies (Himmelberg et al., 1999). In emerging markets, the distance between country-level corporate governance and investor protection regulations and firm-level compliance and application may be significant. Hence, firms that operate in such markets may seek external means of validating and communicating their superior managerial ability and financial reporting policies by resorting to big auditors to audit their accounts and eliminate investors' concerns that might stem from a weak regulatory environment. Developing efficient corporate governance mechanisms and being audited by a high quality auditor, in emerging markets, where investor protection may be weak, would encourage investing and would improve analysts' forecasts performance measures (Doidge et al., 2004). This would apply especially to firms with greater need in external financing and positive market valuations, which would have to persuade capital providers about their future financial prospects and prudent governance procedures (Klapper and Love, 2004). This study focuses on South African and Brazilian firms that are audited by a big auditor and examines their earnings management potential and level of conservatism. It also seeks to identify whether being audited by a big auditor would reduce the level of uncertainty between shareholders and managers and subsequently lead to lower agency costs. Furthermore, the study investigates whether client firms of big auditors provide investors with more assurance about the validity and quality of the reported financial numbers and exhibit lower cost of equity. The study examines whether, despite being audited by a big auditor, there are material differences in terms of earnings management and conservatism and agency cost and cost of equity behaviours between common-law South Africa and code-law Brazil given their dissimilar institutional characteristics. The findings of the study indicate that even though firms may be audited by high quality auditors, their institutional differences influence significantly firms' earnings conservatism, agency costs and cost of equity. Client firms of big auditors in both common-law South Africa and code-law Brazil exhibit lower discretionary accruals. The study has found evidence of more conservative earnings for South Africa but insufficient levels for Brazil. For common-law South Africa, the presence of effective corporate governance mechanisms reduces agency costs. For code-law Brazil, the corporate governance mechanisms generally display an insignificant impact on reducing agency costs. For common-law South Africa, firm-level performance, growth and market determinants tend to lead to a lower cost of equity. For code-law Brazil, it is found that significant discretionary accruals, market beta and analyst forecast dispersion would result in higher uncertainty and would consequently raise the cost of equity. The remaining sections of the study are as follows. Section 2 presents background considerations. Section 3 shows the research hypotheses. Section 4 describes the data. Section 5 discusses the empirical findings, and Section 6 presents the conclusions of the study.

This study focuses on firms that are audited by a big 4 auditor and examines the differentiation in the earnings management potential and the level of conservatism. The study also seeks to identify whether being audited by a big auditor would lead to lower agency costs and lower cost of equity. The study investigates the research questions above focusing on two advanced emerging markets based on the FTSE Global Equity Index Series Country Classification, namely common-law South Africa and code-law Brazil, and seeks to identify whether, despite being audited by a big auditor, there are material differences given their dissimilar institutional characteristics. Overall, the study reports that even though firms may be audited by high quality auditors, their institutional differences influence significantly firms' earnings conservatism, agency costs and cost of equity. The study shows that firms that are audited by a big auditor are likely to exhibit lower discretionary accruals. This would hold especially for firms with large size and high leverage and even for those with low operating cash flows. The findings are similar for common-law South Africa and code-law Brazil, although they appear comparatively weaker for the latter. It has been found that, for common-law South Africa, client firms of big auditors display more conservative and higher quality earnings (see also Patel et al., 2002) and they also reflect bad news timely. The study also reports that following the reporting of bad news that is due to conservatism in a given period, negative earnings changes tend to reverse in later periods. In contrast, the study has found insufficient levels of conservatism for code-law Brazil. The findings indicate that firms that are audited by a big auditor are likely to exhibit lower agency costs. This is evident for common-law South Africa, where the presence of effective corporate governance mechanisms has a reductive effect on agency costs because of the monitoring that they apply over managers' decisions. Similar considerations hold in the case of significant institutional ownership and leverage, which reflect the monitoring role of institutional shareholders and lenders respectively. For code-law Brazil, the study shows that the presence of weak corporate governance mechanisms would not be able to ensure that the interests of shareholders are satisfied, which would in turn lead to higher agency costs. The findings show that duality and a long CEO tenure period would tend to give rise to agency costs. The study reports that institutional ownership exceeds managerial ownership, reflecting poorer internal monitoring. The study indicates that firms that are audited by a big auditor are likely to exhibit lower cost of equity. For common-law South Africa, the findings show that firm-level variables that provide investors with signals of favourable company performance and financial prospects would subsequently tend to reduce the cost of equity. High levels of market visibility, trading volume and financial analysts following a firm would tend to reduce uncertainty and lead to a lower cost of equity. For code-law Brazil, it is found that significant discretionary accruals, market beta and analyst forecast dispersion would result in higher uncertainty and would consequently raise the cost of equity. The findings of this study may be of interest to auditors, financial analysts, investors and stock market authorities, especially when evaluating the verifiability and quality of reported financial numbers of clients/firms that belong to emerging markets with different institutional attributes. The study contributes by providing evidence that firms that are audited by a big auditor and operate in a common-law country with effective corporate governance and investor protection mechanisms adopt a conservative approach in reporting losses and profits. Their conservative reporting in conjunction with their surrounding investor protection environment would contribute to the reduction of information asymmetry and uncertainty and would subsequently reduce agency costs and the cost of equity. This would apply especially for highly leveraged firms, which would seek to impress lenders and improve their terms of borrowing. However, whether firms that are audited by a big auditor and display a high level of conservatism can achieve better terms of financing would depend on how well their financial reporting quality is communicated to capital providers as well as on their institutional background. In countries with weak investor protection mechanisms, where the demand for high quality information is weaker, the application of conservative and transparent reporting would be hailed by investors and would lead to better valuations and lower cost of equity (see Chen et al., 2009 and Klapper and Love, 2004). This is vital for reinforcing informed trading and greater analyst coverage in emerging markets where the quality and credibility of reported financial numbers may be perceived to be lower (see Lai et al., 2009). This implies that regulatory reforms at country and firm level are imperative to take an emerging market beyond national institutional boundaries, eliminate the potential for opportunism and obtain international investors' confidence (see Mitton, 2004). The study also contributes by showing that earnings conservatism and the behaviour of agency costs and cost of equity are not consistent across firms that are audited by big auditors. It is evident that the legal and financial characteristics of different institutional environments influence firms' financial reporting, flexibility and prospects in a significant manner irrespective of the class of auditor, i.e. big or non-big auditor. This distinction is obvious in the reported findings of this study, which imply that the level of earnings conservatism as well as firms' ability to reduce agency costs and the cost of equity is influenced by their institutional background. This further implies that the quality criteria and the audit/consulting procedures that big auditors apply are not consistent across different settings. This implication is in line with Maijoor and Vanstraelen (2006), who argue that national institutional attributes tend to be dominant and difficult to bend by being audited by a big auditor. It also is consistent with Francis and Wang (2008), who claim that earnings conservatism is easier to blossom in settings with strong investor protection mechanisms. Following that firms that are audited by a high quality auditor fail to achieve a common high level of earnings quality, transparency and communication with shareholders and investors, in terms of agency costs and cost of equity respectively, despite the required use of accounting comparability-enhancing IFRSs in both South Africa and Brazil, it becomes imperative to improve the national audit quality inspection mechanisms and the audit quality requirements for audit firms (see Maijoor and Vanstraelen, 2006). Future research should examine the incremental contribution of corporate governance monitoring mechanisms, such as the presence of independent directors on the board, with respect to their competence and perceived independence. Future research should also investigate the levels of earnings management and conservatism upon the renewal of auditors' mandate (see Piot and Janin, 2007).