Abstract
This study investigates the relationship between the ethical, educational, and disciplinary development of professional accountancy organizations (PAOs) in a given country and the development of that country’s stock market. Using a comprehensive measure based on the responses of the major PAOs in 36 countries to a questionnaire designed by the International Federation of Accountants to assess the development of PAOs internationally, we find a significantly positive association between the development of PAOs and stock market development. In addition, we find the positive association between the development of PAOs and stock market development to be more pronounced in countries with higher levels of investor protection, a stronger public enforcement environment, or lower levels of corruption, suggesting the importance of complementary institutions in the relationship between PAOs and stock market development. We also find that better-developed PAOs are associated with better-quality financial reporting. Finally, our result also shows that relative to the investigation and discipline mechanism and educational requirements imposed by PAOs, the ethical development of a country’s professional accountants appears to have the strongest positive association with a country’s stock market development.
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Notes
This definition of the profession was provided by the Australian Council of Professions in 1995 (also see http://www.psc.gov.au/what-is-a-profession).
For example, the UNCTAD-ISAR (The Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting of the United Nations Conference on Trade and Development) stated, “Accounting plays an essential role in economic development. High-quality corporate reporting is key to improving transparency, facilitating the mobilization of domestic and international investment, creating sound investment environments and fostering investor confidence, thus promoting financial stability.” See http://www.accaglobal.com/content/dam/acca/global/PDF-technical/global-economy/pol-tp-raed.pdf.
See Appendix 1 for a comprehensive list of the major PAOs of each country in our sample.
For each country, we create two overall measures of PAOs (i.e., one based on the answers to six general questions, PAO_general, and the other based on the answers to 25 more specific questions, PAO_specific) designed to assess the level of development of each PAO member of IFAC. In addition, we create three additional PAO measures for the three major dimensions of each PAO: (1) requirements for ethics (PAO_Ethics), (2) requirements for education (PAO_Education), and (3) level of investigation and discipline (PAO_Oversight). See Appendix 2 for further details on the definitions of these measures.
Analogous to the conclusion of our study, Joseph Stalin’s famous statement in 1923, “It doesn’t matter how the votes are cast, but how they’re counted,” suggests that the ethics of political practitioners play an important role in the development of a country’s political system.
IFAC states, “When professional accountancy organizations (PAOs) function properly, they have the power to support the production of high-quality information, contributing to public and private sector, economic growth, and the effectiveness of international aid.” Other studies show that higher quality financial reporting and a better information environment contribute to a lower cost of capital, higher liquidity, more efficient corporate investment, and better-functioning capital markets, ultimately leading to a better-developed stock market (La Porta et al. 1998; Bushman and Smith 2001; Healy and Palepu 2001; Frost et al. 2006; Hail and Leuz 2006; Hope and Thomas 2008; Biddle et al. 2009).
In this study, we do not specifically differentiate between accountants and auditors because the ultimate natures of their roles in financial markets are similar—to provide credible and useful financial information to both internal and external users of financial reporting.
For example, the American Institute of Certified Public Accountants (AICPA) defines financial accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.” This definition of financial accounting was formulated in 1941 by the AICPA Committee on Accounting Procedures.
See also “The accountancy profession’s role in creating public value” by ACCA (http://www.accaglobal.com/content/dam/acca/global/pdf/public-value-report.pdf).
Consistent with our argument, Demerjian et al. (2013) show that managers who are more knowledgeable about their business and their operating environment tend to make better judgments and estimates, and they thus have positive effects on firms’ financial reporting quality.
These costs include the risk of losing higher compensation and jeopardizing career development, individual reputation, and social status.
PAOs that are not recognized as substantial national organizations can only be admitted as associates rather than formal members. The associates of IFAC are not required to complete the self-assessment questionnaire used to establish PAOs development score by our study. More information about IFAC’s membership admission criteria and process can be found at https://www.ifac.org/system/files/uploads/CAP/IFAC-Membership-Admission-Criteria-and-Process.pdf.
The full survey comprises three major parts: Part I, whose aim is to obtain an understanding of the country’s regulatory framework; Part 2, which is a self-assessment questionnaire concerning the status quo institutions established or maintained by the PAO (we use this part to construct our PAO measure); and Part 3, which covers action plans demonstrating the progress the PAO has made in fulfilling its membership obligations and how it plans to do so in the future. We use a subset of questions in the self-assessment questionnaire that can be unambiguously quantified to construct the measures of PAOs.
Correlation analysis indicates a significant positive association between the score of each PAO in countries with multiple PAOs.
While not all of the PAOs in our sample countries are affiliated with IFAC, the non-IFAC affiliated PAOs mainly operate like specialist bodies helping the work of accountants and auditors in specific fields such as taxation, forensic auditing, and systems auditing or for networking purposes. We conduct a search for each country included in our sample. Consistent with the specialized nature of these non-IFAC affiliated PAOs, we are only able to identify a few, such as The Association of International Accountants (AIA) and the Consultative Committee of Accountancy Bodies (CCAB) in the U.K., the National Association of State Boards of Accountancy (NASBA) and the Information Systems Audit and Control Association (ISACA) in the U.S., and the Hong Kong Business Accountants Association (HKBAA) and the Society of Chinese Accountants and Auditors (SCAA) in Hong Kong.
We perform additional analyses on an earlier sample period, 2000–2006, instead of 2007–2012. Our conclusions are unchanged.
The aggregate earnings management score from Leuz et al. (2003) is the average rank of two earnings-smoothing measures and two earnings-discretion measures, including the magnitude of accruals and small loss avoidance. Our results indicate that the positive association between the development of PAOs and the aggregate earnings management score measure introduced by Leuz et al. (2003) is mainly driven by the two earnings-smoothing measures. We find no significant relationship between the development of PAOs and any of the two earnings-discretion measures. As a result, we use the altered form of earnings quality measure developed by Leuz et al. (2003) and report only the results based on the two earnings-smoothing measures.
Frost et al. (2006) also measure the extensiveness of disclosure rules for each stock exchange. Our main results are qualitatively the same if we use stock exchange disclosure rules rather than the enforcement of those rules as a control.
As PAO_specific is the mean value of three components of development of PAOs that are available only in the partial sample, we can only examine its effect in the partial sample.
In our model, we follow Frost et al. (2006) in choosing country-level institutional variables to include for model validation and better comparison. However, it is also possible that other country characteristics that are likely to be correlated with the development of PAOs but are not included in the model may drive the results of PAOs on stock market development and accounting quality. To reduce such concern, we further include in our model several time-varying country-level controls including GDP per capita, a variable measuring the openness of a country (i.e., international trade as a percentage of GDP), and inflation. Data on GDP per capita and openness are obtained from IMD World Competitiveness Database and the data on inflation is obtained from the World Bank. We thank our reviewers for making this suggestion.
Moreover, to better distinguish between the rule of law and investor protection strength in a given country, we repeat our test by separating our overall LEGPRO variable into one variable that is more related to the rule of law (calculated as the mean of RL_F, FL_H, and RL_W) and another that is more related to investor protection (calculated as the mean of IP, SR, MIP_G, and IP_G). We find that our results are robust to this test model. Finally, the results remain robust to the exclusion of 2007 and 2008, the years in which the financial crisis occurred.
Conducting a similar test on firm-year-level data does not change our conclusion.
In an additional test, we also interact the development of PAOs with an aggregated earning smoothing measure to examine whether the relationship between PAOs and stock market development varies with firms’ earnings management. We find a significant and negative coefficient on the interaction term. This finding indicates that PAOs’ effect on stock market development is stronger in countries with lower earnings management.
The results are similar when the OLS regression model is used.
Although the average likelihood of restatement appears to be very high in Table 2, a more careful examination indicates that it is mainly driven by the restatement of firms in relatively small countries and firms with small firm size. For example, for both US and Canada, the average likelihood of restatement for firms in each of these two countries in our sample is about 11 %. This average appears to be reasonable given the fact that Capital IQ Compustat tends to have higher firm coverage and thus more small firms are included. Because firms with small size may be more likely to restate their financial information for multiple years during our sample period, in robustness test, we restrict our restatement sample to those firms with restatement for the very first time during our sample period and find our inference unaltered.
We directly test the significance of the differences between (1) the estimated coefficient for PAO_Ethics and that for PAO_Education, and (2) the estimated coefficient for PAO_Ethics and that for PAO_Oversight. In both tests, we find that PAO_Ethics has a statistically higher association with MARKDEV than PAO_Education and PAO_Oversight.
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Acknowledgements
We appreciate the valuable comments from Steven Dellaportas (editor) and two anonymous referees, and the seminar/conference participants at The Chinese University of Hong Kong, Hong Kong Baptist University, Australia National University, Canadian Academic Accounting Association (CAAA) Annual Meeting 2016 Annual Conference, and 4th Joint International Conference of the Journal of International Accounting Research (JIAR) and Accounting, Organizations and Society (AOS) 2016 conference. We also thank international Federation of Accountants (IFAC) for providing the IFAC members survey data for our analysis. Xiangting Kong acknowledges the financial support of The National Natural Science Foundation of China (Grant Numbers: 71272196; 71572206), the Major Project of Guangdong Humanities and Social Sciences Key Research Foundation (Grant Number: 2012JDXM-0002), and The Basic Research Foundation for Assistant Professors of Sun Yat-Sen University (Grant Number: 16wkpy04).
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Appendices
Appendix 1: Professional Accountancy Organizations in the Sample Countries
Country | Professional accountancy organizations (PAOs) | ||
|---|---|---|---|
1 | Argentina | Federación Argentina de Consejos Profesionales de Ciencias Económicas | 1* |
2 | Australia | CPA Australia | |
Australia | Institute of Public Accountants | ||
Australia | The Institute of Chartered Accountants in Australia | ||
3 | Austria | Kammer der Wirtschaftstreuhänder | |
4 | Belgium | Institut des Réviseurs d’Entreprises | 2* |
Belgium | Institut des Experts-comptables et des Conseils Fiscaux—Instituut Van de Accountants en de Belastingconsulenten (IEC-IAB) | ||
5 | Brazil | Conselho Federal de Contabilidade (CFC) | |
6 | Canada | The Canadian Institute of Chartered Accountants | 3* |
Canada | Certified General Accountants Association of Canada | ||
Canada | Certified Management Accountants of Canada | ||
7 | Chile | Colegio de Contadores de Chile | |
8 | Denmark | FSR—danske revisorer | |
9 | Finland | HTM-tilintarkastajat—GRM—revisorer ry | 4* |
10 | France | Conseil Supérieur de l’Ordre des Experts-Comptables | 5* |
11 | Germany | Wirtschaftsprüferkammer (WPK) | 6* |
12 | Greece | Institute of Certified Public Accountants of Greece (SOEL) | 7* |
13 | Hong Kong | Hong Kong Institute of Certified Public Accountants | |
14 | Indonesia | Indonesian Institute of Accountants or Ikatan Akuntan Indonesia (IAI) | |
15 | Ireland | The Institute of Certified Public Accountants in Ireland | 8* |
Ireland | Chartered Accountants Ireland | ||
Ireland | Accounting Technicians Ireland | ||
16 | Israel | Institute of Certified Public Accountants in Israel | |
17 | Italy | Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili | 9* |
18 | Japan | The Japanese Institute of Certified Public Accountants | 10* |
19 | Luxembourg | Ordre des Experts-Comptables du Luxembourg | 11* |
Luxembourg | Institut des Réviseurs d’Entreprises | ||
20 | Malaysia | The Malaysian Institute of Certified Public Accountants | 12* |
Malaysia | Malaysian Institute of Accountants | ||
21 | Mexico | Instituto Mexicano de Contadores Públicos, A.C. | |
22 | Netherlands | Koninklijk Nederlands Instituut van Registeraccountants (Royal NIVRA) | |
23 | New Zealand | New Zealand Institute of Chartered Accountants | |
24 | Norway | Den Norske Revisorforening (DnR) | |
25 | Philippines | Philippine Institute of Certified Public Accountants | |
26 | Poland | National Chamber of Statutory Auditors | 13* |
27 | Singapore | Institute of Certified Public Accountants of Singapore | |
28 | South Africa | The South African Institute of Professional Accountants | 14* |
29 | South Korea | Korean Institute of Certified Public Accountants | 15* |
30 | Spain | Instituto de Censores Jurados de Cuentas de España | |
31 | Sweden | Far | |
32 | Switzerland | Treuhand-Kammer—Swiss Institute of Certified Accountants and Tax Consultants | 16* |
33 | Taiwan | Federation of CPA Associations of Chinese Taiwan | |
34 | Thailand | Federation of Accounting Professions | |
35 | UK | Association of Accounting Technicians (AAT) | 17* |
UK | The Institute of Chartered Accountants of Scotland | ||
UK | The Institute of Chartered Accountants in England and Wales | ||
UK | The Association of Chartered Certified Accountants | ||
UK | Institute of Financial Accountants | ||
UK | The Chartered Institute of Public Finance and Accountancy | ||
UK | The Chartered Institute of Management Accountants (CIMA) | ||
36 | USA | American Institute of Certified Public Accountants (AICPA) | 18* |
This appendix presents the full list of the IFAC’s PAO members for all 36 countries in our sample. The information is provided by IFAC. * Indicates countries with no missing values for the PAOs’ measures in our study. The 18 countries so marked constitute our partial sample, and all 36 countries form the full sample.
Appendix 2: Measures of PAOs’ Development
We construct country-level Professional Accountancy Organization (PAO) measures based on IFAC members’ responses to the Assessment of the Regulatory and Standard-Setting Framework Questionnaire prepared by IFAC. All of IFAC’s members are required to complete this questionnaire, which is included in the Statements of Membership Obligations (SMOs). IFAC designed this assessment questionnaire to collect information on the financial reporting and auditing regulatory and standard-setting framework in each PAO’s jurisdiction and on the professional accountants represented by the organization. More specifically, the PAO measures are constructed on the basis of the following dimensions and information. Overall Measures of PAOs PAO_general is the average score of all six general questions (PAO_general (1) to PAO_general (6)), data on which are available for all 36 sample countries. PAO_specific is the average score of all specific questions (questions about PAOs’ oversights (ID1–ID8), questions about PAOs’ educational requirements (ED1–ED11), and question about PAOs’ ethical requirements (ET1–ET6)), data on which are available for 18 of the sample countries. We further separate the overall PAO_specific measure into its three components to investigate the effect of each: (1) Requirements for investigation and discipline (PAO_Oversight): the average score of all eight specific questions on the requirements for investigation and discipline mechanisms (ID1–ID8). (2) Requirements for education (PAO_Education): the average score of all 11 specific questions on the requirements for the education of professional accountants (ED1–ED11). (3) Requirements for ethics (PAO_Ethics): the average score of all six specific questions on the ethical requirements for professional accountants (ET1–ET6). | ||
(A) Levels of investigation and discipline (ID) | ||
Source: A self-assessment questionnaire for IFAC member bodies on their compliance with IFAC Statements of Membership Obligations 6 (SMO 6). | ||
Description: A measure of the compliance of each country’s PAOs with IFAC requirements on mechanisms for investigating and disciplining (ID) professionals who fail to exercise and maintain professional standards and the related obligations. Each part of the questionnaire contains (1) general questions and (2) more specific questions related to the general questions. The possible scores for each question range from 0 to 1. | ||
Variable | Score | |
General question (1) | ||
(1) Is there a program for investigating and disciplining members of the organization for misconduct, including breaches of professional standards and rules? | PAO_general (1) | 0/1 |
Specific questions (ID1–ID8) | ||
(1) Are there established provisions and processes for investigating and disciplining? | (ID1) | 0/1 |
(2) Which of the following sanctions can be imposed? (A) Reprimand; (B) Loss or restriction of practice rights; (C) Fine/payment of costs; (D) Loss of professional title (designation); (E) Exclusion from membership; (F) Other. (According to the relative severity of the above sanctions, answers (D) or (E) or both score 1; answers including (B) but not (D) or (E) score 2/3; answers including (C) but not (B), (D), or (E) score 1/3; and answers only including (A) or (F) score 0.) | (ID2) | 0–1 |
(3) Does the organization make members fully aware of all of the provisions of the ethical code and other applicable professional standards and requirements and the consequences of non-compliance? | (ID3) | 0/1 |
(4) Is the organization obligated under local laws to report possible involvement in serious crimes and offenses by members to the appropriate public authority and to disclose related information to it? | (ID4) | 0/1 |
(5) Does the organization have all of the necessary powers for authorized personnel to carry out an effective investigation? | (ID5) | 0/1 |
(6) Does the organization maintain appropriate expertise and adequate financial and other resources to enable timely investigative and disciplinary action? | (ID6) | 0/1 |
(7) Does the organization confirm at the start of the investigation that any individual chosen to assist in an investigation is independent? | (ID7) | 0/1 |
(8) Does the tribunal responsible for the disciplinary hearing include a balance of professional expertise and outside judgment (e.g., a mix of accountants and non-accountants)? | (ID8) | 0/1 |
(B) Educational requirements for professional accountants (ED) | ||
Source: A self-assessment questionnaire for IFAC member bodies concerning their compliance with IFAC Statements of Membership Obligations 2 (SMO 2). | ||
Description: A measure of the compliance of each country’s PAOs with international standards and other pronouncements issued by the International Accounting Education Standards Board (IAESB), an independent standard-setting body supported by IFAC. Each part of the questionnaire contains (1) general questions and (2) more specific questions related to the general questions. Possible scores for each question range from 0 to 1. | ||
Variable | Score | |
General questions (2–5) | ||
(2) Does the organization require individuals admitted as members to complete a professional accountancy education program? | PAO_general (2) | 0/1 |
(3) Does the organization require individuals admitted as members to complete a practical experience requirement? | PAO_general (3) | 0/1 |
(4) Does the organization require individuals admitted as members to complete a final assessment of professional capabilities? | PAO_general (4) | 0/1 |
(5) Is there a requirement for members to maintain competence through continuous professional development (CPD)? | PAO_general (5) | 0/1 |
Specific questions (ED1–ED11) | ||
(1) Does the education program have entry requirements that are at least equivalent to those for admission into a recognized university degree program? | (ED1) | 0/1 |
(2) What is the length of the professional accountancy education? (A) less than two years; (B) two years; or (C) more than two years. (Answer (A) scores 0; answer (B) scores 1/2; answer (C) scores 1.) | (ED2) | 0–1 |
(3) Which accounting and finance subjects are required in professional accountancy education? (A) Financial accounting; (B) Management accounting; (C) Control; (D) Taxation and financial management; (E) Business and commercial law; (F) Audit and assurance; (G) Finance (H) Professional values and ethics; or (I) None of the above. (Answers including all eight subjects score 1; answers including seven of the eight subjects score 7/8; answers including six of the eight subjects score 6/8, and so on; answer (I) scores 0.) | (ED3) | 0–1 |
(4) Which organizational and business subjects are required in professional accountancy education? (A) Economics; (B) Business environment; (C) Corporate; (D) Business ethics; (E) Financial markets; (F) Quantitative methods; (G) Organizational governance behavior; (H) Management and strategic decision making; (I) Marketing; (J) International business and globalization; or (K) None of the above. (Answers including all ten subjects score 1; answers including nine of the ten subjects score 9/10; answers including eight of the ten subjects score 8/10, and so on; answer (K) scores 0.) | (ED4) | 0–1 |
(5) Does professional accountancy education cover values, ethics and attitudes? | (ED5) | 0/1 |
(6) Is practical experience required with approved employers? | (ED6) | 0/1 |
(7) What is the required length of practical experience? (A) less than three years; (B) three years; or (C) more than three years. (Answer (A) scores 0; answer (B) scores 1/2; answer (C) scores 1.) | (ED7) | 0–1 |
(8) Is the period of practical experience monitored? | (ED8) | 0/1 |
(9) Does the organization require members to complete a final assessment of an individual’s professional capabilities? | (ED9) | 0/1 |
(10) Is there a process to monitor whether professional accountants meet the CPD requirements? | (ED10) | 0/1 |
(11) Are sanctions such as expulsion or denial of the right to practice imposed when professional accountants do not meet CPD requirements? | (ED11) | 0/1 |
(C) Ethical requirements for professional accountants (ET) | ||
Source: A self-assessment questionnaire for IFAC member bodies regarding their compliance with IFAC Statements of Membership Obligations 4 (SMO 4). | ||
Description: Measures of the compliance of each country’s PAOs with the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (IESBA), an independent standard-setting body supported by IFAC. Each part of the questionnaire contains (1) general questions and (2) more specific questions related to the general questions. Possible scores for each question range from 0 to 1. | ||
Variable | Score | |
General question (6) | ||
Are there established ethical requirements for members? | PAO_general (6) | 0/1 |
Specific questions (ET1–ET6) | ||
(1) Do the ethical requirements require professional accountants to comply with the fundamental principle of “integrity” as described in the IFAC Code? | (ET1) | 0/1 |
(2) Do the ethical requirements require professional accountants to comply with the fundamental principle of “objectivity” as described in the IFAC Code? | (ET2) | 0/1 |
(3) Do the ethical requirements require professional accountants to comply with the fundamental principle of “professional competence and due care” as described in the IFAC Code? | (ET3) | 0/1 |
(4) Do the ethical requirements require professional accountants to comply with the fundamental principle of “confidentiality” as described in the IFAC Code? | (ET4) | 0/1 |
(5) Do the ethical requirements require professional accountants to comply with the fundamental principle of “professional behavior” as described in the IFAC Code? | (ET5) | 0/1 |
(6) Are there specific requirements and guidance to assist members in identifying and resolving ethical issues? | (ET6) | 0/1 |
Appendix 3: General Questions and Answers
Country | Professional accountancy organizations | PAO_general (1) | PAO_general (2) | PAO_general (3) | PAO_general (4) | PAO_general (5) | PAO_general (6) |
|---|---|---|---|---|---|---|---|
Oversight | Education | Education | Education | Education | Ethics | ||
Is there a program for investigating and disciplining members for misconduct? Yes = 1; No = 0 | Does the organization require members to complete professional accountancy education? Yes = 1; No = 0 | Does the organization require members to complete a practical experience requirement? Yes = 1; No = 0 | Does the organization require members to complete a final assessment? Yes = 1; No = 0 | Does the organization require members to maintain competence through CPD? Yes = 1; No = 0 | Are there established ethical requirements for members? Yes = 1; No = 0 | ||
Argentina | Federación Argentina de Consejos Profesionales de Ciencias Económicas | 1 | 1 | 0 | 0 | 0 | 1 |
Australia | CPA Australia | 1 | 1 | 1 | 1 | 1 | 1 |
Australia | Institute of Public Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Australia | The Institute of Chartered Accountants in Australia | 1 | 1 | 1 | 1 | 1 | 1 |
Austria | Kammer der Wirtschaftstreuhänder | 1 | 0 | 1 | 1 | 1 | 1 |
Belgium | Institut des Réviseurs d’Entreprises | 1 | 0 | 1 | 1 | 1 | 1 |
Belgium | IEC-IAB | 1 | 0 | 1 | 1 | 1 | 1 |
Brazil | Conselho Federal de Contabilidade (CFC) | 1 | 1 | 0 | 0 | 1 | 1 |
Canada | The Canadian Institute of Chartered Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Canada | Certified General Accountants Association of Canada | 1 | 1 | 1 | 1 | 1 | 1 |
Canada | Certified Management Accountants of Canada | 1 | 1 | 1 | 1 | 1 | 1 |
Chile | Colegio de Contadores de Chile | 1 | 1 | 0 | 0 | 0 | 1 |
Denmark | FSR—danske revisorer | 1 | 1 | 1 | 1 | 1 | 1 |
Finland | HTM-tilintarkastajat—GRM—revisorer ry | 0 | 1 | 1 | 1 | 1 | 1 |
France | Conseil Supérieur de l’Ordre des Experts-Comptables | 1 | 1 | 1 | 1 | 1 | 1 |
Germany | Wirtschaftsprüferkammer (WPK) | 1 | 0 | 1 | 1 | 1 | 1 |
Greece | Institute of Certified Public Accountants of Greece (SOEL) | 1 | 1 | 1 | 1 | 0 | 1 |
Hong Kong | Hong Kong Institute of Certified Public Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Indonesia | Indonesian Institute of Accountants or Ikatan Akuntan Indonesia (IAI) | 1 | 1 | 0 | 1 | 1 | 1 |
Ireland | The Institute of Certified Public Accountants in Ireland | 1 | 1 | 1 | 0 | 1 | 1 |
Ireland | Chartered Accountants Ireland | 1 | 1 | 1 | 1 | 1 | 1 |
Ireland | Accounting Technicians Ireland | 1 | 1 | 1 | 0 | 0 | 1 |
Israel | Institute of Certified Public Accountants in Israel | 1 | 1 | 1 | 1 | 0 | 1 |
Italy | Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili | 1 | 1 | 1 | 1 | 1 | 1 |
Japan | The Japanese Institute of Certified Public Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Luxembourg | Ordre des Experts-Comptables du Luxembourg | 1 | 1 | 1 | 1 | 1 | 1 |
Luxembourg | Institut des Réviseurs d’Entreprises | 1 | 1 | 1 | 1 | 1 | 1 |
Malaysia | The Malaysian Institute of Certified Public Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Malaysia | Malaysian Institute of Accountants | 1 | 1 | 1 | 0 | 1 | 1 |
Mexico | Instituto Mexicano de Contadores Públicos, A.C. | 1 | 1 | 0 | 0 | 1 | 1 |
Netherlands | Koninklijk Nederlands Instituut van Registeraccountants (Royal NIVRA) | 1 | 1 | 1 | 0 | 1 | 1 |
New Zealand | New Zealand Institute of Chartered Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Norway | Den Norske Revisorforening (DnR) | 1 | 1 | 1 | 1 | 1 | 1 |
Philippines | Philippine Institute of Certified Public Accountants | 1 | 1 | 0 | 1 | 1 | 1 |
Poland | National Chamber of Statutory Auditors | 1 | 1 | 1 | 1 | 1 | 1 |
Singapore | Institute of Certified Public Accountants of Singapore | 1 | 1 | 1 | 1 | 1 | 1 |
South Africa | The South African Institute of Professional Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
South Korea | Korean Institute of Certified Public Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
Spain | Instituto de Censores Jurados de Cuentas de España | 1 | 1 | 1 | 1 | 1 | 1 |
Sweden | Far | 1 | 1 | 1 | 1 | 1 | 1 |
Switzerland | Treuhand-Kammer-Swiss Institute of Certified Accountants and Tax Consultants | 1 | 1 | 1 | 1 | 1 | 1 |
Taiwan | Federation of CPA Associations of Chinese Taiwan | 0 | 1 | 1 | 1 | 1 | 1 |
Thailand | Federation of Accounting Professions | 1 | 1 | 1 | 1 | 0 | 1 |
UK | Association of Accounting Technicians (AAT) | 1 | 0 | 1 | 1 | 1 | 1 |
UK | The Institute of Chartered Accountants of Scotland | 1 | 1 | 1 | 1 | 1 | 1 |
UK | The Institute of Chartered Accountants in England and Wales | 1 | 1 | 1 | 1 | 1 | 1 |
UK | The Association of Chartered Certified Accountants | 1 | 1 | 1 | 1 | 1 | 1 |
UK | Institute of Financial Accountants | 1 | 1 | 1 | 0 | 1 | 1 |
UK | The Chartered Institute of Public Finance and Accountancy | 1 | 1 | 1 | 1 | 1 | 1 |
UK | The Chartered Institute of Management Accountants (CIMA) | 1 | 1 | 1 | 1 | 1 | 1 |
USA | AICPA | 1 | 1 | 1 | 1 | 1 | 1 |
Appendix 4: Variable Definitions
Stock market development variables | |
MARKDEV | Overall stock market development measured as the mean of the following five standardized market development variables covering the 2007–2012 period |
(1) STC | Stock market capitalization relative to GDP for the 2007–2012 period; obtained from IMD WORLD COMPETITIVENESS |
(2) STC_MIN | Stock market capitalization held by minority shareholders deflated by GDP for the 2007–2012 period. Market capitalization held by minority shareholders is computed as the product of a stock exchange’s market capitalization (in US$ billion) and the average percentage of common shares not owned by the top three shareholders in the 10 largest non-financial privately owned domestic listed firms. Stock market capitalization is obtained from IMD WORLD COMPETITIVENESS, and the percentage of shares not owned by the top three shareholders is obtained from the Capital IQ Compustat Database |
(3) N_LIST | Number of listed domestic companies deflated by population (in millions) for the 2007–2012 period; obtained from IMD WORLD COMPETITIVENESS |
(4) N_NEWLIST | Number of newly listed domestic companies deflated by population (in millions) for the 2007–2012 period; obtained from IMD WORLD COMPETITIVENESS |
(5) TRADE | Per-capita annual value traded on the stock market (in US$) for the 2007–2012 period; obtained from IMD WORLD COMPETITIVENESS |
Professional accountancy organizations (PAOs) variables—from IFAC | |
PAO_general | Overall country-level PAO measure based on the responses of International Federation of Accountants (IFAC) member countries to all of the general questions included in the questionnaire (Assessment of the Regulatory and Standard-Setting Framework Questionnaire) designed by IFAC to assess the level of development of a country’s PAOs. See Appendix 2 for more details on the measure and general questions. Data are available for all 36 sample countries |
PAO_specific | Overall country-level PAOs measure based on the responses of IFAC member countries to all of the specific questions included on the questionnaire (Assessment of the Regulatory and Standard-Setting Framework Questionnaire) designed by IFAC to assess the level of development of a country’s PAOs. See Appendix 2 for more details on the measure and specific questions. Data are available for 18 sample countries |
PAO_Oversight | The investigation and discipline dimension of the PAOs measure, which is calculated as the average score of all answers to the specific questions in the investigation and discipline part of the IFAC questionnaire. It captures the compliance of a country’s PAOs with IFAC requirements for mechanisms that investigate and discipline professionals who fail to exercise and maintain professional standards and related obligations |
PAO_Education | The education dimension of the PAOs measure, which is calculated as the average score of all of the answers to the specific questions in the education part of the IFAC questionnaire. It captures the compliance of a country’s PAOs with international standards and other pronouncements issued by the International Accounting Education Standards Board (IAESB), an independent standard-setting body supported by IFAC |
PAO_Ethics | The ethics dimension of the PAOs measure, which is calculated as the average score of all of the answers to the specific questions in the ethics part of the IFAC questionnaire. It captures the compliance of a country’s PAOs with the code of ethics for professional accountants issued by the International Ethics Standards Board for Accountants (IESBA), an independent standard-setting body supported by IFAC |
PAO_big4share1(2) | Market share of Big 4 auditors in a country-year calculated as the total revenue (assets) of firms audited by Big 4 auditors divided by the total revenue (assets) of all firms in each country-year. Big 4 auditor data are from the Capital IQ Compustat Database |
Earnings management variables | |
SMOOTH_sd | Median ratio of firm-level standard deviations of operating income and operating cash flow for each country-year. Operating income and operating cash flow are both scaled by total assets at the beginning of the year. The measure is multiplied by −1 such that a higher value means more smoothing and lower earnings quality. All data are from the Capital IQ Compustat Database |
SMOOTH_corr | Spearman correlation between a change in accruals and change in cash flow from operations for a country-year. The change in accruals and cash flow from operations are both scaled by total assets at the beginning of the year. The measure is multiplied by −1 such that a higher value means more smoothing and lower earnings quality. All data are from the Capital IQ Compustat Database |
Restatement variable | |
RESTATE | The ratio of total observations with restated financial statements to the total number of observations in each country-year. Restatement data are from the Capital IQ Compustat Database |
Informativeness of annual earnings announcement variable | |
AbsCAR | Mean of firm-level absolute CAR around the annual earnings announcements for each country-year. Firm-level absolute CAR is the absolute value of the two-day market-adjusted cumulative return in percentage form during the [0, +1] window, where day 0 is the annual earnings announcement date. All data are from the Capital IQ Compustat Database |
Other country-level variables | |
DISCLOSURE | Measure of a stock exchange’s enforcement of disclosure rules constructed by Frost et al. (2006). It measures the extent to which disciplinary actions are enforced by a stock exchange when listed firms issue false financial statements and misleading material announcements |
LEGPRO | Overall rule of law and investor protection in each country calculated as the mean of the seven following standardized rule of law and investor protection variables |
(1) RL_F | Legal structure and property rights, including judicial independence, impartial courts, protection of property rights, military interference in the rule of law and politics, integrity of the legal system, legal enforcement of contracts, regulatory restrictions on the sale of real property, reliability of the police, and the business costs of crime. Data source: “Economic Freedom of the World” issued by the Fraser Institute; see http://www.freetheworld.com/datasets_efw.html |
(2) RL_H | Rule of law, including property rights (i.e., recognition of private property rights and an effective rule of law to protect them, which are vital features of a fully functioning market economy) and freedom from corruption (i.e., the failure of integrity in the economic system, a distortion by which individuals or special-interest groups are able to gain at the expense of the whole). Data source: “Index of Economic Freedom” issued by the Heritage Foundation and Wall Street Journal; see http://www.heritage.org/index/explore?view=by-region-country-year |
(3) RL_W | A rule of law measure that captures perceptions of the extent to which agents have confidence in and abide by the rules of society and the quality of contract enforcement, property rights, the police, and the courts, along with the likelihood of crime and violence. Data source: “Worldwide Governance Indicators” published by the World Bank; see http://info.worldbank.org/governance/wgi/index.aspx#reports |
(4) IP | Strength of investor protection index. Data source: “Doing Business Indicators” issued by the International Finance Corporation and World Bank; see http://www.doingbusiness.org/custom-query |
(5) SR | Sufficient protection of shareholders’ rights. Data source: “World Competitiveness Yearbook” issued by the International Institute for Management Development (IMD); see https://www.worldcompetitiveness.com/OnLine/App/Index.htm. |
(6) MIP_G | Protection of minority shareholders’ interests. Data source: “Global Competiveness Index” issued by the World Economic Forum; see http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform |
(7) IP_G | Strength of investor protection. Data source: “Global Competiveness Index” issued by the World Economic Forum; see http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform |
ENGLISH | English common law: an indicator variable equal to 1 if a country’s legal system is patterned on English law and 0 otherwise. Data source: La Porta et al. (2006) |
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Huang, H., Kong, X. & Tsang, A. Professional Accountancy Organizations and Stock Market Development. J Bus Ethics 157, 231–260 (2019). https://doi.org/10.1007/s10551-017-3665-5
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DOI: https://doi.org/10.1007/s10551-017-3665-5