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This chapter reviews recent behavioural studies of the effects of regulation on earnings management and accounting choice. It examines the impact of financial reporting, auditing, and other corporate governance regulations on the beliefs and choices of managers, auditors, and corporate directors. Behavioural studies contribute to the broader literature by shedding light on potential unintended consequences and overall efficacy of proposed regulations, revealing the roles of specific actors and the motives behind reporting choices, and demonstrating what determines managers' preferences for different earnings management methods (both real and accruals based). The chapter also discuss areas that have received less attention that provide promising avenues for future behavioural research involving regulation, earnings management, and accounting choice.

This chapter appraises the influence of Burchell et al. (1985) on interdisciplinary studies of accounting standardization and choice in financial reporting as social and organizational practices. It begins with a brief review of economics-based research streams including a priori accounting measurement theories and theorizations of accounting products as information commodities. These research paradigms provided few insights for understanding processes of accounting change. In contrast, Burchell et al. constructed a theoretically engaged analytical method to study financial accounting change that unpacked taken-for-granted assumptions and stimulated new research directions. Subsequent studies of financial accounting change are organized into three areas emphasized by Burchell et al. — accounting problematization, the social functioning of accounting and its articulation with other fields of action, and the unpacking of taken-for-granted assumptions and values contained within neo-classical economics perspectives on accounting regulation and change. The chapter concludes with suggested avenues for future research.

While there are substantial differences in the regulatory regimes, cultures, economic history, nature of government, and institutions among the countries surveyed in the book, these countries have also faced common problems. This chapter provides a comparative assessment of how differences in some of these factors have affected accounting, auditing, and corporate governance. It shows that diversity in financial reports prevails worldwide, and discusses various ways used by companies and users of financial reports to cope with this diversity. The appendix illustrates accounting diversity by describing crucial differences among international financial rules and standards (IFRSs) and national standards, in particular, U.S. generally accepted accounting principles (GAAP).

This chapter examines the role of private regulators in global financial markets, with particular emphasis on institutional structure and complementarity in accounting regulation. It first provides an overview of how the International Accounting Standards Board (IASB) became the focal institution for setting financial reporting standards at the international level before discussing the institutional structures of IASB and corresponding institutions at the domestic level in the United States and in three European countries: Germany, France, and the United Kingdom (as well as pertinent European Union-level regional institutions). It compares accounting standard-setting in the United States and in these three countries and shows that the resulting differences in institutional complementarity put U.S. firms in an advantageous position over their European counterparts when standard-setting shifts to the international level.

This chapter assesses the impact of the International Accounting Standards Committee's (IASC) standards in countries around the world. It reviews the disappointing performance, on the whole, of the members and associate members of the International Accounting Standards Committee (IASC) in fulfilling their ‘best endeavours’ undertaking, and traces the efforts of the IASC to secure recognition and, even more important, acceptance of its standards by national regulators and standard setting bodies. It presents evidence of progress towards fulfilling this obligation in board-member countries and in a sampling of other countries. It concludes by discussing the IASC board's efforts to improve its liaison with accountancy bodies, other organizations interested in financial reporting, and securities market regulators.

Explores the link between corporate governance and accounting using the US cross-listing of Daimler-Benz as an example. The changes in Daimler’s corporate governance around the cross-listing, essentially grafting elements of a shareholder value model onto its stakeholder structure, is highlighted, and the resulting changes in its approach to financial reporting is discussed. The case study highlights the economic forces that shape accounting practice and drive accounting harmonization around the world. The eight sections of the chapter are: Introduction; Background to the events of the case; Code-law and common-law models of corporate governance, financial reporting, and disclosure; Some properties of the German institutional structure; Daimler’s 1993 events: Disclosing a loss, hidden reserves, NYSE listing, US GAAP reporting, plant closing, and employee layoffs; Daimler-Benz’s motives; Embracing shareholder value; and Limitations, outcomes, and risks.

After a general introduction (Section 1), Section 2 discusses the objectives of financial reporting with respect to information. It explains the concept of decision usefulness by looking first at the individual decision-model, and then at the measurement of economic wealth or income using financial statements. Section 3 briefly examines some of the attempts that have been made to test decision usefulness empirically, and gives an overview of some of the results. Section 3 is the conclusion.

This chapter examines the political dimensions of setting standards for global financial reporting. Drawing on the results of an international business survey, conducted among hundreds of chief financial officers and other senior financial managers of companies listed on the main stock exchanges in France, Germany, the United Kingdom, and the United States, the chapter asks whether institutional fragmentation of accounting governance in Europe impedes the effective aggregation of European interests and their projection onto the international stage, while the close institutional fit between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) significantly facilitates the representation of American interests. It shows that U.S. firms are considerably more successful than their European counterparts when they try to influence international financial reporting standards.

Examines the politics of accounting regulation when collective forces and social arrangements appear to mitigate potential conflict. Specifically, the process through which accounting law was redrafted in Austria in preparation for EU (European Union) membership is investigated, paying particular attention to the changes in the legal text of the Financial Reporting Act between the Ministerial and Governmental drafts. The Ministerial draft was the outcome of discussions between representatives of employers, employees, academics, and accountants in an attempt to reach consensus on the legal text in cooperation with the Ministry of Justice. These deliberations took place behind closed doors, but were followed by a process of public consultation. In these circumstances, it was possible to identify changes in those aspects of accounting law to which the main parties could not at first agree, and hence to assess the unconditional influence of powerful groups that is exercised in circumstances where disagreement between the parties is already apparent.

An examination is made of the impact of constituent lobbying activity on accounting regulators during the transformation of the Fourth European Company Law Directive into German accounting law. Using detailed published commentaries prepared by representative organizations on draft accounting legislation, evidence is provided concerning the preferences of the three primary German accounting constituencies – industry preparers, auditors, and academic experts. Initially, a model that merely distinguishes between the three constituencies suggests that the industry lobby group representing preparers exerts the greatest influence on the decisions of the German legislature. However, when the empirical model is extended to include all two-way interaction effects, the relative power of preparers is seen to be far lower, with the influence exerted by industry depending crucially on the support of at least one of the remaining lobby groups.

An insider perspective is presented on the historical development of EU (European Union) accounting regulation. The author explains why the EU moved away from the idea of European harmonization through the EU Accounting Directives to the adoption of International Accounting Standards (IAS) for all listed EU companies, and provides important insights into the dynamics of EU standard-setting processes. The chapter clearly demonstrates that the regulation of financial reporting is a complex issue and that there is no easy way to bring about accounting harmonization. The nine sections are: Introduction; The Accounting Directives; First attempts toward further harmonization; Development of a new accounting strategy; Proposed new accounting strategy; The proposed new accounting strategy in action; Toward a mandatory application of IAS; Regulation of the European Parliament and of the Council on the application of IAS; and Concluding observations.

The corporate supply of information about the impact of macroeconomic fluctuations on exposure and performance does not meet the demands by outside shareholders and financial analysts. Technical and political barriers prevent relevant information from being disclosed. These barriers are discussed in this chapter along with efforts to create a global accounting standard for the impact of a volatile macroeconomic environment on corporate performance. Alternative interpretations of recent International Accounting Standards (IAS) are suggested. Current reporting practices in two global industries are compared with the recommendations of IAS and with the information that would be obtained if the MUST-analysis developed in this book were disclosed. The case for clear standards is strengthened by managers' incentives to remain opaque when disclosing information. International Financial Reporting Standards (IFRS) and the need for a new information paradigm as regards the macroeconomic influences on the firm are discussed.

This chapter focuses on an alternative explanation for the wave of accounting and financial reporting irregularities that surfaced in 2001–2002: namely, that the gatekeepers failed. That is, the professionals who serve investors by preparing, verifying, or certifying corporate disclosures to the securities markets that acquiesced in managerial fraud; not in all cases, to be sure, but at a markedly higher rate than during the immediately preceding period. While the gatekeeper concept will be discussed and refined later, this term certainly includes the auditors, securities analysts, and securities attorneys who prepare, review, or analyse disclosure documents. Part II of the chapter develops competing, but complementary, explanations for gatekeeper failure. Part III maps out the range of strategies available to regulators. Part IV proposes alternative reforms intended to make gatekeepers more responsive to the interests of investors.

This chapter examines the financial reporting practices and information environment of publicly listed firms in China, and is organized as follows. Section 4.1 provides an overview of the information environment in China. Section 4.2 considers the influence of China's legal, political, financial, and regulatory institutions on financial reporting incentives and the resulting information environment. Section 4.3 describes the state of information acquisition and dissemination activities in China. Section 4.4 concludes by outlining the impact of current and future institutional changes on the information environment of China's listed firms. A commentary is included at the end of the chapter.

In this chapter, Janelle Knox-Hayes and David Levy analyse the role of multinational corporations in global environmental governance through the lens of corporate disclosure. They explore the premise that disclosure functions to reinforce the authority and legitimacy of corporations as increasingly important arbiters of (global environmental) governance. In assessing this claim, the authors document the rise of corporate non-financial sustainability reporting systems, including the Global Reporting Initiative and the Carbon Disclosure Project. The chapter argues that two competing institutional logics underpin the embrace and spread of non-financial disclosure: a logic of civil regulation, promoted by civil society actors and intended to secure greater corporate accountability, versus a functionalist corporate logic of sustainability management that highlights the instrumental benefits of disclosure to company managers, investors, and auditors. The chapter reveals how the growing ascendancy of a corporate instrumental logic shapes the quality and modalities of carbon and corporate sustainability disclosure.

In this chapter, the boundaries of the club approach are analyzed for their usefulness in corporate financial reporting, and how rule systems are provided for the international finance and accounting industry by the International Accounting Standards Board (IASB) is examined. The importance of voluntary programs administered through the club approach is analyzed and shown to provide favourable results. The result is that firms which join the program exchange are given membership benefits and club goods in exchange for their financing the public goods that they produce. This success by the IASB can be attributed to how well its institutional design matched both the policy problem and its political and policy context. It is concluded that the club approach is a useful model for the explanation of this type of corporate behavior.

Governments increasingly require that firms address a wide range of corporate social responsibility (CSR) stakeholder demands, rather than narrow shareholder needs. This chapter explores implications for corporate governance of mandatory CSR reporting requirements, focusing in particular on non-financial disclosure, and tax transparency in extractives. Non-financial disclosure requirements are overwhelmingly soft, while tax transparency reporting requirements are hard. Firms typically manage soft CSR programmes in non-core support functions such as communications or health, safety and environment. Soft CSR reporting criteria have limited impact on the internal governance of firms and top-level management decisions. In contrast, hard CSR reporting criteria constitute a key element of corporate governance. Firms manage tax transparency in core corporate functions such as the audit committee, and it is the responsibility of the chief financial officer, who usually sits on the executive board. Top-level management is more likely to take CSR programmes seriously that impose mandatory hard requirements.

Integrity of financial and public information issued by companies is the cornerstone of a strong capital market. The concept of audit committee emerged to ensure that entities uphold public interest and drive fairness in its disclosures. However, with every successive accounting and financial scandals and crisis, the effectiveness and efficacy of the institution came into question. This chapter examines the functioning of the audit committee, evaluates its effectiveness, the challenges it faces in India, and suggests measures to deal with them. The chapter concludes that there is a need to develop professional standards underlining common minimum processes and procedures that audit committee should take for effective discharge of its responsibilities.