[Caption: Associate Professor of Accounting Jimmy Lee presents on his research into the role played by Big N auditors in the assurance of CSR reports]
The 2021 Accounting Research Summer Camp held on 18 June brought together experienced researchers in empirical financial accounting alongside scholars from other disciplines to cross-pollinate ideas and stimulate debate through paper presentations and discussions.
Faculty members from the School of Accountancy and the University’s other schools of discipline gathered to exchange research ideas in anticipation of future collaboration opportunities. This year, the informal event took the form of a virtual conference, whereby selected thought leaders from SMU and other universities presented cutting-edge research papers online and explored opportunities for the application of findings and cross-disciplinary collaboration.
In line with the University’s mission to enable meaningful impact through multidisciplinary research, the Summer Camp included a research forum with faculty members from SMU School of Computing and Information Systems (SCIS), bringing together perspectives and insights and advancing conversations across fields of study.
Lee Kong Chian Professor of Computer Science Lim Ee-Peng shared an overview of the Living Analytics Research Centre (LARC) — of which he is a director. Established in 2011, the Living Analytics Research Centre (LARC) aims to innovate new technologies and software platforms that are relevant to Singapore’s Smart Nation efforts. Dr Lim touched on the future direction of the centre, and how the availability of large datasets can elevate and optimise research collaborations.
This was followed by a presentation by Assistant Professor of Information Systems Ke Ping Fan on the “Application of Domain Adaptive Transfer Learning for Fake Content Analysis". He shared his findings on fake content analysis using machine learning, particularly with the use of domain adaptation and transfer learning.
The recent Summer Camp examined a range of finance and accounting topics, ranging from how Big N auditors affect the disclosure quality of corporate social responsibility (CSR) measures, to the enhanced quality of earnings forecasts when analysts are allowed to report anonymously.
How public opinion restricts self-dealing activities in emerging markets
While legal systems for the enforcement of inappropriate corporate activities may be weak in some emerging markets, a new paper by SMU Associate Professor of Accounting and Programme Director Heng Yue suggests that public enforcement can be powerful in increasing the accountability of independent directors.
Associate Professor of Yue Heng presents his paper "Public Enforcement through Independent Directors"
The paper "Public Enforcement through Independent Directors", co-authored by Xiaoxi LI (JNU), Pingui RAO (JNU), and Yong George YANG (CUHK), reveals how public enforcement impacts the expropriation activities of controlling shareholders — the latter of whom may resign or take positive action when their reputations are at stake.
A common form of expropriation in emerging markets like China is through related-party transactions (RPTs), or “self-dealing,” which undermines investors’ confidence and becomes a major obstacle to financial market development. As such, regulators face a major challenge in constraining such self-dealing activities and protecting minority shareholders.
In the absence of a strong legal infrastructure, traditional forms of enforcement like shareholder voting are often viewed with mistrust. Instead, the study found that comment letters issued by Chinese stock exchanges on firms’ periodic filings were useful tools to significantly curb RPTs.
Stock exchanges are required to review their listed firms’ annual reports at least once every three years and issue comment letters if concerns arise regarding the reports. Firms are then required to clarify or provide additional information in response to the comments.
Interestingly, the study found that the comment letters had a greater effect on reducing RPT related to independent directors who had a bigger reputation and career concerns to protect — measured by media mentions, the number of directorship positions they hold, their ages, and memberships on audit committees. Firms, in turn, tighten their own monitoring based on such comments, resulting in stronger corporate governance, and increased investor protection and enhanced performance.
Spillover effect of Big N audit on CSR disclosure
With the rise in public interest in social and environmental responsibility, CSR reporting has become increasingly important to stakeholders like investors, managers, regulators and scholars. However, the voluntary disclosure of CSR activity and results may not always be perceived to be credible and, currently, only a minority of firms with CSR programmes subject them to third party assessments.
The paper "Can High Quality Financial Audit Assurance Substitute for CSR Assurance? Evidence from Spillover Effects of Engaging Big N Auditors" by SMU Associate Professors of Accounting Jimmy Lee and Lim Chee Yeow, co-authored by Gerald J LOBO (UH), Yanping XU (JNU), therefore examines the role played by Big N auditors in the assurance of CSR reports.
Based on the fact that Big N auditors have a strong understanding of their clients’ operations and businesses, and have access to nonfinancial information including CSR risks, they are therefore well-positioned to influence their clients’ reporting on sustainability issues. Such auditors also have a stakeholder role in the CSR assurance market, and would have the expertise to conduct such assessments.
However, it was noted that the additional costs involved in reviewing and analysing reports beyond the financial reporting for which auditors are hired may discourage them from delving into the quality of a firm’s CSR disclosures. In that same vein, additional billable hours may deter firms from engaging auditors to work on CSR assurances.
Despite such tensions, the paper found that Big N audits did have a positive correlation with CSR disclosure quality, as stakeholders recognise the benefits of investing time and finances to working with auditors to review their CSR activities: During the assessment of business risk, the frequent communication between auditors and clients provides the opportunity for auditors to advise and help clients integrate CSR activities with the firm’s strategy and thus improve CSR performance. Further, CSR performance may be improved during the review of CSR disclosure, as auditors may enhance the quality of information for strategic decision making and resource allocation for CSR activities.
As such, the paper suggests that the positive spillover effects from engaging Big N financial auditors on CSR disclosure quality also positively affect CSR performance in the long run.
How analyst anonymity affects earnings forecasts
Based on the expectations of company growth and profitability, earnings forecasts are developed by analysts to help investors gain a clearer valuation of the companies in which they invest and shape their investment decisions.
Assistant Professor Lin An-Ping presents on the topic of how anonymity of analyst identities may
affect analysts’ economic incentives and reputation concerns
The paper "Anonymous Analysts" by SMU Assistant Professor of Accounting Lin An-Ping and Cheng Qiang, Deng Tian and Sterling Huang looks at how the anonymity of analyst identities may affect analysts’ economic incentives and reputation concerns. While previous studies have found that the anonymity of information providers affects information recipients’ behaviours and attitudes, "Anonymous Analysts" looks at how the identities of analysts affect the content of earnings forecasts.
As there might exist a degree of influence on analysts from their clients to develop optimistic forecasts, the researchers investigated whether anonymity might deter such biases from occurring. Conversely, under a veil of anonymity, analysts may feel they have less of a reputation to uphold, which in turn could lead to a poorer quality of work and decreased forecast accuracy.
The authors relied on data from the move by Thomson Reuters, a media conglomerate that provides business intelligence, to anonymise analyst research in 2018. Based on over 200,000 earnings forecasts, the study deduced that analyst anonymity did indeed lead to less optimistic, more accurate forecasts. In short, anonymisation reduces analysts’ pressure to issue optimistic research.