Accounting and Auditing Framework Quiz

A test examining whether timely loss recognition varies across countries based on investor protection and Big 4 auditor effects.

Accounting earnings immediately reflect bad news (losses) but delay reflecting good news (gains) until realized.

Measures legal environments that protect investors' rights and interests.

An auditor from one of the four largest accounting firms (a proxy for the quality of audit procedures).

Different legal systems affecting how investor protection and accounting are handled.

The actions of the four largest global accounting firms (Arthur Andersen, Coopers & Lybrand, Deloitte Touche, etc.) in auditing client earnings quality and accounting conservatism.

The extent to which a company's reported financial statements accurately reflect its economic performance.

A way of accounting that tends to undervalue assets and liabilities to avoid overstating a company's financial position.

Laws and regulations that protect investors from fraud, mismanagement, and inaccuracies in financial reports.

Motivations driving the Big 4 to enforce higher earnings quality, such as their reputation and potential legal liabilities.

Motivations of smaller audit firms, which are typically less significant than those of the Big 4 and thus have fewer incentives to enforce high earnings quality.

Variations in legal environments, investor protections, and accounting practices between countries.

The process or standards used to assess if companies follow accounting procedures accurately and that a company's reported earnings quality and financial situation is true.

No evidence suggests that earnings conservatism increases for firms with non-Big 4 auditors as investor protection strengthens.

Firms with Big 4 auditors report more conservative earnings as investor protection strengthens.

Earnings quality is consistently higher with stronger investor protection, but only for firms with Big 4 auditors.

Signed abnormal accruals decrease (less income-increasing) and the likelihood of losses increases for Big 4 firms compared to non-Big 4 firms as investor protection strengthens.

Systematic differences in accruals and loss reporting imply differences in enforcement between Big 4 and non-Big 4 auditors.

Tests the earnings conservatism of non-Big 4 clients across investor protection regimes.

Tests the incremental earnings conservatism of Big 4 clients relative to non-Big 4 clients.