ACCA results have been issued this week.
Congratulation to everybody who passed at least one paper ) You deserve it for your hard work and ability to communicate an idea.
Preparation for next session have to be started as soon as possible.
I am going to start reading study text in coming week. Good luck to your preparation!
PS If any US CPA candidate is reading this blog, good luck to you also! ))) I have been doing CPA exams and know what you fill )
Sunday, February 27, 2011
Thursday, February 17, 2011
Goodwill vs Business Reputation
Have your reputation been ever written off? It is probably disaster, isn’t? However, it is quite usual thing for accountants to review reputation of the company and decide whether to leave it or write it off.
Surely, I am talking about Goodwill (GW). According to Oxford Dictionary of English, goodwill is the established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold. Not too "accounting -accounting" definition : )
IFRS 3 sounds much better: GW – is an asset representing the future economic benefits from other assets acquired in a business combination that are not individually identified and separately recognized.
To understand better, mathematically simplified it is just purchase consideration minus fair value of net assets of acquired company. My old Becker CPA book have good illustration of that:
Here starts the story… Two years ago I met my former colleague who was in charge of corporate reporting in her company and encountered audit that period. She told me, that new fashionable audit idea of the season is to write off GW, because of crisis…
On September 2010 I came across interesting article in Financial Times “Goodwill games”. Guys from investment bank Houlinah Lokey have carried out remarkable survey.
According to US GAAP and IFRS, GW is subject to annual review and recalculation. Recalculation is based on discounted cash flow which acquiree able to generate in future. If cash flows fall, the GW is written off. Quiet reasonable.
The FT, Lex Column constitutes:
‘What seemed strange is how little effect the unexpected recession has had on the value of GW. Between the boom years of 2005 and 2008, Europe ’s top 600 companies spent 1,700bn euro on acquisitions and booked about 900bn euro of GW in the process. Those deals were based on expectations of steady growth in real gross domestic product; as late as 2008, the International Monetary Fund forecast GDP would be 15% higher in 2013 than in 2007.
As of the end of 2009, that forecast of GDP was below 5%. Logically that should have triggered a big fall in the potential earnings for acquired companies. But since the recession began, barely 4% of companies’ GW has been written down, excluding the 32bn euro write-off at Royal Bank of Scotland
Just look at this illustrative figure about GW write-offs and IMF’s GDP forecasts provided by Houlinah Lokey:
Good looking charts aren’t they! In the end of the article authors suggest that “cosy relationships” between auditors and their clients are reason for such insufficient conservativeness in accounting for GW.
Personally, I think that if GW is not written off because of “cosy relationships” it is not good. Potentially it could harm not only goodwill of client, but also business reputation of audit firm.
References:
Becker CPA Review. (2008) Financial Accounting and Reporting. DeVry/Becker Educational Development Corp.
Financial Times. (2010) Goodwill games. 28th of September 2010, p. 16
Saturday, February 5, 2011
Audit Opinion and Share Prices
How often have you heard (working as auditor) or told (being client) “what is the value in all your audit procedure”?
Actually, there is the value of audited company at the stake! To keep our clients from such comments, we can now offer scientific dispute :)
Nowadays I am busy with preparation of my research proposal in the audit area. I have reviewed and read sufficient number of research articles dedicated to subject of relationship between share price and audit opinion announcement effect.
It is interesting that while working in audit firm I was not aware that there were lots of researches in this area. Of course, my colleagues and I assumed that audit opinions are able to communicate additional valuable information to investors, public, and regulatory authorities, but I could not imagine that topic is rather popular among researchers in economics and statistics.
So, the main questions which researchers ask: “Is there any information content in audit opinion announcement for investors?”; “Do audit opinions really influence share prices?”. The researches in this area started in 1970-s and still are carried out. There are different research methods are applied: event study statistics with models, sociological interviews, modeling situation based on group of investors.
Based on what I have already read I can say that the results are controversial.
Number of studies (pls. see Firth (1978); Dopuch et al (1986); Chen et al. (2000); Menon and Williams (2010)) present sufficient evidence that share prices significantly decrease after announcement of qualified (modified) opinions as oppose to non-modified. Chen et al. (2000) illustrated his research with interesting figure showing distribution of share returns as a result of reaction on clean and modified audit opinion (MAO) in Shanghai Stock Exchange.
No very much need in comment. MAO announcement effect is rather negative and significant on event date.
On the other hand there are number of researches that do not prove hypothesis that investor reaction towards audit opinion is statistically significant. Studies are carried out by Chow and Rice[different results for API and types of qulafications] (1982); Martinez et al (2004); Ogneva and Subramanyam (2007); Al-Thuneibat and Nedal (2008)). Probably figure provided by Al-Thuneibat who tested same idea in
As seen from the figure above behavior of returns on shares of companies’ which have received qualified audit opinions is rather controversial and does not maintains single pattern.
Conclusion
Finally, I personally think that statistical research depend on quality of data you get and appropriateness of method applied. For example, in event study researches it is important to pick up right date. Moreover, attitude of investors towards audit opinion varies from country to country depending on development of markets, institutes, legal relations and culture. Probably cross country research needed to be carried out based on the unified elaborated methodology by group of scientists. So, I would not be much creative if I say: “further researches to be carried out in this area” ;)
Articles mentioned in post:
Ali A. Al-Thuneibat, Basheer Ahmad Khamees, Nedal A. Al-Fayoumi, (2007) "The effect of qualified auditors' opinions on share prices: evidence from
Chen, C.J.P., Su, X. and Zhao, R. (2000), “An emerging market’s reaction to initial modified audit opinions: evidence from the Shanghai Stock Exchange”, Contemporary Accounting Research, Vol. 17, pp. 429-55.
Chow, C. W., and S, J, Rice. 1982. Qualified audit opinions and share prices — An investigation. Auditing: A Journal of Practice and Theory 1 (Wmter): 35-53.
Dopuch, N., R. Holthausen, and R. Leftwich. 1986. Abnormal stock returns associated with media disclosures of “subject to” qualified audit opinions. Journal of Accounting and Economics 8 _June_: 93–117.
Firth, M, A. (1978). Qualified audit reports: Their impact on investment decisions. Accounting Review 53 (3): 642-50.
Menon, Krishnagopal; Williams, David D (2010). Investor Reaction to Going Concern Audit Reports. Accounting Review, Nov2010, Vol. 85 Issue 6, p2075-2105, 31p
Ogneva, M., and K. R. Subramanyam. 2007. Does the stock market under-react to going concern opinions? The evidence from the
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