Enforcement of Accounting Standards in Germany: The Pre- and Post-Misstatement Development of Censured Firms

July 16, 2013 Leave a comment

Enforcement of Accounting Standards in Germany: The Pre- and Post-Misstatement Development of Censured Firms

Manuel Strohmenger University of Wuerzburg

June 20, 2013

Abstract: 
This paper focuses on implementation of a two-tiered external financial reporting enforcement mechanism in Germany 2004. The first objective of the study is the systematically evaluation of the information contained in 151 disclosed error announcements. I find that error announcement on average contain 3.64 single errors and 77% affect the reported profit. Small, high levered and relatively unprofitable firms are overrepresented by the sample of misstatement firms. In a second step, I investigate the development of censured firms over time; I track the pre- and post-misstatement development of the firms in terms of balance sheet data, financial ratios and (real) earnings management. The analysis detects increasing leverage ratios and a decline in profitability overtime. In the year of misstatement firms report large total and discretionary accruals, indicating earnings management. Compared to matched control firms, significant differences in profitability, market valuation, earnings management and real activities manipulations are observable. A major contribution of this study is the examination of trends in financial data and (real) earnings management over a number of years round misstatement as well as the elaboration of the distinction to non-misstating firms. My results show the meaning of the enforcement of IFRS for the quality of financial reporting to standard setters, policy makers, and investors in Germany.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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