Error announcements shall in principle unfold both a preventative and a sanctioning function via adverse publicity. While US research provides large and unambiguous evidence of sanctions which are based on capital market reactions, but also personal consequences of responsible managers and auditors, the few studies which iestigated the German enforcement system do not yield comparable results, thereby questioning its efficacy. Building on this, we first iestigate for the German enforcement setting whether error announcements lead to abnormal turnover of audit teams and audit firms than comparable non-error firms by using logistic regression. Second, we analyze whether audit team or audit firm turnover results in improved accounting quality. To do so, we proxy accounting quality with well-established earnings management models and explore the turnover’s impact on accounting quality with a difference-in-difference approach. Our results do not provide evidence of increased audit firm turnover due to error announcements, thereby contradicting studies from the US; the same holds for changes of the responsible audit teams. However, our results suggest that firms with changes of the audit firm or audit team exhibit an increase in accounting quality, which however takes place already in the time gap between error announcement and auditor change. Consequently, we interpret auditor changes serving as a signal of improved corporate governance, rather than indeed improving corporate governance.

We examine the expected preventive function of enforcement of financial reporting which has been subject to reforms in several EU member states in the years following mandatory IFRS adoption. Specifically, we are interested in the question whether accounting quality – proxied by several earnings management metrics – improved in countries with substantive changes in their enforcement setting. For this reason, we compare the development in earnings management activities for a treatment sample of firms from 7 countries with enforcement changes with two control samples from 13 countries in total that do not exhibit comparable enforcement reforms. In contrast to prior literature, we cannot provide consistent evidence for a decrease in earnings management activities; however, some results indicate less upwards and more downwards earnings management after a strengthening of enforcement, arguably as an overcautious counter reaction of responsible managers. Given the limited numbers of observations, we regard our findings as a preliminary ientory in the attempt of assessing the effectiveness of accounting enforcement in the EU._x000D_ Keywords Enforcement, IFRS, earnings management, earnings quality, discretionary accruals_x000D_ JEL Classification M 41

The main objective of financial reporting is to provide useful information to a firm’s stakeholders. However, it is questionable whether this goal can be fully realized without effective enforcement, which ensures faithful and consistent application of the relevant accounting standards. Within the multiplicity of studies iestigating enforcement mechanisms and consequences to enforcement actions, this paper provides an overview on the current state of research on enforcement from a corporate governance perspective. We therefore analyze enforcement literature from both internal and external corporate governance perspectives in order to show interactions between enforcement and other mechanisms of financial reporting oversight. In addition, it becomes evident that most preceding research addresses neither efficiency nor efficacy of enforcement systems due to missing effect variables or data accessibility. Furthermore, we deduce further research opportunities with respect to enforcement consequences and their determinants._x000D_ This HHL Working Paper 150 is a revised version of the HHL Working Paper 142._x000D_ Keywords Enforcement, IFRS, Corporate Governance, Regulation, Research Opportunities_x000D_ JEL Classification G18, G34, K22, M41, M48

This paper contributes to the understanding of the German two-tiered enforcement set-up. The first tier is represented by the private review panel FREP, which has been investigating IFRS financial statements since 2005 and ensures consistent and faithful application of the latter. The German securities regulator BaFin, as second tier to the mechanism, enforces disclosure of errors established by either FREP or BaFin and therefore substantiates the adverse disclosure mechanism. We investigate short-term reactions to error announcements published between 2006 and 2013 and find evidence for differences of investor reactions between the early and the current years of enforcement. Disentangling the contributing factors of error severity, we provide evidence that investor reaction is primarily associated with the impact of error announcements on profitability. In addition, we detect that the amount of errors established is negatively associated with investor reaction indicating that extensive error announcements have an attenuating effect on investor reaction. Yet we caution to blindly interpret these findings, since they are also subject to change over time and partially driven by outliers. Further multivariate analyses provide additional insights referring to determinants of investor reactions by examining effects of stated errors on core earnings, effects of errors triggered due to second-guessing the use of professional judgment, and changes of investor perception over time.

_x000D_ _x000D_ <link fileadmin/texte/publikationen/research_data/Hoeltken_Ebner_Enforcement_of_Financial_Reporting_-_Appendix.pdf _blank download "Initiates file download">Appendix (Complete list of studies reviewed)</link>_x000D_ <div class="indent">

Seit 2009 besitzen kapitalmarktorientierte Unternehmen in Deutschland die Möglichkeit, IFRS-Anwendungssachverhalte mit der für das Enforcement-Verfahren zuständigen Deutschen Prüfstelle für Rechnungslegung (DPR e. V.) verfahrensunabhängig abzustimmen. Die Implementierung dieser sog. Pre-Clearance wurde von einer intensiven Diskussion um die kompetenzrechtliche und verfahrensprozessuale Ausgestaltung des Verfahrens begleitet. Rückblickend auf das seit über vier Jahren praktizierte Verfahren fällt auf, dass die Rezeption durch die Bilanzierenden bislang eher eingeschränkt ausfällt. Der Beitrag soll daher zunächst mögliche Gründe für dieses Verhalten identifizieren, um im Anschluss daran die Frage nach der Zukunftsfähigkeit der Pre-Clearance in Deutschland zu stellen.