Expressing concern about the Canadian capital market environment, Boritz (2006) suggested that the accounting and auditing profession may be paying limited attention to quarterly reports. This study investigates whether fourth-quarter adjustments are significantly different from the previous three, thereby limiting the reliability or faithful representation of the firms' results for each quarter. This study includes four years (2003)(2004)(2005)(2006) of quarterly financial information of 353 Canadian public companies. Our results indicate that the volatility of net income in each of the first three quarters is considerably lower than in the final quarter. While lower volatility can improve predictability, the resulting relevance may be limited. The low volatility of reported earnings in the first three quarters suggests that either earnings management is taking place or that management may not be exercising sufficient care at the end of each of the first three quarters on the measurements that generally accepted accounting principles call for and readers of financial statements expect. This could result in quarterly financial statements that do not faithfully represent the underlying resources and obligations of the reporting firms at the end of the quarter, or the firm's performance during the quarter. Our findings support Boritz's proposition for increased audit requirements for interim reports and changes in the approach to the annual audit to integrate it more closely with interim financial reporting. QUALITÉ DE L'INFORMATION LIVRÉE DANS LES ÉTATS FINANCIERS INTERMÉDIAIRES RÉSUMÉExprimant ses pre´occupations a`l'e´gard de l'environnement des marche´s de capitaux canadiens, Boritz (2006) a avance´que le milieu professionnel de la comptabi-lite´et de l'audit faisait peu de cas des rapports trimestriels. Les auteurs effectuent une e´tude empirique visant a`de´terminer si les ajustements du quatrie`me trimestre sont sensiblement diffe´rents de ceux des trois trimestres pre´ce´dents, ce qui pourrait indiquer que les e´tats financiers interme´diaires ne sont pas complets et, par conse´quent, ne donnent une image ni fiable ni fide`le des re´sultats de chaque trimestre.
Defined-benefit pension plans were in a worse state than previously reported due to managements' ability to manage the assumptions, according to our study. This empirical paper examined whether managers would have used unreasonable discount rates and assumed rates of return for their pension obligation and assets in order to improve their financial position. We found companies were 4 times more likely to have used an unreasonable discount rate thereby reporting a better funding status than was warranted. We also found, companies were 34 times more likely to have used an unreasonable rate of return for calculating pension expense thereby increasing net income. This paper has implications for employees who have a defined-benefit pension plan; employers who want to be attractive to future employees; and governments that provide retirement supplements for their citizens.
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