The effect of auditor industry specialization and board independence on the cash flow reporting classification choices under IFRS: evidence from Taiwan

• Date: 23 September 2020
• DOI: https://doi.org/10.1108/IJAIM-07-2019-0084
• Pages: 147-168
• Published date: 23 September 2020
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Shuling Chiang,Gary Kleinman,Picheng Lee

The ef‌fect of auditor industry

specialization and board

independence on the cash f‌low

reporting classif‌ication choices

under IFRS: evidence

from Taiwan

Shuling Chiang

Department of Accounting Information, National Taipei University of Business,

Taipei, Taiwan

Gary Kleinman

Department of Accounting and Finance, Montclair State University, Montclair,

New Jersey, USA, and

Picheng Lee

Department of Accounting, Lubin School of Business, Pace University, New York,

New York, USA

Abstract

Purpose –This study aims to explore the relationship betweena uditpartner and f‌irm industry specialization

and board of director independence on the decision by Taiwanese f‌irms to use InternationalFinancial Reporting

Standards (IFRS) f‌lexibility concerning reporting interest income and expense and dividends received in different

sections of the statement of cash f‌lows. This f‌lexibility existed in Taiwan for thef‌irst tim e in 2013, the year that

Taiwan switched from its own generally accepted accounting principle to IFRS.

Design/methodology/approach –Using 2013 data for a sample of 1,227 f‌irms, 354 of whom changed

their reporting classif‌ication, this study examined the interaction effecto fboard independence and partner-level

and f‌irm-level auditor industry specializationon the cash f‌low reporting decision using logistic regression.

Findings –The results show there is a substitute relationship between board independence and partner-

level industry specialization on the change in cash f‌low reporting classif‌ication, but a complementary

relationship between board independence and f‌irm-level auditor specialization. Further, both partner-level

and f‌irm-level auditor industryspecializations have a complementary (but negative) relationship with board

independence as to whether the f‌irm is likely to report interest expense paid in the operating or f‌inancing

activitiessections.

Practical implications –An important implication is that knowingthe levels of audit f‌irm and partner

specialization and how independent the board is, is useful for researchers and regulators in investigating

auditor-clientrelationships and understanding the inf‌luences of variables investigatedhere on the outcome(s)

of accountingpolicy and regulatory changes.

Originality/value –This study improved the f‌ield’s understanding of the impacts of audit partner and

f‌irm specialization,board independence and relevantinteractions on cash f‌low reporting choices.

Keywords IFRS, Cash f‌low, Board independence, Auditor industry specialization

Paper type Research paper

The ef‌fect of

auditor

industry

147

Received18 July 2019

Revised1 March 2020

19July 2020

Accepted20 August 2020

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 1, 2021

pp. 147-168

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2019-0084

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

In 1989, the Accounting Research and Development Foundationissued Taiwan Accounting

Standard No.17 (TAS No. 17), entitled “cash f‌lowstatements.”It provides detailed guidance

on the preparation of the statement of cash f‌lows for publicly-listed companies. Consistent

with US generally acceptedaccounting principle (GAAP), TAS No. 17 required interestpaid,

interest received and dividends receivedto be classif‌ied in the operating activities section of

the statement of cash f‌lows. InternationalFinancial Reporting Standards (IFRS), in contrast,

allows f‌irms to report these items within the operatingcash f‌low section of the statement of

cash f‌lows or to classify them as investing or f‌inancing cash f‌lows. IFRS, then, provides

management with greaterdiscretion as to where cash f‌lows can be reported. As of January 1,

2013, Taiwanese f‌irms were required to followIFRS accounting standards, giving publicly-

listed f‌irms in Taiwan the opportunityto either retain interest and dividend reporting within

the operating cash f‌low section of the statement of cash f‌lows or to move this reporting to

either the investing or f‌inancingsections of the statement of cash f‌lows. This is an important

issue because cash f‌lows provide critical information to potential investors/creditors as to

the sustainability of the f‌irm’s business operations (Lightstone et al., 2014). Understanding

the determinants of interest/dividend reporting choices, then, is one important avenue

toward the understanding of corporate accounting policychoice more generally (Cole et al.,

2012;Kretzmann et al.,2015;Lee, 2012;Zalata and Roberts, 2016).

Prior research with respect to auditors and cash f‌low classif‌ications has been mixed.

Gordon et al. (2017), for example, found an insignif‌icant relationship between auditor type

(Big Four vs non-Big Four) and operating cash f‌low classif‌ication. Lightstone et al. (2014)

argue for the potential importance of auditor inf‌luence on reducing cash f‌low

overstatements with respectto cash f‌low reporting of Canadian f‌irms when acquisitions are

involved. However, Kretzmann et al. (2015) document that German f‌irms whose f‌inancial

statements are audited by a Big Four audit f‌irm are prone to choose options that increase

reported operating cash f‌low. Unlike earlier studies, we investigate the effect of auditor

industry specializationacross the spectrum of auditing f‌irm sizes on the cash f‌low reporting

classif‌ication choices under IFRS. Expertise provides the expert with a detailed knowledge

of the factors that may inf‌luence observed outcomes. It also may provide experts with the

ability to better match facts to accounting choices. That said, experts observing the same

facts are notorious for comingto different conclusions (Kleinman et al.,2010).

As of January 1st, 2013, Taiwanese publicly-listed f‌irms were required to adopt IFRS.

Earlier studies have pointed out thatthe adoption of IFRS improved the quality of f‌inancial

reporting (Liu et al., 2011;Dayanandanet al.,2016) and positively inf‌luenced capital markets

(Houqe, 2018). The change from Taiwan’sgenerally accepted accounting principles to IFRS

gave Taiwanese publicly-listed f‌irms the option of continuing to report interest income,

interest expense and dividendsreceived in the operating cash f‌low segment of the statement

of cash f‌lows or, consistent with the IFRS’sf‌lexibility,in the investing or f‌inancing sections

of the cash f‌low statement. Out of 1,227 Taiwanese f‌irms, we f‌irst identif‌ied 354 f‌irms that

changed their cash f‌low reportingclassif‌ications. We also identif‌ied the other 873 f‌irms that

did not change their classif‌ication in 2013. We then used logistic regressions to examine

whether there is a relationshipbetween auditor industry specialization and board of director

independence on the one hand and the probability of f‌irms changing their cash f‌low

reporting classif‌ication choices made under IFRS on the other. By sitting this study in one

nation, consistent with earlier literature (Lee, 2012;Gordon et al., 2017;Kretzmann et al.,

2015; see also Aobdia et al., 2015), we control for extraneous factors that might cloud the

interpretationof this work had multiple nations been used.

IJAIM

29,1

148