2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
An International Examination of the Impact of Auditing and Corruption on Earnings
Opacity
Ervin L. Black
Associate Professor
Brigham Young University
erv_black@byu.edu
F. Greg Burton
Associate Professor
Brigham Young University
fgb@byu.edu
School of Accountancy
540 Tanner Building
Provo UT 84602
USA
1 801 422-8767 (office)
1 801 422-0621 (fax)
June 24-26, 2007
Oxford University, UK
1
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
An International Examination of the Impact of Auditing and Corruption on Earnings
Opacity
ABSTRACT
One significant impediment to involvement in global capital markets is the issue of earnings
opacity. Much of earnings opacity can be attributed to variations in the accounting standards
used by different countries. However, even with complete convergence, earnings opacity would
still be an issue. For instance, research has identified factors that affect opacity such as a
country’s legal origin, the quality of legal investor protections, the quality of law enforcement,
market versus bank funding, private versus government accounting standard setting, spending on
external audit services, and the correlation between financial reporting to the country’s tax
system. However, one area which has the ability to have a significant impact on earnings opacity
is corruption. Using various opacity index measures, we find that higher corruption is
significantly associated with higher opacity.
Additionally, companies that are audited by Big Four firms are statistically less associated with
corruption and are more likely to be transparent in their reporting than companies audited by non
Big Four firms. Countries with higher levels of income and with French, English, and Germanic
legal systems are less corrupt and more transparent. In addition, accounting standards, economic
freedom scores, and property rights are significantly associated with corruption and opacity
measures.
June 24-26, 2007
Oxford University, UK
2