Incentives Versus Standards : Properties of Accounting Income in Four East Asian Countries

The East Asian countries of Hong Kong, Malaysia, Singapore and Thailand provide a rare opportunity to study the interaction between the accounting standards under which financial statements are prepared and the incentives of managers and auditors who prepare them. Their accounting standards are largely derived from common law sources [UK, US and International Accounting Standards (IAS)], which are widely viewed as higher quality than code law standards. However, economic and political influences on preparers' incentives predict low quality financial reporting. We show that reported earnings in these countries generally are no higher in quality than in code law countries. We define quality as timeliness in incorporating economic income (particularly economic losses).Countries frequently are classified in terms of accounting standards, or standard-setting institutions. Examples include international accounting literature and texts; compilation of transparency indexes; advocacy of financial reporting reform; and advocacy of International Accounting Standards (IAS). Our results imply this is incomplete and misleading without adequate consideration of preparer incentives