Mos, Ca alin
A icle
Unce ain y, Financial Repo ing Quali y and Accoun ing
En o cemen : E idence om The Eu opean Union
Jou nal o Accoun ing and Managemen In o ma ion Sys ems (JAMIS)
P o ided in Coope a ion wi h:
The Bucha es Uni e si y o Economic S udies
Sugges ed Ci a ion: Mos, Ca alin (2024) : Unce ain y, Financial Repo ing Quali y and Accoun ing
En o cemen : E idence om The Eu opean Union, Jou nal o Accoun ing and Managemen
In o ma ion Sys ems (JAMIS), ISSN 2559-6004, Bucha es Uni e si y o Economic S udies, Bucha es ,
Vol. 23, Iss. 3, pp. 616-642,
h ps://doi.o g/10.24818/jamis.2024.03008
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Accoun ing and Managemen In o ma ion Sys ems
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Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence
om he Eu opean Union
Ca alin Mos1,a
aFacul y o Economics and Business Adminis a ion, Babes-Bolyai
Uni e si y, Romania
Abs ac
Resea ch Ques ion: Wha is he impac o unce ain y on he quali y o inancial epo ing in
he Eu opean Union and whe he accoun ing en o cemen is a c i ical ac o ?
Mo i a ion: The ad ances made by he Eu opean Union (EU) in he ield o inancial
epo ing ha e shown he commi men o imp o e i s quali y. Howe e , unce ain y c ea es
a di icul con ex o capi al ma ke s, in es o s, and managemen . Since inancial epo ing
ep esen s he p ima y sou ce o in o ma ion o in es o s, i s quali y unde unce ain y is a
key opic o esea ch. Fu he mo e, conside ing he EU e o s o s eng hen accoun ing
en o cemen , i is undamen al o in es iga e whe he accoun ing en o cemen ac s as a
mode a ing ac o be ween unce ain y and inancial epo ing quali y.
Idea: Ou s udy in es iga es he e ec s o unce ain y on he quali y o inancial epo ing in
he Eu opean Union and he ole o accoun ing en o cemen .
Da a: The sample consis s o 35,489 i m-yea obse a ions om he 27 EU coun ies. The
sample does no include i ms om he inance indus y, as hey a e subjec o speci ic
egula ions and o e sigh . Fu he mo e, he quali y o inancial epo ing is de e mined
di e en ly compa ed o i ms in he se ices and manu ac u ing indus y.
Tools: We measu e he quali y o inancial epo ing using exis ing models in he li e a u e.
We use acc uals-based models and eal ea nings managemen as an al e na i e measu e. To
es ima e unce ain y, we ely on wo impo an indexes, he Economic Sen imen Indica o
and Business Con idence Indica o ; addi ionally, we use ano he measu e o obus ness
check. Fo accoun ing en o cemen , we use he s eng h o audi ing and accoun ing s anda ds,
and ano he measu e g ounded in he li e a u e o obus ness check.
Findings: Ou esul s sugges ha unce ain y is nega i ely associa ed wi h he inancial
epo ing quali y in he EU. This indica es ha unce ain y wo sens he inancial epo ing
1 Co esponding au ho : Doc o al School o Economics and Business Adminis a ion, Babes-
Bolyai Uni e si y, Romania, Teodo Mihali S ee , No. 58-60, Cluj-Napoca 400591, email
add esses: ca ali[email p o ec ed]; mosca [email protected]
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 617
quali y. In addi ion, we in es iga e he mode a ing ole o accoun ing en o cemen . We ind
ha when accoun ing en o cemen inc eases by one uni , he nega i e associa ion be ween
inancial epo ing quali y and unce ain y dec eases be ween 2.7% and 4.5%. Ou esul s a e
consis en and obus o he use o al e na i e measu es o inancial epo ing quali y,
unce ain y, and accoun ing en o cemen .
Con ibu ion: This s udy con ibu es o li e a u e in se e al ways. The EU p esen s a
pa icula con ex ha allows us o in es iga e mo e ho oughly he associa ion be ween
inancial epo ing quali y and unce ain y using c oss coun y sample. Fu he mo e, his
s udy p o ides ele an insigh s o he policymake s speci ic o EU ins i u ional se ings.
Resea ch a EU le el is welcome as p e ious analysis is limi ed o only se en EU coun ies.
The e o e, mo e e idence is needed o o m solid conclusions ele an o he EU.
Addi ionally, we p o ide s ong e idence abou he mode a ing ole o accoun ing
en o cemen , which was no in es iga ed in li e a u e in he con ex o unce ain y. Ou
esul s a e signi ican o he EU, since he las yea s we e cha ac e ized by high unce ain y,
and conside ing he cu en de elopmen s, he nex yea s will also be unde he sign o
unce ain y. The indings p o ide use ul in o ma ion o in e es ed pa ies on he associa ion
be ween unce ain y and inancial epo ing quali y and highligh he impo ance o
accoun ing en o cemen .
Keywo ds: inancial epo ing; unce ain y; accoun ing en o cemen
JEL codes: M41, M42, M48
1. In oduc ion
High-quali y and eliable co po a e epo ing by lis ed companies is o key
impo ance o he e iciency o capi al ma ke s (EU Commission, 2021). The same
epo highligh s ha inancial epo ing is he ounda ion o capi al ma ke s because
i p o ides in es o s wi h he necessa y in o ma ion o base hei decision. The la es
e en s, Co id-19, Uk aine's agg ession, he ene gy c isis, and he in la ion c isis,
cause an inc ease in unce ain y. Du ing he pe iod 2020-2022, unce ain y2
inc eases by 93% compa ed o 2008 when he inancial c isis s a ed and by 70%
compa ed o he las 10 yea s. This c ea es a di icul con ex o in es o s. The
dec ease in e u ns and he alue o he sha es a e only wo consequences o a lis o
ad e se e ec s o unce ain y. Gi en his, he Chai o he In e na ional Accoun ing
S anda ds Boa d (IASB) poin s ou ha when su ounded by unce ain y and i s
nega i e e ec s, in es o s need o us inancial epo ing. And, in u n, his us
elies on managemen p epa ing anspa en , accu a e, and use ul inancial epo s
(Ba ckow, 2023).
2 We calcula ed he pe cen s based on he global unce ain y index ob ained om Economic
Policy Unce ain y websi e (link: h ps://www.policyunce ain y.com/global_
mon hly.h ml)
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
618 Vol. 19, No. 3
The i s objec i e o his esea ch is o in es iga e he associa ion be ween
unce ain y and inancial epo ing quali y (FRQ) o EU membe s a es. We ocus
on he EU because he e is limi ed e idence a he c oss-coun y le el and he EU
o e s a sui able sample o analysis. The EU made se e al con e gence e o s
wi h espec o he inancial epo ing o he lis ed en i ies. The e o e, as no ed by
Schippe (2005), he EU p o ides a mo e powe ul se ing o es he de e minan s o
inancial epo ing quali y. A single se o accoun ing s anda ds, simila accoun ing
p ac ices, and he same epo ing equi emen s allow us o es he associa ion
be ween FRQ and unce ain y wi hou ca ying abou he es ima ion e o s ha
a ise om di e en accoun ing ea men s and epo ing p ac ices. Fu he mo e,
EU coun ies aim o ha monize economic de elopmen , ins i u ional se ings,
and egula ions. Un il now, no able s eps ha e been aken in his di ec ion. This
ea u e o ou sample allows us o con ol po en ial unobse able e ec s ha in
p e ious c oss-coun y esea ch we e no ully accoun ed o . On he o he hand,
li e a u e on he impac o unce ain y on FRQ is s ill eme ging wi h no esea ch
done pa icula ly o EU. The e o e, his s udy will p o ide applicable and speci ic
indings o he EU.
One o he pilla s ha gua an ees he FRQ in he EU is accoun ing en o cemen . The
EU designed an ins i u ional a chi ec u e o handle his ac i i y. The Eu opean
Secu i ies and Ma ke s Au ho i y (ESMA) supe ises he en o cemen o IFRS,
while he Commi ee o Eu opean Audi ing O e sigh Bodies (CEAOB) supe ises
he audi o lis ed en i ies. The goal o hese ins i u ions is o p o ec in es o s by
ensu ing FRQ. The second objec i e o his s udy is o es whe he accoun ing
en o cemen in he EU plays a ole du ing pe iods o unce ain y. The e is a no able
gap in he li e a u e on accoun ing en o cemen in he con ex o unce ain y. Ou
s udy ills his gap by analyzing he in e ac ion be ween accoun ing en o cemen and
unce ain y and how his a ec s he FRQ.
We use ou models o cap u e he FRQ and wo measu es o unce ain y. Based on
35,489 obse a ions, we ind ha unce ain y is nega i ely associa ed wi h FRQ in
he EU. The esul s a e consis en o all FRQ models and o bo h measu es o
unce ain y. Fu he mo e, we ind ha accoun ing en o cemen educes he nega i e
associa ion be ween unce ain y and FRQ. Ou esul s a e obus o an al e na i e
measu e o FRQ, we use eal ea nings managemen as an al e na i e measu e o
FRQ. We also use an al e na i e measu e o accoun ing en o cemen and
unce ain y. In all cases, he esul s a e simila and o m a solid basis o ou
conclusions. Addi ionally, we used coun y and indus y ixed e ec s in ou analysis,
which allows us o con ol coun y and indus y cha ac e is ics and be e quan i y
he e ec s o unce ain y.
Ou esul s sugges ha unce ain y is a s ong incen i e o ea nings managemen .
A oiding small losses (Shin, 2019), p oducing ea nings su p ises and good news
(Peng e al., 2020), and c ea ing a sense o s abili y a e he key objec i es o
managemen in imes o high unce ain y.
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 619
The indings a e o in e es o in es o s and policy make s. Acknowledging ha
unce ain y is a key de e minan o FRQ will help EU policymake s shape u u e
ules and mechanisms o p o ec in es o s om un us wo hy inancial epo s.
Fu he mo e, he s anda d se e , oge he wi h EU egula o s, can equi e speci ic
disclosu es o he inancial s a emen s o allow in es o s o unde s and he i m’s
pe o mance unde unce ain y. The FRQ is also achie ed h ough he pa icipa ion
o in es o s. The nega i e associa ion be ween unce ain y and FRQ should engage
in es o s o c ea e ele an echniques o de ec ea nings managemen . This is
pa icula ly applicable o ins i u ional in es o s who ha e he esou ces o do so.
Mo eo e , we show ha accoun ing en o cemen is essen ial o secu e he FRQ.
The e o e, ou s udy p o ides an a ailable ins umen ha au ho i ies can use o
mi iga e he e ec s o unce ain y on FRQ. The e a e di e ences in he
implemen a ion o accoun ing en o cemen guidelines ac oss membe s a es (ESMA,
2017). Consequen ly, he i s s ep ha he EU should ake is o imp o e he
con e gence o accoun ing en o cemen be ween membe s a es. A possible
expansion o he cu en accoun ing en o cemen guidelines mus conside he
impac o unce ain y. Accoun ing en o cemen p io i ies in imes o unce ain y
mus ocus on accoun ing es ima es, p esen a ion o pe o mance, and managemen
assump ions. By analyzing he acc ual-based models, we d aw a en ion o he ac
ha es ima es a e subjec o managemen disc e iona y beha io when unce ain y
ises. Howe e , disc e iona y beha io is no limi ed o accoun ing es ima es bu is
also p esen in de e mining whe he o incu an expense. The posi i e associa ion
be ween eal ea nings managemen and unce ain y suppo s his s a emen . This is
o in e es o in es o s, who should ocus on business decisions aken by
managemen and hei u u e e ec s on business de elopmen s.
Besides he abo e-men ioned con ibu ions, ou s udy aims o expand he sample
pe iod o 2022; he e o e, we a e able o eckon impo an e en s ha inc eased he
unce ain y in he EU. Addi ionally, he s uc u e and cha ac e is ics o ou sample
allow o high a iabili y, which is desi ed in he analysis o i m ou comes (FRQ)
and mac oeconomic aspec s (unce ain y). The esul s o p e ious esea ch ha elies
on samples consis ing o only one coun y may be biased due o low a iabili y.
Taken oge he , he cha ac e is ics o ou sample men ioned abo e, he pe iod
analyzed, he inco po a ion o accoun ing en o cemen in o he analysis, and he
addi ional es s p o ide a aluable con ibu ion o he exis ing li e a u e.
The mo i a ion o his s udy is g ounded in he ac ha , as Yung and Roo (2019)
highligh , high unce ain y led o a di e en economic eali y and indus y
egula ions. Mo eo e , Bake e al. (2016) emphasize ha unce ain y has ha med
he economic pe o mance in he Uni ed S a es and EU. In hese ci cums ances,
in es o s need eliable sou ces o in o ma ion, and, as And ei e al. (2023) poin ou ,
he in es o s u n o inancial s a emen s. Howe e , mos o he esea ch done on he
associa ion be ween unce ain y and FRQ is hea ily concen a ed in he Uni ed
S a es (e.g. Be mpei e al., 2021; Dhole e al., 2021; and Naga e al., 2018) wi h no
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
620 Vol. 19, No. 3
e idence o he EU which made no able p og ess owa d he ha moniza ion o
inancial epo ing. To p o ec in es o s om misleading in o ma ion, he e a e
se e al moni o ing mechanisms in place; Jiang e al. (2022), Cui e al. (2021), and
El Ghoul e al. (2021) indica e ha s ong ex e nal moni o ing is bene icial o FRQ
when unce ain y ise. Howe e , he accoun ing en o cemen which can be
conside ed as he mos impo an componen o ex e nal moni o ing was no ye
examined.
The emainde o his pape is o ganized as ollows. In Sec ion 2, we e iew he
exis ing li e a u e and build he hypo hesis. In Sec ion 3, we p esen he
me hodology. In Sec ion 4 we p esen and discuss he indings, and in Sec ion 5 we
d aw conclusions.
2. Li e a u e e iew and hypo hesis de elopmen
2.1 Unce ain y e ec s on FRQ
The ole o inancial epo ing is o educe he asymme y be ween managemen and
in es o s and o a enua e agency con lic . Financial epo s a e he main sou ce o
in o ma ion o in es o s when assessing he pe o mance o he i m and making
in es men decisions. Because unce ain y can c ea e ce ain cons ain s and
conce ns o in es o s, hey pay mo e a en ion o inancial epo s (And ei e al.,
2023). In his con ex , accoun ing schola s we e in e es ed in he e ec s o
unce ain y on di e en dimensions o he FRQ. The li e a u e on he subjec has
g own in ecen yea s; howe e , mos o he esea ch ocusses on he Uni ed S a es
(e.g., Be mpei e al., 2021; Dhole e al., 2021; and Naga e al., 2018) and he e is
li le e idence a he c oss-coun y le el (e.g., El Ghoul e al., 2021). This aspec has
implica ions o he alidi y o he esul s. To be e es ima e he associa ion be ween
FRQ and unce ain y, high a iabili y be ween i m ou comes and mac oeconomic
aspec s is equi ed. In he case o one coun y sample, he unce ain y a ies only
o e ime and no c oss-sec ionally. This limi s he explana o y powe o unce ain y
and does no allow he analysis o o he coun y ac o s. Howe e , when c oss-
coun y samples a e analyzed, ca e ul a en ion should be paid o di e ences
be ween coun ies ega ding accoun ing p ac ices and ins i u ional se ings. F om
his pe spec i e, he EU, which has he same equi emen s and accoun ing p ac ices
o lis ed en i ies, p esen s a pe inen sample o analyze he associa ion be ween
FRQ and unce ain y.
The e a e h ee me hods o measu e unce ain y in he li e a u e. Dai and Ngo (2020),
Jain e al. (2021), and Goncal es e al. (2022) use elec ions. In elec ion yea s, he
unce ain y abou u u e go e nmen policies inc eases. Shin (2019) uses ma ke
ola ili y o measu e unce ain y, while mos au ho s use he index de eloped by
Bake e al. (2016). Elec ion yea s can ha e g ea applicabili y in s a es like he
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 621
Uni ed S a es, whe e no able changes a e expec ed o occu when he new
adminis a ion is in es ed. Howe e , in o he coun ies, i is di icul o measu e
unce ain y using elec ions because i will no necessa ily lead o signi ican changes
in adminis a ion. Fo example, in EU coun ies, elec ions may no c ea e he con ex
o unce ain y. The mone a y policy is cen alized unde he Eu opean Cen al Bank
(ECB), while he iscal policies should adhe e o EU ules. On he o he hand, ma ke
ola ili y only e lec s shocks in he ma ke , which does no always imply
unce ain y. The index de e mined by Bake e al. (2016) is supe io o he o he s, i
is a comp ehensi e measu e cons uc ed based on he p esence o ele an keywo ds
in he main newspape s, changes in mone a y and iscal policy, and mac oeconomic
o ecas s. Howe e , he index is a ailable o 29 coun ies, o which 11 a e om he
EU.
In mos cases, he sample pe iod ends in he 2015-2018 in e al (e.g., Be mpei e al.,
2021; El Ghoul e al. 2021; Naga e al., 2018; and Yung & Roo , 2019).
Consequen ly, p e ious esea ch is limi ed o one single majo e en ha led o an
inc ease in unce ain y, namely he inancial c isis o 2008. The e o e, u u e
esea ch is needed ha inco po a es he la es impo an e en s, such as he Co id-
19 pandemic o he Uk aine agg ession. These inc ease unce ain y wo ldwide and
help us o be e analyze unce ain y.
Rega ding he easons o he decline in FRQ, mos esea che s a gue ha his is
ela ed o managemen incen i es. Be mpei e al. (2021) sugges ed ha managemen
wan s o imp o e inancial pe o mance when unce ain y is high. This is linked wi h
he concep in oduced by Hi shlei e e al. (2009) 'lean agains he wind', when
e e y hing is going down and he unce ain y ises, he managemen is incen i ized
o smoo h he ea nings o c ea e a sense o s abili y. Shin (2019) sugges s ha o
a oid small losses, managemen smoo hs he ea nings un il he i m becomes
p o i able. The au ho hen highligh s ha in es o s eac mo e s ongly o small
losses in imes o high unce ain y han in o he pe iods. On he con a y, Jin e al.
(2019) and Du e al. (2023) poin ou ha he decline in FRQ du ing high unce ain y
can be a ibu ed o in es o s. When unce ain y inc eases, in es o s a e mo e
conce ned wi h mac oeconomic news han wi h i m-le el in o ma ion. The e o e, i
would be di icul o in es o s o de ec he ea nings managemen . The i s s eam
o explana ions linking he decline in FRQ wi h he managemen incen i es is mo e
app op ia e, since he li e a u e sugges s ha in es o s pay mo e a en ion o he
inancial epo s in imes o unce ain y (And ei e al., 2023 and Wal e s e al., 2023).
This is mo e sui able o he EU, whe e mos o he in es o s a e ins i u ional
in es o s and in es men unds ha cons an ly analyze he pe o mance o hei
po olio. Howe e , gi en ha he e is no speci ic esea ch o he EU, i is di icul
o gene alize he p e ious indings.
The li e a u e shows ha unce ain y is dis up i e o capi al ma ke s, in es o s, and
he economy. In es o pessimism inc eases in pe iods wi h high unce ain y, and due
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
622 Vol. 19, No. 3
o inancial cons ain s and ea o u u e losses, hey a e conce ned abou hei
in es men s. In his con ex , inancial s a emen s ep esen a co ne s one and
ensu ing he FRQ is i al. Howe e , managemen incen i es may p e ail o e
accoun ing s anda ds, and he e o e ea nings managemen is mo e equen in
pe iods o high unce ain y. We p esen ha li e a u e has some gaps ha need o be
add essed o u he ad ance esea ch in his ield. Fi s , he e was insu icien
esea ch done a he c oss-coun y le el wi h all he disad an ages p esen ed abo e.
The pe iod be ween 2020-2022 has no ye been add essed in he li e a u e, when
unce ain y inc eases signi ican ly. Fu he mo e, he limi a ions ha a ise om
p e ious measu es om unce ain y; some o hem a e no gene ally applicable,
o he s do no necessa ily imply unce ain y, while he index de eloped by Bake e
al. (2016) is es ic ed o se e al coun ies. Gi en hese poin s and he pa icula i ies
ha cha ac e ize he EU esea ch, which ocusses on he EU is welcome.
H1: In he EU, he FRQ is nega i ely associa ed wi h unce ain y.
2.2 Accoun ing En o cemen and FRQ
Jiang e al. (2022), Cui e al. (2021), and El Ghoul e al. (2021) emphasize ha
ex e nal moni o ing is essen ial o educe he nega i e associa ion be ween FRQ and
unce ain y. They analyze he co e age o analys s and audi o s as a o m o ex e nal
moni o ing. Accoun ing en o cemen is also a o m o ex e nal moni o ing. In he
la es annual epo , ESMA de ines accoun ing en o cemen as he examina ion o
he compliance o inancial epo ing wi h he applicable amewo k and aking
app op ia e measu es when in ingemen s a e disco e ed (ESMA, 2023). Ball (2006)
discussed he expec ed ou come o he adop ion o IFRS in he EU. The au ho
emphasizes ha in he absence o s ong accoun ing en o cemen p ac ices, he FRQ
will no imp o e as expec ed. In his case, a e IFRS adop ion, he EU made se e al
e o s o imp o e and ha monize accoun ing en o cemen be ween membe s a es.
ESMA has a dedica ed depa men ha coo dina es accoun ing en o cemen in he
EU. O e he yea s, his ac i i y has made no able ad ances. In 2014, ESMA
implemen ed he accoun ing en o cemen guidelines, in 2017 i published he epo
on he implemen a ion o hese guidelines in each membe s a e and s a ing wi h
2018 he annual epo s o accoun ing en o cemen con ain mo e ele an
in o ma ion. On he o he hand, Di ec i e 2006/43/EC and Di ec i e 2014/56/EU
s eng hen accoun ing en o cemen by egula ing audi supe ision in he EU.
The li e a u e shows ha accoun ing en o cemen is posi i ely associa ed wi h FRQ
( o example: B own e al., 2015; E ns be ge e al., 2012; Windisch, 2021; and
Böcking e al., 2015). Windisch (2021) desc ibes he mechanism h ough which
accoun ing en o cemen wo ks, ha is, name and shame. Accoun ing e o s and
in ingemen s a e made a ailable o he ma ke by ele an ins i u ions. Following
disclosu e o accoun ing e o s in he capi al ma ke , p io e idence sugges s ha
companies ace a dec ease in ma ke alua ion and an inc ease in he cos o equi y
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 623
( o example, Ch is ensen e al., 2020; E ns be ge e al., 2012; and Dee e al., 2011).
Accoun ing en o cemen is a powe ul mechanism h ough which he FRQ is secu ed
wo ldwide. Howe e , he EU p esen s a pa icula con ex because, in he las ew
yea s, he e has been an imp o emen in accoun ing en o cemen , and all he membe
s a es mus ollow he same ules. The only di e ence is in he implemen a ion o
hese ules, an aspec poin ed ou also by ESMA in he implemen a ion epo
(ESMA, 2017). The e o e, his ea u e allows us o in es iga e whe he accoun ing
en o cemen is essen ial o educe he unce ain y e ec s on FRQ.
H2: In coun ies wi h s ong accoun ing en o cemen , unce ain y is less nega i ely
associa ed wi h FRQ.
3. Resea ch me hodology
3.1 Unce ain y
To measu e unce ain y, we use wo indica o s, he Business Con idence Indica o
(BCI) de e mined and published by he OECD and he Eu opean Sen imen Indica o
(ESI) calcula ed by Eu os a . In p e ious esea ch, mos schola s used he index
de eloped by Bake e al. (2016) o a dummy a iable o yea s wi h poli ical
elec ions. Howe e , he index de eloped by Bake e al. (2016) has da a only o 11
EU coun ies, and poli ical elec ions do no necessa ily inc ease he unce ain y in
EU as al eady explained abo e.
Bo h BCI and ESI a e su ey-based indexes. A high alue o he ESI and BCI
indica es inc eased con idence in he u u e pe o mance o he economy, while a
low alue means unce ain y abou he u u e. We can a gue ha BCI and ESI a e
ele an candida es o measu e unce ain y and app op ia e o his s udy due o:
a) BCI and ESI a e su ey-based and e lec he opinion o economic agen s abou
he u u e. The e o e, when unce ain y ises, he indexes de e io a e;
b) BCI and ESI a e calcula ed o each indi idual coun y o he EU. This ensu es
adequa e a iabili y wi hin ou sample, since ou unce ain y measu es a y be ween
he coun ies included. This ace inc eases he explana o y powe o ou esul s;
c) BCI and ESI dec ease a ound majo e en s o c ises such as he inancial c isis o
he Co id-19 pandemic (please see Figu e 1). In his case, BCI and ESI a e adequa e
o cap u e he unce ain y.
In ou analysis, we use he change in BCI and ESI om yea o yea o each EU
coun y. Bo h indexes ha e da a a ailable o each EU coun y on he OECD and
Eu os a websi es. Bulga ia, C oa ia, Cyp us, Mal a, and Romania a e no pa o he
OECD, he e o e, o BCI we use he alue de e mined o EU 27 ins ead.
Figu e 1 shows he e olu ion o he median alue o BCI and ESI o he 27 EU
coun ies.
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
630 Vol. 19, No. 3
Table 5. Reg ession esul s
Sou ce: au ho ’s p ocessing
Table desc ip ion: The able shows he eg ession esul s. In each case, we employed an OLS
model wi h coun y- and indus y- ixed e ec s. BCI#ENF and ESI#ENF a e he in e ac ion
e ec s be ween ou unce ain y measu es and accoun ing en o cemen . In e ms o
in e ac ion, each a iable was cen ed by sub ac ing he median alue. In each model, he
s anda d e o s a e clus e ed a he i m le el. The T alues a e in pa en heses. The
signi icance le els a 10%, 5%, and 1% a e ep esen ed by *, **, and ***, espec i ely.
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 631
Challenges a ising om clima e change, exis ing con lic s, and a agile economic
si ua ion will make unce ain y a pe sis en s a e in he coming yea s. I policymake s
do no ake he app op ia e measu es, he decline in FRQ will esul in a de e io a ion
in in es o con idence, educed ma ke pa icipa ion, and wi hd awal o in es o s
and o ien a ion owa ds o he capi al ma ke s. Consequen ly, he inabili y o ob ain
inancing om he capi al ma ke will inc ease he cos o capi al o he companies,
and his will a ec he EU economy.
Nex , we in es iga e whe he accoun ing en o cemen can ac as a mode a ing ac o
be ween FRQ and unce ain y. The li e a u e sugges s ha accoun ing en o cemen
is posi i ely associa ed wi h FRQ. Ou esul s a e consis en wi h he li e a u e, he
coe icien o ENF is 0.0068 in Model 1, 0.0071 in Model 2, 0.0066 in Model 3,
0.0065 in Model 4, 0.0072 in Model 5, 0.0073 in Model 6, 0.0071 in Model 7, and
0.0067 in Model 8. The coe icien is s a is ically signi ican a he 5% le el in all
cases. The esul s show ha i accoun ing en o cemen inc eases by one uni , he
FRQ will inc ease on a e age ac oss all models wi h 0.0069. To analyze whe he
accoun ing en o cemen holds signi icance in con ex o unce ain y, we in oduce
wo in e ac ion e ms be ween accoun ing en o cemen and he wo measu es o
unce ain y. The posi i e coe icien o bo h in e ac ion e ms indica es ha
accoun ing en o cemen has he abili y o educe he nega i e associa ion be ween
FRQ and unce ain y. The in e ac ion e m be ween BCI and ENF is s a is ically
signi ican a he 10% le el, while he in e ac ion e m be ween ENF and ESI is
s a is ically signi ican a he 5% le el in Model 5 and Model 7 and a 10% in Model
6 and Model 8. The esul s indica e ha when accoun ing en o cemen inc eases by
one uni , he nega i e associa ion be ween unce ain y and FRQ will dec ease on
a e age by 2.7% in he i s ou models and by 4.57% in he las ou models.
Rega ding he in e ac ion e m be ween ENF and BCI/ESI, he esul s can be linked
o he exis ing li e a u e. The e is a body o esea ch sugges ing ha accoun ing
en o cemen in ingemen s p oduce s ong nega i e ma ke eac ions when hey a e
made a ailable o he public (Ch is ensen e al., 2020; Dechow e al., 1996;
E ns be ge e al., 2012; Dee e al., 2011). In he EU, accoun ing en o cemen bodies
selec a sample o se e al companies o audi o s o be sc u inized in a inancial yea .
E o s a e made a ailable o he public h ough di e en channels: changes in he
inancial s a emen s, public co ec i e no es, o an o icial announcemen om he
accoun ing en o cemen body. We know ha unce ain y is gene alized o he en i e
ma ke and p oduces nega i e e ec s o in es o s and companies. Howe e , when
an accoun ing en o cemen ac ion is aken agains a company o i s audi o , his
c ea es a pa icula con ex ha cap u es he a en ion o he en i e ma ke . The e o e,
he nega i e e ec s p oduced by unce ain y combined wi h accoun ing en o cemen
ac ions wo sen he company’s posi ion in he capi al ma ke . Consequen ly, in EU
coun ies whe e accoun ing en o cemen is s ong, managemen is no likely o
engage in ea nings managemen equen ly.
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
632 Vol. 19, No. 3
The esul s a e o in e es o EU policymake s; accoun ing en o cemen is a use ul
ins umen ha can coun e he nega i e associa ion be ween FRQ and unce ain y.
In he la es pee e iew epo on he implemen a ion o en o cemen guidelines,
ESMA lis s se e al poin s o de iciency o speci ic EU membe s a es such as
inadequa e s a ing, insu icien quali ica ion o human esou ces, imp ope
selec ion me hods, and inconsis encies ega ding he iming and ex en o p ocedu es
(ESMA, 2017). The e o e, s eng hening he implemen a ion o he en o cemen
guidelines and he con e gence be ween he membe s a es is a s a ing poin .
Fu he mo e, possible changes in guidelines should inco po a e he e ec s o
unce ain y, o example, o inc ease he sample o companies o be examined when
unce ain y ises o o ocus on speci ic indus ies, o example, Be mpei e al. (2021)
demons a e ha he FRQ o companies om heal hca e, anspo , de ense, abaco,
and pha ma is mo e suscep ible o unce ain y. Addi ionally, he membe s a es
should alloca e su icien esou ces o accoun ing en o cemen o acili a e p ope
s a ing, alen a ac i eness, and enough aining. We ely on acc uals-based
models in es ing ou hypo heses and we show ha managemen disc e iona y
beha io in ensi ies in imes o unce ain y. The e o e, he en o ce bodies should
p io i ize he accoun ing es ima es and he managemen assump ions. Inspec o s
should check how accoun ing es ima es a e de e mined, hei p esen a ion in
inancial s a emen s, and ela ed disclosu es. Coope a ion be ween membe s a es is
also a key poin in ensu ing s ong accoun ing en o cemen .
The con ol a iables a e consis en wi h he li e a u e. The e is a nega i e
associa ion be ween i m size and FRQ, esul ing in smalle companies managing
ea nings mo e equen ly han la ge companies. Fi ms ha a e audi ed by a Big4
audi o , epo s unde IFRS, ha e good inancial pe o mance, and a e no le e aged
a e posi i ely associa ed wi h FRQ. The adjus ed R squa ed is app oxima ely 10%,
which is compa able o he adjus ed R squa ed ob ained by Be mpei e al. (2021),
Goncal es e al. (2022), Yung and Roo (2019), Jain e al. (2021), and El Ghoul e
al. (2021).
4.2 Ano he measu e o FRQ
Real ea nings managemen (RMS) is used o imp o e company pe o mance by
educing disc e iona y expenses. This me hod es ima es he expec ed disc e iona y
expenses and hen compa es hem wi h he ac ual disc e iona y expenses. The la ge
di e ence be ween he wo means ha manage s cu disc e iona y expenses o
imp o e pe o mance and, he e o e, he FRQ dec ease. The RMS is ob ained
ollowing he app oach o Cohen e al. (2008) and is equal o he esiduals om he
below model.
DEi
TAi i =α0+α1
1
TAi -1 +α2�REVi
TAi �+εi
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 633
The DE is disc e iona y expenses, which is he sum o selling and gene al
adminis a i e expenses and esea ch and de elopmen expenses. The emaining
a iables a e explained in Sec ion 3. To acili a e in e p e a ion, we mul iply he
esiduals by -1. Fo he sake o b e i y, in Table 6 we p esen only he esul s o he
a iables o in e es .
Table 6. Reg ession esul s o unce ain y and RMS
(9)
(10)
RMS
RMS
BCI
-0.0575***
(-10.41)
ESI
-0.0491***
(-14.59)
ENF
-0.0263***
-0.0298***
(-3.44)
(-3.89)
BCI#ENF
0.0011**
(2.62)
ESI#ENF
0.0010*
(2.41)
Con ol a iables
Yes
Yes
R-squa ed
0.4515
0.4522
N
35489
35489
Coun y and indus y ixed e ec s
Yes
Yes
Table desc ip ion: The able shows he eg ession esul s o eal ea nings managemen
(RMS). In each case, we employed an OLS model wi h coun y- and indus y- ixed e ec s.
BCI#ENF and ESI#ENF a e he in e ac ion e ec s be ween ou unce ain y measu es and
accoun ing en o cemen . In e ms o in e ac ion, each a iable was cen e ed by sub ac ing
he median alue. In each model, he s anda d e o s a e clus e ed a he i m le el. The T
alues a e in pa en heses. The signi icance le els a 10%, 5%, and 1% a e ep esen ed by *,
**, and ***, espec i ely.
The coe icien s o BCI and ESI a e nega i e, which also means ha in his case he
unce ain y is nega i ely associa ed wi h FRQ. The nega i e coe icien o BCI is
0.0575 while he coe icien o ESI is 0.0491 which means ha o an inc ease wi h
one uni o unce ain y, he FRQ will dec ease by 5.75% in Model 9 and by 4.91%
in Model 10. Bo h coe icien s a e s a is ically signi ican a he 1% le el. Rega ding
accoun ing en o cemen , he esul s a e consis en wi h hose ob ained in he i s 8
models. Fo an inc ease wi h one uni in accoun ing en o cemen , he nega i e
associa ion be ween FRQ and unce ain y dec eases by 1.98% in Model 9 and by
2.12% in Model 10. When compa ing ea nings managemen wi h eal ea nings
managemen , he la es is ha de o disco e by audi o s and en o cemen bodies
because i lies in ope a ional decisions a he han accoun ing ea men s. This
implies ha i is mo e likely ha managemen will engage in eal ea nings
managemen mo e equen ly han in ea nings managemen . This d aws a en ion o
he in es o s o moni o he business decisions aken by managemen and o analyze
hei impac .
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
634 Vol. 19, No. 3
4.3 Ano he measu e o unce ain y
Unce ain y is an e en -based phenomenon. Ce ain e en s aise o p olong
unce ain y. As ano he measu e o unce ain y, we iden i y 6 yea s wi h no able
e en s in he EU. Table 7 shows he yea and he associa ed e en .
Table 7. Yea s o unce ain y in he EU
Yea
E en
2008
Financial c isis
2011
EU so e eign deb c isis
2016
B exi
2020
Co id-19
2021
In la ion and Ene gy Cos s
2022
Uk aine agg ession
Sou ce: au ho ’s p ocessing
We a gue ha in hese yea s he unce ain y inc eases ac oss he EU. We c ea e a
dummy a iable ha akes 1 o hose yea s and 0 o he emaining yea s. The
eg ession esul s a e in Table 8. Fo he sake o b e i y, we p esen only he esul s
o he a iables o in e es .
Table 8. Reg ession esul s o EVENT
(11)
(12)
(13)
(14)
FRQ1
FRQ2
FRQ3
FRQ4
EVENT
0.1790**
0.1320*
0.1970***
0.2040***
(3.22)
(2.40)
(3.53)
(3.68)
ENF
-0.0050*
-0.0053*
-0.0049*
-0.0046*
(-2.00)
(-2.17)
(-1.97)
(-1.88)
EVENT#ENF
-0.0071**
-0.0063**
-0.0069**
-0.0060**
Con ol a iables
Yes
Yes
Yes
Yes
R-squa ed
0.1304
0.1337
0.1293
0.1326
N
35,489
35,489
35,489
35,489
Coun y and indus y ixed e ec s
Yes
Yes
Yes
Yes
Table desc ip ion: The able shows he eg ession esul s o EVENT as ano he measu e o
unce ain y. In each case, we employed an OLS model wi h coun y- and indus y- ixed
e ec s. EVENT#ENF is he in e ac ion e ec s be ween ou unce ain y measu e and
accoun ing en o cemen . In e ms o in e ac ion, he ENF was cen ed by sub ac ing he
median alue. In each model, he s anda d e o s a e clus e ed a he i m le el. The T alues
a e in pa en heses. The signi icance le els a 10%, 5%, and 1% a e ep esen ed by *, **, and
***, espec i ely.
The esul s sugges ha in hose 6 yea s wi h e en s gene a ing unce ain y, a EU
le el, he FRQ declines. In con as o BCI and ESI, we expec a posi i e sign o he
EVENT coe icien . The coe icien is s a is ically signi ican a 1% in Model 13 and
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 635
Model 14, 5% in Model 11, and 1% in Model 12. The esul s o accoun ing
en o cemen a e simila o hose ob ained p e iously. This obus ness es
demons a es ha ou esul s hold hei signi icance.
4.4 Ano he measu e o accoun ing en o cemen
Isid o e al. (2020) p o ide a comp ehensi e measu e consis ing o ou ac o s ha
explain mo e han 70% o he a ia ion in FRQ. Fac o 3 deals wi h accoun ing
en o cemen . We use he alue o ha ac o as ano he measu e o accoun ing
en o cemen . We ely on his because he s udy o he ecen Isid o e al. (2020)
ad ances a measu e o accoun ing en o cemen and has da a a ailable o 14 EU
coun ies. The p incipal e ec was elimina ed due o collinea i y wi h coun y ixed
e ec s. In Table 9 a e he esul s o eg ession; o he sake o b e i y, we p esen
only he esul s o he a iables o in e es .
The esul s o he in e ac ion e ms a e simila o he p e ious ones and show ha
accoun ing en o cemen has he capaci y o educe he nega i e associa ion be ween
FRQ and unce ain y. In Models 15-18, he educ ion is es ima ed a an a e age alue
o 15%, while in Models 19-22 i is es ima ed a 10%. The coe icien is posi i e and
s a is ically signi ican a he 5% le el. The e o e, we conclude ha ou esul s a e
obus o ano he measu e o accoun ing en o cemen .
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
636 Vol. 19, No. 3
Table 9. Reg ession esul s o ano he measu e o accoun ing en o cemen
Table desc ip ion: The able shows he eg ession esul s o ISIDRO as ano he measu e o
accoun ing en o cemen . In each case, we employed an OLS model wi h coun y- and
indus y- ixed e ec s. BCI#ISIDRO and ESI#ISIDRO a e he in e ac ion e ec s be ween ou
unce ain y measu es and accoun ing en o cemen . In e ms o in e ac ion, each a iable was
cen ed by sub ac ing he median alue. In each model, he s anda d e o s a e clus e ed a
he i m le el. The T alues a e in pa en heses. The signi icance le els a 10%, 5%, and 1%
a e ep esen ed by *, **, and ***, espec i ely.
Accoun ing and Managemen In o ma ion Sys ems
Vol. 19, No. 3 637
5. Conclusions
The pu pose o his s udy is o analyze he e ec s o unce ain y on FRQ in he
con ex o he EU. Based on 35.489 i m-yea obse a ions, ou esul s sugges ha
unce ain y is nega i ely associa ed wi h FRQ. Th ough he p esen s udy, we d aw
a en ion o he EU ins i u ions ha he e o s made o imp o e he FRQ need o be
eassessed, as i is expec ed ha he nex yea s will be cha ac e ized by high
unce ain y. Fu he mo e, i is necessa y o ensu e ha in es o s can always ely on
he quali y o inancial in o ma ion, e en in pe iods o p o ound c isis and
unce ain y. The unc ioning o mode n capi al ma ke s is highly dependen on he
in o ma ion p o ided by i ms; he e o e, EU ins i u ions need o ind e icien
measu es o comba he e ec s o unce ain y.
We analyze unce ain y in he con ex o EU coun ies since his allows us o obse e
di ec ly he e ec s o unce ain y and accoun ing en o cemen . Ou esul s a e obus
and consis en . We use eal ea nings managemen as ano he measu e o FRQ. We
hen a gue ha manage s a e likely o engage mo e equen ly in eal ea nings
managemen han in ea nings managemen . The esul s o his obus ness es
alida e he indings o his s udy. Fu he mo e, we use ano he measu e o
unce ain y and accoun ing en o cemen . The esul s show ha i we use o he
measu es o ou a iable o in e es , he indings a e he same. Fu he mo e, we use
in ou analysis coun y and indus y ixed e ec s and combining his wi h he same
se o ules applied o all EU lis ed companies, ou sample can bene i om pa ially
elimina ing he e ec s o po en ial unobse able e ec s.
One o he a ailable ins umen s ha EU ins i u ions can use o comba he e ec s
o unce ain y is ep esen ed by accoun ing en o cemen . We p o ide e idence ha
when accoun ing en o cemen is s ong, he nega i e associa ion be ween
unce ain y and FRQ is less p onounced. Ou esul s can guide policy make s and
mo i a e hem o imp o e accoun ing en o cemen .
Ou conclusions a e simila o hose al eady p esen ed in he li e a u e ha
unce ain y is nega i ely associa ed wi h FRQ (see, e.g., Be mpei e al., 2021; Shin,
2019; Jin e al., 2019; Du e al., 2023; and Yung & Roo , 2019) and highligh ha
managemen incen i es p e ail in imes o high unce ain y. Rega ding accoun ing
en o cemen , ou conclusions a e in line wi h Jiang e al. (2022), Cui e al. (2021),
and El Ghoul e al. (2021), which highligh s he impo ance o ex e nal moni o ing
when unce ain y ises.
In Sec ion 4 we also discuss he implica ions o his s udy o in es o s and EU
ins i u ions and p opose se e al ac ions o imp o e accoun ing en o cemen .
Implemen ing he en o cemen guidelines and b inging he con e gence among he
membe s a es o he EU a e he i s measu es o be aken. Then, he accoun ing
Unce ain y, inancial epo ing quali y
and accoun ing en o cemen : E idence om he Eu opean Union
638 Vol. 19, No. 3
en o cemen me hodology should accoun o unce ain y. All hese p oposed ac ions
will s eng hen accoun ing en o cemen in he EU.
The p esen s udy has some limi a ions. The i s is ha he s eng h o audi ing and
epo ing s anda ds is a ailable un il 2019. We mi iga e he possible conce ns
ega ding his by using ano he measu e o accoun ing en o cemen . Fu he mo e,
ce ain changes could ha e occu ed in ecen yea s ega ding accoun ing
en o cemen , changes ha a e no ully e lec ed in ou accoun ing en o cemen
measu e. The e o e, u u e esea ch is needed in he coming yea s which can p o ide
addi ional e idence on his subjec . We include con ol a iables al eady es ablished
in he li e a u e in ou eg ession analysis, and he explana o y powe o ou model
is simila o hose al eady exis ing in he li e a u e on his subjec . Howe e , he
esul s may be sensible o he inclusion o o he con ol a iables. We belie e ha
his limi a ion was add essed in he p esen s udy by including indus y and coun y
ixed e ec s. Ano he limi a ion is ha FRQ models may ha e some measu emen
e o s, which a e acknowledged in he li e a u e. We add essed his using ou
models o ea nings managemen and one model o eal ea nings managemen . We
belie e ha his is su icien o he pu pose o his s udy; howe e , u u e esea ch
could ely on o he models. Ano he po en ial opic o u u e esea ch is he
managemen es ima es in imes o unce ain y; since hese a e sensi i e o
subjec i i y, he disc e ion o managemen could inc ease when unce ain y is high.
Re e ences
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And ei, D., F ideman, H., & Ozel, N.B. (2023) “Economic unce ain y and in es o
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