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The need for qualified staff in the hospitality industry

Abstract from main body The aim of our project is to discuss and analyze the need for qualified employees in the hospitality industry and the way they contribute to the development of this segment. Our objective is to find out if education is an indispensable element or if there is another string in the mix that accounts for the success of today’s leading hotel chains. We had the opportunity to speak with some of the managers of leading hotel chains from Bulgaria who gave an honest answer to all of our questions so we can compare theory and practice. After a considerable amount of literature covered we put to a debate the results from our conducted interviews and the initial literature review in order to conclude on the role of education in this rapidly developing business. In the end we came to a decision that higher education is of great importance for the start of any career and nowadays it is a necessity rather than an extra. Combined with the right personal qualities theoretical knowledge is the springboard to future success where nothing is impossible.
Acknowledgements I would like to express my gratitude to Mrs. E. Stoyanova and Mr. S. Ivanov who have supported me throughout the making of this dissertation.
Table of Contents Introduction …………………………………..p. 8 – 9
Literature Review ………………………….p. 10 – 20
Methodology ………………………………p. 21 – 26
Results ……………………………………..p. 26 – 29
Discussion and recommendations …………p. 29 – 32
Conclusion …………………………………p.
List of Abbreviations GDP – Gross Domestic Product
HRM – Human Resource Management
NVQS -National Vocational Qualifications
List of Tables Table 1. The Strengths and Weaknesses of evidence sources .……………………….. p.22 – p.23
Introduction Travel and tourism industry is one of the greatest contributors to the World’s Economy. It employs over a quarter million employees worldwide and accounts for more than ten percent of the Global GDP. The industry’s stability is vital because it keeps the flow of money circulating not only amongst developed countries but also within emerging regions where at times the population is entirely dependent on tourism. Since this sort of industry is based on enjoyment, cultural and natural diversity, it has an educational and placating affect which unifies the people around the world. It is an industry generating a high profit while it does not cause the same environmental damage as other industries do; therefore it is in the interests of the inhabitants of the respective region that its development should be sustained. That has to be done in a balanced manner so that it does not bring negative consequences upon the natural habitat or the local community. The problem is that most people are unaware of the significance that travel and tourism have. For most individuals it is just a two-week period during their summer holiday, which brings back pleasant memories, if any at all. But in fact, the tourism industry is a complex machine, which has its own special features and plays an important role in the global development, preservation of cultures and bio-diversity. There is a high demand in it for qualified staff who understand how this machine works and behaves, who know what to avoid and what measures to take in order to sustain its gradual development.
In the new millennium most profits are generated from services. The Travel and Tourism industries are actively engaged in producing all sorts of services, both tangible and intangible. They also happen to be perishable, therefore we need qualified personnel who know how to deliver these services at a maximum efficiency, thus obtaining as much income as possible but at the same time remaining customer and environment orientated. We need to acknowledge the importance of higher education and training programs since they are the ones which can train and give the needed edge to hospitality employees. Education is an important link at the beginning of a chain responsible for the economic and environmental balance on Earth. The sooner we understand this, the sooner we will have more positive results towards sustaining and expanding the industry.
People from all over the world could benefit from the development of the hospitality industry. Every place on Earth has its beauty and diversity and can deliver attractive sights to visiting tourists. When given the knowledge developing countries can also use their natural resources to enter this business which has a smaller entry barrier compared to other industries. It could bring profit and wealth to places where no other natural resources can be found. In currently popular tourist destinations qualified and educated employees can develop and sustain the business that has been already created. When maintained accordingly, tourism will accumulate wealth in a destination and can improve the infrastructure and everyday life of the people living there but not at the expense of cultural integrity or political stability. If prosperity rises, the lifestyle of the population will improve and people will spend more money, thus stimulating other businesses causing the economy to flourish. That is why tourism is an important segment of the world’s economy and we need to pay more attention to it. On the other hand, if we are not aware of what we are doing we can easily destroy what we already have. Should we continue to manage this industry in a reckless manner, we will inevitably reach the point where most natural resources will be depleted and the tourist destination diversity will be destroyed. Least of all by managing it incorrectly we will suffer greatly from tourist outflows, bankruptcy of hoteliers, insufficient rate of return of the capital invested, all that potentially leading to a financial decay. We have to battle these issues or face the consequences and we can do so by providing better and affordable education.
In this dissertation our aim will be to analyze the significance of hospitality personnel, their contribution to the industry and we will indicate if there is a need for further development in this sector so that the needs of the hospitality industry are met. Also we will show the direct link between education and the impacts it has on the industry. Through analysis of the current state of the educational and on-the-job training systems we will be able to see where sufficient knowledge can be found and where it needs to be developed or upgraded so we can neutralize this weak point in the chain of hospitality industry. We will collect data and analyze different documents and archives as well as conduct interviews that can help us in the evaluation of the state at which the educational system is and how we can improve it so it satisfies the hunger of the tourism industry. There are various ways to collect information for this project, whether it be an interview or analysis of documents and archives or simply by means of observation. We have decided to conduct a document analysis in the form of a case study since it is reliable and practical and can deliver information prior to the study. It is precise and can be reviewed repeatedly. Combined with the exact names of authors it could help us analyze it more accurately. Unfortunately this method will give us the author’s perspective, and as far as the opinions gathered from the interviews are concerned, subjective as they may appear, they will also make up the total objectivity of the study at-hand as this industry is run by people, and more often than not, the successes and failures in it are due to the subjectivity of a decision made or a course taken at any given point in time. At the same time we can examine such documents and review the information and ideas provided to us from other authors and sources, which could be useful in the process. We are going to use the interview research method since it could easily provide the opinion of experienced managers from the hospitality industry.
The results will give us a clear idea of where such educational improvements are needed and how they can contribute to the progress in the hospitality industry and the global economy. We will analyze their long-term effects and their close relation with success.
Literature review Significant changes have been made to the attitudes and attention to training over the last 50 years. From a historical perspective, manual and trade skills have often been realized by means of training apprentices. In more recent years management training has gained a big importance. With the help of modern technology, trainers have significantly improved their efficiency due to the fact that training itself has received a great development and improvement so as to cater to all aspects of modern business.
The data obtained from the HR Focus’s Survey (2001) in the USA define training as having extreme importance second only to that of strategic planning. It is given more prominence than the usually discussed issues of hiring and retention. As regards to planning and forming a strategy, the survey makes he defines training as crucial for every company especially with the advent of high technologies (HR focus, 2001).
Definition It is a process aiming to continually modify attitude knowledge or skill behaviour by means of providing learning experience so that efficient performance can be achieved. It is always a planned process. Its goal as regards the situation at work is to enhance the abilities of the individual so that the current and future needs for qualified staff of the organization are satisfied.
What is the Training Philosophy? According to Armstrong (1999) roughly speaking there are three approaches to training available to companies. Some adopt a laissez-faire approach believing that employees will eventually figure out how to deal with that themselves or by consulting others. (E.g. If skill shortages are incurred, the situation would be rectified by means of staff supply from other companies having already invested in training). Secondly, other companies may invest in training in a time of prosperity for the company, but in a time of woe, money for training will be the first to spare. Furthermore, enterprises adopting a positive training doctrine, do so because they are convinced that a competitive edge is achieved by means of hiring better staff than the competition. This goal cannot be attained to if managers do not invest in improving the abilities and competencies of their employees. It is likewise important for employees to realize that companies are acting driven by pure faith in creating opportunities for further training and improvement. This is the so-called proactive approach assigning to training a continuous and on-going role within the company as opposed to the reactive approach.
What are The Main Principles of Efficient and Effective Training? For a company to work out an efficient training program the following principles should be well known and consistently implemented:
People have their own different rate of learning, and particularly as far as adults are concerned, often have a different starting point as regards to knowledge and skill; they are often driven by different motives and attitudes as well.
Training can only be successful if it implies the recognition of the fact that learning is a voluntary process and also, that individuals must be eager to learn; therefore they must be properly motivated.
Instruction must be delivered regularly in short frequent sessions rather than remain a one-time activity per year, thus providing the much needed continuity of the learning process.
Learning is impeded by inner psychological barriers of a sense of inferiority, previous unpleasant experience, stage frights for trainees lacking previous learning experience.
Appropriate and varied techniques involving the use of all senses are to be implemented during training, which presupposes the active participation of the trainees during training.
Active participation on part of the trainees is to be guaranteed during training sessions.
Praise and reprimand are to be used with care by the trainers, aiming to build up confidence but at the same time curb potential outbursts of overconfidence on part of the trainees.
Targets should be set regularly and cleared by trainees, their progress being checked frequently so that gradual acquisition of knowledge is guaranteed.
It should be recognized that Skills and Knowledge are acquired gradually with periods of progress offset by periods of “standstill” and even regress of what has been so far acquired so instructors must be perfectly aware of the existence of the so-called learning curve, as it can cause disappointment and frustration in many trainees.
What are the Effective and Efficient Training Benefits? The principles of effective and efficient training exact that trainers must also care about the needs of the trainees themselves and only if followed through and understood completely, the following benefits can be realized:
Minimization of learning costs.
Improvement in the performance at an individual, team and corporate level in terms of overall productivity.
Improvement of the operational flexibility by expanding the scope of skills in operators, a combination of many skills, which once achieved, can hopefully bring about multitasking as well.
Attraction of high quality employees with the offer of learning and development opportunities, an increase of their levels of competence and enhancement of their skills, thus enabling them to enjoy a higher job satisfaction so they can gain higher rewards and advance within the enterprise.
Increase of the commitment of employees by introduction of the idea of “ownership” of the objectives and goals of the enterprise.
Change management realized by means of increasing the awareness of the necessity of change needed to adjust to new situations.
Development of a positive culture in the enterprise – respect for and tolerance to other religions, races, etc.
Provide customers with a higher quality service:
The great significance of training managers to the hospitality industry has been emphasized on by Peterson and Hicks (1996). According to them training managers is essential because of the inevitable changes concomitant to enterprises. To achieve a continuity successful enterprises will reprogram themselves in such a way as to retrain their employees in a way compliant with the exigencies at-hand, e.g. to be able to stand out and survive in the harsh competitive world of the Hospitality Industry where the battle for and every client will be won with a little edge based on skills, knowledge and competence, etc.
What is The significance of Training Managers in Hospitality? The significance o training managers to the hospitality industry has been emphasized on by Peterson and Hicks (1996). According to them training managers is of paramount importance because of the unavoidable changes occurring in enterprises. To achieve a continuity in their work, successful enterprises will reprogram themselves in such a way so as to retrain their best staff, thus realizing a clear advantage over the competition in the field stemming from the increased competence of the trained managers.
What are Some of the Consequences of not Providing Training? The above mentioned authors are also adamant that the enterprises successful at present operating without sufficient and timely change and rejecting the idea of change may slacken off the quality of their services and will be in for a big surprise at what will befall them as a result of neglected training.
They claim that training is a process which cannot and should not be stopped under any circumstances ensuring the continuity in updating and upgrading operators’ competences their becoming obsolete or obsolescent just like equipment and technologies become “morally” old or outdated.
What are the Real Benefits of Effective Training? The same authors have pointed out the consequences of not providing training; they have also clarified how enterprises can also benefit from a successful training of managers.
The effect of management training at high levels should be effectuated throughout the entire company where trained staff enjoy having stronger teams of employees, some of whom have the potential to become managers, with that in turn leading to a more competent company at all levels and better financial results.
We can be convinced that hotel owners abroad generally believe strongly in management training and would consider investing in effective training programs as can be seen in the example of a large sum of money spent on training staff at a Hotel and Casino in Las Vegas (Gob, 1999).
The significance of management training is reemphasized by the president of Hospitality Department at HFS, John Russell according to whom only chains focusing on training have chances of survival in the Hospitality Industry (Cited by Gillette, 1996).
What is The Economy’s Effect on Training? Serious investment in quality training will hopefully bring the emergence of managers capable of facing new challenges etc leading the enterprise in a positive and competent manner. During the 80s owing to stresses in the economies of lots of countries, many Hospitality enterprises discontinued management training programs to economize. Once these problems were done away with, almost all enterprises resumed the management training programs as satisfied staff would definitely attract satisfied customers (Gob, 1999).
This pinpoints one of the three approaches propounded by Armstrong that when times are good, enterprises would invest in training while in bad times money for training would be cut out.
What is the Importance of Training in Regards to Staff? Gob (1999) states that this point is often neglected by companies, and it will definitely trigger bad implications as new employees are keen to become contributing members of the team but may be denied this positive urge of theirs. Conversely, in the event that training is effectuated, employees will undoubtedly appreciate the amount of time and effort, an enterprise devotes to them to help them become competent and integrate them better. In the eventuality of the company, not making use of a strong training program, the latter may be viewed from the employees as an indication that the employee in question is not worthy enough to necessitate any such efforts on part of the enterprise.
How Important is Management Training in Regards to Education? Most educational institutions offering Hospitality management-training programs are well aware of the real significance of training according to Gob (1999). The training programs themselves are, to a significant extent, a form of management training.
Gob (1999) claims that most specialists in Hospitality are unanimous as regards the theoretical aspects of management training. However, specialists may remain divided as to the practical application of this theoretical training at work when students already educated on these programs actually enter the Hospitality Industry.
What Are the Types of Training Offered? Professionals in Hospitality also concur in that there are three main places where training can be held. In an Enterprise on the job as well as in an Enterprise off the job. External training can also be provided, each one of them having its advantages and disadvantages deserving to be discussed and interpreted at length.
What is In company – On -the-Job Training? It is a process consisting of several steps as stated by Armstrong (1999). This kind of training involves teaching and coaching by managers or supervisors or training provided at a desk or bench. The efficiency of OJT will remain a function of the quality of this guidance exercised on part of the managers or team leaders.
It is therefore of extreme importance that appropriate training be made available for managers and team leaders, and that it be elucidated to them that it is part and parcel of their job and will constitute a point where their performance as managers and supervisors will be assessed.
Many managers/ team leaders are inexperienced in training techniques and are heavily reliant on their employees’ providing the required training to trainees rather than attempt to acquire the required training capacity themselves. That is why Go et al (1996) claims that OJT is the most widely spread training approach but overusing it can also be detrimental rather than beneficial firstly to the trainee and subsequently or consequently to the enterprise. Specialists in the field also agree that such actions can and will ultimately spell disaster. Employees inexperienced in training techniques may unknowingly instill bad habits or practices in their trainees. In the first instance, the employee may not have the appropriate personality let alone clear idea of the subject-matter be imparted as knowledge to the trainees. It is therefore of paramount importance that if employees are entrusted with the responsibility of developing competence in “rookies”, they must be very knowledgeable of the job at-hand to be able to effectuate a successful training. A more obvious problem which could potentially deter fast acquisition of knowledge among trainees is the attitude to training itself they may have. They should realize what their role in the training is – not of passive onlookers but of actual doers of the training itself together with the trainers. This can be achieved by means of appropriate ways of delivering the training – roleplaying, PBL, etc.
Overall OJT remains the only way to successfully develop specific managerial, technical and administrative skills required by the enterprise as stated by Armstrong (1999). In regards to this point Go et al (1996) is of the opinion that in order for OJT to be effective, planning, structuring and supervising is to be effected. The principal advantages of OJT are as the following:
Actuality and immediacy.
Theory immediately effectuated with relevance easy to observe on site.
Much of the knowledge necessary for the job can be obtained in a natural environment being an integral part of the process where trainees learn how exactly they will be expected to perform at work.
Most efficient if the specific learning objectives have been explained appropriately to the trainees.
Examples can be taken from Domino Pizza where up to 85% of training is OJT given by store managers using training programs developed by corporations. This type of training exemplifies clearly and succinctly the objectives and benefits both to the trainees and the company. It also procures the trainee with the algorithm that should be followed so that all tasks are performed correctly as well as all equipment, materials necessary for effectuating the training. Last but not least, the training aid provides an evaluation form to the trainee so that he/she is allowed to observe his or her progress at any point in time and thus make corrections to his/ her performance at any given moment, thus continually upgrading his/her skills and abilities.
(Go et al, 1996)
What is In Company – Off the job Training? Armstrong (1999) considers this type of training to be the most appropriate way for the trainee to acquire advanced office, customer service or selling skills as well as to make himself/ herself familiarized with company procedures and products. Another asset of this type of training is the increased identification on part of the trainee with the enterprise The availability of equipment and well trained trainers helps in so far as the basic skills are acquired more quickly and often more economically.
The choice of techniques and methods of imparting knowledge may vary. Here are some of them:
Training can be effectuated in the form of talks delivered by the trainers to the trainees. That way, legal matters, outline of procedures, working with applications can be very effective provided that, the newly acquired knowledge is checked on a daily, oftentimes, hourly basis.
Lectures should be avoided as modern trainers nowadays rightfully say: “We don’t lecture”. The trainees are not there to be lectured on anything but to actively participate in the knowledge acquisition.
Discussions based on results of role-playing can also be made use of. They are very effective as knowledge is elicited through the active participation on part of the trainees.
Role-playing is absolutely important as it gives the student a clear idea what his/her role in the company is, as well as helps establish the fact that people play different roles in life – they can be customers or staff even within the same day and they should be good at their roles, no matter how different they can be.
Case studies, PBL based games are to be encouraged. Students, children or adults equally enjoy games as has been discovered by relevant studies, etc.
Films, charts, and other visual materials should not be used alone but be an illustration of something discussed, an additional proof that something is so and so. They are therefore a very good argument, and also develop certain analytical skills in the trainees as they may precede or follow a discussion, thus can be used inductively to the matter-at-hand or as additional arguments.
Interactive videos, computer programs, CD ROMs with relevant software can be used as self-study, but also may be used as group activities where trainees will be expected to analyze in groups a given task, or cover a certain training material.
Questions and answers can be used at any moment following the previous mentioned techniques in which the trainee will ask a question trying to engage the trainees in an activity where they will need to remember what has been covered in a previous session. They are especially useful as warm-up activities and as such may precede other knowledge-building techniques.
(Boella, 1996)
As with any other system apart from the advantages there are always going to be disadvantages as well, as stated by Armstrong (1999). Trainees may be performing very well at class and still find it hard to transfer the knowledge acquired in the classroom on to the working environment due to various reasons – the specificalities of the Hospitality Establishment where there may be some different conditions to the ones encountered during training. Also, the human factor should not be underestimated – different temperaments, mentalities on part of the different members of the staff. Putting the theoretical knowledge to practice, undoubtedly, will require a certain taking into account of lots of other factors specific to each different organization.
The action learning approach was developed by Revans (1989) aiming to eliminate similar situations.
What is External – Off the job Training? As a specific form of training it may include the release of employees so they can have learning sessions at a local college or another learning centre for either short term or their engagement in formal certified programs. Go et al (1996) states that training can either be tailored to the specific needs of an enterprise or it can have its focus on the specific subjects related to both the Hospitality and Tourism Industry. External training can also be concerned with more technical or management topics advantageous to the development of managers or team leaders as well as skills as highlighted by Armstrong (1999).
Various forms of external training could rendered by means of special courses and conferences organized by other enterprises other than educational institutions. Another very beneficial approach used by larger corporations, which Go et al (1996) proposed, are work-based placements at different locations within the mother company or other companies. For those who can participate in external training courses, it broadens their views on the subject as they are exposed to the input of colleagues from different enterprises.
Like most other forms of training, the transfer of what has been learned into practice is more difficult than the two types of training discussed so far. Another major concern is that the efficiency of this type of training will be determined by how quickly the newly obtained knowledge and skills are used; Armstrong (1999) states if not put to practice shortly after completion of the training, it can quickly be forgotten. Finally owing to the variety of courses available, it may be difficult for enterprises to pick the ones most suitable to their objectives.
Hospitality is a business which is demands lots of physical labour, which has been proven time and again in the work of all the establishments in the industry. It definitely depends very much on the commitment and attitude of the staff, the loyalty of the clients depending critically on the human factor’ (Gabriel, 1988:7). Quality and concern for guest service depends crucially on the competence and motivation of employees.
Hochschild (1983) has pointed out that many occupations, in addition to manual and/or mental effort, require the employee to control or manipulate their own or other people’s feelings: what she defined as ’emotional labor’. This is particularly the case in interactive service occupations (Leidner, 1993) where personality and style of role performance are key components. This is the case in most ‘front of house’ hospitality jobs where, according to Western norms, part of giving service is to maintain the fictions that ‘the customer is always right’ and ‘nothing is too much trouble’. Hochschild’s hospitality example is of the air hostess who has been given that job because of her physical attractiveness and personality, and is therefore trained to exude charm and cheerful enjoyment of her stressful, servile and routine job, even when facing an unreasonable, rude or drunken passenger. Smiling is part of the job, however tired, ill or unhappy the employee may be feeling. Failing to smile warmly or frequently enough can be construed as a punishable offence. In some occupations, as with Hochschild’s air cabin crew, emotional labour is part of the job contract and a recognized component of the job training;
Boella (1992:9) has said, ‘sophisticated techniques of marketing, planning, food and beverage control or computer application may be used in a business and these are important, but the extent to which employees can successfully cope with their jobs will determine the level of ‘service’ so often stated as being [the] basic endeavour [of the hospitality industry]’. More effective human resource management is very likely to become an increasingly important priority for the Bulgarian hospitality industry. In a situation of an economic crisis, the call for change in the management of a hotel or a restaurant is great which entails the hiring of competent managers who will be able to increase greatly the chances of success on the tourist market for the respective organization by ensuring that informed decisions are made and also that decision-making has been part of a larger number of people who have all contributed to the respective decisions and who would also be held accountable for the consequences of the respective decisions.
It is well documented that different approaches to handling people c

Weakness In Corporate Governance And Lack Of Transparency Accounting Essay

Weakness in corporate governance and lack of transparency are considered causes of the Asian financial crisis. (Wan et al 2010 ). The corporate scandals happened in the early 2000s urged regulators around the world to suit the medicine to illness of the global financial stability by institute CG reforms. For instance, the Combined Code and the Sarbanes-Oxley Act were then introduced and enacted in UK and US respectively. As an international financial and business hub, Hong Kong is bound to take its share of the sweeping impact of the Asian financial crisis and the scandals. Hong Kong Stock Exchange determined to introduce the code of CG effective from 2005, with similar provisions on financial disclosures in the world. Most of the studies using US and UK data indicated that the quality of corporate governance practices has improved when firms comply with the provisions of the code. A survey conducted by a research team headed by Professor Stephen Cheung in Hong Kong generated a consistent result with those studies; it indicated that the CG standard of Hong Kong listed firms had been improved obviously in 2005.
2.1.3. Earning Management
While regulators aware the issues about CG after the scandals, the confidence of investors around the world who rely on the reported earnings on the financial statement to make their investment decisions have been significantly shaken. Earnings is always the most crucial indicator to evaluate how a firm performs. EM refers to manipulation of a firm’s earnings through direct or indirect accounting methods to achieve a desired level and that does not reflect the economic reality to mislead FS users about the corporate performance or gaining self-interest. In short, the practices of EM deter the credibility of financial reporting. There is tons of empirical researches evidence that good CG improve the transparency of the quality financial reporting which provides more decision-useful information to investors regardless of the geographical location of the listed company. Some of GCG mechanisms include the existence of independent board of directors, audit committee, no CEO duality, no Top Share (controlling shareholder), and shareholder’s coalition in order to face controlling shareholder. ( Werner R. Murhadi 2009).
2.1.4. The unique features of Hong Kong Firms.
A global code of CG should not be applied as a standard among the world attributed to the unique settings of each jurisdiction. It is important for regulators and analysts to understand the unique features and regional conditions affect the incentive of managing earnings and the reporting quality. Therefore, Most of the researches have done to investigate the relationship between the CG practices and EM with US data, only a few o f them analyses about the issues in other regions. An assumption that a same result will be concluded when analyzing HK data is doubtful. The widely acknowledged family ownership concentration characteristic of HK listed firms is still considered as the major contributor of the failure of CG even after the introduction of the code. See the “vote manipulation” done by PCCW and the affair of Citic Pacific in 2009.
2.2 Literature review
The research paper which examine whether the disclosure of Corporate Governance Structures affect the market valuation of earnings surprises and firms’ earnings management, Jui-Chin Chang and Huey-Lian Sun (2010), suggested that the effectiveness of corporate governance in monitoring earnings management is improved after the mandated disclosure. This finding is consistent with the result of the research on CG and earnings forecasts accuracy which supported that it is effective to enhance the quality of financial disclosure by revising the Malaysian Code on Corporate Governance to encourage public companies to implement good governance practices. (Ahmad-Zaluki et al 2010).
However, Davies and Schlitzer (2008) in their paper raised the question about the practicality of an international’ one size fits all” corporate governance code of best practice and the result of the paper implied that the acceptance of a global corporate governance code is limited due to the adaptations in the business environment. Ching, M.L.K. et al. (2002) in their research contended that CG mechanisms and monitoring and oversight activities will affect the use of EM, and the importance of these factors varies across firms and national jurisdictions. Because CG, the legal environment, and monitoring activities are far different in Hong Kong than in the U.S., research studies using American data have limited relevance for HK.
A large proportion of HK listed firms are controlled by families. When most of the results of empirical researches supported the positive association between the CG mechanism and firms’ earnings quality, the unique features of Hong Kong is not being considered in those researches. A rare research done by Jaggi, B., et al. (2009) used samples before the adoption of code of corporate governance and find that a higher proportion of independent corporate boards of HK firms is associated with more effective monitoring to constrain EM by deterring managers from manipulating the reported earnings; thus the earnings quality is expected to be high despite differences in institutional environments. However, it is not the case of which the firms are family-controlled, either through ownership concentration or the presence of family members on corporate boards.
2.3 Objective
While countless studies have already done with data of regions other than HK about the association between CG and EM, some of them have also emphasized on the identity of family ownership concentration in Asian regions. This study is done for the purpose of evaluating the effectiveness of the Code of Corporate Governance Practices effective from 2005 on reducing EM practices and improving earnings quality of HK Firms. Focus on the uniqueness of the Hong Kong Firms’ ownership structure to investigate whether mandatory disclosure of corporate governance structures improves the quality of financial information of Hong Kong family-controlled firms.
2.4 Statement of hypothesis
2.4.1 Indentifying Corporate governance
The research generated by Dey, (2008) examined that different countries have different corporate governance structure. She considered twelve variables of corporate governance to measure different corporate governance structure, such as the effectiveness of the audit committee and duality of CEOs and so on. To determine corporate governance, we would use five variables including a majority-independent audit committee, a majority-independent board, financial professional having sufficient accounting experience on the committee, big 4 auditors and the separation CEO and chair position.
2.4.2 Audit committee and earning quality
According to Hong Kong Exchange and clearing limited (HKEX), after the adoption of code of corporate governance effective that is in 2005, it is a must for Hong Kong listed companies to establish an audit committee, comprising non-executive director (NED) and having at least three members. Based on the research of Bedard, and Courteau (2001), the higher the percentage of independent non-executive director that are not managers in other firms, the higher the earning quality is. Thus, the hypothesis we develop should be:
H1: There is positive relationship between the existence of a majority-independent audit committee and earning quality after the code
2.4.3. Independent board of director and earning management
According to Liu and Lu (2007), they found that when preparing financial statement, the board of director can help to monitor and prevent controlling shareholder as this act may make damage to the other shareholder. Besides, the Hong Kong boards of director were by code at least three NED members as well.
H2: There is positive relationship between the proportion of Independent non-executive directors on the board and earning quality after the code.
2.4.4. CEO duality and earning management
According to R. Murhadi, Werner. Dr (2009), he found that if there is any job duality, it was less effective and strongly influence higher level of discretionary accrual. Anderson et al. (2003) found that earnings informativeness is positively associated with firms having separated CEO and chair positions
H3: The existence of CEO duality positively influences the level of earnings management after the code.
2.4.4 Big 4 auditors and earning management
The previous research done by Klein (2003) found that Big 4 auditors may shift some of their responsibility of monitoring financial reporting to firms’ audit committees after SOX. Therefore, there may be difference between discretionary accruals and Big 4 auditor in the before period of SOX.
H4: There is a negative relation between earning management and proportion of Big 4 auditors after the code.
2.4.5 Experts in audit committee and earning management
The Code in Hong Kong required that among the three members, it should include at least an independent NED with sufficient and appropriate financial experience. Xie, Davison, and DaDalt (2003) use pre-SOX samples to investigate that audit committee members having financial experience/background negatively influence discretionary accruals.
H5: There is a negative relation between discretionary accruals and the existent of financial experts on audit committees after the code.
2.4.6. family control and earning management
Due to the different expectations regarding the effect of family control on earnings management, Jaggi-Leung use pre-code sample to show that an increase in the proportion of outside directors to strengthen board monitoring is unlikely to be effective in family-controlled firms. The percentage of NED on the board to a total number of directors is counted 20% as cut-off point.
H6: There is a negative relation between the existent of family ownership control and earnings quality after the code.
3.1 Sample collection
It is to search the WiseNews Database and HKEX website to collect the data for all Hong Kong Listed Firms in all industry for years before and after adoption of code which is accounting period of 2004-2005 and 2005-2006 respectively.
3.2 Research Design
By using the financial data examined from the above database, it is decided to research all firms excluding banks, insurance and trusts companies as they manage earning obtaining different incentives and opportunities. (Peasnell et al, 2000) For testing earnings management, Dechow et al., 1995 suggested to use modified jones model to measure discretionary accruals. However, based on Kothari, Leone and Wasley (2005), in addition to the modified model, they use return on assets as one of variable so as to estimate accruals more accurately. It is cross-sectional regression by using two-digit SIC code, then find out the estimated coefficient by the following formula:
(Total discretionary accrual) TACCjt = µ0 µ1(1/ ATit-1) µ2 (DSale/ATit-1) µ3 (PPE/ ATit-1) µ4 ROAit-1—- (1)
Then, NON-ACCjt = ß1(1/ATjt-1) ß2 (DSalesjt – DRECjt)/ATjt-1 ß3 (PPE/ATjt-1) ß4 ROAjt —— (2)
Then, calculating the discretionary accrual by using the following formula,
DACCjt = TACCjt – NON-ACCjt —— (3)
Using the regression model to calculating the data before and after the code of corporate governance,
DACCit = p 0 1 Auditindep 2 BdIndep 3 AccExp 4 CEODua 5 Big 4 FAMOWN —— (4)
ROA = the ratio of net income to total assets
FAMOWN = 1 if proportion of family members divided by total number director is greater than 20%, 0 for other than this case.
BdIndep: The number of independent board directors calculated by the no. of board members
AuditIndep: The number of independent audit committee members calculated by the no. of audit committee members
AccExp: 1 for having financial professional experience and 0 for none and divided by the no. of audit committee members
Big 4: It is an indicator of the Big 4 auditors. It is one if the firm was Big 4 accounting firms’ client and it is zero if not.
CEODua: it may be 1 when CEO is the firm’s director of the board, 0 when it is not the case.
4. Time schedule
Finish the background of the problem and objectives
Research data for methodology
1st – 11th February
Finish Methodology
Collect data by using software i.e. Excel
12th – 28th February
Solve the problems that will encounter during the process of collecting data, such as, uncertainty about any data
Analyze data and make result of the analysis
Write discussions
Interpret the data what we find
Finish recommendations, conclusions, summary of the project
1 – 4th April
Finish the draft to supervisor
5 – 28th April
Finish the reference lists
Review and proofread the grammar, organization, format of project
Amend some parts based on comments of supervisors