bluuebunny/crossref_metadata_2025 huggingface dataset:
An Analysis of Segment Disclosures under SFAS No. 131 and SFAS No. 14
Authors: Herrmann Don , Thomas Wayne B.
Published: March 2008

The purpose of this paper is to compare the segment reporting disclosures under SFAS No. 131 with those reported the previous year under SFAS No. 14. Under SFAS No. 131, firms are required to report segments consistent with the way in which management organizes the business internally. In addition, the accounting items disclosed for each segment are defined consistent with internal segment information used to assess segment performance. For many companies, this represents a significant change from the approach used to report segments under SFAS No. 14. Under SFAS No. 14, firms were required to disclose segment information by both line-of-business and geographic area with no specific link to the internal organization of the company or the measurements that were used for internal decision making. As a result, many complained that the resulting disclosures were highly aggregated and of limited use for decision-making purposes. We find that the change in segment reporting requirements under SFAS No. 131 has made a relatively significant impact on the disclosure of segment information. Over two-thirds of the sample firms have redefined their primary operating segments upon adopting SFAS No. 131. There has also been an increase in the number of firms providing segment disclosures and companies are disclosing more items for each operating segment. For enterprise-wide disclosures, the proportion of country-level geographic segment disclosures has increased, while the proportion of broader geographic area segment disclosures has decreased. However, the number of firms reporting earnings by geographic area has declined greatly as this item is no longer required to be disclosed for firms reporting on a basis other than geographic area.
Performance Measures and Management Control in New Product Development
Authors: Hertenstein Julie H. , Platt Marjorie B.
Published: March 2008

An exploratory study was conducted to examine management control issues in new product development (NPD). The study focused on three management control aspects that NPD managers considered important: (1) position of NPD in the firm's organizational structure; (2) NPD process; and (3) NPD performance measures. Primary data were collected from NPD managers via interviews, workshops, and a questionnaire. For each management-control aspect studied, we examined current practice, recent changes, and how the control links to strategy.

The NPD function reported fairly high in the organization. The need to integrate NPD and strategy encouraged higher reporting levels, and shifts in reporting from engineering to marketing. The need to integrate NPD and strategy also drove the addition of NPD/strategy steps into already well-defined, phased NPD processes. However, NPD/strategy integration was not well reflected in performance measures. The firms studied used varied financial and nonfinancial performance measures, yet relatively few firms reported that their performance measures reflected key aspects of their strategies. NPD managers generally expressed dissatisfaction with the performance measurements, and firms appeared to be searching for more effective alternatives.
An Analysis of the Demand for Reporting on Internal Control
Authors: Hermanson Heather M.
Published: March 2008

The purpose of this study is to analyze the demand for reporting on internal control. Nine financial statement user groups were identified and surveyed to determine whether they agree that: (1) management reports on internal control (MRIC) are useful, (2) MRICs influence decisions, and (3) financial reporting is improved by adding MRICs. In addition, the paper examined whether responses varied based on: (1) the definition of internal control used (manipulated as broad, operational definition vs. narrow, financial-reporting definition) and (2) user group.

The results indicate that financial statement users agree that internal controls are important. Respondents agreed that voluntary MRICs improved controls and provided additional information for decision making. Respondents also agreed that mandatory MRICs improved controls, but did not agree about their value for decision making. Using a broad definition of controls, respondents strongly agreed that MRICs improved controls and provided a better indicator of a company's long-term viability. Executive respondents were less likely to agree about the value of MRICs than individual investors and internal auditors.
Response to the Special Report of the G4+1, “Reporting Financial Performance: A Proposed Approach”
Authors: Wahlen James M. , Boatsman James R. , Herz Robert H. , Jonas Gregory J. , Palepu Krishna G. , Ryan Stephen G. , Schipper Katherine , Schrand Catherine M. , Skinner Douglas J.
Published: March 2008

The Financial Accounting Standards Committee of the American Accounting Association (hereinafter, the Committee) is charged with responding to requests for input from standard setters on issues related to financial reporting. The Committee is pleased to respond to the invitation to comment on the Special Report of the G4+1 (hereinafter, the “Group”), “Reporting Financial Performance: A Proposed Approach” (hereinafter, the “special report”). The comments in this letter are based in part on the Committee's review of academic research. The opinions reflect the views of the individuals on the committee and not those of the American Accounting Association.
Congress's Goal of Increasing Electronic Filing: An Assessment Based on the Technology-Adoption Literature
Authors: Walsh Steven T. , White Craig G.
Published: March 2008

The Internal Revenue Service Restructuring and Reform Act of 1998 (the Act) places a heavy emphasis on electronic filing (or e-filing). Here we focus on the IRS's strategy, in response to the Act, for reaching an 80-percent level of e-filing by the year 2007. In this paper we ask the question: Given the current level of acceptance, is this is a realistic goal for individual taxpayers? We address this question through a discussion of the current elements of the electronic-filing process. Additionally, we apply technology-adoption literature to map out the current progress and techniques required to facilitate the adoption of e-filing. We conclude that, given the nonmandatory nature of the change, it is unlikely the 80-percent-adoption level will be reached for individuals by the year 2007. However, it appears that there are some avenues available to the IRS and Congress to further increase the usage of electronic filing.
Trends in Ethical Sanctions within the Accounting Profession
Authors: Moriarity Shane
Published: March 2008

This study examines the disciplinary sanctions imposed on AICPA members before and after the adoption of the Code of Professional Conduct in 1988. It reveals that the number of sanctions for substandard professional service has increased after the change. In addition, the profession has increased the use of education as a means of remediating deficiencies in professional service. An analysis of state-by-state sanctions suggests the profession has also achieved more uniform enforcement of the Code. Taken together, the findings support a conclusion that the 1988 changes have improved self-regulation in the accounting profession.
Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms
Authors: Beasley Mark S. , Carcello Joseph V. , Hermanson Dana R. , Lapides Paul D.
Published: March 2008

This paper provides insight into financial statement fraud instances investigated during the late 1980s through the 1990s within three volatile industries—technology, health care, and financial services—and highlights important corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis. The fraud techniques used vary substantially across industries, with revenue frauds most common in technology companies and asset frauds and misappropriations most common in financial-services firms.

For each of these three industries, the sample fraud companies have very weak governance mechanisms relative to no-fraud industry benchmarks. Consistent with prior research, the fraud companies in the technology and financial-services industries have fewer audit committees, while fraud companies in all three industries have less independent audit committees and less independent boards. In addition, this study provides initial evidence that the fraud companies in the technology and health-care industries have fewer audit committee meetings, and fraud companies in all three industries have less internal audit support.

This study of more current financial statement fraud instances contributes by updating our understanding of fraud techniques and risk factors in three key industries. Auditors should consider the industry context as they evaluate the risk of financial fraud, and they should compare clients' governance mechanisms to relevant no-fraud industry benchmarks.
Antecedents and Consequences of Independence Risk: Framework for Analysis
Authors: Johnstone Karla M. , Warfield Terry D. , Sutton Michael H.
Published: March 2008

This paper presents a framework that explains how certain incentives affecting independence risk interact with situational factors to affect actual or perceived audit quality. We articulate the combined effects of direct incentives, indirect incentives, and judgment-based decisions involving difficult accounting issues, materiality, and audit conduct. We then identify a variety of factors that may mitigate independence risk, including corporate governance mechanisms, regulatory oversight, auditing firm policies, auditing firm culture, and individual auditor characteristics. Finally, we discuss the effects of independence risk on various stakeholders, and propose actions that should be taken by the auditing profession, auditing firms, regulators, and researchers.
Auditing Firms' Fraud Risk Assessment Practices
Authors: Shelton Sandra Waller , Whittington O. Ray , Landsittel David
Published: March 2008

The effectiveness of audits in detecting fraudulent misstatements in financial statements is of major concern to the auditing profession. This concern led to the issuance of Statement on Auditing Standards (SAS) No. 82, which made several changes in the manner in which auditors are required to consider the risk of material misstatements due to fraud. This manuscript reports the results of a study of the practices of CPA firms in implementing SAS No. 82. We compared audit manuals and practice aids and interviewed firm personnel from all of the Big 5 firms and two second-tier firms. Results of this study indicate that audit firms differ as to (1) whether their practice aids for fraud risk assessment are separate or integrated with other risk assessment practice aids, (2) the timing of the fraud risk assessment, and (3) the method of assessing fraud risk. Furthermore, although all of the firms studied include all of the SAS No. 82 factors in their audit practice aids, certain other fraud risk factors identified in academic research are not included in firm practice aids.
SEC Market Risk Disclosures: Implications for Judgment and Decision Making
Authors: Hodder Leslie , Koonce Lisa , McAnally Mary Lea
Published: March 2008

In this paper, we draw on judgment and decision-making research to examine the behavioral implications of the SEC's Financial Reporting Release No. 48 on market risk disclosures. While these disclosures have been examined using archival data, no research has investigated how these disclosures might affect individual users of financial statements. The purpose of our paper is to draw on research in the judgment and decision-making arena to identify and analyze the behavioral implications of the new risk disclosures. We offer three conclusions. First, FRR No. 48 users may have more complex evaluations of risk than perhaps anticipated by the SEC. Second, the flexibility accorded firms in FRR No. 48 will adversely affect users' risk judgments. Third, because the Release does not require disclosure of certain quantitative information that is important to risk assessments, inappropriate risk assessments may result. We believe our insights can help others conduct research in this important area and can help the SEC when they revisit the disclosure requirements in FRR No. 48.
Audit Committee Composition, “Gray Directors,” and Interaction with Internal Auditing
Authors: Raghunandan K. , Rama Dasaratha V. , Read William J.
Published: March 2008

The functioning of corporate audit committees was criticized in recent years by the Treadway Commission, the Public Oversight Board, the Kirk Panel, and the SEC Chairman. In response, the NYSE and NASD sponsored the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees. The BRC Report includes recommendations aimed at strengthening director independence and qualifications, and highlights the role of internal auditors in assisting audit committees in the corporate governance process. Moreover, the first three recommendations of the BRC relate to audit committee composition: absence of inside or “gray” directors, and presence of a member with financial expertise.

This study examines the association between audit committee composition and the committee's interaction with internal auditing. Our results, based on responses from chief internal auditors of 114 public companies, indicate that committees comprised solely of independent directors and with at least one member having an accounting or finance background are more likely to (1) have longer meetings with the chief internal auditor; (2) provide private access to the chief internal auditor; and (3) review internal audit proposals and results of internal auditing. These findings provide empirical support for the BRC's recommendations related to audit committee composition.
Minority Interest in the Consolidated Retained Earnings Statement
Authors: Nurnberg Hugo
Published: March 2008

Consolidated financial statements purport to report income, financial position, and cash flows of a parent company and its subsidiaries as if the group were a single company with one or more branches or divisions. Under the parent company theory, the consolidated entity perspective assumed in the consolidated income statement, the consolidated balance sheet, and the consolidated retained earnings statement differs from the consolidated entity perspective assumed in the consolidated cash flow statement. Even under extant expositions of the entity theory, the consolidated entity perspective assumed in the consolidated income statement, the consolidated balance sheet, and the consolidated cash flow statement differs from the consolidated entity perspective assumed in the consolidated retained earnings statement.

This paper develops a consistent consolidated entity perspective for all four consolidated financial statements. It demonstrates that under the entity theory, consolidated retained earnings includes the separate equities of both the parent company stockholders and the minority interest. As such, both elements of retained earnings should be reported in the consolidated retained earnings statement to make it comparable to the consolidated retained earnings statement of companies without subsidiaries or with only wholly owned subsidiaries. The effect on certain financial ratios of public companies may be substantial. The paper also demonstrates that for purchased subsidiaries, minority interest in consolidated retained earnings includes unamortized write-ups of identifiable net assets and goodwill arising from purchase-type business combinations.
International Harmonization: Cautions from the Australian Experience
Authors: Collett Peter H. , Godfrey Jayne M. , Hrasky Sue L.
Published: March 2008

Global harmonization of accounting is a challenging and controversial issue currently confronting accounting standard setters and market regulators internationally. To date, Australia is further along in its international harmonization program than any other country with an established standard-setting regime. While no country's national standard-setting arrangements are likely to be subject to political pressures identical to those recently exerted in Australia, there are lessons to be learned from the Australian events. Given the political nature of standard setting, it is not surprising that the Australian experience indicates that pushes for harmonization are not necessarily what they seem. This paper describes the Australian experience and identifies some of the political drivers of recent standard-setting reform initiatives. It demonstrates how the rhetoric of harmonization can divert attention from politically motivated changes to the fundamental basis of standard setting. Using the harmonization banner to garner support in principle, parties with vested interests can push regulatory agendas that potentially subrogate user needs.
Customized Financial Reporting, Networked Databases, and Distributed File Sharing
Authors: Jensen Robert E. , Xiao Jason Zezhong
Published: March 2008

We analyze the relation between customization and standardization in corporate financial reporting. We argue that “Customization Around a Standard Report” (CASR) is a promising approach to financial reporting. Under this approach, the prevailing general purpose report serves as a benchmark, upholds information credibility, maintains information comparability, and satisfies users' common information needs while the added customization meets users' different information and presentation requirements. CASR will be less effective if implemented by the reporting company alone. To be more effective, CASR should be undertaken jointly by the reporting company, the information intermediary, and the end user. Such joint CASR could be implemented in a peer-to-peer networking environment where databases from primary financial data sources, such as reporting companies, and secondary reports from certified financial analysts are networked and shared. Such an environment will create an enormous demand for both customization and standardization. We predict that networking and file sharing in this way will greatly enhance opportunities for assurance services to add legitimacy and selectivity to an overwhelming menu of customization options that will one day be available online.
Recognition: An Information Content Perspective
Authors: Liang Pierre Jinghong
Published: March 2008

This essay offers a synthesis of the varied accounting literature on recognition. First, in a review of the historical evolution of accounting thoughts, two debates on accounting measurements stand out: historical cost as the basis for asset valuation and realization as the basic test for income determination. These debates have specific implications for the recognition issue. Second, I examine the shift from the traditional measurement perspective to an information content perspective in both rhetorical policy debates and academic accounting thoughts. Under the information content perspective, the (strategic) decision-making context becomes particularly important. Last, I advocate information content as a combining perspective, not as a replacement of the measurement perspective. In particular, I draw attention to the recent academic studies with an explicit or implicit theme of recognition. These studies combine modern information economics with the accounting measurement structure. This line of research has the potential to provide further understanding of the comparative advantage of accounting as a source of information.
How Informative Are Earnings Numbers That Exclude Goodwill Amortization?
Authors: Moehrle Stephen R. , Reynolds-Moehrle Jennifer A. , Wallace James S.
Published: March 2008

In the original exposure draft, Business Combinations and Intangible Assets, the Financial Accounting Standards Board (FASB) proposed that companies be allowed to report a second per share earnings number that excludes goodwill amortization. Subsequently, the FASB has proposed that goodwill not be amortized at all. Instead, it will be written down when impaired. In this study, we assess the information content of earnings excluding amortization of intangibles relative to two traditional performance measures: earnings before extraordinary items and cash flow from operations.

We find that the relative informativeness of earnings before amortization and earnings before extraordinary items do not differ significantly. We also find, consistent with prior research, that both earnings before amortization and earnings before extraordinary items are more informative than cash flow from operations. These findings suggest that goodwill amortization disclosures were not decision-useful and, therefore, support the FASB's revised position.
Why Not Allow FASB and IASB Standards to Compete in the U.S.?
Authors: Dye Ronald A. , Sunder Shyam
Published: March 2008

This paper discusses arguments for and against introducing competition into the accounting standard-setting process in the U.S. by allowing individual corporations to issue financial reports prepared in accordance with either FASB or IASB rules. The paper examines several arguments supporting the status quo, including (1) the FASB's experience and world leadership in making accounting rules; (2) the increased risk of a “race to the bottom” under regulatory competition; (3) the inability of most users of financial reports to understand the complex technical issues underlying accounting standards; (4) the possibility that IASB's standards will be diluted to gain international acceptance, allowing additional opportunities for earnings management; (5) the risks of the IASB being deadlocked or captured by interests hostile to business; (6) the costs of experimentation in standard setting; and (7) economies from network externalities. Arguments examined on the other side include how competition will (1) help meet the needs of globalized businesses; (2) increase the likelihood that the accounting standards will be efficient; (3) help protect standard setters from undue pressure from interest groups; (4) allow different standards to develop for different corporate clienteles; (5) allow corporations to send more informative signals by their choice of accounting standards; (6) protect corporations against capture of regulatory body by narrow interests; and (7) not affect network externalities at national or global scales.
The Conceptual Framework and Accounting for Leases
Authors: Monson Dennis W.
Published: March 2008

For years, users of financial statements, academics, and standards setters alike have criticized the lease accounting standards as unnecessarily complex and ineffective in portraying liabilities arising from lease contracts in the balance sheets of lessee enterprises. Recognizing that current standards were adopted before the Financial Accounting Standards Board (FASB) and other standard-setting bodies completed their conceptual framework projects, critics of the lease accounting standards contend that the principal defect in existing standards is that they are at variance with the definitions of assets and liabilities in those frameworks. Some, including the Chairman and several other charter members of the newly formed International Accounting Standards Board (IASB), have called for new lease accounting standards anchored securely in the framework definitions of assets and liabilities. There is not universal agreement, however, on exactly what assets and liabilities result from applying these definitions to a lease contract. For companies that lease a significant amount of physical plant, financial statements produced under the two alternative interpretations explored in this paper are radically different.

This paper proposes a decision model for choosing between two alternative interpretations of the definitions of assets and liabilities in a leasing context, illustrates the effects on the basic financial statements of a lessee enterprise of applying these two alternative interpretations, and evaluates the results using the proposed decision model.
Charitable Organizations' Strategies and Program-Spending Ratios
Authors: Baber William R. , Roberts Andrea Alston , Visvanathan Gnanakumar
Published: March 2008

Analysis in this study demonstrates how differences in strategy can be incorporated into evaluations and comparisons of financial statements of charitable organizations. The ratio of program spending to total spending, a metric commonly used in practice to evaluate charities, is the focus of the analysis. Our approach involves classifying charities according to how they access markets for donated resources and then using regression analysis to predict an organization's program-spending ratio, given the organization's strategic choice, size, and charitable objective. We then compare the predicted ratio to the organization's actual ratio to identify candidates for further review and investigation. In doing so, this paper illustrates how considering strategic choice enhances the analysis of financial statements of charitable organizations and informs assessments of organization effectiveness.
Auditors' and Investors' Perceptions of the “Expectation Gap”
Authors: McEnroe John E. , Martens Stanley C.
Published: March 2008

The auditing “expectation gap” refers to the difference between (1) what the public and other financial statement users perceive auditors' responsibilities to be and (2) what auditors believe their responsibilities entail. The notion of this divergence receives much attention in the accounting literature (i.e., Commission on Auditors' Responsibilities 1978; Guy and Sullivan 1988; AICPA 1993; U.S. Government Accounting Office 1996). Although prior empirical studies encompass certain expectations associated with a range of audit services, these papers often involve the opinions of bankers as the primary user group employed in the research (Nair and Rittenberg 1987; Lowe and Pany 1995). In contrast, this study extends the prior research by directly comparing audit partners' and investors' perceptions of auditors' responsibilities involving various dimensions of the attest function. We conducted the study to determine if an expectation gap currently exists and we find that it does; investors have higher expectations for various facets and/or assurances of the audit than do auditors. Our findings serve as evidence that the accounting profession should engage in appropriate measures to reduce this expectation gap.
Accounting for Tax Benefits of Employee Stock Options and Implications for Research
Authors: Hanlon Michelle , Shevlin Terry
Published: March 2008

This paper examines how firms account for and report the tax benefits of employee stock options (ESOs). The tax benefits of ESOs reduce taxes actually owed but enter stockholders' equity directly without reducing reported income tax expense. Failing to adjust reported income tax expense for this benefit can lead to poorly specified studies with the distinct possibility of considerable measurement error and flawed inferences.

We explain the adjustments needed for more reliable estimates of effective tax rates, tax burdens, and marginal tax rates often critical to analyses of firm-specific and public policy issues. We document problems with firms' disclosures and, using a sample of large NASDAQ firms likely to be heavy users of ESOs, find that adjusting for the ESO tax benefit is essential to understanding the impact of taxes on those firms.
The Use of Target Prices to Justify Sell-Side Analysts' Stock Recommendations
Authors: Bradshaw Mark T.
Published: March 2008

This study examines a sample of 103 sell-side analysts' reports to document the frequency with which analysts disclose target prices as justifications for their stock recommendations. In addition, I investigate whether the degree of assessed overpricing or underpricing implied by target prices is related to the favorableness of stock recommendations. I find that analysts use target price justifications in over two-thirds of the sample reports, and higher target prices are associated with more favorable stock recommendations. The most favorable recommendations (and target prices) are more likely to be justified by price-earnings ratios and expected growth while the least favorable recommendations are more likely to be justified with other qualitative statements. Further evidence suggests that analysts actually compute target prices using price-multiple heuristics such as “PEG.” However, in reports that do not disclose target prices, estimates of target prices based on these heuristics are unable to justify the stock recommendations. Several explanations are proposed, including self-selection biases implying analysts do not disclose target prices when the disclosure would not support the recommendation or when analysts are less certain about underlying earnings forecasts.
The Effects of Corporate Ownership on Public Accountants' Professionalism and Ethics
Authors: Shafer William E. , Lowe D. Jordan , Fogarty Timothy J.
Published: March 2008

The current trend toward corporate acquisitions of CPA firms poses potential threats to the autonomy and ethical standards of public accounting professionals. This recent consolidation movement suggests that for the first time a significant number of public accounting professionals are subject to the supervision and control of nonprofessionals. In addition to acknowledging the potential threats to auditor independence and objectivity, this paper suggests that these new organizational arrangements for the provision of public accounting services have other negative effects on professionalism and ethics such as desensitizing CPAs to traditional professional values, and subverting professional institutions to the goals of corporate employers. This paper develops a framework that identifies several specific research questions related to the effects of corporate ownership on professionalism and ethics in public accounting.
Sampling Practices of Auditors in Public Accounting, Industry, and Government (Retracted)
Authors: Hall Thomas W. , Hunton James E. , Pierce Bethane Jo
Published: March 2008

Although audit sampling is a common procedure, relatively little is known about the sampling practices of auditors in public accounting, industry, and government. This study surveyed practicing auditors to determine how they: (1) planned sample sizes, (2) selected sample items, and (3) evaluated sample outcomes. Respondents also provided data on the training received, debiasing techniques employed when using nonstatistical (judgmental) methods, and literature sources relied on to provide guidance regarding sampling matters.

Respondents in all areas of practice reported that a majority of audit sampling applications rely on nonstatistical methods for sample planning, selection, and evaluation. Despite the heavy reliance on nonstatistical methods, less than 10 percent of respondents reported receiving training in debiasing techniques, and no respondents reported using these techniques. Among statistical methods dollar-unit sampling is the most frequently employed technique. All respondents reported reliance on employer guidelines, and most reported reliance on sampling standards promulgated by the American Institute of Certified Public Accountants.
Characteristics Influencing Perceptions of Accounting Pronouncement Quality
Authors: Collins Denton L. , Pasewark William R. , Strawser Jerry R.
Published: March 2008

Effective capital markets rely on financial information mandated by highquality accounting pronouncements. This study identifies characteristics associated with the quality of pronouncements issued by the Financial Accounting Standards Board (FASB). We relate pronouncement qualities described in previous literature directly to comments on actual pronouncements made by respondents familiar with pronouncement use. Our review of previous literature suggests that desirable or normative characteristics of accounting pronouncements can be categorized as informational, operational, and formational in nature. We find that informational characteristics tend to dominate FASB constituents' explanations of their rankings of the best and worst accounting pronouncements, with operational and formational characteristics carrying relatively larger weights in the rankings of worst pronouncements.
Fair Valuing Debt Turns Deteriorating Credit Quality into Positive Signals for Boston Chicken
Authors: Lipe Robert C.
Published: March 2008

This article analyzes proposed accounting for financial instruments using Boston Chicken's financial report from 1997. The example shows how the proposal would cause Boston Chicken to reduce the carrying value of debt and to recognize a gain as its credit quality deteriorated. Several important financial ratios—debt-to-equity, return-on-equity, and interest-coverage—based on reported numbers are consistent with the company's negative performance. When the same ratios are restated to reflect the proposed accounting, 1997 appears to be a good year for Boston Chicken. A discussion of the example raises several issues to be considered in the policy debate over when to recognize the gain from a decline in the debtor's own credit quality.
Evidence from China on Whether Harmonized Accounting Standards Harmonize Accounting Practices
Authors: Chen Shimin , Sun Zheng , Wang Yuetang
Published: March 2008

While international harmonization of accounting is gaining momentum in recent years, there is little empirical evidence on whether the harmonization of accounting standards leads to harmonized accounting practices and comparable financial reports. Benefiting from a unique research opportunity in China, this study provides such evidence. Since January 1, 1998, a newly promulgated Accounting Regulation for Listed Companies is in effect. This new regulation is the most comprehensive effort at harmonizing Chinese generally accepted accounting standards (GAAP) with International Accounting Standards (IAS). Based on a sample of listed companies required to reconcile accounting earnings from Chinese GAAP to IAS, we find no evidence that the Chinese government's efforts eliminated or significantly reduced the gap between Chinese and IAS earnings despite harmonized accounting standards. We explore reasons for the continued earnings gap after the 1998 regulation and find that a lack of adequate supporting infrastructure, manifested in excessive earnings management and low quality auditing, may explain the gap.
Viewing the 1996 FAF Restructuring as Policy Making without a Formal Due Process
Authors: Miller Paul B. W.
Published: March 2008

In 1996, a major financial reporting controversy emerged, escalated, and was resolved without substantial exposure or a formal due process. Specifically, a committee of the Financial Executives Institute (FEI) sent a letter to the chair of the Financial Accounting Foundation (FAF) asserting that the Financial Accounting Standards Board (FASB) “process is broken and in need of substantive repair.” When Securities and Exchange Commission (SEC) Chair Arthur Levitt determined that neither FAF nor public accounting leaders were dealing with the FEI proposals to his satisfaction, he acted to defeat this perceived threat to FASB's independence, focusing on the composition of the FAF. In response, the FAF trustees resisted because they viewed his intervention as a threat to FASB's independence. When the trustees did not voluntarily change, Levitt proposed reconsidering Accounting Series Release No. 150, which designates FASB as the sole source of GAAP for SEC filings. Eventually, Levitt prevailed. This paper describes this intervention as a case of policy making without a formal due process and adds to the already weighty evidence that accounting standards are political.
Disclosures in Audit Committee Charters and Reports
Authors: Carcello Joseph V. , Hermanson Dana R. , Neal Terry L.
Published: March 2008

In response to recent criticisms of audit committee performance, new SEC and stock exchange rules require companies to prepare an audit committee charter and to publish the charter in their proxy statement at least once every three years. Audit committees also must disclose how they discharged their responsibilities during the year.

We study the disclosures in audit committee charters and reports by examining a random sample of 150 proxy statements filed in Spring 2001. The primary purposes of this analysis are to understand audit committee activities and to identify possible areas for further audit committee reform.

We find that what audit committees say they are doing in their reports differs from what their charters say the committee should be doing. There is a generally high level of compliance with mandated audit committee disclosures, such as disclosures related to reviewing and discussing the financial statements with management. However, voluntary disclosure of audit committee activities was more common for depository institutions, larger companies, NYSE-listed companies, and companies with more independent audit committees. These results indicate either more active audit committees in such companies, or a greater commitment to audit committee disclosure in such companies. In addition, some of the disclosure levels suggest the need for additional reforms regarding audit committee oversight of interim reports, number of audit committee meetings, and audit committee oversight of internal audit. We also suggest directions for future research.
Tax Practitioner Credentials and the Incidence of IRS Audit Adjustments
Authors: Hite Peggy A. , Hasseldine John
Published: March 2008

This study analyzes a random selection of Internal Revenue Service (IRS) office audits from October 1997 to July 1998, the type of audit that concerns most taxpayers. Taxpayers engage paid preparers in order to avoid this type of audit and to avoid any resulting tax adjustments. The study examines whether there are more audit adjustments and penalty assessments on tax returns with paid-preparer assistance than on tax returns without paid-preparer assistance. By comparing the frequency of adjustments on IRS office audits, the study finds that there are significantly fewer tax adjustments on paid-preparer returns than on self-prepared returns. Moreover, CPA-prepared returns resulted in fewer audit adjustments than non CPA-prepared returns.
How Chevron, Texaco, and the Indonesian Government Structured Transactions to Avoid Billions in U.S. Income Taxes
Authors: Gramlich Jeffrey D. , Wheeler James E.
Published: March 2008

This paper explains the transactions, agreements, and accounting that Chevron, Texaco, and the Government of Indonesia used to structure transactions that avoided billions in U.S. income taxes. Although ChevronTexaco became a merged entity on October 9, 2001, for many years Chevron and Texaco operated as separate corporations, with each owning 50 percent of a group of primarily non-U.S. companies collectively known as Caltex. Transactions were structured such that Chevron and Texaco subsidiaries paid Caltex excessive prices for Indonesian crude oil, leading to excessive dividend income (with foreign tax credits) and cost of sales deductions on U.S. income tax returns. When one of the equal shareholders purchased more overpriced oil than the other, Caltex paid monthly “Special Dividends” to the “overlifter” that could be construed as cost rebates, not dividends. To compensate for the extra taxes it received, the Government of Indonesia provided Caltex with oil in excess of the amount called for under the formal production-sharing contract (PSC) with the Government of Indonesia.

We estimate that this arrangement allowed Chevron and Texaco together to annually avoid paying some $220 million in federal income taxes and $11.1 million in state income taxes from 1964 to 2002. These estimates produce total federal and state taxes avoided of $8.6 billion and $433 million, respectively, for the combined company, ChevronTexaco.
How the U.S. Accounting Profession Got Where It Is Today: Part I
Authors: Zeff Stephen A.
Published: March 2008

Few would deny that the U.S. accounting profession is in a very troubled state. The aim of this two-part article is to explain how and why the profession evolved and changed during the 20th century, with particular emphasis on the last three decades. It is my hope that this article will illuminate the origins and consequences of these changes that collectively brought the profession to its current condition.
Conservatism in Accounting Part I: Explanations and Implications
Authors: Watts Ross L.
Published: March 2008

This paper is the first in a two-part series on conservatism in accounting. Part I examines alternative explanations for conservatism in accounting and their implications for accounting regulators. Part II summarizes the empirical evidence on conservatism, its consistency with alternative explanations, and opportunities for future research. The evidence is consistent with conservatism's existence and, in varying degrees, the various explanations.

Conservatism is defined as the differential verifiability required for recognition of profits versus losses. Its extreme form is the traditional conservatism adage: “anticipate no profit, but anticipate all losses.” Despite criticism, conservatism has survived in accounting for many centuries and appears to have increased in the last 30 years.

The alternative explanations for conservatism are contracting, shareholder litigation, taxation, and accounting regulation. The evidence in Part II suggests the contracting and shareholder litigation explanations are most important. Evidence on the effects of taxation and regulation is weaker, but consistent with those explanations playing a role. Earnings management could produce some of the evidence on conservatism, but cannot be the prime explanation.

The explanations and evidence have important implications for accounting regulators. FASB attempts to ban conservatism in order to achieve “neutrality of information” without understanding the reasons conservatism existed and prospered for so long are likely to fail and produce unintended consequences. Successful elimination of conservatism will change managerial behavior and impose significant costs on investors and the economy in general. Similarly, researchers and regulators who propose the inclusion of capitalized unverifiable future cash flows in financial reports should consider the costs generated by their proposal's effect on managerial behavior.
Initial Evidence on the Association between Nonaudit Fees and Restated Financial Statements
Authors: Raghunandan K. , Read William J. , Whisenant J. Scott
Published: March 2008

An increasing number of firms have restated previously issued financial statements in recent years. Legislators, regulators, and others speculate that restatements are associated with fees received by auditors for nonaudit services (nonaudit fees). The current study provides empirical evidence on the association between firms that restate financial statements and the nonaudit service fees received by incumbent auditors during reporting periods that required restatement.

We identify a sample of 110 firms that restated financial statements previously filed with the SEC for fiscal years 2000 or 2001, and provided relevant audit and nonaudit fee data. The SEC requires firms to disclose these fee data beginning in proxy statements filed on or after February 5, 2001. We compare the fees paid by the restatement sample with fee data for 3,481 firms that filed proxies with the SEC from February 5, 2001 to August 31, 2001 and develop benchmarks for expected nonaudit fees, fee ratio, and total fees. Using these benchmarks, we calculate the unexpected values for these measures and investigate whether restatement firms differ from the control firms. Our findings of no significant differences between the restatement and control samples for unexpected nonaudit fees, fee ratios, and total fees do not support concerns that either nonaudit fees or total fees inappropriately influence the audit and lead to restatements.
A Proposed Framework Emphasizing Auditor Reliability over Auditor Independence
Authors: Taylor Mark H. , DeZoort F. Todd , Munn Edward , Thomas Martha Wetterhall
Published: March 2008

This paper introduces an auditor reliability framework that repositions the role of auditor independence in the accounting profession. The framework is motivated in part by widespread confusion about independence and the auditing profession's continuing problems with managing independence and inspiring public confidence. We use philosophical, theoretical, and professional arguments to argue that the public interest will be best served by reprioritizing professional and ethical objectives to establish reliability in fact and appearance as the cornerstone of the profession, rather than relationship-based independence in fact and appearance. This revised framework requires three foundation elements to control subjectivity in auditors' judgments and decisions: independence, integrity, and expertise. Each element is a necessary but not sufficient condition for maximizing objectivity. Objectivity, in turn, is a necessary and sufficient condition for achieving and maintaining reliability in fact and appearance.
Conservatism in Accounting Part II: Evidence and Research Opportunities
Authors: Watts Ross L.
Published: March 2008

This paper is Part II in a two-part series on conservatism in accounting. Part I examined alternative explanations for conservatism in accounting and their implications for accounting regulators (SEC and FASB). Part II summarizes the empirical evidence on the existence of conservatism, conservatism's increase over time, and conservatism's alternative explanations. It also discusses opportunities for future research on conservatism.

The empirical literature uses a variety of conservatism measures in time-series and cross-sectional tests of contracting, shareholder litigation, taxation, and accounting regulation explanations for conservatism. The tests' results suggest the importance of all four explanations. Two non-conservatism explanations—earnings management and the abandonment option—cannot individually or jointly explain the observed systematic understatement of net assets that is the hallmark of conservatism.

Researchers should note that accounting's effects on managerial behavior play a central role in the evolution of both accounting and financial reporting. Assessing the relevance of an accounting method to financial statement users' decisions requires assessing managers' abilities to use that method to manipulate accounting numbers and commit fraud. The evidence on conservatism suggests asymmetric verifiability is critical to constraining manipulation and fraud.
The Impact and Valuation of Off-Balance-Sheet Activities Concealed by Equity Method Accounting
Authors: Bauman Mark P.
Published: March 2008

This paper reports the results of a study of the financial reporting effects of off-balance-sheet activities concealed by the equity method of accounting. The study examines footnote disclosures relating to equity method investees, offers suggestions for improving the usefulness of those disclosures, and estimates the valuation effects of information in the disclosures. An important empirical finding is that the market places significant negative values on investor-guaranteed off-balance-sheet obligations.