bluuebunny/crossref_metadata_2025_split huggingface dataset:
Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*
Authors: Schrand Catherine M. , Wong M. H. Franco 
Published: November 2003

AbstractStatement of Financial Accounting Standards No. 109 (SFAS No. 109) allows firms to use their discretion to set arbitrarily high valuation allowances against deferred tax assets. Firms can then later use these "hidden reserves" to manage earnings. Our evidence indicates that most banks do not record a valuation allowance to manage earnings, but rather to follow the guidelines of SFAS No. 109. However, if the bank is sufficiently well capitalized to absorb the current‐period impact on capital, then the amount of the valuation allowance increases with a bank's capital. In later years, bank managers adjust the valuation allowance to smooth earnings. The magnitude of the discretionary adjustment increases with the deviation of unadjusted earnings from the forecast or historical earnings.
An Experimental Investigation of Alternative Going‐Concern Reporting Formats: A Canadian Experience*
Authors: ANANDARAJAN ASOKAN , VIGER CHANTAL , CURATOLA ANTHONY P. 
Published: November 2003

ABSTRACTThis study questions whether the current or proposed Canadian standard of disclosing a going‐concern contingency is viewed as equivalent to the standard adopted in the United States by financial statement users. We examined loan officers' perceptions across three different formats ‐ namely, an integrated note with a clean auditor's report (the current Canadian standard), a stand‐alone note with referencing on the face of the balance sheet and income statement (the proposed and now rescinded standard), and a modified auditor's report with an explanatory paragraph in addition to a stand‐alone going concern note (the standard adopted in the United States and other countries). Bank loan officers were selected as the appropriate financial statement users for this study. The results of the test of the hypothesis suggest that once the going‐concern note is fully disclosed in the notes, the style of presentation within the notes (a stand‐alone note versus an integrated note) does not significantly influence the reactions and perceptions of risk if the auditor's report is unmodified (i.e., if no reference is made to a going‐concern contingency). However, when the auditor's report is modified with an explanatory paragraph detailing the uncertainty and referencing the going‐concern note in the footnotes, the format appeared to convey a stronger signal of financial distress to loan officers. These results appear to differ from prior research, which holds that once the information is released in the financial statements, the format has no additional effect.The finding of this study is that the proposed and withdrawn Canadian standard was not perceived differently by the bankers from the present Canadian standard, but the standard adopted in the United States and most other countries was. This makes a strong argument for moving all the way to that standard as opposed to the “halfway” approach of the now rescinded CICA exposure draft. Thus, the public interest in Canada may not be served by adopting a halfway approach.
Competency‐Based Education and Assessment for the Accounting Profession: A Critical Review*
Authors: BORITZ J. EFRIM , CARNAGHAN CARLA A. 
Published: November 2003

ABSTRACTIn recent years many professional accounting associations have become interested in establishing competency‐based professional requirements and assessment methods for certifying accounting professionals. A competency‐based approach to qualification specifies expectations in terms of outcomes, or what an individual can accomplish, rather than in terms of an individual's knowledge or capabilities. This idea has an obvious appeal to many practitioners and administrators of professional qualification programs. However, there is limited knowledge about competency‐based approaches in the accounting profession and among accounting academics, which is constraining discussion about the value of these approaches and about the strengths and weaknesses of the different competency models that have sprung up in various jurisdictions.In this paper we review and synthesize the literature on competency‐based approaches. We identify a number of theoretical benefits of competency‐based approaches. However, we also find many alternative definitions and philosophies underlying competency‐based approaches, and a variety of visions of how competencies should be determined and assessed. We note that there is limited evidence supporting many competency‐based approaches and we identify 14 research questions that could be used to help policy makers to more effectively address policy matters related to competency‐based education and assessment.
Market Response to Earnings Surprises Conditional on Reasons for an Auditor Change*
Authors: Hackenbrack Karl E. , Hogan Chris E. 
Published: November 2003

AbstractOur interest in this study is the relative informativeness of earnings announcements reported before and after Form 8‐K disclosures of the reason for an auditor change. We appeal to several models that predict that the market's response to an earnings surprise is positively related to the perceived precision of the earnings report. We predict that the Form 8‐K reason disclosures aid investors in updating their expectations of earnings precision by providing useful information about the financial reporting process that produces the earnings report. For 802 auditor changes from late 1991 through late 1997, the average price response per unit of earnings surprise is lower subsequent to an auditor change for companies that switched for disagreement‐related or fee‐related reasons and higher for those that switched for service‐related reasons. This paper provides further evidence on the effects of differential earnings quality on differences in the returns‐earnings relation across companies and over time as well as the efficacy of Form 8‐K disclosures of reasons for auditor changes.
Production Efficiency and the Pricing of Audit Services*
Authors: Dopuch Nicholas , Gupta Mahendra , Simunic Dan A. , Stein Michael T. 
Published: November 2003

AbstractIn this paper, we examine the relative efficiency of audit production by one of the then Big 6 public accounting firms for a sample of 247 geographically dispersed audits of U.S. companies performed in 1989. To test the relative efficiency of audit production, we use both stochastic frontier estimation (SFE) and data envelopment analysis (DEA). A feature of our research is that we also test whether any apparent inefficiencies in production, identified using SFE and DEA, are correlated with audit pricing. That is, do apparent inefficiencies cause the public accounting firm to reduce its unit price (billing rate) per hour of labor utilized on an engagement? With respect to results, we do not find any evidence of relative (within‐sample) inefficiencies in the use of partner, manager, senior, or staff labor hours using SFE. This suggests that the SFE model may not be sufficiently powerful to detect inefficiencies, even with our reasonably large sample size. However, we do find apparent inefficiencies using the DEA model. Audits range from about 74 percent to 100 percent relative efficiency in production, while the average audit is produced at about an 88 percent efficiency level, relative to the most efficient audits in the sample. Moreover, the inefficiencies identified using DEA are correlated with the firm's realization rate. That is, average billing rates per hour fall as the amount of inefficiency increases. Our results suggest that there are moderate inefficiencies in the production of many of the subject public accounting firm's audits, and that such inefficiencies are economically costly to the firm.
Resource Allocation Effects of Price Reactions to Disclosures*
Authors: Dye Ronald A. , Sridhar S. 
Published: November 2003

AbstractCapital market participants collectively may possess information about the valuation implications of a firm's change in strategy not known by the management of the firm proposing the change. We ask whether a firm's management can exploit the capital market's information in deciding either whether to proceed with a contemplated strategy change or whether to continue with a previously initiated strategy change. In the case of a proposed strategy change, we show that managers can extract the capital market's information by announcing a potential new strategy, and then conditioning the decision to implement the new strategy on the size of the market's price reaction to the announcement. Under this arrangement, we show that a necessary condition to implement all and only positive net present value strategy changes is that managers proceed to implement some strategies that garner negative price reactions upon their announcement. In the case of deciding whether to continue with a previously implemented strategy change, we show that it may be optimal for the firm to predicate its abandonment/continuation decision on the magnitude of the costs it has already incurred. Thus, what looks like “sunk‐cost” behavior may in fact be optimal. Both demonstrations show that, in addition to performing their usual role of anticipating future cash flows generated by a manager's actions, capital market prices can also be used to direct a manager's actions. It follows that, in contrast to the usual depiction of the information flows between capital markets and firms as being one way — from firms to the capital markets — information also flows from capital markets to firms.
Equity Valuation Employing the Ideal versus Ad Hoc Terminal Value Expressions*
Authors: Courteau Lucie , Kao Jennifer L. , Richardson Gordon D. 
Published: November 2003

AbstractRecently, Penman and Sougiannis (1998) and Francis, Olsson, and Oswald (2000) compared the bias and accuracy of the discounted cash flow model (DCF) and Edwards‐Bell‐Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non‐price‐based terminal values, RIM outperforms DCF.Our first research objective is to explore the question whether, over a five‐year valuation horizon, DCF and RIM are empirically equivalent when Penman's (1997) theoretically “ideal” terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these valuation models. Thus, the apparent superiority of RIM does not hold in a level playing field comparison.Our second research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression generates the lowest prediction errors, compared with models that employ non‐price‐based terminal values under arbitrary growth assumptions. The results indicate that, for both DCF and RIM, price‐based valuation models outperform the corresponding non‐price‐based models by a wide margin. These results imply that researchers should exercise care in interpreting findings from models using ad hoc terminal value expressions.
The Relation between Market Values, Earnings Forecasts, and Reported Earnings*
Authors: Begley Joy , Feltham Gerald A. 
Published: November 2003

AbstractRecently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one‐ and two‐period‐ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one‐ and two‐period‐ahead residual income, current capital investment, and start‐of‐period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one‐period‐ahead residual income forecast and a positive coefficient on the two‐period‐ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.
Earnings, Book Values, and Dividends in Equity Valuation: An Empirical Perspective*
Authors: OHLSON JAMES A. 
Published: November 2003

AbstractThis paper revisits Ohlson 1995 to make a number of points not generally appreciated in the literature. First, the residual income valuation (RIV) model does not serve as a crucial centerpiece in the analysis. Instead, RIV plays the role of condensing and streamlining the analysis, but without any effect on the substantive empirical conclusions. Second, the concept of “other information” in the model can be given concrete empirical content if one presumes that next‐period expected earnings are observable.
Earnings Manipulation in Failing Firms
Authors: Rosner Rebecca L. 
Published: November 2003

AbstractPrior literature and anecdotal evidence, most recently provided by allegations relative to Enron, Global Crossing, and WorldCom, suggest that failing firms (defined here as prebankruptcy firms) may be motivated to engage in fraudulent financial reporting to conceal their distress. I examine two research questions: (1) Are failing firms' prebankruptcy financial statements more likely to exhibit signs of material income increasing earnings manipulation than those of nonfailing firms? (2) Do auditors detect the overstatements in firms that they perceive to be failing? I predict and find that as (ex post) bankrupt firms that do not (ex ante) appear to be distressed approach bankruptcy, their financial statements reflect significantly greater material income‐increasing accrual magnitudes in nongoing‐concern years than do control firms. The accrual behavior of these firms resembles that of bankrupt firms that the Securities and Exchange Commission (SEC) has sanctioned for fraud. Like sanctioned firms, the nonstressed bankrupt firms display significantly greater (material) increases in receivables; inventory; property, plant, and equipment; sales; net working capital, current, and discretionary accruals in prebankruptcy nongoing‐concern years than do control firms. They also display significantly more negative changes in cash flows from operations and net cash and a greater disparity between accrual‐based net income and operating cash flows than do control firms, consistent with Lee, Ingram, and Howard 1999. Finally, I predict and find that these firms' going‐concern years reflect evidence consistent with auditor‐prompted reversal of previous overstatements. These results are based on parametric and nonparametric tests for various subsample combinations drawn from a sample of 293 bankrupt firms representing approximately 2,500 observations.
An Empirical Investigation of Audit Fees, Nonaudit Fees, and Audit Committees*
Authors: Abbott Lawrence J. , Parker Susan , Peters Gary F. , Raghunandan K. 
Published: November 2003

AbstractThis study examines the association between audit committee characteristics and the ratio of nonaudit service (NAS) fees to audit fees, using data gathered under the Securities and Exchange Commission's (SEC's) fee disclosure rules. Issues related to NAS fees have been of concern to practitioners, regulators, and academics for a number of years. Prior research suggests that audit committees possessing certain characteristics are important participants in the process of managing the client‐auditor relationship. We hypothesize that audit committees that are independent and active financial monitors have incentives to limit NAS fees (relative to audit fees) paid to incumbent auditors, in an effort to enhance auditor independence in either appearance or fact. Our analysis using a sample of 538 firms indicates that audit committees comprised solely of independent directors meeting at least four times annually are significantly and negatively associated with the NAS fee ratio. This evidence is consistent with audit committee members perceiving a high level of NAS fees in a negative light and taking actions to decrease the NAS fee ratio.
Determinants of Revenue‐Reporting Practices for Internet Firms*
Authors: Bowen Robert M. , Davis Angela K. , Rajgopal Shivaram 
Published: November 2003

AbstractThe financial press and accounting regulators (e.g., the Securities and Exchange Commission and Financial Accounting Standards Board) have expressed concern about pressures on Internet firms to report high levels of revenue. This study verifies the association between market capitalization and revenue, and examines economic factors that potentially influence Internet company managers' decisions to adopt allegedly aggressive revenue‐recognition policies. Specifically, we examine factors hypothesized to influence the reporting of advertising barter revenue and grossed‐up sales levels. We begin by providing descriptive evidence on the use of barter and grossed‐up revenue across Internet sectors. Although common in some sectors, we find that the use of these accounting policies is not pervasive overall. We limit our empirical analyses to Internet companies that have the opportunity to report grossed‐up or advertising barter revenue. Our cross‐sectional predictions are based on both external and internal incentives to maximize revenues as well as constraints that may limit management's discretion. We predict that the following factors increase the likelihood that a firm will report grossed‐up and/or barter revenue: shorter time before needing additional external financing, more active individual investor interest in the firm's stock, more active pursuit of growth via acquisitions, and greater use of stock options in employee compensation. We also posit that barter transactions might be an inexpensive way for firms to evaluate the viability of future marketing or content alliances with potential partners. Finally, we predict that constraints on management discretion are related to the reputation/quality of the firm's auditor and underwriter and the extent of management ownership. We find that firms with greater cash burn rates and higher levels of activity on Motley Fool message boards are consistently associated with barter and grossed‐up revenue reporting.
Corporate Governance and the Audit Process*
Authors: Cohen Jeffrey , Krishnamoorthy Ganesh , Wright Arnold M. 
Published: November 2003

AbstractThere has been growing recognition in recent years of the importance of corporate governance in ensuring sound financial reporting and deterring fraud. The audit serves as a monitoring device and is thus part of the corporate governance mosaic. The objective of this paper is to examine the impact of various corporate governance factors, such as the board of directors and the audit committee, on the audit process. Importantly, there is little professional guidance on how auditors should consider such factors when formulating an appropriate audit strategy, and there has been only one prior study on this issue (Cohen and Hanno 2000). Because there are no current specific auditing standards that relate to the effect of corporate governance on the audit process, we conducted a semi‐structured interview with 36 auditors on current audit practices in considering corporate governance in the audit process. Reflecting on client experiences, auditors indicate a range of views with regard to the elements included in the rubric of “corporate governance”. Most significantly, auditors view management as the primary driver of corporate governance. The inclusion of top management in the “corporate governance mosaic” is inconsistent with agency theory's prescription of the board and other mechanisms serving as a means to independently oversee management's actions to protect stakeholders. Auditors consider corporate governance factors to be especially important in the client acceptance phase and in an international context. Further, despite the attention placed on the audit committee in the academic literature, in the business community, and by regulators in different countries (e.g., Canada, United States, Australia), several respondents indicated that their experiences with their clients suggest that audit committees are typically ineffective and lack sufficient power to be a strong governance mechanism. Implications for research and practice are presented.
Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?*
Authors: LANG MARK H. , LUNDHOLM RUSSELL J. 
Published: November 2003

AbstractWe examine corporate disclosure activity around seasoned equity offerings and its relationship to stock prices. Beginning six months before the offering, our sample issuing firms dramatically increase their disclosure activity, particularly for the categories of disclosure over which firms have the most discretion. The increase is significant after controlling for the firm's current and future earnings performance and tends to be largest for firms with selling shareholders participating in the offering. However, there is no change in the frequency of forward‐looking statements prior to the equity offering, something that is expressly discouraged by the securities law.Firms that maintain a consistent level of disclosure experience price increases prior to the offering, and only minor price declines at the offering announcement relative to the control firms, suggesting that disclosure may have reduced the information asymmetry inherent in the offering. Firms that substantially increase their disclosure activity in the six months before the offering also experience price increases prior to the offering relative to the control firms, but suffer much larger price declines at the announcement of their intent to issue equity, suggesting that the disclosure increase may have been used to “hype the stock” and the market may have partially corrected for the earlier price increase. Firms that maintain a consistent disclosure level have no unusual return behavior relative to the control firms subsequent to the announcement, while the firms that “hyped” their stock continue to suffer negative returns, providing further evidence that the increased disclosure activity may have been hype, and suggesting that the hype may have been successful in lowering the firms' cost of equity capital.