Showing papers in "Accounting Horizons in 2007"

Beyond Competition: Institutional Isomorphism in U.S. Accounting Research

Abstract: We propose remedies to the dramatic reduction in the diversity of research topics within the academic accounting literature. As a basis for our recommendations, we apply institutional theory in the field of academic accounting research and propose that responses to identifiable institutional influences rather than competitive forces account for the current exclusion of nonfinancial accounting topics. All three processes of institutional isomorphism (mimetic, coercive, and normative) appear to shape the organizational field of accounting research. However, the field has reached a stage where it is primarily, but not exclusively, motivated by the normative isomorphism. As such, institutional pressures often eclipse theoretical relevance, individual research preferences, and practical applicability. These effects pervade aspects of the accounting academy beyond publishing. We outline programs and propose actions for enhancing diversity as prescriptions for countering the institutional forces acting within th...

Determinants of Audit Committee Diligence

Abstract: The number of audit committee meetings is the only publicly available quantitative signal about the diligence of audit committees, and private sector bodies and Securities and Exchange Commission (SEC) officials have emphasized the need for frequent meetings of the audit committee. Prior research indicates that the number of audit committee meetings is associated with many “good” outcomes related to financial reporting, but there is little empirical evidence related to the determinants of audit committee diligence. In this paper we examine the association between firm characteristics and the number of audit committee meetings as a proxy for audit committee diligence. Our sample includes 319 firms from the S&P SmallCap600 with a December 31, 2003 fiscal year‐end. We find that there are more audit committee meetings in firms that (1) are larger, (2) have high outsider block‐holdings, (3) are in litigious industries, or (4) have more board meetings. The number of audit committee meetings increases with audit...

Audit Fees and Auditor Dismissals in the Sarbanes‐Oxley Era

Abstract: The accounting scandals and Sarbanes‐Oxley Act (SOX) of 2002 resulted in large increases in required audit work, and corresponding increases in audit fees for public companies. This study provides early evidence regarding the relationship between higher audit fees, both levels and changes, and auditor dismissals in the period immediately subsequent to the passage of SOX. We find that clients paying higher fees are more likely to dismiss their auditors. We also find that dismissals are associated with smaller companies, companies with going‐concern reports, and companies that later reported material weaknesses in their internal controls. Among dismissing clients, smaller Big 4 clients, paying higher fees, tend to hire non‐Big 4 successor auditors. This result holds when auditors are divided into Big 4, national, and local tiers. We also find evidence that dismissing clients, in particular clients hiring new non‐Big 4 auditors, experience smaller fee increases than nonswitching clients in the following year...

Is Accounting an Academic Discipline

Abstract: INTRODUCTION The question of whether accounting is an academic discipline transcends our usual concerns for the latest research or pedagogical twist or the ever-present tensions among our numerous clusters of interest. Indeed it speaks to the very essence of who we are and the stewardship we exercise in our domain. My analysis and answer are highly personal, and should be interpreted as simply my opinion. You may or may not agree. But the central point of the exercise is for each of us to ponder seriously this question and, in the process, take a proactive role in exercising stewardship in our own domain.

PCAOB Inspections of Smaller CPA Firms: Initial Evidence from Inspection Reports

Abstract: We examine 316 Public Company Accounting Oversight Board (PCAOB) inspection reports issued to smaller CPA firms (100 or fewer issuer clients) through July 2006. We find that 60 percent of the inspected firms have audit deficiencies. Firms with audit deficiencies are smaller, have a larger number of issuer clients, and are growing more rapidly than firms without deficiencies, suggesting an over‐extension into the issuer client market by some firms. Deficiencies are more likely for inspections conducted in 2004 than 2005, and the PCAOB appears to have targeted smaller, riskier, rapidly growing audit firms for its 2004 inspections. In addition, we find some evidence that clients of deficiency firms are smaller, less profitable, and more highly leveraged. We also summarize the most common audit deficiencies and offer implications and directions for future research.

Auditor Communications with the Audit Committee and the Board of Directors: Policy Recommendations and Opportunities for Future Research

Abstract: To contribute to the Public Company Accounting Oversight Board (PCAOB) project on auditor communications with audit committees and boards of directors, we present in this paper a review of relevant academic literature. We also identify promising future research opportunities for the academic community. We specifically focus on how the communication process may affect overall financial reporting quality, internal controls, control environments, and external auditors' performance, as well as matters that potentially impact financial reporting and should interest the PCAOB (e.g., in the area of management discussion and analysis). We specifically link the findings from academic research to the discussion questions posed by the PCAOB in its 2004 briefing paper. Several potential implications of the findings should also interest standard‐setters and regulators addressing issues related to corporate governance and financial reporting quality.

Auditing Related Party Transactions: A Literature Overview and Research Synthesis

Abstract: We examine research relevant to auditing related party transactions to contribute to the PCAOB project on this topic and to provide other policy makers, auditors, and academics with an overview of relevant literature. Specifically, we report on the challenges associated with the identification, examination, and disclosure of related party transactions. Additionally, we address issues and research evidence related to nondisclosure and reliance on management assertions, risk assessment, materiality, fraud detection, the effect of related party transactions on corporate governance, and international auditing issues. Overall, we believe that the findings in academic research and the significance of related party transactions in recent prominent fraud cases are consistent with the PCAOB's reconsideration of auditing of related party transactions. We conclude with implications for further research.

Reflections on Stewardship Reporting

Abstract: Following the July 2005 decision by the IASB/FASB not to designate “stewardship” as a separate financial reporting objective in their converged Conceptual Framework, the purpose of this commentary is to call for a renewed emphasis on stewardship‐related research in financial reporting. To this end, I propose specific questions related to the following themes: (1) the interaction between stewardship and decision‐usefulness; (2) the contemporary meaning of stewardship; (3) changes in the importance of stewardship over time; (4) stewardship and corporate governance; and (5) stewardship and social and environmental reporting. The primary goal of the proposed research agenda is to better inform the debate about the wisdom of consigning the separate stewardship reporting objective to the realms of accounting history in those many nations where the converged IASB/FASB Conceptual Framework is likely to guide the future development of financial reporting standards.

Were Former Andersen Clients Treated More Leniently Than Other Clients? Evidence from Going‐Concern Modified Audit Opinions

Abstract: In the wake of the collapse of Enron and Andersen, several questions were raised about Enron's accounting and the behavior of its auditor. An important question is whether ex‐Andersen's clients received more conservative treatment by their new auditors, either due to a greater perceived litigation risk because of their previous association with Andersen or because of a “correction” of alleged lax auditing by Andersen. We examine going‐concern modified audit opinions for former clients of Arthur Andersen, and compare them with opinions issued for other newly acquired clients. We find that auditors were less likely to issue going‐concern modified audit opinions to small clients who switched from Andersen than to their existing clients. However, this trend reverses with an increase in client size, with large former Andersen clients more likely to receive going‐concern opinions. Our results are consistent with suggestions that increased litigation risk associated with the larger ex‐Andersen clients led to inc...

Unrecorded Intangible Assets: Abnormal Earnings and Valuation

Abstract: We use the unique banking industry setting to demonstrate the impact of unrecorded intangible assets on abnormal earnings and equity valuation in the context of the residual income valuation model. We show that the persistence of bank abnormal earnings and, consequently, the pricing multiples on bank abnormal earnings, vary with the level of unrecorded intangible assets. Our evidence suggests that unrecorded intangible assets are important in understanding the persistence and valuation of abnormal earnings in the banking industry. The analysis framework introduced in this paper could also be used to examine the valuation impacts of intangible assets in other industries.

Standard‐Setting Issues and Academic Research Related to the Accounting for Financial Asset Transfers

Abstract: A large number and cross‐section of firms undertake financial asset transfers. The Financial Accounting Standards Board and the International Accounting Standards Board have been grappling with the appropriate accounting for financial asset transfers, especially with respect to derecognition—that is, when the assets should be removed from the transferor's balance sheet. This paper discusses the financial reporting issues surrounding financial asset transfers and summarizes the related academic research. It also discusses potentially useful future research that could provide insights for standard‐setters and suggests some impediments to that research.

Congressional intervention in the standard-setting process: An analysis of the stock option accounting reform act of 2004

Abstract: We examine H.R. 3574, the Stock Option Accounting Reform Act of 2004 (the Act), which sought to prevent the Financial Accounting Standards Board (FASB) from requiring the expensing of employee stock options at fair value. We find that employee stock option expense under the Act would be approximately 2 percent of what it would be under the FASB's preferred method. We also find that House members supporting the Act were more likely to be Republican, to be conservative, and to have received larger Political Action Committee (PAC) contributions. Finally, the larger the impact of H.R. 3574 on the amount of stock option expense reported by the firm for employees who are not top‐five executives, the more contributions the firm's PAC made to House members and to members of the committee that approved the Act. This result suggests that corporate opposition to the mandatory expensing of stock options at fair value is not driven solely by concerns of top‐five executives about the cost of recognizing their own options.

State Accountancy Regulators' Perceptions of Independence of External Auditors When Performing Internal Audit Activities for Nonpublic Clients

Abstract: This study explores state accountancy regulators' perceptions of whether external auditors remain independent when also performing internal audit activities for nonpublic entities. The purpose of this study is to provide a more complete understanding of perceptions regarding auditor independence in the nonpublic entity environment. The primary issues are (1) whether performing the external audit and internal auditing services for the same entity affects perceptions of independence, and (2) whether a separation between the CPA firm's internal and external audit personnel significantly affects perceptions of independence when both services are performed. We use a between‐subjects design and target state accountancy regulators from each of the 54 U.S. jurisdictions. Findings based on 206 usable responses indicate that state board members do not perceive a significant difference in the independence of a CPA firm performing a nonpublic entity's external audit versus a CPA firm performing that entity's external...

Do Clients Share Preparers' Self‐Assessment of the Extent to Which They Advocate for Their Clients?

Abstract: A conflict between the tax preparation services that tax preparers provide and the services taxpayers seek is demonstrated in the literature: tax professionals equate client advocacy with aggressive tax positions while taxpayers hire preparers to increase accuracy and reduce the probability of tax audit. Although this difference has been demonstrated at the large firms, more than half of tax preparers are at regional and local firms. This study examines tax preparers, self‐employed or from local and regional firms, and their clients using an established scale—the recently developed Mason–Levy Advocacy Scale. This research measures the understanding taxpayers have of their tax preparers' self‐assessed levels of client advocacy. A practically small but statistically significant difference is found. Advocacy is found to be equal between CPAs and non‐CPAs—counter to prior research. Also, CPA clients and non‐CPA clients are found to have similar perceptions regarding the aggressiveness of their preparers. The ...

Unfunded Public Employee Health Care Benefits and GASB No. 45

Abstract: The Government Accounting Standards Board (GASB) recently released Statement No. 45, Accounting and Financial Reporting by Employers for Post‐Employment Benefits Other Than Pensions and its companion Statement No. 43 for pooled stand‐alone health care plans, which will profoundly affect American governmental finance. The goal of this article is to encourage governments to consider carefully a full range of options in funding and restructuring other post‐employment benefits (OPEB). This article will review Statement No. 45's potential impact on governments and review existing disclosures in financial reports as well as bond offering statements. The article will discuss the statement's impact on budgets and governmental operations, including collective bargaining. Funding options under Statement No. 45 will be detailed, including the advantages and disadvantages of irrevocable trusts and OPEB bonds. The article will also discuss the impact of Medicare Part D subsidies received by governments, as well as the...

Disclosure, Incentives, and Contingently Convertible Securities

Abstract: We present descriptive evidence on the quality of firms' disclosures related to contingently convertible securities (COCOs). We document evidence of inconsistent and inadequate disclosure of the information necessary to undo the financial reporting effects associated with COCOs prior to 2004, when only the general disclosure requirements on capital structure provided in SFAS 129 were in effect. Disclosure quality improved after the introduction of FASB Staff Position 129‐a, which specifically required firms to disclose the terms of COCOs that would enable users to understand the conversion features of COCOs and their potential impact on earnings per share (EPS). However, we find evidence that managerial incentives significantly affect disclosure quality in both disclosure regimes. Our results underscore the difficulty that standard setters face in developing general disclosure guidelines that foster adequate disclosure and suggest that additional specific disclosure guidance may be necessary as new financ...

Including Credit Standing in Measuring the Fair Value of Liabilities—Let's Pass This One to the Shareholders

Abstract: Measuring and reporting liabilities at fair value is part of the FASB's overall project on fair value measurement and reporting. The FASB has taken the position that in measuring and reporting the fair value of a liability, such as a debt financial instrument, the fair value measure should reflect the credit standing of the issuer. Furthermore, changes in fair value, including the effect of changes in the issuer's credit standing, should be reported as gains and losses on the issuer's income statement. Whether liabilities should be reported at fair value and whether the fair value measure should incorporate credit standing and changes in credit standing are controversial issues. The primary controversy centers on the counterintuitive results of an entity's recording of a loss if its credit standing improves or a gain if its credit standing deteriorates. In this paper, we advocate an alternative position. We propose that liabilities be measured and reported using risk‐free rates. This proposed approach rec...

Anticipatory Reporting Standards

Abstract: The Conceptual Framework offers an approach to understanding and managing reporting choices and their regulation. Qualitative characteristics of the underlying information, in terms of an unrelenting focus on relevance and reliability to the exclusion of particular interests or transaction motives, is a cornerstone of the Framework. We argue that the focus on qualitative characteristics precludes a focus on first‐order economic fundamentals and, in the process, invites a static view of reporting standards, as opposed to one based on anticipation of their effect.

Recent Developments at the Securities and Exchange Commission: Academic Contributions and Opportunities

Abstract: In recent years, the Securities and Exchange Commission (SEC) has grown in size and scope. The implementation of Sarbanes‐Oxley (SOX) and the globalization of accounting standards have increased the SEC's workload and brought forth important questions regarding the development and application of accounting and auditing standard setting and regulation. This paper identifies key issues of importance to the SEC including record levels of restatements, SOX implementation, the backdating of stock options, increased use of fair‐values in financial reporting, adoption of IFRS by numerous non‐U.S. registrants, and foreign deregistration. The article highlights the contribution of academic research as it relates to SEC speeches and rulemaking, drawing upon experience of 2005–2006 SEC academic fellows.

An Investigation of Auditor Perceptions about Subsequent Events and Factors That Influence This Audit Task

Abstract: Events that occur after the balance sheet date but before the audit report is signed and dated (subsequent events) may have a material effect on the financial statements and their users. New SEC reporting requirements reduce the time between the balance sheet and report dates, limiting the availability of subsequent event evidence. Professional groups, including the Canadian Institute of Chartered Accountants (CICA) and the American Institute of Certified Public Accountants (AICPA), question whether sufficient evidence will exist if subsequent event information is not available. They fear that decreased availability of subsequent event evidence may lower the quality of both audit judgments and financial reporting. Scant prior research examines auditors' perceptions about subsequent events. Our study examines how auditors search for and discover subsequent event evidence and factors that influence this process. Responses from auditors representing all Big 4 firms and one national firm suggest that subseque...

The Current State of Auditing as a Profession: A View from Worker‐Owners

Abstract: America’s 15 million union members and their families participate in benefit plans with over $5 trillion in assets. Unions themselves sponsor benefit plans with over $400 billion in assets. These funds are set aside to provide the good things in life to working people— in particular the chance to retire in comfort and dignity. These assets are invested in a wide variety of plans, but most are invested in the debt and equity securities of public companies. While individual workers have diverse goals when investing, most worker money is invested through institutions with very long-term horizons, and at a scale where diversification is crucial. When workers’ benefit funds make investment decisions based on inaccurate financial disclosures, workers are hurt. And workers are not just hurt through the impact on their benefit funds. The employment relationship is a deep and profound mutual investment by the employee and the employer. The employee presumes that the employer is what it seems to be—that promises of wages and benefits, not just in weeks but in years to come, can and will be honored. Financial disclosures create the background circumstances in which employees feel comfortable making that commitment. When those disclosures are false and companies collapse, as happened at Enron, WorldCom, Global Crossing, and dozens of other companies, the employees are usually the most profoundly injured in the form of undiversified losses: lost jobs, health care, and retirement benefits.

Assurance versus Insurance: A Study of Consumer Receptiveness in an E‐Commerce Setting

Abstract: Periodic examination is a critical feature for assurance but not insurance; accordingly insurance is potentially a lower‐cost alternative to assurance. Unlike assurance, however, whether insurance inspires consumer confidence remains an unexplored empirical question. This paper compares consumer receptiveness to the concepts of assurance and insurance in an e‐commerce setting. Results (n = 360) in a controlled experiment indicate equivalent consumer receptiveness to assurance and insurance; both significantly increase purchasing intention. Results further indicate that consumer preference for CPA versus non‐CPA insurance providers depends on consumers' assurance knowledge. High‐assurance knowledge consumers prefer insurance provided by insurance companies while low‐assurance knowledge consumers prefer insurance provided by CPA firms. Our finding suggests that the CPA profession could potentially leverage its brand name in a service area outside the profession's traditional markets. An extension to our stu...