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Volume 10

The Volatility of Pension Cost:
Some Exploratory Research

Stanley C. Martens and John E. McEnroe

Statement of Financial Accounting Standards No. 87 (FAS 87), Employers' Accounting for Pensions, is a complex and controversial accounting promulgation. A way to describe the complexities is to show how the provisions of FAS 87 differ from a simple model for pension accounting. There is evidence in the "Basis for Conclusions" section of FAS 87 that some of the complexities were designed as devices to reduce the volatility of pension cost. The question arises as to how successful these devices are in reducing pension cost volatility. Answering this question involves developing a measure of smoothness or non-volatility and selecting a benchmark to use against which GAAP pension cost can be compared as to smoothness. The benchmark selected was pension cost calculated under the simple model. The results of some exploratory research show a dramatic reduction in volatility when comparing GAAP pension cost to pension cost under the simple model. The major limitation of the research is the small number of companies studied, thus precluding the ability to make generalizations. Volume 10, 1996, pgs. 3-16.

GASB Rhetoric:
A Content Analysis of GASB Statements

Suzanne H. Lowensohn, Thomas Robinson, and
George Sanders

The creation of the Governmental Accounting Standards Board (GASB), in the United States in 1984, was preceded by several years of contention among financial statement preparers, attesters, and users. The formation of the GASB had the potential to affect a variety of parties, perhaps chief among them the preparer governments that had always enjoyed great accounting latitude.

Considerable research has addressed attempts by private sector preparers and attesters to influence the deliberations of the Financial Accounting Standards Board (Zimmerman and Watts, 1986) and a similar study (Roberts and Kurtenbach, 1992) has addressed lobbying before the GASB.

The unique nature of the GASB, which is faced with setting standards for sovereign governments, requires persuasion in both directions. While interested parties may lobby the GASB, the GASB must also persuade state and local governments to accede to its reporting and disclosure standards. This paper examines the GASB's approach to the disclosure among preparers, attesters, and standard setters by examining the rhetoric it uses to persuade preparers and users that the standards that it has promulgated will result in appropriate translations of objects, exchanges and relations into financial quantities (Robson 1991).

This study uses content analysis to examine the rhetoric used in the Basis for Conclusions of GASB Statements 2 through 17. The technique allows quantification of the GASB's reliance on particular arguments and demonstrates how qualitative and quantitative content analysis methods may be combined. Results suggest that the Board relies heavily on five categories of argument and that appeals for consistency with existing accounting principle tend to dominate. The results for these early statements are consistent with conservative attempts to rationalize existing, accepted practice. Volume 10, 1996, pgs. 17-39.

A Study of Characteristics Related to Public Accountants' Professional Conduct

Ho-Chan Hwang and Arnold Schneider

This study analyzes CPA firm practitioners' judgments pertaining to the AICPA Code of Professional Conduct. Six characteristics associated with professional conduct were tested: understanding of the Code, attitudes, subjective norms, sanctions, firm size, and organizational position. Questionnaires were administered to accountants employed by CPA firms. Each questionnaire contained four cases involving professional conduct issues. The four issues were integrity, independence, confidentiality, and competence. A major finding was that professional accountants' understanding of the Code was significantly related to decision-making in all four cases. The results also suggest that attitudes and sanctions had significant relationships with professional accountants' decisions in some of the cases. No significant efforts for subjective norms were found. In addition, CPA firm size and accountant's organizational position were significant in some cases. Volume 10, 1996, pgs. 41-62.

The Debt Equivalency of Recognized vs. Disclosed Obligations:
An Examination of Borrower and Lender Perceptions

V. Gopalakrishnan and Mohinder Parkash

The debate over recognition versus disclosure is a timely and relevant topic for accounting policy makers, users and preparers of financial statements, and the accounting academics. This research contributes to this debate by examining two questions: whether the effects of recognition versus disclosure depend on the type of information and whether the effects differ depending on the class of user.

We provide evidence on borrower (Fortune 500 companies) and lender (insurance companies and banks) perceptions of debt equivalency of recognized (capital leases, deferred tax liability, and minimum pension liability) versus disclosed obligations (operating leases, unfunded projected benefit pension obligation, and unfunded postretirement benefit obligation.) Our findings indicate that both borrower and lender perceptions differ between obligations recognized in the balance sheet and those disclosed in footnotes. More specifically, it appears that both parties are more likely to consider recognized obligations as debt than disclosed obligations as debt than borrowers. Volume 10, 1996, pgs. 63-77.

The Professional Identification of Accountancy:
Evidence from Comparative Content Analysis
of Mission Statements

Julia Grant

This study examines the strength of the professional identification of accountancy by comparing goals presented in the mission statement of the American Institute of Certified Public Accountants (AICPA) to those of state CPA societies. Content analysis is used to identify consistencies or inconsistencies between the mission statements of these organizations. The comparisons indicate that some norms are shared between the local and national level. However, state societies appear to place relatively more weight on the local needs of members, while the national organization emphasizes its own representative capacity for and the public perception of the accountancy profession. These results are important because for a profession to survive and flourish, its members must subscribe to shared norms and objectives in order to establish and maintain the professional identity. Within the profession of accountancy, efforts have been made to develop shared understandings of needs and goals. Documents produced by the strategic planning process of the AICPA indicate the existence of "efforts to enhance collaboration" (p. 3) between the Institute and the state societies; and representatives from the state societies have been involved more formally in the national planning efforts since 1992 (AICPA, 1994). The evidence presented herein indicates that the alignment of the national and state missions of these professional organizations could be increased.

The remainder of this paper is organized as follows. The first section discusses, within the context of game theory, why shared goals and a professional identification are important for the accountancy profession. The next section describes the use of content analysis to compare the mission statements of the state and national organizations. The results of the analysis are then presented and discussed, and a concluding section completes the paper. Volume 10, 1996, pgs. 79-93.

Managerial Turnover and Successor Accounting Discretion:
Bank Loan Loss Provisions after Resignation,
Retirement or Death

Drew Dahl

This paper analyses discretionary accounting practices of small commercial banks in periods surrounding managerial turnover. Evidence is provided that incidents of resignation, retirement or death exert an influence on loan loss provisions that is consistent with a hypothesis whereby incoming managers accelerate discretionary charges. This evidence extends prior research on the relationship between managerial turnover and accounting discretion by focusing on turnovers that are unlikely to be contaminated by performance effects. It also appears relevant to the more general issue of accounting practices in the banking industry. Volume 10, 1996, pgs. 95-110.

Economic Consequences of Accounting Standards
and Islamic Banks

Rifaat Ahmed Abdel Karim

Islamic banks are a new type of financial institution that must adhere to the doctrines of Islam in their business and financial transactions. Recently, Islamic banks and other interested parties have appreciated the need to establish a private self regulatory body - Accounting and Auditing Organization for Islamic Financial Institutions [AAOIFI] - to promulgate accounting and auditing standards for Islamic banks.

Investment accounts is one of the products that Islamic banks use to mobilize funds. The contractual relationship between Islamic banks and holders of these accounts is governed by the mudaraba (commenda) contract. A review of these accounting rules of the mudaraba contract reveals that economic consequences is a central feature that is embodied in these rules.

This implies that in setting standards for financial reporting by Islamic banks, AAOIFI cannot separate the two issues of giving considerations to economic consequences considerations and concerns for attributes of credible and useful accounting information are not mutually exclusive.

Furthermore, the paper suggests that in setting accounting standards AAOIFI's main focus should be to determine the rights and obligations of interested parties. Although such an objective renders AAOIFI's accounting standards political, it is argued that this does not imply that the outcome of such a process would be a matter of social choice. In addition, neither does such a political process, which takes place within the boundaries of the Shari'a principles, constitute a threat to AAOIFI as a private self regulatory body nor rob its accounting standards of their credibility and integrity. Volume 10, 1996, pgs. 111-138.

Auditor Reports on Client Internal Control Structures
and Management Fraud: A Theoretical Investigation

Frank Nekrasz, Jr.

This research is motivated by the call to mandate external auditor attestation reports on clients' assertions regarding the effectiveness of their internal control structures. The call for these reports is motivated by an apparent desire to reduce the incidence of fraud perpetrated by the highest levels of management; i.e., management fraud. The impact of external auditor attestation reports on internal control structure effectiveness on the incidence of management fraud is an open question. To provide insight into the strategic interaction among a manager, an auditor, and the mandating of external auditor attestation reports on client internal control effectiveness, I provide a theoretical investigation through game-theoretic analysis. Specifically, I use game-theoretic analysis to investigate the following question: Will mandatory external auditor attestation reports in client internal control structures necessarily reduce the incidence of management fraud? The results reported herein suggest that the incidence of management fraud does not decrease and may increase when external auditor attestation reports in client internal control structures are mandated. Consequently, such mandatory reports may not be a viable solution to the vexing problem of management fraud. This finding can serve as a warning to regulators, the public, and the audit profession who may view these mandatory reports as a solution to the problem of management fraud. Volume 10, 1996, pgs. 139-168.

Legislation and Case Law 1995: Review and Analysis

Mark A. Segal

During December 1995 there occurred two events of major importance to the accounting profession. In the most far reaching of these, on December 22, the Private Securities Litigation Reform Act of 1995 (Act) became law. Enacted through the override of a presidential veto, the Act contains measures intended to deter and sanction the asserting of frivolous and abusive securities litigation, while still protecting the investing public. December was also highlighted by a U.S. District Court decision which confirms the difficulty faced in placing restrictions on the ability of licensees to communicate the fact of their being licensed. Volume 10, 1996, pgs. 171-178.

Political, Financial and Economic Risks and
Accounting Disclosure Requirements of
Global Stock Exchanges

Ahmed Riahi-Belkaoui

This study relates the international differences in the level of disclosure requirements of stock exchanges to political, financial, and economic risks. The results show that the level of disclosure requirements of stock exchanges was influenced positively by political risk and negatively by financial risk. Differences in political and financial risks create different social environments for the demand of information by global stock exchanges. Volume 10, 1996, pgs. 179-191.

Chairman's Presentation to AICPA Governing Council, October, 1995

Ronald S. Cohen

… The paths and choices for the future are not that depressing, though some of the accounting critics would have you believe that they are. The accounting profession is facing a new business climate. Many old assumptions will no longer hold true and standard practices will no longer apply. But these new economic realities are opportunities, not threats, for a profession known for its integrity, professional judgments and objectivity... Volume 10, 1996, pgs. 195-200.

Presentation of the President, International Federation of Accountants to AICPA Governing Council, October 1995

Juan R. Herrara


To briefly share with you this afternoon the main issues which are being considered at the international scenario and of which all our members should be aware. They represent the present and future of our profession as well as our participation, as a unified front, in the process of revolutionary changes of the world in which we practice.

    1.    World Trade Organization

    2.    Ethics Forum

    3.    Accountant's Liability

    4.    Capital Market Forum  Volume 10, 1996, pgs. 201-208.