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Volume 14

Going Concern Auditor Reports at Corporate Web Sites

Michael Ettredge, Vernon J. Richardson and Susan Scholz

Firms are required to include their auditor's report in SEC Form 10-K filings, presumably because the report contains relevant information for investors and others. The report is particularly likely to be useful when it contains a 'going concern' modification. However, current SEC regulations and AICPA standards do not require firms to provide auditors' reports at their Web sites. This is true even if those sites include year-end accounting data, and even if the auditor's report contains a 'going concern' modification. This study finds evidence that companies receiving going concern modifications are less likely to publish those opinions at their Web sites than are matched (distressed) firms that did not receive such modifications. Yet the 'going concern' firms do provide extensive financial accounting data at the Web sites, including summaries of year-end results. This finding should interest regulators and others who are concerned with the quality of financial information provided at firms' Web sites. Volume 14, 2000,  pgs. 3- 22.

Assessing the Value Added by Peer and Quality Reviews of CPA Firms

Arnold Schneider and Robert J. Ramsay

This study examines the value added by audit peer reviews and quality reviews to financial statement users. A survey of 193 bank lending officers indicates that peer/quality reviews do increase confidence in audited financial statements, but they do not directly affect lender's willingness to approve lines of credit, nor do they directly affect the size of the lines of credit approved. Surprisingly, lending officers provided with audited financial statements where no peer or quality review is mentioned were slightly more likely to approve a lower interest rate, indicating that bank lending officers do not consider the results of a peer or quality reviews unless they are specifically provided to them. Where peer or quality review information is provided, bank lending officers express more confidence in the financial statements if the opinion of the review was clean, and the reviewer was reputable. They were willing to provide a significantly lower interest rate if the audit firm had received a peer review rather than a quality review. This supports the AICPA's decision to abandon quality reviews in favor of peer reviews for firms offering audit and attest services (Elsea and Stewart 1995). The results suggest that CPAs should do more to make financial statement users aware of the peer review process. Clients of firms that receive clean reviews may take advantage of the apparent value added by the review by making users of their financial statements aware of such reviews. Volume 14, 2000,  pgs. 23- 38.

The Relevance of Audit Committees for Colleges and Universities

Zabihollah Rezaee, Robert C. Elmore and Joseph Z. Szendi

The importance and number of audit committees have grown significantly for profit-oriented organizations during the last two decades. Corporate audit committees are viewed as playing an important role in insuring a responsible corporate governance and a reliable financial reporting process. There is, however, little evidence regarding the relevance of audit committees for colleges and universities and their perceived functions and responsibilities. This study gathered survey opinions regarding the relevance and roles of university audit committees. The results indicate that: (1) audit committees are relevant for colleges and universities; (2) college audit committees are more likely to be responsive to top administrators than to governing boards; and (3) the perceived functions of university audit committees are similar to those of municipal governments and private corporations. The results should be useful to regulators, authoritative bodies, and colleges and universities in establishing new audit committees or redesigning existing committees. Volume 14, 2000,  pgs. 39- 60.

Environmental Policy: Corporate Communication of Emission Allowances

S. Douglas Beets and Paul L. Lejuez

As a result of the Clean Air Act Amendments of 1990 (CAAA), utility companies are annually issued emission allowances (EAs) by the federal government; each allowance allows a company to emit one ton of a certain pollutant, sulfur dioxide, into the atmosphere. Companies that reduce their pollution below a benchmark level do not need all of the allowances that they are given, so they may sell their excess EAs to other companies or investors, retain them for future purposes, or donate them to environmental organizations. If a company's annual emission levels exceed the number of allowances they are given, that company must acquire an adequate amount of EAs commensurate with their pollution. These allowances, consequently, are marketable commodities, and their market prices and trading activity have increased materially since inception of the CAAA in 1995. Unfortunately, however, current accounting and disclosure requirements result in financial statements that inadequately reflect company EA holdings, receipts, and trading activity. A study of the public utility companies affected by the first phase of the CAAA revealed that several companies have EA holdings from prior years that have a market value of millions of dollars but are not represented on the financial statements. Many of these companies have also had several transactions regarding EA sales, purchases, and donations, and the financial statements fail to disclose these events. Because emissions trading is widely considered successful and may become a part of the business environment for any polluting organization, accounting and disclosure requirements regarding this phenomenon should be revised as many financial statement users may consider information regarding EAs relevant and influential to their decisions. Volume 14, 2000,  pgs. 61- 80.

Corporate Disclosure of the Decision to Change the Fiscal Year-End

Thomas L. Porter, Edward P. Swanson, Michael S. Wilkins and Lori Holder-Webb

This paper investigates whether registrants comply with SEC rules designed to provide timely notification and transparent disclosure of the effects of a change in fiscal year-end. For a sample of 79 firms, the Form 8-K announcement of the change was filed late 25% of the time and no announcement was available for an additional 14% of the firms. In the subsequent Form 10-K, roughly half of the firms did not report operating results for both the transition period and a comparative period from the prior year, as required by the SEC. The rate of non-compliance was higher for firms audited by non-Big-6 firms. Non-compliance is more important if poor disclosure occurs in conjunction with income management. In this regard, we found an unusually high frequency of losses reported in the transition period that results from a fiscal year change (relative both to the firms' prior experience and to other COMPUSTAT firms). Volume 14, 2000,  pgs. 81- 100.

Earnings Management, The Pharmaceutical Industry and Health Care Reform: A Test of the Political Cost Hypothesis

Joseph Legoria

This paper tests the political cost hypothesis (PCH) by examining how the debate over health care reform impacted the earnings reported by the pharmaceutical industry. The paper examines whether discretionary accruals and research and development (R&D) expenditures were used to manage earnings. The results show that R&D was not used to manipulate earnings in 1993. However, the results indicate that discretionary accruals were used to manage earnings during 1993 consistent with the PCH. In addition, the pharmaceutical industry's sales in 1993 grew at a slower rate than in control years and the industry took more restructuring charges in 1993 than in control years and a set of control firms in other industries. In summary, the evidence for 1993 is consistent with the PCH and indicates that the pharmaceutical industry responded to the potential of increased political regulation by taking steps to reduce their reported earnings. Volume 14, 2000,  pgs. 101- 134.

Analogies Drawn Between Marketing and Financial Reporting Research - Possible Implications for Reporting Comprehensive Income

Pamela A. Smith and Kim R. Robertson

The issues surrounding the format and presentation of financial statement information are similar to those identified in the literature related to nutrition labeling. The regulatory objective of nutrition labeling and financial reporting is the same: to provide information that increases decision effectiveness. This report presents some findings from research on nutrition labeling to identify some implications of reporting comprehensive income. The Financial Accounting Standards Board (FASB) recently issued a standard requiring firms to report comprehensive income. This all-inclusive measure of performance was requested by users and streamlines financial performance measures. Findings in the nutrition labeling literature indicate that, although users may request such information, they do not necessarily use or comprehend it. Presentation formats that reduce information processing load do seem to enhance some aspects of decision efficiency. However, it appears that financial analysts most likely to make use of newly formatted financial information are precisely the ones most likely to already be using this information in its present format. Frequently, accounting researchers measure the effect of accounting information on the financial statement users through the capital markets. Marketing researchers study the decision effects at the individual consumer level. Accounting research supports earnings management behaviors, but there are still unanswered questions regarding if those actions influence the user of that information. The findings from the nutrition labeling studies present a different perspective on how users of information are or are not influenced. The approaches taken in the nutrition information studies may be a way for accounting researchers to address these questions. Volume 14, 2000,  pgs. 135- 150.

A Selected Annotated Bibliography of SEC Accounting Research

J. Edward Ketz and Jimmy W. Martin

In 1934, when Congress passed legislation creating the Securities and Exchange Commission, it is probable that few legislators or even President Roosevelt fully realized the impact that this agency would have on capital markets for the remainder of the twentieth century. The SEC's influence on the evolution of the accounting profession in the United States cannot be overly emphasized. As a result of its prominent role since its inception, the SEC has been the focal point of many research efforts on the part of accounting scholars. Undoubtedly, this research interest will continue into the next century. As we enter a new century, it is appropriate to look back and recognize the efforts of researchers who have studied the effects of SEC regulation of the accounting profession during the twentieth century. This paper presents an annotated bibliography of selected SEC research efforts that have been published since the Commission's inception. Any effort of this nature is subject to certain constraints. First, the scope of the bibliography is restricted to journal articles. Texts have been omitted due to their voluminous contents and the resulting difficulty of summarizing them in a few lines which is necessary for a bibliographic work of this nature. Second, the bibliography is limited to articles whose primary theme relates to the accounting profession. Thus, research on issues such as insider trading and market regulation have been omitted. In selecting particular articles, an effort is made to include published works that cover the entire period since the SEC's inception; thus, research from each decade from the thirties through the nineties is represented. Articles that offer insights into twenty-first century problems have been especially favored. Finally, articles from SEC Commissioners and SEC Chief Accountants, as well as leaders in the academic and professional world are included. Hopefully, the bibliography will serve as a reference point for future SEC research efforts. Volume 14, 2000,  pgs. 151-198.

Auditors and the Post-Litigation Reform Act Environment

Ross D. Fuerman

The Private Securities Litigation Reform Act of 1995, which became law on December 22, 1995, is the first comprehensive revision of the federal securities laws since their enactment 65 years ago. The post-Reform Act period ended when the Securities Litigation Uniform Standards Act of 1998 became law on November 3, 1998. The role of auditors in the financial disclosure private securities class action lawsuits commenced during the post-Reform Act period is the subject of this paper. The analysis, which includes multiple logistic regression of 468 private securities class actions in the United States and Canada, suggests several trends. First, the deep pockets motivation is weakening, and auditor quality (a component in determining auditor culpability) is strengthening, as determinants in naming auditors defendants. In addition, auditors are less likely to be named defendants in federal-only lawsuits than in parallel proceedings. These both suggest a reduced auditor liability exposure in the future. Conversely, a larger number of private securities class actions are being filed, which suggests an increased auditor liability exposure in the future. Also, foreign companies are increasingly being sued in private securities class actions. Volume 14, 2000,  pgs. 199-220.

Remarks on AICPA Recognition of 
Federal Accounting Standards Advisory Board

Robert K. Elliott and Barry Melancon

At the July 1998 AICPA Board of Directors meeting, the chair of the Federal Accounting Standards Advisory Board (FASAB) and representatives from the U.S. General Accounting Office (GAO) discussed the federal government's interest in having the accounting profession designate the FASAB as a body to establish generally accepted accounting principles (GAAP) for the federal government. The AICPA's Council has previously designated only two accounting standards-setters: the Financial Accounting Standards Board (FASB) in 1973 for nongovernmental entities and the Governmental Accounting Standards Board (ASB) in 1986 for state and local governments. Auditors of the federal agencies had been using "other comprehensive basis of accounting" methods. GAAP is a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. It includes not only broad guidelines of general application, but also detailed practices and procedures. GAAP is the most widely recognized method of accounting in the U.S. The move toward stronger federal financial management, through a series of continuous financial reporting improvements, is driven by four major pieces of legislation. They are the Chief Financial Officers Act of 1990, the Government Performance and results Act of 1993, the Government Management Reform act of 1994, and the Federal Financial management Improvement Act of 1996. One of the specific mandates of these reform laws was the requirement that annual independent audits of the financial statements of federal agencies be conducted. On October 19, 1999, the AICPA's governing Council adopted a resolution recognizing the Federal Accounting Standards Advisory Board (FASAB) as the body designated to establish generally accepted accounting principles for federal government entities under Rule 203 of its Code of Conduct. Pursuant to the resolution, statements of federal financial accounting standards are recognized as GAAP for the applicable federal government entities. The following text relates the remarks of Robert K. Elliott and Barry Melancon at the December 14, 1999 ceremony recognizing the FASAB. Volume 14, 2000,  pgs. 221- 228.

Accounting: Continuity and Transition

Shyam Sunder

This paper considers accounting in the new information economy. The basic framework of accounting for firms reflects a set of contracts and helps define, implement and enforce these contracts. This framework is stable, and unlikely to change soon. However, the new information technology has been transforming the markets in which firms operate, and opening up new markets. Using a taxonomy identified with Hatfield [1924] and related to market demand for managerial talent, investment capital and products, helps develop a perspective and commentary on the changes which relate to organizations and accounting systems. Five aspects of accounting in the new economy are considered. Technology; Information and Efficiency; New organization design for web commerce; New cost structures and management; and Experimentation with the market for standards. Volume 14, 2000,  pgs. 229- 244.

Investors' Expectations and the Corporate Information Disclosure Gap

Asokan Anandarajan, Gary Kleinman and Dan Palmon

Many parties rely on corporate financial statements in making their investing and lending decisions. Are financial statement users receiving the information that they desire and understand? Do they expect either quantity or quality of information that they are not getting? The existence of an "expectations gap" between the needs of users and the priorities of financial statement preparers is not contested. This expectations gap is the main issue of this paper. We argue here that several things cause the expectation gap. First, there are deficiencies in the auditing/financial statement preparation/measurement tools available to auditors and preparers. Second, there is a lack of motivation to completely use these tools. Third, user ability to best use the information maybe limited by their lack of experience, knowledge, and/or training on the part of financial statement users. We present some recommendations for addressing the problems. Volume 14, 2000,  pgs. 245- 260.

Quo Vadis CPA?

Gary John Previts

Dynamic opportunities for change in the marketplace for CPA services are causing, once again, an examination of the scope of those services. Proposals are being made to transform the profession and to be responsive to the marketplace as a key to transcending traditional mandates. In such free enterprise systems where the right to own private productive property is the constitutional cornerstone of economic enterprise, the CPA's role is fundamentally aligned with an information right inherent when such property is invested. This paper considers the implications such information rights have upon the scope of CPA services. Volume 14, 2000,  pgs. 261- 264.

The Tyranny of the Analysts: Value Driving Information

Larry M. Parker and Gary John Previts

A variety of views exist as to the price setting processes in public capital markets. This paper examines the role and influence of the analysts on price setting in relation to other groups. It inquires into the implications of "value driver" information as a component of publicly available information, in part as a response to concerns about selective disclosure within the investment community. Despite the possible rationale for such disclosure, the road to acceptance and implementation of such information seems likely to be lengthy and controversial. Volume 14, 2000,  pgs. 265- 270.