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Volume 21-1


Understanding the Changes in Accounting Thought

Rebecca Toppe Shortridge, Northern Illinois University, Pamela A. Smith, Northern Illinois University,

Financial accounting and reporting is in the midst of one of the most significant revolutionary changes in modern history.  The purpose of this paper is to provide a framework that will contribute to the dialogue surrounding these developments.  We use Kuhn’s (1970) framework on the theory of scientific revolution to describe how changes in the need for information, coupled with the lack of relevant accounting information, led to reporting anomalies that have spurred a revolutionary shift in accounting paradigms.  We are moving from an accounting paradigm that existed in the age of an industrial economy to an accounting paradigm that fits the economy in an information age.  This redirection has resulted in the following:  a change in the conceptualization and application of relevance and reliability, an increased use of fair value versus historical cost measurements, a renewed emphasis on principles versus rules, and an evaluation of the composition of the basic financial statements.


Critical Accounting Policy and Estimate Disclosures: Company Response to the Evolving SEC Guidance

Susan B. Hughes, The University of Vermont,  James F. Sander, Butler University,  Jillian K. Snyder, Ernst & Young LLP,

In late 2001, soon after numerous financial reporting failures including the much publicized demise of Enron, the SEC began a series of initiatives to improve critical accounting policy (CAP) and critical accounting estimate disclosures included within the MD&A section of Form 10-K.  The first announcement, in the form of cautionary guidance, was issued in December 2001.  This was followed by a proposed rule in 2002, and additional disclosure guidance near the end of 2003.  Combined, the guidance required companies to provide information that would help investors understand the impact of estimates, accounting policies and external factors on financial results.  Through 2007, the SEC continued to provide guidance as to the content of CAP disclosures in the MD&A.

In this study, we assess the extent to which companies responded to the initial CAP guidance, and determine the extent to which company disclosures changed with additional SEC guidance by analyzing CAP disclosures included in the 2001 and 2003 10-K filings for 112 of the Mid-Cap 400 companies.  Our findings indicate that most, but not all, sampled companies included 2001 CAP disclosures consistent with the cautionary advice.  We find that the disclosure content increased from 2001 to 2003, and that the disclosure quality also increased. However, some items remained underdisclosed in 2003, indicating that even after a two year period in which the SEC continued to provide additional guidance and reviewed company CAP disclosures, companies were not fully disclosing content identified as important by the SEC, particularly when the guidance was included in the Proposed Rule.

Insiders' Perspectives of the Effects of Recent Regulation on Corporate Taxation

Kathryn K. Epps, Kennesaw State University, M. Catherine Cleaveland, Kennesaw State University

Recent legislation and standard interpretations promulgated by governmental bodies and the Financial Accounting Standards Board (FASB) have attempted to address several issues related to corporate taxation.  These issues include the lack of transparency regarding specific tax transactions, the difficulty in reconciling the corporate tax return with the corporate income statement, the relative lack of disclosure of tax contingencies in the financial statements, and the impact of internal control on the reliability of the corporate tax return.  While the stated objectives of several recent regulations have included improvements in the areas of corporate tax compliance and transparency of financial statements, it is unclear whether these regulations have resulted in the desired effects.  This study analyzes the perceptions of 223 corporate tax executives regarding the effects of Internal Revenue Announcement 2002-63, Schedule M-3 of IRS Form 1120, FASB Interpretation Number 48 (FIN 48), and Section 404 of the Sarbanes-Oxley Act.  The findings indicate that the respondents perceive an overall increase in tax return transparency and corporate tax compliance as a result of Schedule M-3 and FIN 48; yet the ability of corporations to engage in tax planning has decreased as a result of FIN 48.  The respondents also perceive that both FIN 48 and Section 404 of the Sarbanes-Oxley Act have increased their reliance on outside sources for tax compliance work.


The Association Between Financially Expert Independent Directors and the Accounting for Employee Stock Options

 Ling Jiang, Virginia State University, Kenneth R. Ferris, Arizona State University, Edward N. Coffman, Virginia Commonwealth University

This study investigates how the financial expertise of independent directors is associated with voluntary accounting policy decisions.  As representatives of a company’s shareholders, financially-expert independent directors are more likely to cause management to pursue higher quality accounting policy decisions.  The policy decision investigated involves the expense/no-expense policy choice for employee stock options as previously permitted under SFAS No. 123.  Using a sample of 174 option-expensing firms and a matched control sample of 174 non-expensing firms, the results indicate a significant, positive association between the decision to expense employee stock options and the financial expertise of a company’s independent directors.  Further, a significant, negative association was found between the option-expensing decision and whether the chief executive officer was the largest internal stockholder.