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Volume 21-2

A European view on the legitimacy of accounting procedures: Towards a deliberative-accountability framework for analysis

Ulf Luthardt, Jochen Zimmermann, Tilburg University


Accounting rules affect fundamental areas of social interaction encompassing groups that have diverse and conflicting interests regarding financial reporting.  In the absence of a coherent social choice theory, concepts of legitimacy can be used to assess the acceptance of accounting standard-setting processes and their resulting norms.  In this paper, we analyze the standard-setting process in Europe.  Accounting rules in Europe are developed in a two-stage process involving both private standard-setting and public rule-making.  From a structural perspective, the European Union (EU) is well positioned to develop legitimate accounting procedures.  However, the original purpose and the ensuing legitimacy of its control mechanism are jeopardized when EU structures are used and sometimes abused for policy formation and the creation of EU-IFRS.



The Impact of SFAS No. 141 on Earnings Predictability of Merging Firms: Evidence from the Initial Year of Implementation

Natalia Mintchik, University of Missouri – St. Louis College of Business Administration


This study examines the impact of SFAS 141 on earnings predictability of merging firms.  I expect a relative improvement in analysts’ earnings forecast accuracy for merging firms versus non-merging peers after SFAS 141 adoption.  I restrict the post-SFAS 141 sample to the initial year of SFAS 141 implementation. This research design disentangles effects of SFAS No. 141 from those of SFAS No. 142. The evidence from analysis of 48 pairs of merging and matched non-merging firms is consistent with expectations and confirms the increase in earnings predictability for merging firms versus their comparable non-merging firms post-SFAS 141.  Results of additional tests suggest that earnings predictability improvement more likely follows from extended disclosure requirements and the other changes in the Purchase Method (“better purchase” issue) than from the elimination of Poolings-of-Interest (“purchase vs. pooling” issue).



Post-Regulation G Findings

Linda Campbell, Texas State University – San Marcos, Marshall K. Pitman, The University of Texas – San Antonio

 Researchers generally recognize that the stated goal of Regulation G (Reg. G), the Securities and Exchange Commission’s (SEC) conditions for use of non-Generally Accepted Accounting Principles (GAAP) financial measures, is to improve the quality and transparency of non-GAAP financial measures rather than to specifically affect various reporting trends of such measures.  Various researchers continue to report substantial deceases in the number of non-GAAP disclosures and/or discloser firms since its implementation in early 2003.  By using a sampling criteria in line with the SEC’s definition of non-GAAP financial measures and by reviewing actual corporate press releases, rather than relying on proxies (such as keyword searches), our results indicate that the proportion of companies releasing non-GAAP financial measures has decreased only moderately.  We further examine recent changes in two areas of reporting trends noted in prior literature and conclude: 1) the most common pre-Reg. G categories of adjustments have changed and non-GAAP terminology remains as inconsistent as noted in pre-Reg. G research; and 2) the business services sector, which had previously been identified as a prominent non-GAAP discloser (reporting) sector is still an avid discloser of non-GAAP financial measures.



Updated Stock Index and Market Seasonals (SIMS) 3.0 Data Base Includes Two International Control Measures


Anthony J. Cataldo II, West Chester University


This article provides updated information related to a database that regulators have found useful.  Previous versions of the SIMS database were discussed in Cataldo (1998, 1999, and 2006).  New to the database are BBA LIBOR measures (1997 through September 2007) and Shanghai Composite (SSE) Index measures (2000 through September 2007).  BBA LIBOR measures complement the 30-day commercial paper rates provided in SIMS 2.0, as it represents the prevalent measure associated with both debt and equity markets, as impacted by sub-prime loans.  The SSE Index was the Asian index most responsive to rumors of the imposition of a capital gains tax in China in late February 2007.  The significance of these additional, international debt and equity control variables may require control by capital markets researchers and is the motivation for their inclusion in this description of the expanded SIMS 3.0 data base.



A Perspective on Regulatory Paradigms: The Case of IRS and Sarbanes-Oxley Approaches to Executive Compensation-related Regulation

Kenneth Ferris, Arizona State University, James S. Wallace, Claremont Graduate University, Victoria Krivogorsky, San Diego State University

 In this paper we explore two regulatory paradigms, with an emphasis on the regulation of executive compensation.  An example of the traditional rule-based paradigm is Internal Revenue Code Section 162(m) in which a tax-deductible cap was passed into law to limit executive compensation.  We demonstrate that this approach yielded mixed results.  While stronger pay/performance sensitivity has been documented, Section 162(m) appears to have actually exacerbated the level of executive compensation.  We contrast the rules-based paradigm with an alternative paradigm illustrated by the Sarbanes-Oxley Act in which the U.S. Congress introduced a series of corporate governance initiatives into federal securities law.  The transformation of the mode of regulatory intervention as reflected by SOX is shown to be fully consistent with recent changes in the generally accepted conceptual framework for financial reporting.



The Impact of Tax Law Uncertainty on the Development of the Sarbanes-Oxley Auditor Independence Rules With Regard to Tax Shelters

William D. Terando, Butler University, James M. Kurtenbach, Iowa State University

 The paper examines the impact of tax rule uncertainty on the development of the Sarbanes-Oxley auditor independence rules.  We show that the inability of Congress to articulate a concise and agreed-upon tax shelter definition forced the SEC to adopt their own definition that incorporates two characteristics common to most tax shelters: contingent fee arrangements and confidentiality.  We also consider whether this definition eliminates the subjectivity in the tax shelter identification process because it reinstates the significant purpose standard (used for tax enforcement purposes) to assist auditors (and their public company clients) identify tax shelter transactions.  We conclude that the new definition has reduced the incentive of auditors to provide tax related services to their public company clients.



Developments in Accounting Regulation:  A Synthesis and Annotated Bibliography of Evidence and Commentary in the Academic Literature (1999-2000)

Stephen R. Moehrle, Mary Beth Mohrman, Jennifer A. Reynolds-Moehrle, Pamela Stuerke, University of Missouri – St. Louis


 In this article, we synthesize in annotated bibliography form, recent regulation-related findings and commentaries in the academic literature.  This annotated bibliography is the fourth in a series of bibliographies that will summarize regulation-related academic research for at least the period 1990 and forward.  We reviewed academic outlets such as The Accounting Review, The Journal of Accounting Research, The Journal of Accounting and Economics, Accounting Horizons, The Journal of Accounting, Auditing & Finance, The Journal of Accounting and Public Policy, The Journal of Business, Finance & Accounting, Auditing:  A Journal of Practice and Theory, and Research in Accounting Regulation.  We annotate results of regulation-related research studies and key points from regulation-related commentaries.