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Volume 22-2

Accounting Standard Attributes and Accounting Quality: Discussion and Analysis

Mark Kohlbeck, Florida Atlantic University, and Terry Warfield, University of Wisconsin

 We explore accounting quality attributes of 19 general-purpose accounting standards implemented over the past thirty years to increase our understanding of the US standard-setting process in terms of improving accounting quality and the principles vs. rules-based debate. Our study is timely given recent criticism of US standard setting. Evidence on how US accounting standards may impact accounting quality helps evaluate the overall standard-setting process. Our analysis of the accounting standards suggests that the standards contain both principle- and rule-based features. We also perform an analysis of the impact on earnings management (an indication of accounting quality). We find that earnings management indicators decrease following new standards implemented over this time period. These results are consistent with FASB’s increasing focus on the balance sheet and enhanced disclosures in implementing standards during this period. Our findings, based on existing standards, can be used to assess the merits of US standard setting and to evaluate proposals on the direction of future standard setting.

 

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Developments in Accounting Regulation: A Synthesis and Annotated Bibliography of Evidence and Commentary in the 2007 Academic Literature

Gregory A. Jonas, Case Western Reserve University, Stephen R. Moehrle, University of Missouri – St. Louis, and Jennifer A. Reynolds-Moehrle, 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 one in a series of bibliographies that summarizes regulation-related academic research. 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.

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Investigating International Accounting Standard Setting: The Black Box of IFRS 6

Corinne Cortese, University of Wollongong, and Helen Irvine, Queensland University of Technology

 This paper examines the role of powerful entities and coalitions in shaping international accounting standards. Specifically, the focus is on the process by which the International Accounting Standards Board (IASB) developed IFRS 6, Exploration for and Evaluation of Mineral Resources. In its Issues Paper, the IASB recommended that the successful efforts method be mandated for pre-production costs, eliminating the choice previously available between full cost and successful efforts methods. In spite of the endorsement of this view by a majority of the constituents who responded to the Issues Paper, the final outcome changed nothing, with choice being retained. A compelling explanation of this disparity between the visible inputs and outputs of the standard setting process is the existence of a “black box”, in which powerful extractive industries entities and coalitions covertly influenced the IASB to secure their own ends and ensure that the status quo was maintained.

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Analysis of Professional Standards and Research Findings to Develop Decision Aids for Reliance on Internal Auditing

Arnold Schneider, Georgia Institute of Technology

 This paper analyzes professional standards and research findings pertaining to external auditors’ reliance on internal auditing and develops decision aids for reliance. The paper obtains various characteristics relating to the evaluation of internal audit competence, objectivity, and work performed, as well as other non-internal audit factors that impact reliance. These characteristics and factors are integrated into decision aids for reliance on internal auditing.

 

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Impact on Pre-and post-Sarbanes Oxley Users’ Perceptions by Incorporating the Auditor’s Fraud Detection Responsibility into the Auditor’s Internal Control Report

Benjamin P. Foster, University of Louisville, Guy McClain, Auburn University, and Trimbak Shastri, University of Louisville

 The Department of the Treasury’s Advisory Committee on the Auditing Profession (Advisory Committee, 2008) has recommended that the Public Company Accounting Oversight Board (PCAOB) clarify the auditor’s role in detecting fraud in the auditor’s report. The PCAOB replaced Auditing Standard No. 2 (AS2) with Auditing Standard No. 5 (AS5) but did not clarify the auditor’s fraud detection responsibility in the auditor’s report covering internal control and/or the financial statements. The focus of this study is to evaluate (i) whether the PCAOB mandated auditor’s internal control report (ICR) format with a ‘limitations’ paragraph meets users’ expectations, (ii) whether users’ prefer an ICR incorporating auditor’s fraud detection responsibility, and (iii) whether users’ expectations have changed over time. Results based on analyses of data from prior studies indicate that in pre-and post-SOX time frames, an ICR format without a limitations paragraph and clarifying the auditor’s role for fraud detection best met users’ expectations from an audit, consistent with the Advisory Committee’s recommendation. Users’ perceptions of potential auditor liability associated with ICR formats have changed significantly over time. Pre-SOX users perceived reduced auditor liability associated with an ICR that contained a limitations paragraph, but post-SOX users perceive similar potential auditor liability with all ICR formats.

 

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Small Cap Financial Reporting: Determinants of Emphasis and Placement of Non-GAAP Disclosures

Linda Campbell, Texas State University – San Marcos, and Dennis M. López, The University of Texas at San Antonio

 This study examines the determinants of emphasis on non-GAAP disclosures in the earnings announcements of small cap companies. Two proxies of non-GAAP information emphasis are investigated—placement of the first non-GAAP disclosure and placement of the non-GAAP to GAAP reconciliation required by Regulation G. Using hand-collected data from fourth quarter press releases, we find evidence indicating that small cap firms place a higher level of emphasis on non-GAAP financial measures when GAAP earnings suggest lower value-relevance and when their shares are owned by a higher proportion of institutional investors. We also find that small cap companies decrease the level of emphasis placed on non-GAAP information as their listing tenure increases.

 

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No news is bad news: Market Reaction to Reasons Given for Late Filing of Form 10-K

Carol Callaway Dee, University of Colorado, William Hillison, Florida State University, and Carl Pacini, Pennsylvania State University

 We examine the relation between reasons provided by management for late filing of Form 10-K and the market reaction to news of the late filing. We find negative abnormal returns for firms providing inadequate or boilerplate reasons for late filing (no attribution), and positive abnormal returns for firms that provide apparently legitimate reasons for late filing (attributions). Regression analyses show a positive relation between attributions and two-day CARs, after controlling for the type of earnings news in the notification of late filing found in Form 12b-25 (positive or negative news).

 

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Consequences of Real Earnings Management on Subsequent Operating Performance

Gary K. Taylor, University of Alabama, and Randall Zhaohui Xu, University of Houston-Clear Lake

 Using three criteria, we identify firms that may have engaged in real earnings management. We then investigate whether real earnings management activities lead to a significant decline in these firms’ subsequent operating performances. Our test results demonstrate that firms identified as conducting real earnings management activities do not experience a significant decline in subsequent operating performance. The finding enhances our understanding of the process through which management evaluates the costs and benefits of real earnings management and helps address concerns about costs of the increase in real earnings management activities that arose due to the heightened accounting regulation implemented by the Sarbanes–Oxley Act.

 

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An Evaluation of the FIN 46R Consolidation Standard

Chandra Subramaniam, University of Texas at Arlington, and Richard S. Mark, University of Texas at Arlington

 The FASB is reconsidering several provisions related to FIN 46R. The FASB and the IASB are also reevaluating the concept of an “entity” in their conceptual framework project. This study investigates the financial statement impact of Financial Interpretation (FIN) 46R. In addition, we examine changes in firms’ risk profile using bond yields. Our findings suggest that the impact of FIN 46R was minimal and largely confined to the financial sector and the energy production sector. In addition, corporate risk was largely unaffected. These findings suggest that FIN 46R is not entirely effective at reducing off-balance sheet financing and manipulations.

 

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The Ascent of Money, Niall Ferguson. Penguin Press, New York, NY (2008). 442p.

Timothy J. Fogartya, Case Western Reserve University

 

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LORDS OF FINANCE, The Bankers Who Broke the World, By Liaquat Ahamed, The Penguin Press, New York, 2009, 564p.

Larry M. Parker, Case Western Reserve University

 

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