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Volume 03

Accounting Regulation and Research and Development Expenditures: An Equilibrium Effect

Mohammad S. Bazaz, Frances L. Ayres, and Philip D. Harsha

This study examines the impact of Statement of Financial Accounting Standard No. 2 on firms' expenditures on research and development. The percentage change in R & D from the pre- to post SFAS 2 period is modeled to be a function of the pre-SFAS 2 accounting method, whether the firm is controlled by owners or managers, the level of pre-SFAS 2 leverage and the level of pre-SFAS 2 spending on R & D. The overall model was significant (@ < .0001), explaining about thirty percent of the percentage change in R & D. The results indicate that manager-controlled firms who were expensing R & D costs prior to SFAS 2 increased R & D by about twenty-two percent, while other firms showed a significant decrease in R & D from the pre- to post-SFAS 2 period the results also indicate that firms who were capitalizing R & D in the pre-SFAS showed a negative relation between the change in R & D and the degree of pre-SFAS 2 leverage. Using a broader view of the economic impact of accounting regulation than was employed in prior studies of the impact of SFAS 2, we argue that SFAS 2 had a more general equilibrium effect than was previously believed. In general, SFAS 2 appeared to lead to a more uniform level of R & D spending among classes of firms. Volume 3, 1989, pgs. 3-14.


Management Expectations, Firm Characteristics, and the Economic Consequences of Statement 87: Implications for Transitions Period Policy

Heibatollah Sami and Roland Lipka

In December 1985, after 11 years of deliberation, the Financial Accounting Standards Board approved, by a 4-3 vote, SFAS 87 on accounting for pensions. This paper studies the effect of the new regulation's lengthy transition period on certain managerial expectations and decisions. In addition, the study is designed to provide evidence on the positive theory of accounting choice and the theory of costly contracting since the regulators expressed concern with company reactions to the rule changes. Survey data was collected from the CFOs and corporate controllers. The results of the study indicate that management estimates of the effects on earnings, liabilities, and cash flow are related to whether the company: (1) is overfunded or underfunded; (2) has a GAAP based executive compensation plan; and (3) whether the company chooses to voluntarily adopt the provisions early. Furthermore, the evidence supports the positive theory of accounting choice's prediction that voluntary choice for firms with GAAP bases bonus plans will be income increasing. Counterfactual to the regulators' concerns, the evidence does not support the assertions that contract renegotiation costs would be significant (as suggested by costly contracting theory). Volume 3, 1989, pgs. 15-43.


An Analysis of the Development of Education and Experience Requirements for CPAs

Philip H. Seigel and John T. Rigsby

The changing educational and experience requirements needed to enter and remain in the accounting profession are examined in this paper. The requirements are reviewed at five different points in time (1915, 1934, 1951, 1965, and 1985) and important changes are discussed. The goal is to place some of the present developments concerning education and experience requirements in a broader perspective and to improve understanding of the changes taking place. Volume 3, 1989, pgs. 45-68.


Regulation and Response: The Case of Lease Disclosure in the U.K.

Neil Garrod

Regulation is a complex and multifaceted concept. It is in incumbent upon regulators, however, to support the imposition of rules, additional to 'natural laws,' deemed necessary to ensure the smooth and efficient operation of organizations or functions being regulated.

Using the leasing standard in the U.K., [SSAP21], as a vehicle, to important regulatory questions are addressed in this paper:

  1. Does the regulation bring new, previously unavailable information to the investment market?
  2. Is management behavior affected by the new regulation?

Both of these are very broad questions and are proxied empirically in this research by (1) a market price reaction test, and (2) an evaluation of changes in management decisions regarding financial leverage.

The price test indicates that the new disclosure, following enactment of the standard, eliminates positive abnormal returns previously enjoyed by non-disclosing companies. Also, this same group of companies reduces their non-lease debt levels prior to first disclosure of their lease information, relative to those companies that voluntarily capitalize leased assets prior to any regulation. Volume 3, 1989, pgs. 69-92.


Cultural Determinism and Professional Self-Regulation in Accounting: A Comparative Ranking

Ahmed Belkaoui

This study examines the international differences in professional self-regulation and relates these differences to cultural influences. The results show that the extent of professional self-regulation was influenced by various cultural dimensions. Cultural differences create different social environment for a promotion of professional self-regulation in accounting. Volume 3, 1989, pgs. 93-101.


A Comparison of Regulation Theories: The Case for Mandated Auditing in the United States

Hain Falk

Competing theories explaining the economic regulation phenomena are examined in this paper in the context of the 1934 mandatory auditing requirements for publicly traded firms in the United States. The demand for and supply of auditing services in a non-regulated setting is analyzed, followed by an analysis of the evolution that led to the mandatory auditing requirements. While some support for the economic incentive driven (capture) theories is found, those theories fall short of fully explaining the observed phenomena. It is suggested that theories emphasizing the role of ideology, ethics and self-satisfaction on the part of legislators may better explain the mandating of audits for publicly traded firms in the United States. Volume 3, 1989, pgs. 103-123.


The Potential Effects of Different Voting Rules on the FASB Due Process

Prakash P. Shenoy, Keith A. Shriver and David B. Smith

The institutional legitimacy of the FASB is dependent upon a substantive and procedural due process. A major step in the due process is the combination of individual Board members' preferences into an aggressive FASB decision on a statement of financial accounting standards. Different voting rules may have varying degrees of "success" in aggregating individual Board members' preferences. The purpose of this paper is to analyze four voting rules and to demonstrate that the ultimate FASB decision about a statement decision of financial accounting standards may be dependent upon which voting rule is used, even though its rule is based on the same set of board member preferences. Volume 3, 1989, pgs. 125-132.


On the Logical Foundation for Self-Regulation: Rules, Corporations and Financial Accounting

Joni Young and Orace Johnson

Drawing on general concepts from political science, we analyze the relations between rules, corporations, and financial accounting. The rule typology consists of possession, boundary, scope, authority, aggregation, payoff and information rules. We use to opposing views of the business corporation (concession theory and inherence theory) to deduce different conclusions about financial accounting information rules (FAIR). We are concerned about the question, "What makes FAIR fair when established by separate corporate entities?" We conclude by raising a comparable question: "How fair is FAIR when produced by the FASB?" Volume 3, 1989, pgs. 133-151.


Income Disclosure, Descriptive Power and Cash Flows

Jenice P. Stewart

The objective of this study is to test the usefulness of "regular income" in the forecasting market cash flows in the spirit of the Discussion Memorandum on "Reporting Earnings" (1979) and the Statement of Financial Accounting Concepts No. 5 (1985). More specifically, gross profit, as suggested by the Financial Accounting Standards Board (FASB, 1979), is used as a surrogate for "regular income." This study derives a relationship between "regular" and net earnings by expanding the information upon which market cash flow (MCF) expectation are conditioned to include data other than prior net income. This approach differs from previous studies which have examined the time-series behavior of earnings based solely on previous net income. This approach can result in earnings forecasting models that are more accurate than the random walk with a drift model which has been robust against mechanical model challengers. The research design incorporates a cross-sectional multiple regression approach. The results provide a plausible reason for the FASB (1985) not requiring additional earnings classifications. That is, "regular income" was approximated from gross profit (an item already disclosed in earnings reports) which provided significant descriptive power above net income in assessing future market cash flows. Volume 3, 1989, pgs. 153-182.


Perspective after One Year

Edmund Coulson

This paper explains the new SEC's Chief Accountant perspectives regarding several issues areas and their importance to additional future activities.

  1. The SEC's continuing role as a regulator: SEC's focus on accounting will not change (as a law enforcement agency devoted to the principle of full and fair disclosure), and that the accuracy and the credibility of a registrant's financial statements are at the heart of the full disclosure program.
  2. Oversight of private standard setting: SEC must continue to maintain an active and visible oversight function of private standard setting for the reason of the vital importance of the standards to the public.
  3. Independence: auditor independence is a primary factor in maintaining investor confidence in the disclosure system.
  4. Internationalization: Internationalization of the world economy requires recognition of worldwide accounting and auditing standards. There have been several significant changes in international accounting standards and a similar initiative to pursue potential solutions in auditing.
  5. Fraudulent Financial Reporting Initiatives: SEC is actively pursuing initiatives in fraudulent financial reporting.

Volume 3, 1989, pgs. 185-190.


The Aftermath of Excellence

Charles Kaiser Jr.

This paper concerns about ethics in accounting profession. The writer is optimistic that the ethics in accounting profession are better than ever. This optimism is based upon the plan to restructure professional standards. This plan forms a tripod (establishment of the foundation of ethical goals and responsibilities, a program of stronger education and technical standards, and the framework for improving adherence to ethical standards) to support the profession. Volume 3, 1989, pgs. 191-196.


Research Contributions to Canadian Standards: A Retrospective

Ross M. Skinner

This paper tells about Skinner's reflection on how his career was much shaped by professional research environment and how the research had contributed to the developments of standards in Canada. Skinner divided the "environment reflection" into several parts: Initial Development, The 1945 Audit Environment, The sense of professional obligation, Personal Development, Formalization of a Research Responsibility, Initial Ideas, Early Research Efforts, Development of Analytical Auditing, and Skinner's Transition to Accounting Research. Volume 3, 1989, pgs. 197-217.


The Reemergence of the Cost Accounting Standard Board

Larry M. Parker

This paper analyzes the reemergence of the Cost Accounting Standards Board (CASB) in 1988. Re-establishment of the CASB is important because the authority of the new CASB is greater than before (it has exclusive authority over all cost accounting standards for all contracts in excess of $500,000). Furthermore, direct input by the accounting profession to the CASB will be more difficult because none of the CASB members need be from the accounting profession. The effect of the no appointed accounting profession to sit on the board, made the profession be prepared to act in a strong supporting and advising role. Volume 3, 1989, pgs. 219-226.


SEC Case Law: A Summary for Accountants

J. W. Martin

This paper summarizes the selection of important cases on certain key areas regarding the SEC case law. The educators should have a general background understanding on the topics selected in order to provide students on regulatory matters. The topics selected are: Liabilities, Enforcement issues (Injunctive actions, Formal Investigations, and Administrative proceedings), Definition of Security, Disclosure (Material Opinions), Proxy Solicitations, Tender Offers, Insider Trading, and Short-Swing Profits. Volume 3, 1989, pgs. 227-237.


A Guide to SEC Regulations and Publications: Mastering the Maze

Paul B. W. Miller and Jack Robertson

This paper is a guide for academic and professional accountants in the activities and the influences of the SEC. The problems arise from the SEC regulations and publications are the complexities of their structures. The complexities are the results of the fact that the SEC is a direct product of legislation, and its literature has been shaped by legal traditions and procedures. The structure has four levels:

  1. Statutes (1933 Securities Act, 1934 Securities Exchange Act, and Other Statutes)
  2. Regulations and Forms (Regulation S-X, Regulation S-K)
  3. Commission Releases
  4. Staff Accounting Bulletins, Securities Act Industry Guides, and Exchange Act Industry Guide

Volume 3, 1989, pgs. 239-249.


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