Theodore E. Christensen, Bringham Young University, William G. Heninger, Bringham Young University, Earl K. Stice, Bringham Young University
We investigate the extent to which rapid accessibility of financial reports filed electronically through the Securities and Exchange Commission’s EDGAR system has affected the ability of investors and security analysts to use accounting data in pricing decisions and forecasting. Consistent with prior research, we find evidence confirming that stock price reactions to SEC filings are significant in the EDGAR period but not the pre-EDGAR period. We also find significant revisions in analysts’ one-quarter-ahead earnings forecasts around SEC filings dates in both the pre-EDGAR and EDGAR periods. The price and forecast revision evidence indicates that financial analysts have used SEC filings all along. However, it is the advent of EDGAR that has allowed individual investors to also use 10-K and 10-Q filings. Cross-sectional analyses indicate that in the EDGAR period, trading volume around the preceding earnings announcements may influence individual investors to react to SEC filings. In contrast, variables such as the earnings surprise and the level of total accruals attract the attention of financial analysts. Interestingly, analysts appear to have been less likely in the pre-EDGAR period to bear the cost of searching out each SEC filing to identify those with large total accruals, which are known only after examining the SEC filing itself.
Mark P. Bauman, University of Northern Iowa
Prior to 1995, the U.S. Securities and Exchange Commission (SEC) required publicly-traded, capital-intensive registrants to prepare detailed supplemental schedules summarizing the activity in fixed asset-related accounts. This study examines these previously-mandated schedules and illustrates how current aggregated reporting requirements potentially conceal insights that could be gained with finer information. This is a significant issue, as current disclosures under International Financial Reporting Standards (IFRS) are similar to the former SEC requirements. The analysis supports the conclusion that stakeholders in capital-intensive U.S. firms are at an informational disadvantage relative to stakeholders in similar firms reporting under IFRS.
Rick N. Francis, University of Texas at El Paso, Sid Glandon, University of Texas at El Paso, Lori Olsen, Central Michigan University
The measurement of operating cash flow using U.S. generally accepted accounting principles (GAAP) currently requires deductions for interest and income tax payments, and prohibits deductions for capital expenditures. In contrast, the IASB and the FASB are jointly proposing a new measure of operating cash flow which prohibits deductions for interest and income tax payments, and requires deductions for capital expenditures. This study compares the persistence of the current and proposed measures of operating cash flow, and the industry-specific results indicate that there is no significant difference between the persistence of the two measures for more than three-fourths of the industries in the sample. Moreover, the Boards’ constituents are recommending the use of a subtotal of operating cash flow prior to capital expenditures, and the results of this study suggest that this subtotal is more persistent for a limited number of industries than the current measure. Overall, the results of this study suggest that the predictive ability of operating cash flow will not change significantly for most industries.
May H. Lo, Western New England University, Le (Emily) Xu, University of New Hampshire
This paper investigates whether investors’ bias in processing the information contained in the cash components of annual earnings has been reduced, and whether the difference in bias between financial analysts and investors has decreased subsequent to Regulation Fair Disclosure (hereafter, Reg FD). We compare analysts’ and investors’ weightings of the three cash flow components of earnings, defined by Dechow, Richardson, and Sloan (2008), from 1985 to 2008, using historical weightings as benchmarks. Our results show that, in the post Reg FD period, the magnitude of investors’ (analysts’) mis-weightings has decreased (increased), and the differences between analysts’ and investors’ mis-weightings have become smaller. Overall, these results suggest that financial analysts’ information advantages over investors declined after Reg FD took effect, and that investors consequently are less biased in assessing the persistence of the cash flow components of earnings following the implementation of Reg FD.
Derek Dalton, Clemson University, Steve Buchheit, Texas Tech University, Derek Oler, Texas Tech University, Ming Zhou, DePaul University
SEC filing deadlines accelerated for many firms over the past decade; nevertheless, the percentage of late 10-K filings has decreased by historical standards. From 2000 to 2007, six percent of 10-Ks are late but remain SEC compliant (via a Form 12b-25 filing). An additional 2.5 percent of all 10-K filings are both late and non-compliant. When analyzing all 10-K filings (i.e., both timely and late filings), we find that (1) relatively large stock exchanges, (2) greater analyst coverage, and (3) larger audit firms are each associated with improved timeliness and compliance in 10-K report filings.
An examination of the perceptions of auditors and chief financial officers regarding principles versus rules based accounting standards
John E. McEnroe, DePaul University, Mark Sullivan, DePaul University
The debate over the adoption of International Financial Reporting Standards (IFRS) by United States issuers, or its convergence with U.S. Generally Accepted Accounting Principles (U.S. GAAP) has been going on for several years now. However, as of this writing, the Securities and Exchange Commission (SEC) has still not taken a definitive position on the issue. This is in part due to issues involving the cost of adoption, independence concerns relating to the IFRS promulgation body, the International Accounting Standards Board (IASB), and the debate over which type of accounting standards is superior for financial reporting: IFRS, which are said to be “principles-based,” or U.S. GAAP, which are said to be “rules-based.” In this paper we examined the views of two stakeholders in the U.S. financial reporting system, auditors in large public accounting firms and Chief Financial Officers in the Fortune 1000. We elicited their perceptions involving ten situations where specific rules are incorporated in U.S. GAAP. We asked if the elimination of the specific rule would be likely to better achieve the “qualitative characteristics of useful financial information” as defined by the Conceptual Framework for Financial Reporting adopted by the Financial Accounting Standards Board (FASB) in 2010 (FASB 2010) and the similar document adopted by the IASB at the same time (IASB 2010). We found that in eight of the ten situations both groups preferred the rules-based accounting regime (the current U.S. GAAP rules) over a principles-based approach.
Patricia L.D. Derrick, Salisbury University
SFAS No. 116, Accounting for contributions made and contributions received, issued in 1993, requires that nongovernmental organizations, both proprietary and nonprofit, recognize unconditional promises to give as current period revenue. This study examines whether charities—organizations that rely heavily upon contributions—are affected by SFAS No. 116 adoption along two dimensions: whether an accounting effect exists, and whether a subsequent economic, or behavioral impact is felt by charities reporting positive adjustments to net assets when adopting SFAS No. 116.
First, this study documents the effect of SFAS No. 116 adoption on receivables, and considers whether increases in pledges that result from adoption persist in post-adoption periods. The evidence suggests that the accounting effect of SFAS No. 116—that is, the recognition of unconditional pledges—persists in the post-adoption regime.
Second, the economic effect of SFAS No. 116 is considered by examining, for charities affected by adoption, whether cash contributions decline in post-adoption periods, whether fundraising increases, and whether reliance on cash contributions decreases in post-adoption periods. Results indicate that cash contributions decrease, that fundraising increases, and that reliance on cash contributions decreases for these organizations.
Mariah Webinger, John Carroll University, Matt Comer, PricewaterhouseCoopers, Robert Bloom, John Carroll University
This paper examines fair value accounting – specifically, the application of FASB FSP 157-4 in the US. Data is analyzed from financial firms before and after FSP 157-4 was implemented to examine how this standard changed fair valuations and disclosures. We consider whether managers took advantage of the flexibility in the new standard by classifying their assets at level 3. We find that there is no significant change in the amount of assets that are transferred into level 3 after FSP 157-4 as compared to before. We also find a significant increase in the extent of disclosures as measured by word count. Fair value disclosures increased by an average of 52%. After further partitioning the sample based on size, we find that both main results hold for small and big firms in our additional sample. There is no evidence managers used the flexibility of the new standard to classify more financial assets at level 3; however, managers responded to the new standard with a significantly longer disclosure.
Sin-Hui Yen, Tamkang University, Yu-Shan Chang, Tamkang University, Hui-Ling Chen, Tamkang University
This paper employed aquestionnaire survey to investigate the opinions of audit report stakeholders in Taiwan regarding the regulation of signatures in audit reports. The Public Company Accounting Oversight Board (PCAOB) proposed these regulations in 2009, and again in 2011 with a slight alteration. Most respondents agree that having the engagement partner sign the audit report could increase the accountability of CPAs. In addition, the participants believed that knowledge of the name of the engagement partner is important for the users of audit reports. Both of these views are consistent with the views voiced by the PCAOB. Most of the respondents also believe that the regulation of signatures would increase the legal responsibility of the engagement partner and minimize the role of firms in the auditing process. Finally, the respondents felt that the engagement partner has a much greater responsibility when their signature is in the audit report than when it is disclosed elsewhere, indirectly supportingthe second proposal of the PCAOB, which, rather than having the engagement partner sign their name on the audit report, simply lists the names of engagement partners elsewhere.
Non-GAAP adjustments to net income appearing in the earnings releases of the S&P 100: An analysis of frequency of occurrence, materiality and rationale
Sarah J. Webber, University of Dayton, Nancy B. Nichols, James Madison University, Donna L. Street, University of Dayton, Sandra J. Cereola, James Madison University
For 2005 through 2010, we examine the extent to which S&P 100 companies provide non-GAAP income measures in their annual earnings releases. Our findings provide insight into the evolving nature and magnitude of the adjusting items characteristic of non-GAAP income measures during the post-Reg G period. We find that the number of S&P 100 companies disclosing a non-GAAP income measure increases significantly from 44% to 60% during our period of study.
Based on Gray’s (1980) index of materiality, we find that for each year between 2005 and 2010, the excess of non-GAAP income compared to GAAP income is 18%, 19%, 43%, 61%, 54%, and 45%, respectively. For approximately half of the S&P 100 disclosing non-GAAP income measures, we identify repetitive adjustments for the same item (e.g. restructuring) in multiple years. While none of these companies specifically refer to repetitive adjustments as non-recurring, infrequent or unusual, several include terminology alluding to the use of non-GAAP earnings to evaluate ‘ongoing’ operating trends.
Thus, our findings suggest that a change in tone at the SEC has lead to the reappearance of the disclosure of non-GAAP performance measures that the Commission previously considered to be potentially misleading. In January 2010, the SEC relaxed its position on non-GAAP disclosures clarifying that the recurring item prohibition for SEC filings is based on the description of the item adjusted, not its nature.
Finally, while most of the S&P 100 providing such disclosures indicate why management believes presentation of a non-GAAP financial measure is useful to investors, the rationales are typically general and broad and accordingly not informative.
Mahmud Hossain, Gulf University of Science and Technology, Santanu Mitra, Wayne State University, Zabihollah Rezaee, The University of Memphis
This paper examines the ability of auditing regulation to protect bank shareholders’ wealth during the time of normal growth and during the 2007–2009 global financial crises. The study uses the bank regulation database available at the World Bank website. We select a sample of 2467 banks from 107 countries for the years 1999–2009. We perform multivariate regression analyses and find that while auditing regulations enhance bank equity prices in normal growth periods, there is no evidence that auditing regulations are associated with bank share prices during the period of financial crisis. We observe similar results for both developed and emerging countries and for the common and code law countries. Our results suggest an immediate need to strengthen audit regulations so that investor confidence is more likely to persist during periods of financial downturn.
Kati Pajunen, University of Eastern Finland
This study identifies relevant issues regarding behavior and responsiveness of accounting practices and standards to political developments in a single national setting. Research into monitoring of attitudes and practices regarding traditional versus evolving models will likely engage researchers for some time to come in all sovereign jurisdictions particularly in the light of post 2008 global financial events.
Environmental factors including culture have influenced the development of accounting systems internationally (Gray, 1988 and Nobes and Parker, 2008). The adoption of International Financial Reporting Standards has been affected by local financial reporting practices in all nations. This study examines the results of three studies, based on archival data, surveys, and interviews, that address internationalization of accounting in Finland (Pajunen 2010a).
In 1973 Finland passed fundamental accounting legislation (The Accounting Act of 1973/655), based on the so-called expenditure-revenue theory as developed by Professor Martti Saario in the 1940s–1960s. While this approach to accounting is not unique to Finland, its important role as the basis for the Accounting Act of 1973 may be unique. Thus, in Finnish accounting the focus has been on measurement of the income statement and resulting profit, with the balance sheet holding only residual items as an outcome of matching. Saario’s theory emphasized the adoption of historical costs in valuation, believing that revaluation of fixed assets is not appropriate (Saario, 1969). The realization and matching principles are important in this theory, as they are in other countries’ systems (Räty, 1992). Also the accrual basis in book-keeping is important in Saario’s theory (Saario, 1969 and Pihlanto and Lukka, 1993).
Since passing the Accounting Act of 1973 (655), Finnish financial reporting has moved towards internationalization. In the 1980s, in order to provide better information for international users, some larger Finnish companies began to prepare parallel financial statements in addition to those prepared under the Finnish accounting legislation. Secondary financial statements were prepared under international accounting principles such as IAS and US GAAP. (Niskanen et al., 1993, Pirinen, 1996, Pirinen, 2005 and Räty, 1992.) In 1995 Finland joined the European Union. However, not until the Accounting Act of 1997 (1336) did Finland remove the expenditure-revenue theory officially from its role as the cornerstone. Since the beginning of 2005, Finnish listed companies have adopted IFRS in their consolidated financial reporting. Thus, financial reporting of Finnish companies has followed a path of responsiveness to its changed regulatory and economic environment.
An examination of the articles published during the period 1973–2005 in two professional journals, Auditingand Accounting Gazette, reveal four distinct periods of professional writing and discussion that correspond roughly to the responsiveness mentioned earlier. The articles in the period from 1973 until 1983 are characterized by growing internationalization. This was a relatively inactive era with few articles on the subject. However, an explicit desire for more international Finnish financial reporting was expressed by some active auditors who wanted to promote the adoption of IAS in Finland. The second period is characterized bythe first appearance of the IAS. This period started in 1984 and lasted until the turn of the 1990s. During this period, a number of articles on internationalization were published, and the discussion was very active. Some auditors and representatives of larger companies strongly criticized Finnish financial reporting, which in turn provoked replies regarding Finnish accounting traditions based on expenditure-revenue theory from other writers. In the third period, the early half of the 1990s, dominance of the EU directives is the focus, and IAS was pushed to the sidelines. However, this period produced fewer articles and less controversy. The fourth period, the second coming of the IAS, began in the mid-1990s and continued to the end of the research period. Once again, the IAS was discussed while the EU directives became less important. Many articles were written on related topics, including explications of complicated standards ( Pajunen 2009).
To understand the meaning of IFRS for Finnish accounting professionals, eleven interviews with thirteen Finnish accounting professionals were conducted in 2007, following the end of the previously discussed time periods. Based on these interviews, implementing IFRS has been a difficult and challenging task. Fair value is seen as a problematic issue because of its vague definition. Goodwill in consolidation is considered problematic because goodwill is not amortized. There were complaints of too few detailed instructions about practical procedures, and inconsistencies among the many explanations and definitions. These interviews demonstrated that even now, while some accounting professionals regard accounting simply as a practice and technique, others focus on accounting as a culture where theoretical and conceptual considerations predominate. Both expenditure-revenue theory and IFRS have strong proponents in Finland. However, attitudes toward IFRS are sometimes simultaneously both critical and approving. One interviewee acknowledged that he has different mental niches for evaluating the old and the new issues in accounting (Pajunen 2010b).
To further examine professional viewpoints, an additional survey was administered in May 2008 to examine attitudes among Finnish accounting professionals toward both IFRS and earlier Finnish accounting traditions. The questionnaire included statements based on the differences between traditional Finnish accounting and IFRS, as well as on information obtained from the earlier interviews. Agreement or disagreement with the statements was measured. The resulting responses were subjected to factor analysis, which identified four different lines of current accounting thought in Finland (Pajunen 2010a).
IFRS enthusiasm is the first factor. This factor was related to statements that expressed a positive attitude towards IFRS, as well as statements that supported rejection of expenditure-revenue theory. IFRS criticismis the second, and opposite, factor. The statements that weighted on this dimension reflected a critical attitude toward IFRS. Fair value emphasis is the third factor. These statements focused on acceptance of fair value in the financial statements, without necessarily rejecting the expenditure-revenue theory. Moreover, this factor is less enthusiastic towards IFRS than the first. The fourth factor is Conservative prudence. The statements weighted here reflect prudence, and simply regard IFRS as a big change in financial reporting. Not surprisingly, age and the length of work experience affected the attitudes reflected toward IFRS, older Finnish accounting professionals and those respondents with long work experience being more critical ( Pajunen 2010a).
The strong cultural tradition in Finnish financial reporting that favors the income statement approach continues to exist, but it is accompanied by a pragmatism toward IFRS as the operational reality. It is not clear that the income statement approach acted as a deterrent to the adoption of IFRS. Obviously as Finland took steps to join the EU and it would be expected to move its financial reporting into a more into a form more in line with IFRS’s balance sheet and value model, as a response to this political development. (Pajunen 2010a).