Professionalism
John D. Keyser, Case Western Reserve University
The U.S. Securities Laws in the early l930s vested public accountants with a public interest responsibility to assure the reliability of financial information. This added to the growing recognition of CPAs as professionals. The author discusses the role of the varies entities, the PCAOB, accounting firms, and the individual auditors in this audit based profession. The author points out that since public accountants serve a vital role in the functioning of the capital markets, it is to society that CPAs abide by their professional identity and that they are accepted by others and themselves as professionals.
Keywords: Auditing, Professionalism, PCAOB, Accounting Firms, Individual Auditors
The Impact of Different Types and Amounts of Guidance on the Implementation of an Accounting Principle
Yin Xu, Old Dominion University; Timothy Doupnik, College of Charleston
Transfer of asset control is a central principle in the revenue recognition standard jointly developed and issued by the FASB and IASB (Boards) in 2014. Guidance with respect to this principle will be very important in applying the new standard. This study examines the effect of type and amount of guidance on the judgment of whether control has been transferred. Study participants receive different hypothetical standards and provide judgments with respect to the transfer of control in a construction-type contract case setting. Results indicate that adding guidance to the basic principle in the form of either key indicators or an illustrative example results in participants’ being more likely to judge the customer as having control during the construction period. Participants perceive indicators as being more useful than examples in forming their judgments. The nature of the example (affirmative or counter) does not have a differential impact on judgments when added to a principle-only standard. On the other hand, when an example is added to a standard that contains a principle and key indicators, judgments are significantly different when a counter example is present than when an affirmative example is part of the standard. This study provides the Boards with research results that may be useful in determining the type and amount of guidance to be provided in a principle-based standard.
Keywords: Accounting principle; Key indicators; Illustrative examples; Additional guidance; Principles-based standards
Balance Sheet Classification and the Valuation of Deferred Taxes
Mark P. Bauman, University of Northern Iowa; Kenneth W. Shaw, University of Missouri-Columbia
The Financial Accounting Standards Board issued Accounting Standards Update 2015-17, which requires firms to classify all deferred tax assets and liabilities as noncurrent in classified balance sheets instead of separating them into current and noncurrent amounts. This change is designed to simplify the reporting of deferred taxes and align with International Financial Reporting Standards. This study conducts empirical analyses on a broad cross-section of publicly-traded U.S. firms in order to examine the stock market’s valuation of current and noncurrent deferred tax assets and liabilities. The results suggest that classifying all deferred taxes as noncurrent may adversely affect the usefulness of financial statements for equity investors.
Keywords: Deferred taxes, Balance sheet classification, Investors
To Exempt or Not to Exempt Non-Accelerated Filers from Compliance with the Auditor Attestation Requirement of Section 404(b) of the Sarbanes-Oxley Act
Kareen E. Brown, Brock University, Ontario, Canada; Fayez A. Elayan, Brock University, Ontario, Canada; Jingyu Li, Brock University, Ontario, Canada; Emad Mohammad, McMaster University, Ontario, Canada; Parunchana Pacharn, Brock University, Ontario, Canada; Zhefeng Frank Liu, Brock University, Ontario, Canada
The authors examine the stock market reaction to the SEC announcement to permanently exempt non-accelerated filers from compliance with Section 404(b) of the Sarbanes-Oxley Act. Mandatory compliance with auditor attestation under Section 404(b) is highly controversial. Using a sample of non-accelerated issuers for 2006-2011, we find a negative market reaction to the November 4, 2009 exemption announcement. However, most of the negative returns accrue to non-accelerated filers that do not voluntarily comply with Section 404(b), suggesting that auditor attestation enhances firm value. The use of a Big 4 auditor, strong analyst following, and superior internal controls over financial reporting (ICFR) are associated with positive/less negative market responses. Voluntary compliers with Section 404(b) are more likely to have a Big 4 auditor, stronger analyst coverage, effective ICFR, stronger firm performance and lower information asymmetry. Our results are consistent with firms using voluntary compliance with SOX 404(b) as a signal of superior operating performance and ICFR quality to overcome information asymmetry and therefore mitigate the negative valuation impact of the permanent exemption from auditor attestation.
Keywords: Sarbanes-Oxley Act, Internal Control, Auditing, Disclosure regulation
Developments in Accounting Regulation: A Synthesis and Annotated Bibliography of Evidence and Commentary in the 2015 Academic Literature
Stephen R. Moehrle, University of Missouri – St. Louis; Laurel Franzen, Loyola Marymount University; Michele Meckfessel, University of Missouri – St. Louis; Jennifer Reynolds-Moehrle, University of Missouri – St. Louis
In this paper, the authors provide an annotated bibliography of 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 articles published in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Accounting Horizons, The Journal of Accounting, Auditing & Finance, Journal of Accounting and Public Policy, 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. The literature featured some strong regulation-related threads in 2015 including the foundations of financial accounting and reporting, international financial reporting standards, Sarbanes-Oxley and the Public Company Accounting Oversight Board.
Keywords: Financial Accounting, Regulation, FASB, PCAOB, IASB, Sarbanes-Oxley, Auditing
Comment Letter Activity: A Response to Proposed Changes in Lease Accounting
Fernando Comiran, University of San Francisco; Carol M Graham, University of San Francisco
This study examines the motivations that lead some firms to lobby, via comment letters, against the changes in accounting for leases proposed by FASB/IASB. There are at least three distinct motivations for a company to lobby against the proposed changes: a high perceived cost of implementation/operation, a belief that the changes will increase the cost of capital, and a desire on the part of management to avoid any administrative burden associated with the changes. Our research suggests that companies that engage in lobbying are concerned with the costs of such changes (renegotiation of debt covenants, auditor fees, change in IT systems, etc.), but they also seem to be motivated by their accounting Manager’s desire to avoid any additional effort that the changes will require.
Keywords: Leases, comment letters, FASB.
Presentation Formats of Other Comprehensive Income after Accounting Standards Update 2011-05
Jung Hoon Kim, Florida International University
Using S&P 500 entities, this study examines presentation formats of “Other Comprehensive Income” after ASU 2011-05. This study finds that 92 percent of entities presented in two separate but consecutive statements after ASU 2011-05, and 94 percent of the entities that presented in a statement of changes in shareholders’ equity before ASU 2011-05 switched to two separate but consecutive statements after ASU 2011-05. This reflects the practitioners’ view that presenting net income and other comprehensive income together in a single continuous statement may create confusion among financial statement users, but is inconsistent with the FASB’s initial position that only allowed a single continuous statement. Thus, pros and cons of both formats should be further evaluated by standard-setters so that a more useful presentation format can be adopted by more entities. This study also documents that presentation formats do not seem to be associated with the specific industries and the propensity to report negative other comprehensive income after ASU 2011-05.
Keywords: ASU 2011-05, Other comprehensive income, Presentation formats
Enhancing the Learning Experience in Intermediate Accounting
Joseph Faello, Mississippi State University
This paper provides an example of how an accounting educator can build upon an intermediate accounting assignment of using practical real-world examples of earnings management by introducing to students the academic research that explains earnings management behavior. Students improve their critical thinking skills because of the connection to the real-world example. Accounting educators can provide this opportunity to students at a minimal cost of resources and time. In addition, a seed is planted for the development of the next generation of accounting academics because of this exposure to research at the undergraduate level.
Keywords: Pedagogical teaching tool, Earnings thresholds
The Chief Financial Officer Act
25 Years Later
Honorable Joseph J. DioGuardi, Former Member, U.S. House of Representatives
In this paper, the author discusses the origins of the Chief Financial Officer Act of 1990 relating it to the initial version which he introduced in the House of Representatives, as a CPA member of that body. The author also discusses why the CFO Act should be amended to adopt features in the original proposal which were not included in the 1990 law. This updated CFO Act would address problems associated with 1990 Chief Financial Officer Act. Such items include auditor selection processes, annual reporting, independent audits of government entities by private-sector Certified Public Accountants, and necessary CFO qualifications as part of the revision of auditing and accounting systems involved.
Keywords: The Chief Financial Officer Act, The Chief Financial Officer, Congress, The White House, CPA
Teed Off at Bernard Madoff? His Character was Provable on the Golf Course
Jim Peterson
In this essay, an analogy is drawn between golf etiquette and fiduciary behavior. The author makes the point that the financial fraud of Bernard Madoff was made evident by his behavior on the golf course. The author points out that manipulative behavior of Madoff on the golf course forecast the financial reporting performance Madoff also practiced. A golfer who regularly violates and manipulates the rules of golf, the author concludes, is signaling someone who is more likely to employ such manipulative devices when in the position of being a financial fiduciary. Through this comparison, the author concludes that personal integrity as reflected in social behavior underscores behavior in other forms of business and, crucially, on honesty in matters related to self-reporting.
Keywords: Fraud, Integrity, Consistency, Due Diligence
History of Management Accounting in Japan: Institutional & Cultural Significance of Accounting, Studies in the Development of Accounting Thought, Volume 18 by Hiroshi Okano.
Book Review Essay by William H. Black University of North Georgia
In this study, the author applies an arduous approach to capture the reasons why the environment and culture produced such different results may prove substantially more beneficial, rewarding the dedicated viewer with a series of insights into the nature of the processes and principles in one’s own environment. The author concludes that the history of Japanese management accounting reflects how Japanese culture shaped the development of manufacturing enterprises during and after World War II. Also, the author points out that taking a fresh look removed from previous definitions and reference points can help one to understand why Japanese companies did not incorporate the principles of strong controllership functions or even standard costing as practiced in Western accounting systems.
Keywords: Japan, Japanese Culture, Management Accounting, World War II