Why Municipalities Fail:
Implications for Uncertainty Disclosures
Amanda Beck, Iowa State University; Mary Stone, University of Kansas
Why Nations Fail (Acemoglu and Robinson 2012), a book widely and favorably reviewed by the business press (MacLeod 2013), identifies political and economic factors that allow some jurisdictions to prosper while other, often geographically and culturally similar, jurisdictions languish. The book’s propositions are based on detailed case studies of countries across time and continents. The study summarized here follows a similar approach by relying on hand-collected evidence of municipalities that failed in the sense they ceased to exist as separate legal entities.[1] This evidence is used as a basis for identifying misconceptions about governments as going concerns, redefining what it means for a government to be a going concern, suggesting ways to improve disclosures related to going concern uncertainty (as redefined), and identifying questions for future policy-relevant research.
Keywords: Municipal dissolution; Going Concern; Financial distress; GASB, Governmental accounting
Self-Regulation of the Academic Accounting Literature:
The Case of James Hunton
Stephen Moehrle, University of Missouri–St. Louis; Michele Meckfessel, University of Missouri–St. Louis
In 2015, several journal publishers retracted more than 30 papers written by Dr. James E. Hunton (Dr. Hunton) and various other co-authors. Retractions in academic literatures are not entirely rare and they are best understood in terms of their ‘chain effect’ potential impact. There is a first-order effect, namely the findings in the retracted papers are no longer reliable. A second-order effect occurs through other papers that cited and relied upon certain findings in the retracted papers. This paper sets forth the recently retracted papers. It will also be useful in identifying second-order papers to assist editors, other reviewers, and researchers who otherwise may be unaware of retraction details as they are known at this time.
This article sets forth Dr. Hunton’s body of work with retractions noted. The article has several goals aimed at effective regulation of the accounting literature. First, it is a resource for researchers to determine whether a paper that they intend to cite has been retracted. Second, it encourages researchers to review and where feasible, replicate other papers authored by Dr. Hunton that have not been retracted to date in order to establish the legitimacy of those findings. Third, it encourages researchers to replicate or otherwise retest research questions in retracted papers so that reliable findings are made available to these questions. Fourth, at the second-order level, it encourages authors that have cited Dr. Hunton’s papers to review their papers and where they deem it consistent with scholarly effort, restate their work. Similarly, editors of journals involved in the first- and second-order effects are encouraged to publish the additional analyses to reinforce the credibility of the literature. Fifth, an addition to the literature review process is suggested to assure that no papers in the chain of noted or cited work have been retracted. Finally and importantly, it reminds scholars of the importance of being diligent in their processes for producing, summarizing and retaining data and cross-reviewing data provided by and work completed by co-authors.
Keywords: Retraction, James Hunton, American Accounting Association, Accounting literature
The Role of Federal Regulation in State and Local Governments and the Potential Impact of New Reforms: An Assessment of the Effectiveness of Reporting, Disclosure, and Funding
Craig Foltin, Cleveland State University
The state and local government accounting profession continues to contend with issues surrounding self-governance, funding for the profession’s standard setting body, federal regulation and states’ rights. Fiscal conditions, bankruptcies and struggling pension funds bring to question whether self-governance has been effective in the state and local government sector. Federal regulation has impacted the government accounting sector but to a much lesser extent than in the private sector. With new discussion by lawmakers in Washington regarding the appropriate levels of regulation, particularly surrounding the financial markets; more change could be on the horizon. This paper assesses the proper balance between self-governance and regulation in the government sector and how current considerations by policymakers could impact the profession.
Key Words: Government Accounting, Municipal Securities, SEC, Tower Amendment, Dodd-Frank
A Survey on Firms’ Implementation of
COSO’s 2013 Internal Control – Integrated Framework
Bradley P. Lawson, Oklahoma State University; Leah Muriel, Oklahoma State University; Paula R. Sanders, University of Central Oklahoma
Many firms began implementing COSO’s 2013 Internal Control – Integrated Framework in 2014. This study surveys U.S. accounting professionals, primarily from large publicly-traded firms, to examine views concerning the framework and its impact on key areas related to internal controls. The analyses provide insight into five specific topics important to the framework. First, results indicate that respondents view the 2013 Framework and its 17 principles as an overall improvement to the 1992 Framework. However, benefits and costs from implementing the framework appear mitigated because firms already had effective internal control structures in place. Second, respondents view the 17 principles as a set of rules for achieving effective internal controls, but believe the principles still provide adequate flexibility and allow for sufficient management judgment. Third, most respondents indicate changes in at least one of the five components of internal controls, as well as across information technology-related controls. Fourth, in addition to external financial reporting objectives, firms are applying the framework to non-financial, operational, and compliance objectives. Last, results indicate greater expected external audit effort related to SOX Section 404 testing but not audit fees, perhaps due to external auditors’ reliance on internal audit departments’ work.
Keywords: COSO, internal controls, framework, ICFR audit, SOX Section 404
An Investigation of the Effectiveness of the Division of Corporate Finance as a Monitor of Financial Reporting
Jennifer E. Edmonds, University of Alabama at Birmingham; Ryan D. Leece, University of Alabama at Birmingham
This study investigates whether the Securities and Exchange Commission’s Division of Corporate Finance(DCF)allocates resources towards public companies that investors perceive as having poor financial reporting quality. Resource allocation within the DCF is an important topic given the SEC’s overall mission to improve disclosures and protect investors. The findings are consistent with the DCF being more likely to allocate resources towards firms that market participants perceive as having poor financial reporting quality.
Keywords: SEC, Division of Corporate Finance, comment letters, financial reporting quality
The Curious Case of Level 3 Instruments
Robson Glasscock, University of Wyoming; David Harless, Virginia Commonwealth University; Jack Dorminey, West Virginia University
Standard setters and regulators face an ever-present concern over the discretionary influence firms have in financial reporting. For information to have enhanced relevance, some level of discretion in financial reporting is often necessary. Prior work suggests that firms may be opportunistic in exercising choice and influence where discretion is available to advantageously affect reported results. This study examines if aggressive firms take the opportunity afforded by the wide discretion in Level 3 valuations under the original Accounting Standards Codification (ASC) 820 standard to manipulate financial reporting. Minimal evidence is found to support an association between Level 3 valuations and other metrics reflecting earnings management. The findings may be driven by the high-level, and typically limited, disclosures that firms are required to make under the originally promulgated ASC 820. This primary finding suggests that FASB’s move to increase the disclosures required under the standard was warranted.
Keywords: Fair value, Level 3, Earnings management
The Materiality of Directors’ and Officers’ Insurance Information:
Case for Disclosure
Yan Luo, San Diego State University; Victoria Krivogorsky, San Diego State University
This paper advocates for the regulation of the disclosure of the information contained in directors’ and officers’ liability insurance policies. To prove the merit of the argument, it is demonstrated that this information meets the disclosure criteria identified in both the SEC Staff “Report on Public Company Disclosure” (2013) and the SEC disclosure concept release “Business and Financial Disclosure Required by Regulation S-K” (2016).
Keywords: Disclosure, Corporate Governance, Directors’ and Officers’ Liability Insurance, Managerial Opportunism, Regulation
Learning from Ecology: Financial Reporting as a ‘Commons’
Thomas A. King, Case Western Reserve University
This note explores how the financial reporting environment for listed companies is a common good put at risk by participants with incentives to extract benefits at the cost of the investing public. Disclosure of misleading financial information confers economic gain for a few but pollutes the environment and reduces its usefulness for all. After showing how a variant of the prisoner’s dilemma may explain Enron-era scandals, the note discusses how U.S. government intervention was the only practical solution to repair damage to the financial reporting Commons. The implication of this note is that government involvement in financial reporting is here to stay.
Keywords: Ecology, Financial Reporting, Common Good, Prisoner’s Dilemma
The Gresham’s Law of Measurement and Audit Quality Indicators:
Implications for Policy Making and Standard-Setting
Sridhar Ramamoorti, Kennesaw State University and University of Dayton; Dorsey L. Baskin, Jr., Grant Thornton LLP (retired); George W. Krull, Jr., St. Louis University
The relevance-measurability tradeoff is at the very heart of accounting and auditing; typically, what is most relevant to practitioners is also notoriously difficult to measure. When it comes to auditing, the measurement of the audit quality of an auditing firm or the quality of a specific audit is subject to similar challenges.
In general, many of the most relevant and useful assessments are challenging because there appears to be “multiple determinism” involved, that is, a plethora of factors would seem to influence the assessment, many of which defy meaningful quantitative expression and measurement. We formulate the “Gresham’s Law of Measurement” (similar to the so-called “streetlight effect” or “the principle of the drunkard’s search”) as follows: “Easy-to-calculate quantitative metrics tend to crowd out more relevant but difficult-to-measure assessments.” Thus, succumbing to the Gresham’s Law of Measurement means allowing measurability to trump meaningfulness. In other words, easily calculated quantitative metrics may provide the illusion of measurability while in actuality not being meaningful.
We use a philosophy of science approach, including concepts such as information integrity, feedback vs. measurement, static vs. dynamic measures, and look back and look-forward dimensions to evaluate and critique the 2015 Public Company Accounting Oversight Board (PCAOB) Concept Release on Audit Quality Indicators. Specifically, we use concepts such as information integrity, feedback vs. measurement, static vs. dynamic measure and lookback vs. look forward perspectives to inform our analysis. Toward the end, we also provide a list of potential topics worthy of further examination.
Keywords: Audit Quality, PCAOB, Audit Quality Indicators (AQI), Information Integrity, Feedback, Measurement, Gresham’s Law, Streetlight Effect, Relevance, Measurability, Standard-setting, Policy Making
Las Vegas -- No Fun Once You Know the Odds
Jim Peterson, James R. Peterson LLC
This article addresses the uncertainty in the gambling industry and also, the significance of risk management. The author recognized that his job included hazard big-money consequences on being right or wrong. It also points out that success in making calculated predictions based on incomplete information includes paying close attention to knowable adverse odds.
Keywords: Odds, Gambling Industry, Risk Management, Information
[1] The research described in this article was funded by a Governmental Accounting Standards Board Gil Crain Grant.