Volume 07
A Critical Assessment of the Literature
on Political Activity and Accounting Regulation
Robert J. Walker and Peter Robinson
Most studies of the rule-making process in accounting have focused on political activity undertaken through written submissions to profession-sponsored boards developing accounting standards. This form of lobbying activity represents a late and relatively insignificant part of the overall political process surrounding rule-development. Earlier stages in the rule-making process involve contests over the powers of the regulatory agencies, the composition of boards, and the overall structure of regulatory arrangements. Government- and private-sector agencies may seek jurisdiction over particular types of disclosure, or particular forms of financial reporting. Within a particular agency, there may be contests over what items gain admittance to the formal agenda, and how those issues will be addressed. In many cases these phases in the rule-making process may have a greater impact on regulatory outcomes than written submissions on discussion memoranda or exposure drafts. Yet few studies have examined these earlier phases. Gaps in the research literature are identified, and suggestions are offered about possible research opportunities. Volume 7, 1993, pgs. 3-40.
Local Government Audit Quality and
the Analyst Reaction to Bond Rating Changes
Arthur C. Allen
This paper investigates some effects of differences in local government audit quality. Audit quality was hypothesized to decrease the bond analyst reaction to bond rating changes. Two proxies for audit quality were used in this study: auditor firm size and audit fees. In order to control factors which affect audit fees but do not affect audit quality, audit quality was measured as the residual of a regression equation in which auditee size, risk, complexity, and busy season were regressed on actual audit fees. In separate regressions, each measure of audit quality was regressed on a measure of the analyst reaction to bond rating changes. The results of this paper found no evidence that auditor firm size is associated with the analyst reaction to bond rating changes. Audit fees do appear to be associated with the analyst reaction to bond rating changes. Therefore, this study found support for the contention that audit quality differential, as proxied by audit fees but not auditor firm size, affect user decisions. Although there is a substantial body of research investigating audit quality issues, this study is one of the first to investigate whether audit quality differentials have an impact on user decisions. Regulators of local government financial reporting (e.g., state legislatures) need to understand the linkage between audit quality and user decisions. Volume 7, 1993, pgs. 41-60.
The Standard of Care for Independent Public Accountants:
Insights for Self-Regulation and Standard Setting
Ramona L. Paetzold and H. Fenwick Huss
This paper provides a descriptive and normative evaluation of the professional accountant's standard of care. It explains the standard of care that has evolved in the context of common law and federal securities law cases, and presents judicial language suggestive of both the legal rules and the legal policies that influence the legal rules. It corrects any misconceptions that compliance with GAAP/GAAS will shelter an accountant from liability for negligence, and presents arguments why such a shelter is not likely ever to be obtained. Policy implications for self-regulation and standard-setting are considered. Volume 7, 1993, pgs. 61-68.
An Analysis of Statements on Standards
for Accounting and Review Services No. 1
Albert D. Spalding
The accounting profession, like any profession, must maintain and communicate to its members its own standards of care. These standards effectively define the profession itself, provide guidance for its members, and ensure public confidence in the quality of the profession's credentials so long as the standards reflect current case law and therefore the realities of legal constraint. This paper examines the extent to which Statements on Standards for Accounting and Review Services No. 1 (SSARS 1) reflected case law at the time of its issuance, and whether case law generate since its issuance has been constant with SSARS 1. This particular question posed it whether AICPA promulgations are safe "legal advice" that helps the accountant avoid professional negligence, or malpractice. Volume 7, 1993, pgs. 81-93.
The Distribution of Management Advisory Services:
The Case of Actuarial Services
Noel Addy, Alan Friedberg, and Alan Mayper
The provision of Management Advisory Services to audit clients is controversial, since it has been argued that independence may be impaired. To control potential impairment, CPA firms segregate Management Advisory Services form audits. If the separation were so effective as to make Management Advisory Services divisions behave as through they were not related to audit divisions, there should be evidence that Management Advisory Services are independent of audit clients. WE specifically study the extent to which the set of Management Advisory Services clients is independent of the set of audit clients. Independence of client groups implies independence of marketing their two services. But, if the two groups are not independent, then a condition necessary for impaired independence would exist, although the condition is not sufficient to guarantee that "independence in fact" has been impaired. We narrow the research design to consider (1) only the single Management Advisory Services of actuarial services to define benefit pension plans, (2) only CPA firms who are significant providers of these services, and (3) only clients who can demand these services by having defined benefit pension plans. The results show CPA firms offer actuarial services for defined benefit pension plans primarily to their audit clients. This result suggests that the perceptions of potential impaired independence are not misplaced. Volume 7, 1993, pgs. 95-115.
Extended Adoption Windows by the
Financial Accounting Standards Board: The Case of SFAS 87
John A. Brozovsky, Dennis Murray, and Frank H. Selto
In December 1985, the FASB issued SFAS 87, "Employers' Accounting for Pensions." A novel feature of this standard is that it allowed an unusually long (three year) adoption period. This long adoption period was justified by the FASB as necessary because of the anticipated difficulty and cost in assimilating and implementing the complex standard. This paper investigates whether the economic incentives (e. g., not violating debt covenants) and/or the difficulty and cost of adoption affected managers' decisions about when to adopt SFAS 87. The results show that while other economic incentives did play a role in the decision of when to adopt SFAS 87, the cost of adoption also influenced the decision. Volume 7, 1993, pgs. 119-136.
Accountant Liability:
A Perspective on Section 10 (B)(5) Aiding and Abetting
Mark A. Segal
In recent years there has been a proliferation of lawsuits brought against accountants for aiding and abetting the perpetration of alleged securities law violations. In particular these actions have been based upon claimed aiding and abetting of Section 10 (b)(5) violations. This trend will likely continue as investors and creditors seek financial redress for financial injuries caused by a failed enterprise, and certain jurisdictions utilize expansive approaches to determine when an accountant can be held liable for aiding and abetting Section 10 (b)(5) violations will be examined and recommendations of legislative reform of the law in this area provided. Volume 7, 1993, pgs. 137-149.
Some Factors Related to the Failure of Savings and Loans
James H. Thompson
The financial press and politicians have attempted to place the blame for many recent S&L failures on several sources including S&L management, economic conditions, and improper accounting methods. One of the accounting methods depicted as a "culprit" in the S&L presently may elect to use either generally accepted principles (GAAP or RAP). The National Commission on Financial Institutional Reform, Recovery, and Enforcement (FIRREA) was established by Congress to investigate the causes of the S&L debacle and make recommendations to Congress. The commission report will address how egregious accounting practices can be avoided, including the possibility of putting the SEC in charge of accounting procedures. The report also will compare GAAP and RAP procedures and consider the approaches of the FHLBB, the FSLIC, the Internal Revenue Service, and the accounting profession generally. Empirical studies have not considered GAAP/RAP selections a predictive variable of S&L failure. This study considers whether GAAP/RAP selection and four other independent variables-association type, assets, net income, and regulatory capital as a percentage of total assets-are useful in predicting the failure of an S&L. The findings of this study indicate that the choice between GAAP or RAP did not successfully predict failure. In this study, the amount of regulatory capital and net income were the only independent variables that were significantly more likely to use RAP accounting, have less assets and produce more income than stock S&Ls. Volume 7, 1993, pgs. 151-158.
The Accounting Profession and Financial Reporting:
Why Should Anyone Believe Us?
David P. Tweedie
In 1987 the six British Accounting Institutes responded to a request by the Chairman of the then Accounting Standard Committee (ASC) for a review of the United Kingdom's standard setting system. At this time the British economy was booming; merger activity was at its height; pressure existed on management to produce good results either to deter hostile bids or to be in a position of having a strong share price to enable their company to take over other companies. The auditing profession was bombarded with ever more complex creative accounting techniques: corporate financiers were inventing new financial instruments, new modes of financing, and new forms of presentation designed to improve the look of the income statement and of the balance sheet. Recession seemed to be a thing of the past. Those who stood for traditional values were deemed to be standing 'in the way of process' and were considered to be old-fashioned and out-of-line with modern thinking. Auditors were reluctant to qualify accounts if the issue under consideration has been accepted by their competitors and auditors who considered qualification were often faced by the prospect of second opinions, opposing statements from learned Counsel or even the prospect of the audit going to tender. Why had this happened and why had the standard setters lost control? Volume 7, 1993, pgs. 161-182.
A Call for Change: Comments by A. Marvin Strait, 1992 AICPA Gold Medal Recipient, At The 1992 Annual Meeting of the AICPA
A. Marvin Strait
...We are granted a license- it’s our monopoly, our franchise—to attest as CPAs to the fairness of financial statements prepared in accordance with Generally Accepted Accounting Principles. Attestation to GAAP financial statements is a protected service that, in most states, can be performed only by those that hold the CPA license. The system has served the public and the profession well for over 100 years and has helped make the CPA profession to be among the most respected and trusted in our society… Volume 7, 1993, pgs. 183-186.
Accountancy and Capital Market Regulations in Turkey
Yuksel Koc Yalkin
The accounting profession in Turkey has sought for more than half a century to become legally recognized. Activities by members of the profession seeking legislation pertaining to accounting began in 1932. Several drafts of legislation were submitted to the Grand National Assembly. Finally, on June 1, 1989, Act 3568, the Law of Independent Accountancy, Independent Financial Consultancy, or the law for Certified Consultancy (LCC), was passed. Although LCC had significant deficiencies, the members of the profession welcomed its enactment because it gave legal recognition to the profession.
Before the passage of Act 3568, several studies were undertaken to improve and develop Turkish accounting systems under the control and guidance of ministerial and other governmental bodies. The systems developed by these studies had provided guidance concerning accounting systems in Turkey.
A review of the historical background of these studies and accounting applications in Turkey is necessary before the legislation affecting Turkish capital markets and the accounting profession can be discussed. Volume 7, 1993, pgs. 187-197.
Statement on Senate Bill 165 on the 150-Semester-Hour Requirement for Practice as a Certified Public Accountant before the Senate Financial Institutions and Insurance Committee of the Senate of Ohio
November 13, 1991
Robert K. Elliot
KPMG Peat Markwick’s position on the 150-semester-hour educational requirement to become a CPA is briefly summarized as follows:
We strongly support a 150-semester-hour requirement to practice as CPA in the State of Ohio (as well as other states)
We will employ graduates of 150-semester-hour programs when and as they are available on a state-by-state basis. Volume 7, 1993, pgs. 199-208.