Category Archives: Accounting

Behavioral-economic nudges and performance measurement models

Mary A Malina, Frank H Selto
Journal of Management Accounting Research,Vol. 27, Issue 1, Pages: 27-45.

We describe the context wherein a Fortune 500 company’s performance measurement model (PMM) has endured and evolved over a 15-year period. The PMM’s tenure and continued importance refute the alleged faddish nature of PMMs such as the Balanced Scorecard, at least in this case, and allow identification of factors that add to theory about PMM longevity. We use a behavioral-economic framework and qualitative and quantitative data to examine the mechanisms behind this successful PMM. Aspects of the …
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Have CPAs Captured State Accountancy Boards?

Gary J. Colbert and Dennis F. Murray
Accounting and the Public Interest, Volume 13, Issue 1, pp. 85-104

All states in the U.S. regulate the practice of public accounting. An important part of the regulatory apparatus is the state accountancy board (SAB). SABs implement the laws that govern public accounting. State societies of CPAs (SSCPAs), in contrast, are advocacy mechanisms that can potentially be used by members of the profession to achieve their regulatory objectives. Economic theory raises the possibility that regulatory bodies such as SABs might be captured by the profession that they regulate. We examine the composition of SABs and find that the majority of members are CPAs. A survey of CPA SAB members reveals that nearly one-third of the respondents are past leaders of their SSCPAs. We further find that the percentage of board members who are CPAs and the percentage of our respondents who are past leaders of their SSCPAs are positively associated with the rapidity with which states adopt two important accountancy laws (interstate mobility and the 150-hour education requirement) that can be viewed as being in the best interest of the profession. These findings support the hypothesis of regulatory capture and suggest that states may benefit from reconsidering the qualifications of SAB members.

The Evolution Of A Balanced Scorecard

Mary A Malina
Journal of Applied Business Research, Vol 29, Issue 3

Both professionals and academics have long criticized the use of traditional financial performance measures and called for balance in performance measurement systems. In 1992, Kaplan and Norton introduced the Balanced Scorecard and it has been adopted widely around the world and offered as a superior combination of nonfinancial and financial measures of performance. This paper is the result of a 15-year field study of a Fortune 500 company’s Balanced Scorecard. Both qualitative and quantitative data were collected to address the following research questions with respect to the Balanced Scorecard: 1) What has changed over time? 2) What has not changed over time? 3) Why has it endured? Changes highlighted are that the Balanced Scorecard was unaffected by a major change in organizational structure, a narrowing of focus and reduction in the scope over time, processes for changing the design were formalized, and that it has become engrained in the compensation system. Factors that have remained constant over time are the purpose of the Balanced Scorecard, its use for relative performance evaluation, and its use as a tool for best practice sharing. Two factors that appear to explain why it has endured are its use as a learning and communication tool and its ability to influence behavior. The paper concludes with a list of key success factors for building and sustaining a successful scorecard. This list might also be helpful to researchers seeking to investigate the design, use or impact of a Balanced Scorecard.

Bankruptcy outcomes: Does the board matter?

Dahlia Robinson, Michael Robinson and Craig Sisneros
Advances in Accounting, Vol 28, Issue 2, Dec 2012, Pages 270–278

We examine the association between board composition and bankruptcy outcomes. Preliminary analyses provide no evidence that the proportion of outside directors is significantly associated with the likelihood that a Chapter 11 firm liquidates. Further analyses indicate, however, that the relation between the proportion of outside directors and bankruptcy outcomes is a function of the outside directors’ ownership. More specifically, we find that the association is positive when outside director ownership is low and negative when it is high. The overall evidence supports the notion that a one-size-fits-all approach to corporate governance is likely to result in suboptimal board structures and hinder firms’ strategies for dealing with poor performance.

Practitioner summary “Should PCAOB Disciplinary Proceedings Be Made Public? Evidence from Sanctions against a Big 4 Auditor”

Carol Callaway Dee,Ayalew Lulseged,and Tianming Zhang
Current Issues in Auditing, Volume 6, Issue 2, pp. 18-24

In our paper “Client Stock Market Reaction to PCAOB Sanctions against a Big 4 Auditor” (Dee et al. 2011), we examine stock price effects for clients of a Big 4 audit firm when news of sanctions imposed by the PCAOB against the audit firm was made public. These PCAOB penalties were the first against a Big 4 auditor, and they revealed information about quality-control problems at the audit firm that were not publicly known until the sanctions were announced. Our analysis of stock prices suggests that investors in clients of the penalized Big 4 firm reevaluated their perceptions of the quality of the firm’s audit work after learning of the sanctions. The negative stock price effects for the firm’s clients were consistent with investors inferring that the financial statements were of lower quality. In the paper, we conclude that investors find information about PCAOB sanctions against audit firms to be relevant in assessing audit quality and use that information in setting stock prices for audit firms’ clients. This finding has relevance for the debate on the proposed legislation in Congress (H.R. 3503), which would allow the PCAOB to disclose proceedings against auditors before the investigations are concluded. Our results suggest that, although investors may find early disclosure of this information useful, public disclosure of Board disciplinary proceedings before they are completed could unfairly harm an audit firm’s reputation if the firm is ultimately vindicated of wrongdoing.

Should pcaob disciplinary proceedings be made public? evidence from sanctions against a big 4 auditor

Carol Callaway Dee, Ayalew Lulseged, Tianming Zhang
Current Issues in Auditing,Vol. 6, Issue 2, Pages: P18-P24.

SUMMARY: In our paper “Client Stock Market Reaction to PCAOB Sanctions against a Big 4 Auditor”(Dee et al. 2011), we examine stock price effects for clients of a Big 4 audit firm when news of sanctions imposed by the PCAOB against the audit firm was made public. These PCAOB penalties were the first against a Big 4 auditor, and they revealed information about quality-control problems at the audit firm that were not publicly known until the sanctions were announced. Our analysis of stock prices suggests that investors in clients of the …
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Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

William M. Cready, Thomas J. Lopez, and Craig A. Sisneros
The Accounting Review, Vol. 87, Issue 4, pp. 1165–1195

Burgstahler et al. (2002) investigate the implications of special items for future earnings and report that firms use negative special items to accelerate the recognition of future expenses into the current period. That is, negative special items serve as an ‘‘inter-period transfer’’ device. We extend their analysis and find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In particular, we find that future earnings increase over the subsequent 16 quarters by more than 130 percent of the reported negative special item. The earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns suggest that negative special items also signal real future performance improvements (i.e., performance improvement hypothesis) in addition to inter-period expense transfer (i.e., inter-period transfer hypothesis). Moreover, the real improvement effect appears to be driven by restructuring charges, the most prevalent type of special item.

Management control systems dilemma: Reconciling sustainability with information overload

Bruce R Neumann, Eric Cauvin, Michael L Roberts
Advances in Management Accounting, Volume 20, pp. 1-28.

In the growing debate about designing new management control systems (MCS) to include stakeholder values, there has been little discussion about information overload. Stakeholder advocates call for including more environmental and related social disclosures but do not consider how information overload might impair the use and interpretation of corporate performance measures. As we know, shareholders and boards of directors are most concerned with market data such as earnings per share, dividend rates and market value growth. In this chapter we assert that management control system designers must consider information overload before expanding MCS to include social and nonfinancial disclosures.

Lessons learned: advantages and disadvantages of mixed method research

Mary A. Malina, Hanne S.O. Nørreklit, and Frank H. Selto
Qualitative Research in Accounting & Management, Vol. 8 Iss: 1, pp.59 – 71

Purpose – The purpose of this paper is first, to discuss the theoretical assumptions, qualities, problems and myopia of the dominating quantitative and qualitative approaches; second, to describe the methodological lessons that the authors learned while conducting a series of longitudinal studies on the use and usefulness of a specialized balanced scorecard; and third, to encourage researchers to actually use multiple methods and sources of data to address the very many accounting phenomena that are not fully understood.

Design/methodology/approach – This paper is an opinion piece based on the authors’ experience conducting a series of longitudinal mixed method studies.

Findings – The authors suggest that in many studies, using a mixed method approach provides the best opportunity for addressing research questions.

Originality/value – This paper provides encouragement to those who may wish to bridge the authors’ ideological gaps and to those who are actively trying to do so.

Stakeholder value disclosures: anchoring on primacy and importance of financial and nonfinancial performance measures

Bruce R. Neumann, Michael L. Roberts and Eric Cauvin
Review of Managerial Science Vol. 5, Issue 2-3, Pages: 195-212

In the growing debate about stakeholder values, there has been little discussion about information overload or whether the requested disclosures can be effectively used. Stakeholder advocates call for complicated and massive environmental and related social disclosures while not considering how information overload might affect the discourse about corporate performance. Stakeholders, including shareholders, plead for more transparency in financial statements, management discussion and analysis (MDA), and other corporate disclosures. As we know, shareholders and boards of directors are most concerned with the ‘Holy Trinity’ of earnings per share, dividends and market value changes. We believe that managers and stakeholders involved in performance evaluations have multiple interests that extend beyond traditional shareholder value measures. We note that the Balanced Scorecard (BSC) was developed as one tool to reflect and communicate these multiple measures. We test how managers use (or ignore) multiple performance measures and we posit that stakeholders will face many of the same constraints when using and processing multiple disclosures including Corporate Social Reports (CSR), environmental, or similar disclosures. While we do not directly test a wide variety of stakeholder disclosures, we examine eight (four for a single subject) shareholder values (financial measures) and four stakeholder values (nonfinancial measures). The eight measures included in our research instruments serve as proxies for the multiple concerns that might be of interest to many stakeholders. Note that stakeholders are likely to be extremely interested in nonfinancial performance measures, while many shareholders will likely concentrate on financial performance measures. Field research has reported managers tend to favor financial measures while discounting or ignoring nonfinancial measures when evaluating subordinates, making it difficult to align performance evaluations and incentives with corporate strategies (Ittner et al. Account Rev 78:725–758, 2003). In this study, we find the relative weights managers place on financial and nonfinancial performance measures are influenced by both (1) presentation order and (2) the relative importance of specific measures. When financial measures are presented first, the manager who performs better on financial measures is rated higher than the manager who performs better on nonfinancial measures. However, when nonfinancial measures are presented first, managers who excel on nonfinancial measures are rated higher. Reports that include financial measures that are relatively more (less) important also produce higher (lower) ratings for the manager who excels on financial measures. Thus, the relative weights that superiors place on financial and nonfinancial measures in evaluating corporate managers’ performance are substantially anchored both by the order in which measures are presented as well as by the importance of the specific performance measures employed. Other stakeholder disclosures are likely to be similarly anchored, perhaps biased, by primacy and a priori importance rankings.

A Social Network Analysis of the Literature on Management Control

K. J. Euske, James W. Hesford, and Mary A. Malina
Journal of Management Accounting Research, Vol. 23, No. 1, pp. 259-283.

This paper investigates the literature on management control published in accounting and management journals. Social network analysis of citation data from the 25-year period 1981-2005 enables us to examine topics and ties among researchers. Social ties have important consequences for the development of the literature, shaping topics, research methods and the diffusion of knowledge. We observe minimal communication between the two disciplines, appearing as two distinct communities despite similar interests. This lack of communication includes citations and authoring across the two disciplines. When citations across disciplines occur, it is almost exclusively accounting authors citing management authors, not vice versa. There is virtually no joining of accounting and management scholars within social networks. Within the two broader communities there also exist smaller research clusters. While we cannot determine the impact this has on our understanding of management control, we discuss possible reasons for this phenomenon and its potential implications for management control research.

Why Shareholders and Debt-Holders Value Internationally Diversified Firms: Evidence from the United States

Kingsley Olibe, Robert Strawser and
William Strawser

Journal of Accounting and Finance, Vol. 11, Issue 2, pages 26-52.

This paper empirically tests whether international diversification is associated with market value and debt. Specifically, we relate the levels of equity and debt to firms’ foreign assets and foreign sales. We find that market value is positively related to international diversification, indicating significant gains to share-holders of these firms. Alternatively, the level of debt is positively (negatively) associated with the level of foreign assets (foreign sales. We also consider whether debt levels alter the valuation of foreign assets and foreign sales, finding that the association between market value and foreign assets is stronger for highly-leveraged firms.

Client stock market reaction to PCAOB sanctions against a Big 4 auditor

Carol Calloway Dee, Ayalew Lulseged, and Tianming Zhang
Contemporary Accounting, Volume 28, Issue 1, Pp 263–291

We examine the stock market effects of news of the Public Company Accounting Oversight Board’s (PCAOB) sanctions imposed upon Deloitte and Touche, LLP (Deloitte) on December 10, 2007 for actions related to its 2003 audit of Ligand Pharmaceuticals Incorporated (Ligand). Deloitte was censured and fined one million dollars. In addition, the firm agreed to create an internal “Leadership Oversight Committee” responsible for increased supervision of its partners and directors. The engagement partner responsible for the Ligand audit was banned from association with a registered accounting firm, although after two years he may file a petition for relief. These sanctions mark the first time the PCAOB has used its enforcement powers against a Big 4 auditor (or any national or international firm), as well as the first time the PCAOB has issued a monetary penalty against any individual or registered accounting firm.

What Are the Essential Features of a Liability?

Murray, Dennis
Accounting Horizons; Dec. 2010, Vol. 24 Issue 4, p623-633.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are in the process of jointly re-examining their conceptual frameworks. The re-examination includes assessing the definition of a liability. The Boards’ existing liability definitions include three criteria: (1) a present obligation; (2) a past transaction or event; and (3) a probable future sacrifice of economic benefits. The Boards have recently proposed that a liability be defined as “a present obligation for which the entity is the obligor” (FASB 2008c, 2). The proposed definition mentions only one time dimension (the present). References to the past and future are omitted. This paper argues that these omissions are undesirable. Omitting a reference to the past removes the link between the definition and the tradition of historically based financial statements. More importantly, however, the failure to reference future sacrifices of economic benefits divorces the definition from the primary objective of financial reporting: to provide information about the “amount, timing and uncertainty of an entity’s future cash flows” (FASB 2008a, para. OB6). This paper offers an alternative definition that emphasizes the past and future rather than the present.

No News is Bad News: Market Reaction to Reasons Given for Late Filing of Form 10-K

Carol Callaway Dee, William Hillison, and Carl Pacinic
Research in Accounting Regulation, Volume 22, Issue 2, Pp. 121–127

We examine the relation between reasons provided by management for late filing of Form 10-K and the market reaction to news of the late filing. We find negative abnormal returns for firms providing inadequate or boilerplate reasons for late filing (no attribution), and positive abnormal returns for firms that provide apparently legitimate reasons for late filing (attributions). Regression analyses show a positive relation between attributions and two-day CARs, after controlling for the type of earnings news in the notification of late filing found in Form 12b-25 (positive or negative news).

The Persistence and Market Valuation of Recurring Nonrecurring Items

William Cready, Thomas J. Lopez, and Craig A. Sisneros
THE ACCOUNTING REVIEW, Vol. 85, Issue 5, pp. 1577-1615

This study focuses on the persistence and market value implications of a subset of nonrecurring charges that are atypical due to repeated occurrence. The increased recurrence of supposedly nonrecurring items perhaps reflects managerial shifting of (more permanent) ordinary expenses to a transitory category or, alternatively, may reflect an environment where these items naturally occur more frequently. Either scenario suggests that these repetitive charges have future earnings implications dramatically different from truly nonrecurring events and should therefore be valued more like a recurring component of earnings. Consistent with this notion, we find that as the
frequency of reporting negative special items increases (measured by the presence of multiple prior charges), the persistence of these items significantly increases with respect to future earnings. Our evidence also suggests that the valuation multiple on such charges increases with frequency. That is, the market values “recurring nonrecurring” items more like the other components of recurring earnings.

How to transition from assessing performance to enhancing performance with balanced scorecard goal action plans.

Albright, Thomas, Burgess, Christopher M, Hibbets, Aleecia R, and Roberts, Michael L.
Journal of Corporate Accounting & Finance,  Sep/Oct 2010, Vol. 21 Issue 6, pp. 69-74, 6p

The balanced scorecard (BSC) has achieved widespread acceptance as a strategic performance measurement tool. This article builds on the BSC process by showing how goal action plans can be used to help organizations translate strategic goals into actionable employee behavior to improve bottom-line performance.

Usefulness of Expected Values in Liability Valuation: The Role of Expected Value

Colbert, Gary, Murray, Dennis and Nieschwietz, Robert.
Journal of Finance and Accountancy, Volume 4, pp. 1-13.

This study investigates whether the usefulness of expected values to financial statement users depends on portfolio size (N). Given that standard setting boards require some liabilities to be measured at fair value, and given that fair values are often estimated using expected cash flows, the investigation is conducted within the context of liabilities. Expected value is hypothesized to be more useful when N is large because actual cash flow realizations are more centered on their expected value than when N is small. That is, because users will perceive that expected values are more accurate predictors of actual realizations when N is large, valuations assigned to liabilities will be closer to their expected values than when N is small. The results show that when N is large, the valuations assigned by subjects to liabilities are much closer to the expected value of the future cash outflows than when N is small, but users’ perceptions of the accuracy of expected values did not appear to influence their valuations. These results suggest that standard setters should give consideration to the effect of portfolio size on the use of expected value in financial reporting.

Four steps to simplify multimeasure performance evaluations using the balanced scorecard

Albright, Thomas L, Burgess, Christopher M, Hibbets, Aleecia R., and Roberts, Michael L.
Journal of Corporate Accounting & Finance, Jul/Aug 2010, Vol. 21 Issue 5, pp. 63-68

Processing complex, unstructured information can be difficult. Since balanced scorecards can include as many as 24 or more measures, this article presents a methodology to help managers manage the complexity. The four-step process explained here can lead to accurate and consistent evaluations using both quantitative and qualitative performance measures.