Category Archives: Accounting

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, In Press

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.

Return of the Tallahassee Bean Counters: A Case in Forensic Accounting

Dee, Carol Callaway and Durtschi, Cindy
Issues in Accounting Education; May 2010, Vol. 25  Issue 2, pp. 279-321

Your firm has been engaged to conduct a forensic investigation of the Tallahassee BeanCounters (TBC), a privately owned minor league baseball team in Tallahassee, Florida. Team owner Franklin Kennedy has told employees that the audit is related to the mortgage TBC obtained for the recently constructed training facility. However, Mr. Kennedy tells you privately that the investigation is not due to loan requirements; rather, it is due to his concerns arising from an anonymous tip he received in the mail. The assignment requires you and your investigative team to (1) analyze the financial and background data provided; (2) brainstorm the possible ways in which a fraud could be perpetrated and concealed within the organization; (3) determine the additional information you need to confirm or disprove your suspicions; and (4) request this information from the appropriate party at TBC. When your investigation is complete, you will present your written results to the owner, including (1) who committed the fraud, (2) how it was committed, (3) the economic impact of the fraud to TBC, and (4) the financial benefit your suspect(s) received from committing the crime.

Return of the Tallahassee BeanCounters: A case in forensic accounting

Carol Callaway Dee, Cindy Durtschi
Issues in Accounting Education,Vol. 25, Issue 2, Pages: 279-321.

Your firm has been engaged to conduct a forensic investigation of the Tallahassee BeanCounters (TBC), a privately owned minor league baseball team in Tallahassee, Florida. Team owner Franklin Kennedy has told employees that the audit is related to the mortgage TBC obtained for the recently constructed training facility. However, Mr. Kennedy tells you privately that the investigation is not due to loan requirements; rather, it is due to his concerns arising from an anonymous tip he received in the mail. The …
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An efficient method for acquiring auditing procedural knowledge

Jane Dillard-Eggers and Michael L. Roberts
Advances in Accounting Behavioral Research, Vol 13, pp.89-111

In light of advances in the theory of cognition (Anderson, 1996, 2000; Anderson & Fincham, 1994; Anderson & Lebiere, 1998) and research on learning from worked examples (Atkinson et al., 2000; Cooper & Sweller, 1987; Sweller & Cooper, 1985), this study extends earlier research findings that auditors need practice and certain kinds of feedback to acquire procedural knowledge to identify causes of variations between expected and actual financial ratios. We test an alternative form of instruction: worked examples. As predicted by Anderson’s ACT-R 4.0 theory, the results indicate individuals’ pre-test declarative knowledge interacts significantly with learning method (with or without examples) on procedural knowledge acquisition. In contrast to prior findings, this study shows that improvements in auditing procedural knowledge can be achieved by passive instruction in worked examples, a potentially more efficient (cost-effective) method than practice and feedback for auditor training.

The Shareholder Wealth Effects of an Executive Joining Another Company’s Board

John Byrd, L. Ann Martin, and Subhrendu Rath
International Journal of Managerial Finance, Volume 6 Issue 1, pp. 48-57

Purpose – The purpose of this paper is to examine the impact of high‐level‐executives joining the Board of another US company on the shareholder wealth of the firms in which these executives work.
Design/methodology/approach – The “event‐study” methodology is used first to estimate the shareholder effects and then, through multivariate regression analysis, establish a relationship of these effects with executive characteristics.
Findings – The paper documents that the abnormal return becomes more positive the closer the executive is to retirement and more negative as the number of other corporate Boards the executive already sits on increases. Unlike previous research, it is not found that prior performance of the employing company helps explain the cross‐sectional variation in the announcement day abnormal returns.
Research limitations/implications – The result supports the concerns of shareholder activists that key executives joining the Boards of other companies do their home shareholders a disservice by being spread too thin. It supports the hypothesis that investors interpret a CEO joining the Board of another firm as value decreasing.
Originality/value -The paper provides a link between managerial labor and shareholder wealth. Important and high‐level‐executives, while attempting to enhance their own personal benefits by joining other Boards, can destroy shareholder value of the company for which they work.

Independence, impartiality, and advocacy in client conflicts

Michael Roberts
Research in Accounting Regulation, In Press

Prior research indicates auditors’ financial reporting judgments are conservative when client preference is unknown, but auditors are less conservative (though not client-supportive) when clients’ preferred accounting methods for favorable financial reporting are explicitly communicated. This paper reports, for the first time, a situation in which experienced auditors exhibit client-supportive behavior. Professional judgments in an audit setting in which there is an explicit client preference for a material, income-increasing reporting classification and the relevant GAAP standard is principle-based are compared to a similar judgment in a tax setting. This research design contrasts the auditor’s ethical duty to exercise “judicial impartiality” toward the client with Certified Public Accountants’ ethical duty to be a client advocate in tax contexts. The results suggest experienced CPAs’ are as client-supportive in audit settings as they are in tax settings when exercising their professional judgment, and ethical standards mandating impartiality in auditing are not uniformly being followed.

Information technology acceptance in the internal audit profession: Impact of technology features and complexity

Hyo-Jeong Kim, Michael Mannino, and Robert J. Nieschwietz
International Journal of Accounting Information Systems, Vol. 10, Issue 4, pp. 214-228

Although various information technologies have been studied using the technology acceptance model (TAM), the study of acceptance of specific technology features for professional groups employing information technologies such as internal auditors (IA) has been limited. To address this gap, we extended the TAM for technology acceptance among IA professionals and tested the model using a sample of internal auditors provided by the Institute of Internal Auditors (IIA). System usage, perceived usefulness, and perceived ease of use were tested with technology features and complexity. Through the comparison of TAM variables, we found that technology features were accepted by internal auditors in different ways. The basic features such as database queries, ratio analysis, and audit sampling were more accepted by internal auditors while the advanced features such as digital analysis, regression/ANOVA, and classification are less accepted by internal auditors. As feature complexity increases, perceived ease of use decreased so that system usage decreased. Through the path analysis between TAM variables, the results indicated that path magnitudes were significantly changed by technology features and complexity. Perceived usefulness had more influence on feature acceptance when basic features were used, and perceived ease of use had more impact on feature acceptance when advanced features were used.

The use of expected value in pricing judgments

Colbert, Gary, Murray, Dennis, and Nieschwietz, Robert
Journal of Risk Research Vol. 12, Issue 2, p. 199-208

Previous research has examined the extent to which decisions made in binary choice situations are consistent with expected value. Li (2003) reports that decisions in multiple-play gambles are well explained by expected value, while single-play gambles are not consistent with expected value. The present study extends previous work by examining the use of expected value in the pricing of gambles. The results show that subjects’ pricing decisions are much more consistent with expected value in multiple-play situations than in single-play situations, particularly when the subjects are provided with a simple decision aid (i.e. a very brief description of expected value and the calculated amount of the expected value). Additionally, substantially fewer subjects in our study made decisions consistent with expected value than in Li’s (2003) study, suggesting that binary choice studies may overstate the extent of expected value usage.

Assessing The Appearance Of Auditor Independence Using Behavioral Research Methodology

Colbert, Gary, Murray, Dennis, and Nieschwietz, Robert
Journal of Applied Business Research Vol. 24, Issue 4, p. 113-124

Recent archival studies have examined the association between auditor independence and non-audit services. The results of these studies suggest that fees for non-audit services are not associated with indicators of auditor independence in fact whereas these fees are associated with financial statement users’ perceptions of auditor independence (i.e., independence in appearance). The present study attempts to reconcile these conflicting findings by using a behavioral research methodology that provides greater control over the independent variables and measures more directly financial statement users’ perceptions. Our results indicate that fees for financial information systems development services do not affect perceptions of auditor independence, whereas, fees for tax services adversely affect perceptions of independence. Overall, the results provide mixed support for the recent Securities and Exchange Commission policy changes on auditor independence.