Accounting Commons^™

Ethical And Environmental Disclosures: An Analysis Of The Oil And Gas Industry, Violet C. Rogers, Jack R. Ethridge, Treba Marsh, Jessica Lott

Faculty Publications

This study investigates the similarities of ethical and environmental disclosures, as well as risk factors contained within annual reports for the reporting year 2009. The data were collected from Fortune 500 oil and gas company annual reports. Findings include: 1) an emphasis on environmental, financial, nonfinancial and ethical disclosures and 2) similar reported risks for all companies investigated. The findings illustrate that many of the studied oil and gas companies have similar disclosures but, on the other hand, are situation specific to particular company and location.

We Are Not Publicly Traded And So The Rules Don't Apply Or Do They Should They?, Kelly Noe

Faculty Publications

This paper presents a case study of the accounting practices of a company that is privately held. The company follows Generally Accepted Accounting Principles (GAAP) but has some questionable transactions. The paper then follows up with a discussion of baby-GAAP and possible consequences of two different GAAP options.

Lease Transaction Structuring, Earnings Management, And Management Credibility, Susan D. Krische, Paula R. Sanders, Steven D. Smith

Faculty Publications

Despite recent regulatory concerns regarding off-balance sheet financing, and concerns about lease accounting in particular, relatively little is known about how financial statement users view lease transaction structuring compared to other forms of earnings management. We examine sell-side financial statement analysts’ views on lease transaction structuring and its impact on their assessments of management credibility. Although operating leases often act as the prototypical example of transaction structuring, survey responses suggest that lease structuring and related voluntary reconciliations do not raise the same concerns for analysts as do other earnings management activities (which lower analysts’ perceptions of management credibility). Our findings …

Investor Information Demand: Evidence From Google Searches Around Earnings Announcements, Michael S. Drake, Darren T. Roulstone, Jacob Thornock

Faculty Publications

The objective of this study is to investigate factors that influence investor information demand around earnings announcements and to provide insights into how variation in information demand impacts the capital market response to earnings. The Internet is one channel through which public information is disseminated to investors and we propose that one way that investors express their demand for public information is via Google searches. We find that abnormal Google search increases about two weeks prior to the earnings announcement, spikes markedly at the announcement, and continues at high levels for a period after the announcement. This finding suggests that …

A Re-Examination Of Analysts’ Superiority Over Time-Series Forecasts Of Annual Earnings, Mark T. Bradshaw, Michael S. Drake, James N. Myers, Linda A. Myers

Faculty Publications

We re-examine the widely held belief that analysts‟ earnings per share (EPS) forecasts are superior to random walk (RW) time-series forecasts. We investigate whether analysts‟ annual EPS forecasts are superior, and if so, under what conditions. Simple RW EPS forecasts are more accurate than analysts‟ forecasts over longer horizons, for smaller or younger firms, and when analysts forecast negative or large changes in EPS. We also compare the accuracy of a third forecast of longer-term earnings based on a naïve extrapolation of analysts‟ one-year-ahead forecasts. Surprisingly, this naïve extrapolation provides the most accurate estimate of long-term (two- and three-year-ahead) earnings. …

The Information Content Of Annual Earnings Announcements And Mandatory Adoption Of Ifrs, Wayne R. Landsman, Edward L. Maydew, Jacob Thornock

Faculty Publications

This study examines whether the information content of earnings announcements – abnormal return volatility and abnormal trading volume – increases in countries following mandatory IFRS adoption, and conditions and mechanisms through which increases occur. Findings suggest information content increased in 16 countries that mandated adoption of IFRS relative to 11 that maintained domestic accounting standards, although the effect of mandatory IFRS adoption depends on the strength of legal enforcement in the adopting country. Utilizing a path analysis methodology, we find evidence of three mechanisms through which IFRS adoption increases information content: reducing reporting lag, increasing analyst following, and increasing foreign …

Strategy Selection, Surrogation, And Strategic Performance Measurement Systems, Jongwoon Choi, Gary Hecht, William B. Tayler

Faculty Publications

Strategic performance measurement systems operationalize firm strategy with a set of performance measures. A consequence of such alignment is the tendency for managers to lose sight of the strategic construct(s) the measures are intended to represent, and subsequently act as though the measures are the constructs of interest, a phenomenon referred to as surrogation. We investigate how involvement in strategy selection affects managers’ propensity to exhibit surrogation. We predict and find that strategy selection reduces surrogation. Surprisingly, we do not find that engaging in strategy deliberation, a key process underlying strategy selection, reduces surrogation. Thus, managers’ involvement in the actual …

Internal Audit Outsourcing And The Risk Of Misleading Or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong?, Douglas F. Prawitt, Nathan Y. Sharp, David A. Wood

Faculty Publications

The Sarbanes-Oxley Act of 2002 (SOX) represents a far-reaching legislative attempt to improve the quality of financial reporting in the United States in response to the major accounting frauds of the late 1990s and early 2000s (Klein 2003). A significant change imposed by SOX was to prohibit the outsourcing of internal audit services to firms’ external auditors.1 Competing academic arguments suggest that this ban will either improve or worsen financial reporting quality. The knowledge spillover argument suggests that by both performing the external audit and providing nonaudit services, auditors improve overall audit quality through a deeper understanding of the client …

Publication Benchmarking Data Based On Faculty Promoted At The Top 75 Us Accounting Research Institutions, Steven M. Glover, Douglas F. Prawitt, Scott L. Summers, David A. Wood

Faculty Publications

The primary purpose of this study is to update the Glover et al. (2006) publication benchmarking study by providing benchmarking statistics of faculty promoted to associate and/or full professor from 2004 to 2009. We also extend Glover et al. (2006) by examining new benchmarking metrics and by investigating publication productivity differences between studies. Our results indicate that, on average, faculty promoted from 2004 to 2009 had more publications in leading accounting journals at the time of promotion than faculty promoted from 1995 to 2003. We explore possible explanations for the increase in publication productivity. We find that increases in the …

The Effects Of Preventive And Detective Controls On Employee Performance And Motivation, Margaret H. Christ, Scott A. Emett, Scott L. Summers, David A. Wood

Faculty Publications

We examine how two attributes of preventive and detective controls affect employee performance and employee motivation. Specifically, we examine how the extent to which controls (1) restrict employees’ autonomy, and (2) provide more or less timely feedback impacts employees’ performance and intrinsic motivation. These characteristics are the defining differences between preventive and detective controls in that preventive controls restrict employee autonomy relative to detective controls and preventive controls always provide immediate feedback; whereas, detective controls can provide either immediate feedback or delayed feedback. We conduct an experiment to examine how and why these two types of formal controls impact employees’ …

Has The Regulation Of Pro Forma Reporting In The Us Changed Investors’ Perceptions Of Pro Forma Earnings Disclosures?, Dirk E. Black, Ervin L. Black, Theodore E. Christensen, William G. Heninger

Faculty Publications

We explore whether investors’ perceptions of pro forma earnings numbers have changed following the regulation of pro forma reporting imposed by the Sarbanes-Oxley Act of 2002 (SOX). First, we find that investors appear to pay more attention to pro forma earnings disclosures in the post-SOX period, consistent with the notion that they perceive that regulation generally renders these disclosures more credible. Second, the results indicate that investors discount aggressive pro forma earnings reports in both periods. However, they appear to discount at least some potentially misleading pro forma earnings disclosures more in the post- SOX period. Finally, our results imply …

Year-End Individual Taxation Report, Annette M. Nellen, E. Cook, K. Fava, E. Gershman, J. Hagy, J. Horn, D. Moore, D. Newman, T. Newman, K. Rubin

Faculty Publications

Several actions by Congress and the IRS aimed to reduce improper claims of the earned income tax credit by increasing preparer penalties and due diligence procedures. * Litigation over restricted stock-based compensation focused on the proper date of the stock's market valuation and the effect of company and SEC restrictions on disposition of the stock. * The Tax Court applied the IRS's recent practice of allowing professional gamblers to deduct ordinary and reasonable nonwagering business expenses over their gambling winnings, overturning a 1951 case holding. * The Tax Court also held that limited partners of a limited partnership who perform …

Assessing Audit Risk, Annetta M. Gibson

Faculty Publications

Presentation for the General Conference Auditing Service meeting, San Diego, California, June 20, 2011.

Individual Taxation: Digest Of Recent Developments, Ellen Cook, Edward A. Gershman, Janet Hagy, Jonathan Horn, Daniel T. Moore, Annette Nellen, Kenneth L. Rubin

Faculty Publications

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the current individual income tax rates on ordinary income and the rates on qualified dividend and capital gains income for two years through 2012. * The IRS, changing its long-standing position, ruled that debt on a mortgage loan used to acquire, construct, or substantially improve a qualified residence, to the extent it exceeds $1 million, qualifies as home equity indebtedness, and thus the interest on up to $100,000 of that debt is deductible as an itemized deduction. * The Tax Court held that the Sec. 121 exclusion …

Internal Controls For Sda Organizations: Conferences, Unions And Churches, Annetta M. Gibson

Faculty Publications

A presentation on internal control systems, presented to the East Central Africa Division in March of 2011.

Cash Flow Management For Sda Organizations, Annetta M. Gibson

Faculty Publications

A presentation on managing cash flow in SDA organizations. Given to the East Central Africa Division on March, 2011.

Fasb/Gasb Recognition And Reporting Differences: A Nonprofit Sector Perspective, Treba Marsh, Mary Fischer

Faculty Publications

The financial statement users’, investors’, donors’ and academic researchers’ understanding of current accounting recognition and reporting guidance affect their ability to compare financial information issued by nonprofit universities, hospitals, fund-raising organizations and government agencies. The financial results reported by public nonprofit organizations is different from that reported by private nonprofit organizations. This study discusses the events that brought about the divergence in nonprofit financial accounting recognition and reporting,and illustrates specific differences.

Environmental Risks: Doing Business In China, Jack R. Ethridge, Treba Marsh, Esther Bunn

Faculty Publications

Planning and conducting the audit of financial statements involves understanding the entity and the environment in which it operates. First and foremost this requires identifying the risks faced by the entity. Identifying these risks can be a complex and difficult task since the auditor needs to not only understand the entity’s risk process but also independently understand the risks facing the firm. Tackling this task will involve a comprehensive review of the external and internal factors affecting the business. It is possible many identified business risks are related to financial reporting risk and ultimately to audit risk. Therefore, the auditor …

Enterprise Risk Management For Fishing Tournaments, George Louis Hunt, Jack R. Ethridge, Violet Rogers

Faculty Publications

The fishing tournament industry is confronted with many of the same risks as other industries (such as financial statement misstatements), share some risks specific with others (such as cheating in casinos), and face some unique risks (such as the risk of competitors adding weight to fish).

This teaching case explores some of the risks inherent in the fishing tournament industry. Students are given background information about a how a tournament operates and then asked to perform an overall risk assessment using the COSO enterprise risk management framework. Elements of the assignment include assessing the internal environment, setting of objectives, and …

Firm And Industry Effects In Accounting Versus Economic Profit Data, Matthew J. Holian, Ali M. Reza

Faculty Publications

This article presents estimates of firm and industry fixed-effects on profit rates for large US corporations, using both Economic Value Added (EVA), the popular measure of profits produced by Stern Stewart and Company, as well as simple (unadjusted) accounting measures as the dependent variable. We find that the improvement in explanatory power of the fixed-effect model is substantially greater when using EVA than has been documented with alternative measures.

A Perspective On The Joint Iasb/Fasb Exposure Draft On Accounting For Leases, Yuri Biondi, Robert Bloomfield, Jonathan C. Glover, Karim Jamal, James A. Ohlson, Stephen H. Penman, Eiko Tsujiyama, T. Jeffrey Wilks

Faculty Publications

The International Accounting Standards Board (IASB) and The Financial Accounting Standards Board (FASB) recently issued a joint exposure draft on accounting for leases. This exposure draft seeks to shift lease accounting from an “ownership” model to a “right-to-use” model. Under the current ownership model, leases can be reported on balance sheet (finance leases) if certain tests are met, or off balance sheet (operating leases) if those tests are not met. The new model seeks to report all leases on the balance sheet based on the present value of lease obligations without any bright line tests, and no sharp on or …

Should Investors Follow The Prophets Or The Bears? Evidence On The Use Of Public Information By Analysts And Short Sellers, Michael S. Drake, Lynn Rees, Edward P. Swanson

Faculty Publications

We investigate whether short sellers and analysts differ in their use of information that is predictive of future returns. We find that open short interest is significantly associated in the expected direction with all eleven variables examined. In contrast, analysts tend to positively recommend stocks with high growth, high accruals, and low book-to-market ratios, despite these variables having a negative association with future returns. We then investigate the profitability of using short interest in trading. We find abnormal returns (1.11 percent per month) from a zero-investment strategy that (1) shorts firms with highly favorable analyst recommendations (buy signal) but high …

Lost In Translation: The Effects Of Incentive Compensation On Strategy Surrogation, Jongwoon Choi, Gary Hecht, William B. Tayler

Faculty Publications

To facilitate managers’ decision-making, firms develop strategic performance measurement systems that translate strategy into performance measures. Ideally, managers see measures for what they are: imperfect proxies for intangible strategic constructs. However, managers may fail to fully appreciate the fact that measures are merely representations of the strategic constructs, and act as though the measures were the construct of interest – a phenomenon we label surrogation. In this paper, we investigate whether and how the use of strategically-linked performance measures for compensation purposes affects managers’ propensity to exhibit surrogation. In accordance with the attribute substitution framework (Kahneman and Frederick 2002), we …

Short Interest As A Signal Of Audit Risk, Cory A. Cassell, Michael S. Drake, Stephanie J. Rasmussen

Faculty Publications

Motivated by evidence from the empirical accounting and finance literatures suggesting that short sellers target firms with suspect financial reporting, we investigate whether short interest provides a signal of the degree of audit risk. We find a positive association between audit fees and short interest (total shares sold short scaled by total shares outstanding) after controlling for other determinants of audit fees. This finding suggests that short interest is an indicator of audit risk that reflects information not captured by traditional client risk measures. We also find an increase in the magnitude of the association between audit fees and short …

Analysts’ Accrual-Related Over-Optimism: Do Analyst Characteristics Play A Role?, Michael S. Drake, Linda A. Myers

Faculty Publications

Bradshaw, Richardson, and Sloan (2001) find that analyst forecast over-optimism is greater for firms with high accruals. This “accrual-related over-optimism” is generally interpreted as evidence that analyst forecasts do not fully incorporate predictable earnings reversals associated with high accruals. We investigate whether analyst experience, access to resources (brokerage size), and portfolio complexity moderate the relation between over-optimistic forecasts and high accruals. We demonstrate the robustness of accrual-related over-optimism to controls for cash flow and prior forecast errors. We find that accrual-related over-optimism is lower for analysts with greater general experience and for analysts following fewer firms but find only limited …

Managerial Ability And Earnings Quality, Peter Demerjian, Melissa F. Lewis-Western, Baruch Lev, Sarah Mcvay

Faculty Publications

We examine the relation between managerial ability and earnings quality. We find that earnings quality is positively associated with managerial ability. Specifically, more able managers are associated with fewer subsequent restatements, higher earnings and accruals persistence, lower errors in the bad debt provision, and higher quality accrual estimations. The results are consistent with the premise that managers can and do impact the quality of the judgments and estimates used to form earnings.

Individual Accounting Faculty Research Rankings By Topical Area And Methodology, Jeffrey Pickerd, Nathaniel M. Stephens, Scott L. Summers, David A. Wood

Faculty Publications

This paper ranks individual accounting researchers based on their research productivity in the most recent 6, 12, and 20 years. We extend prior individual faculty rankings by providing separate individual faculty research rankings for each topical area commonly published in accounting journals (AIS, audit, financial, managerial, and tax). In addition, we provide individual faculty research rankings for each research methodology commonly used by accounting researchers (analytical, archival, and experimental). These findings will be of interest to potential doctoral students and current faculty, as well as accounting department, business school, and university administrators as they make decisions based on individual faculty …

Reconciling Archival And Experimental Research: Does Internal Audit Contribution Affect The External Audit Fee?, Douglas F. Prawitt, Nathan Y. Sharp, David A. Wood

Faculty Publications

Consistent with guidelines from external auditing standards, a large body of experimental and survey research suggests that an internal audit function (IAF) can contribute in ways that lead to decreased external audit fees; however, research using archival methodologies generally finds either no relation or a positive relation between proxies for IAF contribution and external audit fees. In this paper, we provide new evidence using a unique and previously unavailable data set to develop archival proxies of internal audit contribution. We find that SAS No. 65-based proxies for the contribution of internal audit are associated with lower unexpected external audit fees. …

Accounting Doctoral Program Rankings Based On Research Productivity Of Program Graduates, Nathaniel M. Stephens, Scott L. Summers, Brady Williams, David A. Wood

Faculty Publications

This paper presents rankings of accounting doctoral programs based on the research productivity of each institution’s graduates in the years immediately following their graduation. We use two time periods for analysis: the first three years after graduation and the first six years after graduation. We extend previous doctoral program ranking literature by expanding rankings of accounting doctoral programs with specific rankings for topical areas (accounting information systems (AIS), audit, financial, managerial, and tax) and methodologies (analytical, archival, and experimental). We show that rankings for topical and methodological areas differ significantly from rankings produced using methodologies that create a singular doctoral …

Do Earnings Reported Under Ifrs Tell Us More About Future Earnings And Cash Flows?, T.J. Atwood, Michael S. Drake, James N. Myers, Linda A. Myers

Faculty Publications

We contribute to the debate about the relative benefits and costs of International Financial Reporting Standards (IFRS) adoption by examining whether earnings persistence and the association between current accounting earnings and future cash flows differ for firms reporting under IFRS versus firms reporting under United States Generally Accepted Accounting Principles (U.S. GAAP) and firms reporting under non-U.S. domestic accounting standards (DAS). Using samples comprised of 58,832 firm-year observations drawn from 33 countries from 2002 through 2008, we find that positive earnings reported under IFRS are no more or less persistent than earnings reported under U.S. GAAP but losses reported under …