Accounting Commons^™

Audit Standard Setting And Inspection For U.S. Public Companies: A Critical Assessment And Recommendations For Fundamental Change, Steven M. Glover, Douglas F. Prawitt, Mark H. Taylor

Faculty Publications

The Sarbanes-Oxley Act of 2002 (SOX) established the Public Company Accounting Oversight Board (PCAOB) to oversee the public accounting firms that audit publicly traded companies in the U.S. In this commentary we outline why we believe the PCAOB’s audit standard setting and inspection models are inefficient and dysfunctional. We assert that the Board’s ability to achieve its mission is limited by its early choices, together with its incentives, organizational composition, and structure. We support our assertions with a number of indicators of serious problems and flaws in the current approach. We also present high-level recommendations for change for policy makers, …

Component Materiality For Group Audits, Steven M. Glover, Jonathan T. Liljegren, Douglas F. Prawitt, William F. Messier

Faculty Publications

Determining overall group materiality and materiality levels for individual components is becoming more of a hot-button issue as the number and complexity of large and international group audits increases. Auditing standards and other professional materials offer little practical guidance on the topic. Internal and peer reviews and regulatory inspections have revealed a variety of approaches in this area. In some instances, reviews have discovered potentially troubling practices. Our conversations with regulators and practitioners indicate an intense and growing interest in the development of conceptually sound guidance. This article outlines a practical approach that group engagement partners can consider in establishing …

Individual Taxation Report, Annette M. Nellen, E. Cook, D. Neuschwander, S. Q. Covington, J. Horn, M. Musacchio, J. Walloch

Faculty Publications

Recent developments affecting taxation of individuals, including legislation, regulations, and IRS guidance, are presented in Code section order.

Recent Developments In Individual Taxation, Annette M. Nellen, E. Cook, J. Horn, M. Musacchio

Faculty Publications

The article focuses on developments affecting individual taxation in the U.S. It says that the Small Business and Work Opportunity Tax Act of 2007 raised the age requirements for Sec. 1(g) effective for tax years after May 2007. It notes that final regulations on the child and dependent care credit clarify that expenses for a child in kindergarten or higher grades do not qualify for the credit. Recommendations in the report "Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance" are cited, such as enhancement of taxpayer service.

An Examination Of Accounting Majors' Ethical Decisions Before And After An Ethics Course Requirement, Violet Rogers, Aileen Smith

Faculty Publications

The increased focus on ethical decision making in the accounting profession has resulted in greater attention being paid to the education of future accountants. Texas is one of the states that requires a State Board approved university course in Accounting Ethics to be on the transcript of prospective CPA candidates. This study reports on research using senior/graduate level accounting majors at a Texas state university before the university course requirement and after the requirement. The survey presented four vignettes for the students to consider (i.e., 2 describe an ethical decision and 2 describe an unethical decision). Students were requested to …

Student Cheating Habits: A Predictor Of Workplace Deviance, Sharron M. Graves

Faculty Publications

Unethical behavior seems to be increasing exponentially in every facet of today's business environment. Property and production deviance are just two of the unethical behaviors exhibited by employees. According to a study conducted by S. Nonis and C. Swift (2001), students who engage in dishonest acts in college classes are more likely to engage in dishonest acts in the workplace. Research conducted during the three year period 2002 - 2005 by Don McCabe in conjunction with The Center for Academic Integrity at Duke University reveals that 70 percent of the 50,000 undergraduate students surveyed admit to some cheating (McCabe 2005). …

Earnings Quality And Corporate Governance In Ipo Firms, Mary F. Calegari, M. A. Harjoto

Faculty Publications

No abstract provided.

Unusual Digital Patterns In Eps: Evidence On The Association Between Earnings Management And Company Characteristics, Charles E. Jordan, Stanley J. Clark, Mary M. Anderson

Faculty Publications

Prior studies (Thomas, 1989; Das and Zhang, 2003) provide evidence of earnings manipulation to achieve cognitive reference points in EPS. The current study extends this line of research by examining the relation between unusual digital patterns in the right EPS position and specific firm characteristics. Results suggest that the propensity to manage earnings to effect desired EPS results is particularly associated with company size and to a lesser degree with operating performance and the level of debt leverage employed.

Diversification To Mitigate Expropriation In The Tobacco Industry, Messod D. Beneish, Ivo Ph. Jansen, Melissa F. Lewis-Western, Nathan V. Stuart

Faculty Publications

While it is well established that diversifying acquisitions by large, cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show that these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show that wealth creation increases in the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms’ influence in more political districts) and in the liquidity of tobacco firms’ assets (converting cash to harder-to-expropriate operating assets). We also show that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.

Incentives Bring Zero-Emission Vehicle Manufacturing To California, Annette M. Nellen

Faculty Publications

No abstract provided.

Margin Trading, Overpricing, And Synchronization Risk, Sanjeev Bhojraj, Robert J. Bloomfield, William B. Tayler

Faculty Publications

We provide experimental evidence that relaxing margin restrictions to allow more short selling can exacerbate overpricing, even though it reduces equilibrium price levels. This is because smart-money traders initially profit more by front-running optimistic investor sentiment than by disciplining prices. When short selling is not possible, competitive pressures among arbitrageurs rapidly drive prices to the equilibrium. However, the risk of margin calls slows the convergence process, because arbitrageurs who sell short too early face substantial losses if they are unable to synchronize their trades with other arbitrageurs (as in Abreu and Brunnermeier. 2002. Journal of Financial Economics 66(2–3):341–60; 2003. Econometrica …

Momentum, Reversal, And Uninformed Traders In Laboratory Markets, Robert J. Bloomfield, William B. Tayler, Flora H. Zhou

Faculty Publications

We report the results of three experiments based on the model of Hong and Stein (1999). Consistent with the model, results show that when informed traders do not observe prices, uninformed traders generate long-term price reversals by engaging in momentum trade. However, when informed traders also observe prices, uninformed traders generate reversals by engaging in contrarian trading. Results suggest that a dominated information set is sufficient to account for the contrarian behavior observed among individual investors, and that uninformed traders may be responsible for long-term price reversals but play little role in driving short-term momentum.

Effects Of Friendship In Transactions In An Emerging Market: Empirical Evidence From Brazil, Wesley Mendes-Da-Silva, Thaís Fernanda Salves De Brito, Rubens Famá, Jonathan T. Liljegren

Faculty Publications

This paper considers the inclusion of human behavioral aspects and implications of cognitive psychology and anthropology in decisions relating to the emerging field of behavioral finance. The formulated hypotheses were tested using 400 questionnaires, answered by students enrolled in MBA programs. The principal results suggest that individuals involved in transactions among friends or among strangers assume different behaviors—friends agree about the price attributed to an asset, while strangers show the propensity to bargain.

Treatment Of Legal Fees Incurred By Individuals, Annette M. Nellen

Faculty Publications

If the origin of a claim that generated legal fees is personal, the fees are not deductible. Possible favorable treatment for legal fees includes either above-the-line deductions or adjustments to basis or selling price in a property transaction. Some taxpayers have claimed described legal fees in such a way that they directly reduce the related income.

When Management Override Negates Common Sense, Kelly Noe, Violet Rogers

Faculty Publications

Write OK per big boss across the invoice and everything is fine! Or is it? This paper analyzes the human factor link related to the Debra Valice Case. The human factor is the weakest link of any internal control system. Understanding the human factors that cause people to not follow the rules, is key to strengthening this link. This research will utilize the human factors adapted from the Independence Education Program to analyze the DebraValice Case. Valice was responsible for ensuring a secure internal control system. The Chief Executive Officer was able to manipulate this system and unauthorized payments were …

Engagement Risk: Perceptions And Strategies From Audit Partners, Jack R. Ethridge, Treba Marsh, Bonnie Revelt

Faculty Publications

The audit function creates several important relationships among the various parties. One of the significant and potentially problematic relationships is between the audit firm and the audit client. The decision by the audit firm to accept or retain a client is crucial because of the potential risk of being associated with certain clients. The potential damage can range from financial loss and/or loss of prestige to the ultimate demise of the audit firm. Engagement risk is considered to be composed of three components: entity’s business risk, audit risk, and auditor’s business risk. This research questioned whether audit firms have significantly …

The Global Significance Of Locus Of Control In Ethical Decision Making: A Multi-Country Examination Of University Students, Aileen Smith, Evelyn C. Hume, Ray Zimmermann, Alan Davis

Faculty Publications

Locus of control (LOC) is a personality variable shown to possess potential explanatory power in the study of ethical decision making. There have been, however, diverse results reported in the literature. Whenever differences on this variable are indicated by the research, individuals with an Internal LOC report the more ethical responses. This study extends the examination of the global relevance of the LOC variable to ethical decision making of university students in thirteen universities from eight countries. Using an instrument designed to elicit responses to questionable academic behaviors, this research analyzes ethical responses of university students (n=2,420) to look for …

Was The Accounting Profession Really That Bad?, Elizabeth K. Jenkins, W. Donnelly, T. Black

Faculty Publications

To gain insight into the extent of malpractice in the State of California prior to the Passage of Sarbanes-Oxley, we examined the nature and magnitude of complains filed with the California Board of Accountancy (CBA) against both licensed and unlicensed accountants during the fiscal years 2000, 2001, and 2002. The CBA currently licenses and regulates over 73,000 licenses, with 1,431 complaints filed during the period reviewed. Disciplinary actions were taken against 283 different licensees for the three fiscal years reviewed. SEC issues were involved in 19 cases, theft or embezzlement 46 cases, public accounting malpractice 146 cases, improper retention of …

Do Bulls And Bears Listen To Whispers?, Janis K. Zaima, M. A. Harjoto

Faculty Publications

A post-earnings announcement drift associated with the market reaction to analyst forecasts errors remains a puzzle. This study suggests that whispers help to explain part of the puzzle. The study examines the market reaction to whispers and analysts in bull and bear markets, and finds that investors listen to whispers in the bull market and whispers help explain the post-announcement drift. In a bear market, reaction to whispers is significantly positive prior to announcement despite a down market, indicating optimism by investors who follow whispers. However, in the bear market, both whispers and analysts contribute to the post-announcement drift.

Internal Audit Sourcing Arrangement And The External Auditor's Reliance Decision, Steven M. Glover, Douglas F. Prawitt, David A. Wood

Faculty Publications

This paper examines the effects of internal audit sourcing arrangement on the external auditor’s reliance decision in the presence of different levels of inherent risk and task subjectivity. We posit that external auditors will rely more on outsourced than in-house internal audit functions (IAFs) and that this difference will be more pronounced when inherent risk is high or when the work performed by internal auditors relates to a subjective task. Participants in the study were 127 external auditors from a Big 4 firm who completed an experimental case in which we manipulated internal audit sourcing, inherent risk, and task subjectivity. …

The Role Of Tax Regulation And Compensation Contracts In The Decision To Voluntarily Expense Employee Stock Options, Walter G. Blacconiere, Marilyn F. Johnson, Melissa F. Lewis-Western

Faculty Publications

We show that firms with executive bonuses that qualify for deduction under Internal Revenue Code Section 162(m) were less likely to expense stock option compensation (SOC) in 2002. Additionally, the more likely it is that a qualified firm will incur re-contracting costs, the less likely it is that the firm will expense SOC. CEOs of qualified firms that also expense SOC receive smaller bonuses than CEOs of expensing firms that are not qualified under 162(m), and the lower 162(m) bonuses are not offset by higher SOC. Our results suggest that 162(m) tax incentives are an important determinant of the decision …

Ranking Scholarly Outlets For Information Technology, Barry Lunt, Michael Bailey, Jospeh Ekstrom, C. Richard G. Helps, David A. Wood

Faculty Publications

Many well-established disciplines have a number of outlets for scholarly work, including archival journals, conference proceedings, periodicals, and others. These outlets are commonly known within the discipline, and many have an established reputation and even ranking. Faculty seeking to publish in one of these disciplines, and seeking to advance in rank and tenure status, are well served by knowing the most common scholarly outlets and their rankings. The relatively new discipline of Information Technology does not yet have a well established ranking of scholarly outlets. This paper presents the findings of a survey conducted among the members of the IT …

A Research Agenda For Studying Open Source I: A Multi-Level Framework, Ashley R. Davis, Fred Niederman, Martina E. Greiner, Donald Wynn, Paul T. York

Faculty Publications

This paper presents a research agenda for studying information systems using open source software A multi-level research model is developed at five discrete levels of analysis: (1) the artifact; (2) the individual; (3) the team, project, and community; (4) the organization; and (5) society. Each level is discussed in terms of key issues within the level. Examples are based on prior research. In a companion paper, [Niederman, et al 2006], we view the agenda through the lens of referent discipline theories.

Rising Expectations In Business Education, Annette M. Nellen, Marlene E. Turner

Faculty Publications

The article comments on the rising expectations in business education. It explains the term liberal education. It mentions the Liberal Education & America's Promise Campaign launched by the Association of American Colleges & Universities in 2005. The article also notes that integrative learning is particularly relevant because it melds students' professional and liberal educations.

An Empirical Investigation Of The Minority Interest And Marketability Discounts In Valuation Of Closely Held Stock For Estate And Gift Tax Purposes, Ted D. Englebrecht, Mary M. Anderson, Otto Martinson

Faculty Publications

The discounts for lack of marketability and minority interest are crucial in reducing the value of transferred interests of closely held companies for estate and gift tax purposes. Because the current highest marginal estate and gift tax rate is 49%, there is a strong inducement for CPAs, Attorneys, Investment Bankers, Financial Planners, and others who value these transfers to accurately gauge the judicially allowed discounts for lack of marketability and minority interests in the valuation of closely held stock. This study examines the relationship between Tax Court determined values for lack of marketability and minority discounts to closely held stock …

Publication Records Of Facility Promoted At The Top 75 Accounting Research Programs, Steven M. Glover, Douglas F. Prawitt, David A. Wood

Faculty Publications

This paper presents a descriptive analysis of the publication records of faculty promoted from 1995 to 2003 at the top 75 accounting research programs (as ranked by Trieschmann, et al. 2000). The presentation and analyses of these data are designed to be useful to faculty and evaluation committees from a benchmarking and decision-making perspective. From a benchmarking perspective, the results will be useful in helping schools as they develop or refine relevant policies and research expectations. The results may be particularly useful in view of the fact that average accounting faculty publication records differ from the average publication records of …

Information Pursuit In Financial-Statement Analysis: Effects Of Choice, Effort, And Disaggregation, Mark W. Nelson, William B. Tayler

Faculty Publications

Prior research provides evidence that financial-statement users weight information less heavily in judgment when that information is provided in a less accessible format (e.g., information disclosed in a footnote or less important financial statement rather than being recognized on the income statement (Maines and McDaniel 2000)). We provide evidence that, conditional on users performing the analysis necessary to transform the financial statements to appear as if disclosed information had been recognized, users may weight that information more heavily than it would have been if it had been recognized. Our experiments are set in the context of constructive capitalization of operating …

The Effects Of Financial Statement And Informational Complexity On Cash Flow Forecasts, Leslie Hodder, Patrick E. Hopkins, David A. Wood

Faculty Publications

We characterize the operating-activities section of the indirect-approach statement of cash flows as backwards because it presents reconciling adjustments in a way that is opposite from the intuitively appealing, future-oriented, Conceptual Framework definitions of assets, liabilities and the accruals process. We propose that the reversed-accruals orientation required in the currently mandated indirect-approach statement of cash flows is unnecessarily complex, causing increased cash-flow forecast error and dispersion. We also predict that the mixed pattern (i.e., +/–, –/+) of operating cash flows and operating accruals reported by most companies also impedes investors’ ability to learn the time-series properties of cash flows and …

Individual Cognition And Dual-Task Interference In Group Support Systems, William G. Heninger, Alan R. Dennis, Kelly Mcnamara Hilmer

Faculty Publications

Previous research shows that synchronous text discussion through group support systems (GSS) can improve the exchange of information within teams, but this improved information exchange usually does not improve decisions because participants fail to process the new information they receive. This study examined one potential cause for this failure: Dual-task interference caused by the need to concurrently process new information from others while also contributing one's own information to the discussion. Although prior research argues that dual-task interference should be minimal, we found that it significantly reduced participants' information processing and led to lower decision quality. The effect sizes were …

The Application Of Model Checking For Securing E-Commerce Transactions, Bonnie Anderson, James V. Hansen, Paul Benjamin Lowry, Scott L. Summers

Faculty Publications

As firms become progressively more dependent on Internet-based information systems, they are increasingly vulnerable to defects in those systems. These defects can lead to errors, undetected fraud, and malicious intrusion. Information system errors can be catastrophic, whether they occur in market transactions, banking, air traffic control, and so forth. Resulting damages can include lost revenue, lost data, lost trust, and increased costs.

Consequently, effective design of e-business processes is essential to avoid defects that can otherwise lead to errors, fraud, and intrusion. Whereas carefully designed e-business protocols can perform effectively within most expected situations, assuring correct processing under all circumstances …