Comments on: Useful insights from Jim Leisenring’s Roundtable discussion today http://fasri.net/index.php/2010/01/useful-insights-from-jim-leisenrings-roundtable-discussion-today/ Informing FASB Deliberations Through Academic Research Fri, 03 Sep 2010 13:34:59 -0400 http://wordpress.org/?v=2.8.5 hourly 1 By: Robert Lipe http://fasri.net/index.php/2010/01/useful-insights-from-jim-leisenrings-roundtable-discussion-today/comment-page-1/#comment-5771 Robert Lipe Wed, 13 Jan 2010 21:11:46 +0000 http://fasri.net/?p=1981#comment-5771 I found this anecdote about option expense disclosure versus recognition very interesting. I wonder if it had anything to do with the back-dating scandals? Companies did not care about backdating as long as they thought (incorrectly) that it would only change disclosed amounts. I say incorrectly because backdating typically resulted in companies issuing in the money options, and those options would generate recognized compensation expense, even under the old stock-comp rules. We should ask Jim if has heard of this in other contexts or whether stock option accounting was just a lightening rod for awful accounting. I found this anecdote about option expense disclosure versus recognition very interesting. I wonder if it had anything to do with the back-dating scandals? Companies did not care about backdating as long as they thought (incorrectly) that it would only change disclosed amounts. I say incorrectly because backdating typically resulted in companies issuing in the money options, and those options would generate recognized compensation expense, even under the old stock-comp rules.

We should ask Jim if has heard of this in other contexts or whether stock option accounting was just a lightening rod for awful accounting.

]]> By: Jeffrey Hales http://fasri.net/index.php/2010/01/useful-insights-from-jim-leisenrings-roundtable-discussion-today/comment-page-1/#comment-5763 Jeffrey Hales Wed, 13 Jan 2010 01:21:21 +0000 http://fasri.net/?p=1981#comment-5763 I agree, Ray. This was one of the many interesting points of discussion in today's round table. There's at least one paper which seems to be right on point, and that's Libby, Nelson, & Hunton (2006). The full site is below, but here's the abstract (quoted in full, emphasis added): "We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock-compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. <em><strong>While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability.</strong></em>" Libby, Nelson, & Hunton (2006). "Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information", <em>Journal of Accounting Research</em> 44 (3): 533-560. I agree, Ray. This was one of the many interesting points of discussion in today’s round table.

There’s at least one paper which seems to be right on point, and that’s Libby, Nelson, & Hunton (2006). The full site is below, but here’s the abstract (quoted in full, emphasis added):

“We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock-compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability.”

Libby, Nelson, & Hunton (2006). “Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information”, Journal of Accounting Research 44 (3): 533-560.

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