• Most of JAE issue 31 (Sept 2001). Contains lit reviews of various areas of financial accounting research, along with some ideas of how different research areas fit together.
• “Experimental research in financial accounting” by Libby, Bloomfield, and Nelson, AOS Vol 27:8 (Nov 2002).
• “Empirical Accounting Research Design for Ph. D. Students” by Bill Kinney, TAR Vol 61:2 (Apr 1986).
• Ball and Brown 1968 (JAR)
• Beaver 1968 (JAR)

Your thoughts?

The web is a abuzz with the release of the Lehman Brothers post-mortem by the Bankruptcy Examiner yesterday.  I wasn’t aware of potential accounting gimmicks:

 http://www.economist.com/business-finance/displaystory.cfm?story_id=15695099

 Many are starting to question EY’s role.  I offer no judgments, but thought some might find it interesting.

Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent’s cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent’s peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents’ sensitivities to social norms are unobservable.

The result is that if the principal knows the prevailing social norm and how conforming to the norm either enhances or detracts from the performance of the agent, then the principal will alter the contract in light of the norms. 

I wonder if extending the notion of a norm to an investor’s utility function might help explain market bubbles and credit crunches?  I guess this is the idea behind herding, but by calling it complying with a norm, the investor sounds less irrational.

I also wonder if the strength of norms affects whether a country or region adopts financial reporting guidance that is more or less rules based?  If norms push people to comply with the spirit of the professional guidance, then a principles based system might work well.  If norms reinforce a compliance mentality (e.g., income tax preparation in the U.S.), then rules arise endogenously. 

FYI, the Fischer and Huddart paper won the University of Oklahoma’s Glen McLaughlin Prize for Research in Accounting Ethics in 2005.  The winning paper for 2010 was just announced: “Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get it Wrong?” by Prawitt Sharp, and Wood.  Click here for more information on the McLaughlin Prize

When teaching my students about accruing for vacation pay, I observed that it seemed that if we knew for certain that employees were likely to get a raise between the date they earned their vacation and the date that they took it, we should probably measure the expense and liability at the amount we actually expected to spend when the vacation days are used.  The textbook approach, which I presume to be GAAP as well as typical practice, ignores this and records the accrual at the current wage rate.

As we discussed the measurement of pension obligations yesterday in class, I pointed out that the rules governing pension accounting (ASC 715-30-25) dictate that measurement of the obligation must include the effects of future expected salary increases (that is, the projected benefit obligation is the measure of choice to be used in recognition of the net pension asset or liability in the balance sheet).

I thought that this revealed an interesting contrast in thinking about the measurement of liabilities.  On the one hand, one can argue that the likelihood of future salary increases in an economy with non-negative consumer price changes is extremely high; accordingly, in thinking about the ultimate settlement of a liability that is linked to salary levels, it makes sense to include and forecast such increases.  On the other hand, one can argue that the firm does not have a present obligation for the component of future pension or vacation payments that is based on salary increases that have not yet happened — essentially questioning whether that part of the liability meets the definition of a liability.

I’d be interested in others’ thoughts about this.  For example, could one say that compensated employee absence liabilities are understated and pension obligations are overstated?  Do financial statement users see it this way?

Join us Tuesday, March 9 at 4pm when Scott Dyreng of Duke University discusses his recent research on the cost of violating covenants on private debt.  The key message of the paper is that firms are willing to pay extra taxes in order to avoid debt covenant violations.  The study uses a somewhat unfamiliar data set (Loan Pricing Corporation’s DealScan database), and has an interesting policy twist — it applies to private firms as well as public firms.  This is timely given the recent announcement of a Blue Ribbon Panel to address accounting standards for private companies. (Congratulations to Teri Yohn, who is a member of the panel!)

FASRI Round Tables tend to be rather informal and broad affairs, so you can expect us to talk about some of Scott’s other research.  I’m hoping we will also find time to talk about a more unusual paper of Scott’s, written with Bill Mayew and Christopher Williams on religious norms and financial reporting.

From the abstract:

Social norms have been shown to influence economic decisions in a variety of contexts. We investigate how social norms stemming from religious adherence surrounding a firm’s headquarters affect financial reporting choices. We hypothesize and find that religious social norms are negatively associated with financial reporting aggressiveness. Relative to counties exhibiting low levels of religious adherence, firms operating in counties with high levels of religious adherence (1) are less likely to meet or beat analyst forecasted quarterly earnings, (2) have higher accrual quality, (3) have lower risk of fraudulent accounting, and (4) are less likely to restate their financial statements. Corroborating these results, we find that capital market participants respond to reported good news earnings in manor consistent with investor acknowledgement of the role of religious social norms curbing aggressive financial reporting. Finally, we extend our inferences to tax planning and find that religious social norms are also inversely associated with tax avoidance, where cash effective tax rates and tax haven usage act as proxies.

Please join us for what promises to be a very interesting conversation. Remember that you can attend Round Table Discussions in Second Life (instructions here) or on the web at our LIVE page.

Join us Tuesday, March 9 at 4pm when Scott Dyreng of Duke University discusses his recent research on the cost of violating covenants on private debt.  The key message of the paper is that firms are willing to pay extra taxes in order to avoid debt covenant violations.  The study uses a somewhat unfamiliar data set (Loan Pricing Corporation’s DealScan database), and has an interesting policy twist — it applies to private firms as well as public firms.  This is timely given the recent announcement of a Blue Ribbon Panel to address accounting standards for private companies. ( Congratulations to Teri Yohn, who is a member of the panel!)

FASRI Roundtables tend to be rather informal and broad affairs, so you can expect us to talk about some of Scott’s other research.  I’m hoping we will also find time to talk about a more unusual paper of Scott’s, written with Bill Mayew and Christopher Williams on religious norms and financial reporting. From the abstract:

Social norms have been shown to influence economic decisions in a variety of contexts. We investigate how social norms stemming from religious adherence surrounding a firm’s headquarters affect financial reporting choices. We hypothesize and find that religious social norms are negatively associated with financial reporting aggressiveness. Relative to counties exhibiting low levels of religious adherence, firms operating in counties with high levels of religious adherence (1) are less likely to meet or beat analyst forecasted quarterly earnings, (2) have higher accrual quality, (3) have lower risk of fraudulent accounting, and (4) are less likely to restate their financial statements. Corroborating these results, we find that capital market participants respond to reported good news earnings in manor consistent with investor acknowledgement of the role of religious social norms curbing aggressive financial reporting. Finally, we extend our inferences to tax planning and find that religious social norms are also inversely associated with tax avoidance, where cash effective tax rates and tax haven usage act as proxies.

Please join us for what promises to be a very interesting conversation.  Details on participating are here.

There are several major changes taking place at the same time. I list three below:

1. Switch from two case-based simulations to six or seven task-based simulations.

2. Testing of the organization and use of the FASB Codification.

3. Testing of IFRS. According to the first article, published by the Utah Association of CPA’s:

The decision to add IFRS to the new CPA exam was essential since the U.S. Securities and Exchange Commission (SEC) is preparing to adopt IFRS as the national financial reporting standard. It is the responsibility of every CPA to be proficient in this new, authoritative literature.

Whether or not the SEC and IASB are “gung ho” on convergence, potential CPA’s will be tested on it.

I use segments of the House testimony in my class to provide a vivid example of political pressure in standard setting.  I think the Weil article will add a nice follow up to this example.
By the way, all of this is related to the Roundtable for tomorrow on the predictivability of fair value.

To view the archived video and a brief summary of the event, click here.

Additional information about Jim and this Round Table Event can be found here.

Follow-up comments from this event can be found here.

Mark Evans of Indiana University will lead our next roundtable discussion, Wednesday March 3rd, 11am ET).  Here is the abstract from his recent paper, written with Leslie Hodder and Pat Hopkins, exploring fair value in commercial banks:

For a sample of commercial banks during 1994–2008, we find that accumulated fair value adjustments for investment securities are positively associated with realized income from investment securities in the following period, suggesting that fair values have predictive ability for future realized income. We also find that our measure of predictive ability appears to be a reasonable proxy for reliability because it varies with traditional proxies for the reliability of reported fair values of investment securities. Furthermore, we provide evidence that the relative ability of fair values to predict reported income is a factor that strengthens the relationship between fair values and the market value of equity for commercial banks. Our results also indicate that market-wide credit risk affects the pricing of fair value information in banks’ market value of equity, suggesting that the value relevance of fair value information is partially dependent on market- or industry-wide factors. Finally, in contrast to prior research, we find that both amortized cost and fair value play important roles in predictive ability and value relevance.

Join us for what should be an interesting conversation.  You can watch on the web here, and get more details on attending in Second Life here.

* Update: you can view  the video of this Round Table event here.

I found an article by WEB CPA about this morning’s announcement, as well as a dig by Tom Selling on his post. Given the different levels of enthusiasm for IFRS that exist in practice (with big accounting firms being strongly supportive and almost everyone else wondering who besides the big accounting firms support this move toward IFRS), I thought it would be useful to post both of these articles. I guess we still have another year or so before the SEC will make any definitive decisions. And a lot of that will depend on how effective the IASB and FASB are in in their convergence efforts.

Over the next few weeks I’ll be posting videos of previous Round Table discussions. We hope this will make the archived discussions more accessible to readers.

We welcome any comments or follow-up questions regarding today’s Round Table topic.

Click here for details on the session.

* UPDATE: The archived video of this Round Table can be found here.