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.

Many accountants have only passing familiarity with Emissions Trading Schemes.  As the FASB project page describes,

Emission trading schemes to reduce greenhouse gas emissions have expanded rapidly in recent years at the state, national, and international levels. Cap and trade schemes are a common emission allowance approach. In a cap and trade scheme, a government (or government agency) typically issues tradable rights (allowances) to emit to participating entities. Participants may buy and sell allowances with others, and liquid markets have developed to facilitate this trading activity. At the end of a compliance period, participants are required to deliver allowances equal to their actual emissions, and they may be required pay a fine or suffer other penalties for emissions in excess of remitted allowances.

In a typical U.S. cap and trade scheme, each individual emissions allowance has a vintage year designation, indicating the first year an allowance may be used. Unused allowances may be carried forward to future years. Allowances with the same vintage year designation are fungible and may be remitted by any party to cover its emissions from any source. In these schemes, vintage year swaps among participants are common, as government agencies typically issue allowances for multiple years at a time. For example, a entity may expect to install equipment to reduce its emissions in 2009 but may need additional allowances in 2008 to cover a projected shortfall. That entity might exchange some of its allowances with a 2010 vintage year designation (when it expects to have reduced emissions) for allowances with a 2008 designation with another entity that has an opposite exposure.

You might know that emissions trading schemes are a hot-button political topic.  (The US House of Representatives has passed a bill providing for a cap-and-trade program, but the Senate has not.  You can see previous FASRI blog post and discussion on the matter here.)  But such schemes also present vexing accounting challenges.  A particular challenge arises when a firm receives an allowance free of charge.  Does this give the firm an asset?  If so, for what amount?  If that amount is not zero, what is the other side of the entry?  A gain?  Or a liability for pollution that has not yet occurred (and is therefore hard to construe as a liability).

Naomi Soderstrom, along with Derek Johnston and Stephan Sefcik, has recently published a paper on the value implications of emissions allowances:

This paper examines the valuation implications of greenhouse gas (GHG) emissions allowances. We posit that the value of a firm’s bank of emission allowances has two components that are likely to be positively valued by the capital market: (1) an asset value component; and (2) a real option value component. Since the necessary data to examine this research hypothesis in the setting of GHG emission allowances is not yet available, we test our conjecture by examining the value relevance of sulfur dioxide (SO2) emission allowances held by US electric utilities. Empirical results reveal that the capital market assigns a positive price to a firm’s bank of SO2 emission allowances, consistent with the argument that emission allowances have, at least, an asset value component that is assigned a positive price by the market. We also find weak evidence
consistent with the market assigning a real option value to the allowance banks.

Naomi will be presenting her research results, but more importantly will be introducing us to the relatively unknown but important emissions trading markets, and indicating directions for future work.  Shayne will weigh in with some standard setting insights and updates.

Details on attending are available here, and of course you can always watch right on the web, at our LIVE page.

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

Richard Scrushy … the CEO of Health South.   His tactics with the Board of Directors were shocking!  Doesn’t everybody carry a gun in their briefcase?  (Okay maybe in Texas, yes, where I live .. and heck, where I live, you can even steal a plane and fly it into a local IRS office.)

Anybody who does earnings management, auditing, corporate governance, internal auditing, etc. research, you will want to watch the archived copy.  Very interesting.

Ms. Born tried to proceed with her attempts to introduce regulation and was shut down by Congress at the urging of Greenspan, Rubin, Summers, and Levitt.  (In the program, Levitt states clearly that he was wrong about Brooksley Born and wished he had supported her at that time in 1998.  They also showed Greenspan in testimony to Congress in the last year or so admitting that he was wrong about markets being self-regulating.)

Here’s a link to the PBS/FrontLine page about this episode:

http://www.pbs.org/wgbh/pages/frontline/warning/