Search

To aid accountants in making professional judgments and decisions regarding the accounting methods for transactions, we propose a classification system by integrating computational linguistics with semantic web technologies. We use constituency parsing to convert the classification rules in accounting standards into a machine-processable data structure: Resource Description Framework (RDF) triples. When an accounting classification question is input, the system converts it into an RDF triple, compares it with the established triples of different accounting methods, and subsequently identifies the most appropriate accounting method. We showcased and evaluated our proposed model using IFRS 9 and IAS 28. Our study provides both scholarly and practical applications by (1) incorporating computational linguistics and semantic web technologies to create an interpretable, process-traceable, and explainable classification system aligned with regulatory requirements; and (2) proving that the knowledge-based model can be established without substantial training data, enhancing its accessibility and utility for accounting professionals. Data Availability: Data are available from the authors upon request. [ABSTRACT FROM AUTHOR]

This study examines how bookkeeping was used to determine the financial results of the Datini Partnership in Pisa in the late 14th century. It highlights the difference between accounting procedures in a medieval partnership and accounting procedures in individual medieval enterprises and over time. Building upon previous studies, the analysis of archival documents and the construction of a model of the flow of information between accounts and account books reveals the details of the bookkeeping procedures in the firm and a complete picture of the calculation of the financial result of the partnership in 1394. The study found that the need for the partnership to identify profits resulted in a change in the bookkeeping method for inventory that improved the information quality when used in the process of identifying operating results and the overall financial result. JEL Classifications: M41; N83. [ABSTRACT FROM AUTHOR]

This project offers a unique learning experience for forensic accounting and/or audit students by first having them think like fraudsters by thinking through and "committing" fraud and then switching roles to an internal auditor tasked with uncovering their classmates' fraud schemes. Students are put in a situation where they feel pressure to and have the opportunity to commit fraud. Using the Hub of Analytics Education's Bibitor Company data, they are asked to think through possible fraud schemes, then eventually enact the most promising scheme. They are then asked to switch roles and become the internal auditor, where they use a software program of their choice to carry out forensic accounting procedures to uncover the fraud of a classmate. This case gives students a wide range of experiences and learning opportunities in a relatively short case with a small time commitment. Data Availability: Data are available from the Hub of Analytics Education. Access can be requested at https://www.hubae.org/. [ABSTRACT FROM AUTHOR]

We develop and validate an empirical measure of the informativeness of accounting assets in measuring firm-specific economic capital, an important determinant of both cash flows and intrinsic values. Our validation tests show that the asset informativeness measure is sensitive to differences in both accounting methods and implementation decisions at the firm level and corresponds to the way equity investors use the information in accounting assets. We find that accounting assets contain substantial information about firms' productive capacity (economic capital) and the information is not summarized in several earnings attributes often associated with earnings quality. JEL Classifications: M41; G14; G32. [ABSTRACT FROM AUTHOR]

Under the accrual accounting model, the timing role of accruals leads to a negative correlation between accruals and cash flows. Our study investigates the time-series trend of the timing role of accruals and finds a temporal decline in the magnitude of the correlation between accruals and cash flows in our sample of 51 countries over 1991–2019. This decline is primarily caused by increases in loss firms and operation volatility. Several accounting and economic factors, such as the use of accrual accounting, discretionary accruals, matching between revenues and expenses, IFRS adoption, and accounting connectedness, are positively associated with the strength of the accrual-cash flow relation and therefore decelerate the decline of the accrual timing role. Additional analysis suggests that the decline in accrual timing over time is present regardless of a country's economic growth, legal tradition or institutions, and the extent of the use of accrual accounting. JEL Classifications: M41. [ABSTRACT FROM AUTHOR]

This article presents information on an empirical study designed to provide additional evidence about changes in accounting methods. The primary responsibility for effecting accounting changes currently rests with the management of a reporting firm. This results from a structure of accounting authority which leans heavily upon "general acceptance" of accounting practices among statement issuers and which allows flexibility for managers to tell their story as they see it. As long as this framework prevails, the primary pressure point for effecting changes in reporting practices will continue to be the management of the reporting firm. One can define an innovation as an idea perceived as new by the individual even if, in fact, it is not new. Diffusion is the process by which adoption of the innovation spreads. In terms of primary emphasis, this view differs substantially from that reflected in the diffusion of innovation studies which suggest that accounting change behavior is related primarily to the characteristics of the innovative accounting methods themselves, rather than to the behavioral set of the changer. Accounting change behavior is a complex phenomenon which is probably influenced to some extent both by the behavioral set of potential changers and by the characteristics of the particular changes as well as by other factors.

In the 1930s, active industrialization of the economy in the USSR was impossible without using modern management techniques and accounting methods. To increase the manageability of industrial enterprises, attempts to introduce standard costing, imported from the United States, were undertaken. Previously called progressive and useful, after the policy of the Communist Party changed, standard costing was identified as a calculative technique that did not correspond to the goals of the socialist state. Soviet researchers formulated the principles of normative cost accounting, based on standard costing. This new version was greatly simplified and lost its analytical focus. The paper investigates the influence of state policy on the transformation of standard costing methodology during the construction of the Socialist economy. The authors contribute to previous literature by focusing on the periodic press, professional societies, and educational institutions being used as tools of political power to put pressure on accounting theory and practice. [ABSTRACT FROM AUTHOR]

We conduct an experiment to investigate whether the effects of an SAS No. 90-like quality assessment standard (QAS) on auditors' decision to accept a client-preferred accounting method is jointly moderated by the nature of advice from an audit firm's technical department and the strength of the client's justification. Results indicate that, in the absence of advice, the presence of QAS does not affect auditors' decision, regardless of client justification strength. However, in the presence of advice from the technical department, the presence of QAS significantly reduces auditors' propensity to accept the client-preferred method, but only when the advice explicitly recommends the use of the most appropriate method and the client's justification is strong. These findings demonstrate the complementary roles that professional standards and audit firms' technical departments play in enhancing the quality of auditors' decisions, and indicate that the nature of advice matters. [ABSTRACT FROM AUTHOR]

The Accounting Historians Journal has made significant improvements in the past year, including being indexed by SCOPUS in the category of "Arts and Humanities: History" and receiving an upgraded rating of "A" in four categories by ANVUR for Italy. The journal is currently accepting papers for a special section on accounting research methods and resources, with a focus on widening the doorway to accounting history and providing scholars with the latest techniques and resources for conducting historical research. The deadline for submission of manuscripts is March 31, 2025. For more information, readers can contact Senior Editor Bill Black or Guest Editor John Keyser. [Extracted from the article]

SYNOPSIS: After the financial crisis of the late 2000s, concern about delayed credit-loss recognition under the incurred-loss method prompted the FASB and the IASB to develop expected-loss methods. We review the development of these methods, including through comment-letter analysis. Initially, the FASB recommended immediate full recognition of expected losses, including at day one, and the IASB recommended spreading the recognition of initially expected losses across time. After unsuccessful attempts to converge based on proposals that partly reflected initial recommendations of each board, the boards eventually adopted different methods. We report that U.S. respondents largely opposed the FASB's final method, which required day-one recognition of all expected losses, and that non-U.S. respondents largely supported the IASB's final method, which required day-one recognition of 12-month expected losses. Day-one loss was controversial and impeded convergence. Our comment-letter analysis suggests that a day-one-loss-free more forward-looking incurred-loss method might provide a route to a more converged solution. JEL Classifications: G21; M41. [ABSTRACT FROM AUTHOR]

ABSTRACT: This paper examines the effect of the firm's capital structure on management's preference for alternative accounting standards. It is argued that an accounting standard which causes a reduction in reported earnings or equity and/or increases the volatility of reported earnings may put a firm into technical default on its loan agreements. Accordingly, it is hypothesized that highly leveraged firms would not favor such accounting standards. To test this hypothesis, the financial leverage of a sample of oil and gas producing firms which employ the full cost method of accounting for exploration expenses is compared with that of a sample of similar firms which use the successful efforts method. The results of this test are consistent with the hypothesized effect of the firm's capital structure on management's choice of accounting methods in that more highly leveraged firms tend to select the full cost method. [ABSTRACT FROM AUTHOR]

The use of textual analysis methods in the accounting profession has grown markedly over the past decade. Accounting professionals as well as business and accounting accreditors have called for accounting students to acquire an increased depth and breadth of knowledge of digital data analytics. This case enables accounting instructors, who have no previous background or experience in textual analysis, to introduce students to the use of textual analysis in accounting and allows students to conduct simple analyses using freely available software and documents retrieved from publicly available SEC filings. This case is designed for auditing, accounting information systems, fraud examination, and financial statement analysis courses, but it can be used in any accounting course in which the content of relevant documents is subject to examination. [ABSTRACT FROM AUTHOR]

Student evaluations and judgments of the accounting method used in the restatement of financial statements by a public company for channel stuffing are examined. In order to reduce any heuristics and biases that may have affected student judgments, a group brainstorming method was incorporated to supplement individual assessments made by the students. The case study was administered to 206 students in three student groups: non-degree, justice school, and business school students. Between-subjects' assessments of the accounting restatements show that justice school and business school students are more likely than non-degree students to disagree with the assessment that the restatement was appropriate. Similar results were obtained for accounting major students compared to non-accounting major students. Empirical evidence was also found for the presence of social identity bias between business school and justice school students' evaluation of sanctions. Implications on the use of behavioral techniques in accounting and ethics education are discussed. [ABSTRACT FROM AUTHOR]

The industrial revolution with its division of labor, its competition, and its profit motive demanded forms of measurement which could not be found in the conventional single-entry or simple double-entry bookkeeping system. Stockholders, workers, and management demanded reports of operations and financial information on a current basis which had not been available before then. Governmental accounting has a great many basic concepts found in industrial accounting, although some of the major principles are completely different. In industrial accounting the measurement of profits is the deciding factor for a great many of the basic principles. Matching of costs and revenues probably is considered the fundamental concept of industrial accounting. No such concept exists in governmental accounting. Usually, revenues and expenditures do not have a direct accounting relationship in governmental administration. Most governmental units have a great many operational activities. One set of combined records is not sufficient to analyze these activities. Governmental fund accounting for each of these various operational activities has no counterpart in industrial accounting.

SYNOPSIS: We introduce and apply machine transfer learning methods to analyze accounting disclosures. We use the examples of the new BERT language model and sentiment analysis of quarterly earnings disclosures to demonstrate the key transfer learning concepts of: (1) pre-training on generic "Big Data," (2) fine-tuning on small accounting datasets, and (3) using a language model that captures context rather than stand-alone words. Overall, we show that this new approach is easy to implement, uses widely available and low-cost computing resources, and has superior performance relative to existing textual analysis tools in accounting. We conclude with suggestions for opportunities to apply transfer learning to address important accounting research questions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G31; G32; M21; M41. [ABSTRACT FROM AUTHOR]

This paper examines the administrative and accounting reforms coordinated by Herman A. Metz around the turn of the 20th century in New York City. Reform efforts were motivated by deficiencies in administering New York City's finances, including a lack of internal control over monetary resources and operational activities, and opaque financial reports. The activities of Comptroller Metz, who collaborated with institutions such as the New York Bureau of Municipal Research, were paramount in initiating and implementing the administrative and accounting reforms in the city, which contributed to reform efforts across the country. Metz promoted the adoption of functional cost classifications for city departments, developed flowcharts for improved transaction processing, strengthened internal controls, and published the 1909 Manual of Accounting and Business Procedure of the City of New York, which laid the groundwork for transparent financial reports capable of providing vital information about the city's activities and subsidiary units. JEL Classifications: H72, M41, N91. Data Availability: Data are available from the public sources cited in the text. [ABSTRACT FROM AUTHOR]

SYNOPSIS: This paper evaluates whether alternative methods of subsequent accounting for goodwill result in accounting numbers that are significantly different from previous methods prescribed by standard setters. Financial statement users have identified significant flaws in both the amortization-and-impairment and impairment-only methods of subsequent accounting for goodwill. In this paper, we (1) summarize the current debate over subsequent accounting for goodwill, (2) empirically examine the decline in goodwill value under the amortization-and-impairment and impairment-only regimes, and (3) empirically investigate whether there are alternative methods that result in significantly different rates and patterns of decline in the value of goodwill (and thus have the potential to address the identified weaknesses of each method). We conclude that the proposed alternative methods provide markedly different patterns and periods over which goodwill is written off and, therefore, have the potential to provide a more faithful representation of the economics of goodwill. Data Availability: Data are available from the public sources cited in the text. [ABSTRACT FROM AUTHOR]

With the proliferation of data analytics in the field of accounting, educators need resources to enhance their curricula with analytics projects. This paper provides educators with a robust tool that generates large, unique revenue-cycle transaction data with certain realistic properties. The datasets can be used by educators to teach accounting-based data analytic procedures in accounting information systems, auditing, fraud, and data analytics classes. Additionally, multiple potential implementation opportunities for the datasets are proposed and a comprehensive example case is provided. Data Availability: The data generator can be accessed at: https://mplholt.shinyapps.io/GADGET/ [ABSTRACT FROM AUTHOR]

Recent advances in technology have increased the accessibility and ease in using eye-tracking as a research tool. These advances have the potential to benefit behavioral accounting researchers' understanding of the cognitive processes underlying individuals' judgments, decisions, and behaviors. However, despite its potential and wide use in other disciplines, few behavioral accounting studies use eye-tracking. The purpose of this paper is to familiarize accounting researchers with eye-tracking, including its advantages and limitations as a research tool. We start by providing an overview of eye-tracking and discussing essential terms and useful metrics, as well as the psychological constructs they proxy. We then summarize eye-tracking research across research domains, review accounting studies that use eye-tracking, and identify future research directions across accounting topics. Finally, we provide an instructional resource to guide those researchers interested in using eye-tracking, including important considerations at each stage of the study. JEL Classifications: M41; C91. [ABSTRACT FROM AUTHOR]

Prior studies report a decline or no change in acquirers’ profitability after a merger or business acquisition. Those studies, however, do not consider the downward impact on profitability that stems from use of the ‘‘purchase accounting’’ (and in later periods, ‘‘acquisition’’) method for business combinations. Drawing on financial statement data from both targets and acquirers, we estimate the effects of the application of purchase/acquisition method accounting rules on post-acquisition profitability. We find that recognition rules for acquired inventories, deferred revenues, in-process research and development (IPR&D), and depreciation and amortization expense resulting from writing acquired assets up to fair value vis-á-vis purchase/acquisition accounting methods are all important sources of downward pressure in post-acquisition profitability. We find that investors and analysts appear to recognize the effects of IPR&D in assessing post-acquisition profitability of the combined entity. The findings also suggest that investors and analysts do not appear to fully incorporate the accounting effects related to inventories, deferred revenues, and depreciation and amortization expense for post-acquisition profitability. [ABSTRACT FROM AUTHOR]

SUMMARY: Using a sample of public firm FCPA violations, we investigate how auditors respond to FCPA risk. We find that audit fees are higher for FCPA violators beginning in the violation period with an additional increase during the period in which regulatory investigations occur. Fees exhibit a greater sensitivity to payables and SG&A expenses for FCPA violators than for non-violators, suggesting that auditors adapt their procedures for accounts that have the highest likely FCPA risk. We also find evidence of a contagion effect with respect to FCPA risk and audit fees among non-violating peers of FCPA violators. Finally, we show that many of the relationships we document for FCPA violators exist among non-violating firms with elevated foreign bribery risk as well, but in magnitudes that are smaller than those of confirmed FCPA violators. [ABSTRACT FROM AUTHOR]

SYNOPSIS: We examine the contributions of CEOs and company-affiliated political action committees (PACs) to members of Congress who supported a moratorium on the Financial Accounting Standards Board's 2003 proposed standard to require firms to expense stock-based compensation at fair value. Our evidence—based on a sample of firms targeted by shareholder proposals to voluntarily expense employee stock options—indicates that CEOs and PACs had different motivations for lobbying on this policy issue. Specifically, we find that opposition to shareholder proposals varies positively with CEOs' contributions to the moratorium co-sponsors. However, opposition varies positively with PAC contributions to co-sponsors only when the targeted CEO contributes to the PAC. These results suggest that CEO lobbying relates more to executives' interests to preserve excessive pay, whereas PAC lobbying relates more to interests in preserving the level of earnings. [ABSTRACT FROM AUTHOR]

SYNOPSIS: We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study. [ABSTRACT FROM AUTHOR]

This study examines whether accounting quality changed for a diverse set of German firms that were required to switch accounting standards from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS) (MANDATORY sample). Additionally, we utilize a control sample of German firms that report using IFRS during the entire sample period (CONTROL sample). In both the MANDATORY and CONTROL samples, we find evidence of decreased conditional conservatism, increased value relevance of earnings, and smoother earnings surrounding the mandatory IFRS adoption period. Further, we find no evidence that these changes in accounting quality proxies are significantly different between the MANDATORY and CONTROL samples. While we do not draw causal inferences, results are consistent with the notion that other concurrent changes within Germany, such as economic shocks or the changes in the institutional environment (e.g., enforcement system) documented in Christensen, Hail, and Leuz (2013), are driving the observed changes in accounting quality, rather than the transition from U.S. GAAP to IFRS. [ABSTRACT FROM AUTHOR]

SUMMARY: Regulators, standard setters, and the accounting profession maintain that complexity in accounting standards is a significant issue. However, it is unclear what complexity means in the context of accounting standards. This study examines, via comment letter submissions, the accounting profession's engagement with complexity in accounting standards. We analyze comment letters submitted to the Financial Accounting Standards Board (FASB) over a 12-year period and find the profession characterizes complexity through three dimensions—multiplicity, diversity, and interrelatedness. We examine the Big 4's discourse on these dimensions and observe consistency between audit firms in their discourse on several features. For instance, we find that firms primarily oppose proposed FASB changes when firms perceive those changes to increase rather than decrease complexity. Additionally, firms perceive proposed changes to affect financial statement preparers more often than other stakeholders. However, the Big 4 do not hold universal opinions as to the root causes of complexity. At the cross-firm level, we find inconsistencies that imply heterogeneity in the Big 4's discourse on root causes. Such inconsistency may, in and of itself, construct accounting complexity. Ultimately, we maintain that the Big 4's engagement with accounting standards has consequences for how complexity is thought about and acted upon in accounting standards. [ABSTRACT FROM AUTHOR]

"Quality of Earnings" is a multidimensional concept. There are at least three distinct sets of decisions that affect the quality of earnings: decisions made by standard setters, choices made by management about which accounting methods should be chosen from a set of acceptable alternatives, and judgments and estimates made by management in order to implement the chosen alternatives. Earnings management is a concept related to, but clearly not synonymous with, earnings quality. Earnings management activities, broadly considered, can affect quality of earnings on each of the three dimensions. Actions of participants in the standard-setting process that affect the quality of the allowed accounting standards could be considered earnings management. Because of the diversity of concepts relating to quality of earnings and earnings management, addressing these concepts with students will likely be more difficult than addressing the "facts" of acceptable accounting standards. Quality of earnings and earnings management are important issues today because of the reliance of the capital markets on credible financial reporting.

Research documents significant management bias and opportunism around the discretionary inputs of audited complex estimates, including fair value measurements (FVMs), which raises questions about auditors' ability to test these estimates. We examine how the degree of quantification in client evidence and client control environment risk influence auditors' planned substantive testing of management's discretionary inputs to FVMs. We find that auditors allocate a lower proportion of effort to testing the subjective inputs to the fair value estimate when the degree of quantification in the client evidence and level of client risk are both high. Further, this tendency persists even after auditors receive a regulatory practice alert reminding them to focus more audit effort on testing fair value (FV) inputs that are susceptible to management bias, and despite the auditors increasing their overall audit effort. Qualitative analyses of the procedures auditors selected indicate that inapt attention to the degree of quantification in evidence is a potential root cause of the difficulty auditors encounter when testing complex estimates. Our results imply that in situations where both quantified and non-quantified data are important to the audit, there is the potential for management to manipulate the evidence they provide to auditors to distract auditors from testing the discretionary inputs to complex estimates that are susceptible to management opportunism. [ABSTRACT FROM AUTHOR]

Statistical decision models have been suggested as decision aids for accounting-related judgments as early as 1968, receiving continued attention in the financial analysis and auditing literatures through the 1980s. Yet the rate of adoption of such techniques has not matched their demonstrated success in research studies. The objective of this case is to provide a basis for students to think about the impact of (1) alternative accounting methods on the interpretation of financial ratios, (2) using financial ratios in statistical prediction models for financial decision-making, and (3) common objections to augmenting or replacing managers' judgments with statistical models. Altman's Z-score model and a cash-flow forecast are used to allow students to follow the effects of differences in financial reporting practices on an important financial judgment. This leads to a second part of the case wherein students discuss the pitfalls related to the simplistic use of decision aids and the resistance to the adoption of such techniques. The case study is designed primarily for use during the financial statement analysis segment of introductory financial accounting for MBAs or intermediate accounting and in financial statement analysis courses. This case study was adapted from publicly available documents. [ABSTRACT FROM AUTHOR]

This article presents information on the use of dynamic programming in analyzing two accounting methods for inventories and their potential effect on manager decisions. The objectives are to consider the viability of dynamic programming in considering alternative accounting methods and their potential decision effects and the potential decision effects of variable and absorption cost inventory methods. These objectives are met by developing quantitative statements of the alternative methods in a decision-making context, transforming these statements to a dynamic programming formulation, solving these mathematical programs via the computer and analyzing the results in view of past research in the area. Inventory valuation methodology alternatives were selected because of the longtime interest of accountants in utilizing and comparing these systems, the resulting literature made available by that interest, and most important the failure of that literature to disclose a general model capable of fully investigating the decision alternatives in either an analytic or empirical manner. The dynamic programming solution technique is employed as the only viable optimizing methodology in existence.

In this article, the author analyzes some of the unique accounting practices in foreign countries. A study of international accounting practices reveals an array of methods and procedures. Some nations still use the primitive accounting techniques which most industrialized nations considered outmoded fifty years ago; on the other hand, a number of nations now employ the most advanced accounting methods, supported by up-to-date laws. International accounting is important because it gives us the opportunity to study historical accounting methods supported. More than that, however, one can learn from the failures and successes of nations that have applied accounting methods different from ours to solve many of the same problems now facing people. The relative merits of flexibility as compared with uniformity of accounting principles, procedures and methods have been under much discussion in the United States. Although there is no space here for detailed investigation, it is interesting to note that there are still three nations in which complete or partial uniformity was or is still required by law.

This article discusses the relation between abandoned property and the rate base in the U.S. The cases dealing with abandoned property of a utility in obtaining a fair value fall within the following groups: Those cases that exclude abandoned property from the valuation; those cases that include the salvage value; those cases that include abandoned property at book value in the valuation; and those cases that consider the accounting methods of the utility before deciding whether to include or exclude the value of abandoned property or any portion thereof. The accounting methods used in charging off abandoned property by a utility depend upon the system of uniform accounting prescribed by the commission and by the decisions of the commission in interpreting such system when abandonment of property is presented as the point at issue. The cases indicate that in modem rate determination expenses are a larger factor in determining the ultimate charge to the consumer than the value of the property included in the rate base. Therefore, would it not be more simple to estimate the net earnings that a utility should have by subtrading the estimated expenses from the estimated income.

Environmental Management Accounting is rapidly evolving from an ethical side-issue into a core business concern. However, traditional management accounting methods and currently available tools provide only limited support. Resource-Event-Agent (REA) is a well-known business ontology that offers a rigorous axiomatic basis for accounting and auditing. The paper demonstrates that on the basis of an extension of REA, it is possible to develop integrated modeling solutions and tools for environmental management accounting and assurance. The focus is on physical resource flow modeling (internal and external). [ABSTRACT FROM AUTHOR]

Economic consequences theories (Watts and Zimmerman 1986) formulate ex ante, that costs of debt covenant violations are significant, while the limited empirical evidence focuses on ex post costs. The expected economic consequences of debt covenant violations are a function of the borrowers' and lenders' perceptions of these violations, although we know of no systematic analysis of the way borrowers and lenders perceive covenant violations and their related costs. We survey borrower and lender perceptions of: (a) the use of accounting information in debt covenants, (b) the economic consequences of debt covenant violations, and (c) the renegotiations following violation. Borrowers include Fortune 500 Companies with public and private debt outstanding. Lenders include the private placement department heads of the top 100 insurance companies and the largest 400 banks. We find debt-to-equity ratio and tangible net worth covenants to be the two covenants most likely to contribute to a technical default in both public and private debt. Furthermore, our evidence supports the assertion made by Smith and Warner (1979) that private debt agreements include more restrictive covenants, resulting in a higher likelihood of violations than in public debt. Ninety-three percent of responding lenders do not perceive violations of accounting-based debt covenants as serious. Both borrowers and lenders indicate a waiver of violations as the most likely consequence. The probability of waiver is perceived to be higher for private than for public debt. Our results also indicate that waivers are perceived to be costly. The cost of waivers is lower for private debt. In choosing accounting methods, borrowers rank debt covenants ahead of compensation contracts and the political environment, although most commonly used, industry convention, and level of reported income are ranked as the top three factors. [ABSTRACT FROM AUTHOR]

This article examines the need for stricter guidelines in reporting accounting changes in the United States. The issue of when to permit and how to account for changes in accounting principles involves one of the most basic of all concepts in accounting: that of consistency. The Financial Accounting Standards Board (FASB) has stated that interperiod consistency in the application of accounting methods helps users better understand and interpret financial accounting data and therefore makes the data more useful. As economic conditions and events change, it may be necessary to change accounting methods to preserve comparability. This is what the FASB had in mind when it stated that consistency in application of accounting methods is a necessary condition for comparability to exist, but consistent application of accounting principles cannot alone produce comparability. New evidence suggests that a firm is more likely to undertake a discretionary accounting change having a material positive earnings effect than one having a material negative earnings effect. In addition, current disclosure practices raise more questions about management's motivation than they answer and therefore detract from the credibility of the financial reporting process.

The majority of empirical regulatory accounting studies on financial reporting have focused on the ex post evaluation of accounting choices (see Lev [1979] and Barth [1991] among others) after an accounting method is adopted. There has not been much research involving the evaluation of accounting methods ex ante because, it is argued, newly mandated accounting information is usually available only some time after the Financial Accounting Standards Board (FASB) has required its release. In December 1990, after lengthy and controversial deliberations, the FASB issued SFAS No. 106, Employers' Accounting for Postretirement Benefits other than Pensions (PRB) replacing the current "pay as you go" practice with a combination of present-value and accrual method. Few of the information items mandated by SFAS No. 106 has yet been disclosed earlier. Consequently, this research uses the data that were available during the time of the FASB's deliberations as an example of ex ante empirical research concerning the standard-setting process. This study uses the PRB cash payments to retirees as disclosed by firms in their footnotes to the financial statements under SFAS No. 81 (FASB 1984) to investigate whether investors underestimated the full effect of the PRB liability on firms' values. Such underestimation would occur if investors are not aware of the high rate of increase in health care costs or when future benefits' payments to current employees are partially ignored. Additionally, this study investigates whether an estimate of the present value of the PRB liability is value-relevant to investors. Finally, an analysis is made of the range and sensitivity of economic parameters (discount rate and health care cost trend rate) used by investors to estimate the PRB obligation. The results indicate that, during the period 1984-1986, investors, on average, valued each dollar of PRB cash payment in any year as a dollar; i.e., they underestimated the full consequences of firms' promise to continue making such payments in the future. During the period 1987-1990, in contrast, investors translated each dollar of PRB cash payment to an average of $13.75 PRB obligation. Further, estimating the present value of the PRB obligation with publicly available data shows that the present-value measure is value-relevant to investors in addition to the cash payments disclosed by firms. [ABSTRACT FROM AUTHOR]

ABSTRACT: The measurement of divisional performance is still a subject of some debate. Most accounting researchers appear to favor measures which either include an interest charge on capital employed or relate divisional income to its capital asset base, but some dissenters exist. Various measures are used in practice. The use of particular accounting methods is hypothesized to be influenced by organizational characteristics, such as the extent to which decision making authority has been delegated to divisional managers. An empirical study of associations between 12 variables reflecting accounting methods and the nature of divisional autonomy was undertaken from questionnaire surveys of large companies in the United States (U.S.) and the United Kingdom (U.K.), and the relationship between accounting methods and the nature of divisional autonomy in the two countries is examined. Many similarities were observed in the accounting methods used by the responding companies in the U.S. and the U.K. to evaluate divisional performance, analyze divisional capital expenditure proposals, and control authorized divisional capital expenditures. The major difference between the countries was the use of post-completion audits by more than twice as many U.S. companies (84.2 percent) as U.K. companies (36.3 percent). In both countries, the expected associations between accounting methods and divisional autonomy were not found. Further research is needed to explore the dynamics of accounting systems in divisionalized companies, such as longitudinal studies of individual companies. [ABSTRACT FROM AUTHOR]

Immediately prior to going public, a medium-sized Hong Kong property development company switches from the completed contract to the percentage-of-completion revenue recognition method. Students are required to play "financial detective" and infer a reason for the switch. Using only the publicly available prospectus data, students reconstruct a proforma pre-issue balance sheet and "undo" the effects of the accounting switch. In so doing they discover a direct link between a large, pre-listing dividend and the switch. While the focus is on the dividend/method choice link, opportunities are provided for students to address, at a more general level, the motivations for changes in accounting methods. [ABSTRACT FROM AUTHOR]

Cost allocations present one of the most challenging topics instructors must teach in cost/managerial accounting courses. A primary reason for this is that students typically do not comprehend fully the behavioral implications inherent in situations which offer choices among different acceptable accounting methods. This article describes how an instructor might use a real-world-based exercise to bring to life the behavioral concerns inherent in cost allocation accounting choices. Using an actual company's joint cost data and classroom role-playing, students discover for themselves that their choice of an allocation method normally is contingent upon the company role they are asked to assume. For many of them, these choices are in sharp contrast to the normative choice they made prior to being assigned a specific company role and seeing the allocated dollar amounts. Brief discussions of cost allocations and role-playing are presented, suitable to introduce students and faculty, respectively, to the primary issues involved in both. In addition, the exercise materials are presented along with a recapitulation of our experience in using them in a fourth-year undergraduate cost accounting class. [ABSTRACT FROM AUTHOR]

Tools to assist auditors in making sound, complete, and consistent judgements have become increasingly important due to regulation, litigation, and the desire to increase audit effectiveness. Historically, expert systems have been problem specific and created from scratch. Such systems were challenging to update and had limited adaptability when applied to additional problem spaces. If an adaptable system is possible, then costs and time may be reduced related to production, testing, and implementation of quality audit tools. Increased availability of such tools could be a tremendous benefit to auditors. Using a design science research method, this paper describes the process used to create a fraud risk assessment audit tool by embedding audit rules into a generic expert system shell that is widely used in the medical field. The resulting decision and training aid can assist auditors in making fraud risk assessments. While prior research has addressed many components of the issue, the current system was created to address the current risk environment, and a variety of contexts of interest, as the risk environment changes. The system was evaluated by practicing auditors while completing a series of cases. Evaluation results support the benefits of the artifact when used to assist in fraud risk assessments. [ABSTRACT FROM AUTHOR]

Modern organizations are inundated with data, and they often struggle to organize it in an efficient and effective manner in order to get the most value from the data. The context of this case is, thus, situated in current business practice. Students are given large data files that were extracted from an enterprise system. They must use Microsoft Access and Excel to summarize and organize the data to create a dynamic profit and loss statement. Basic skills in Excel and general accounting knowledge are assumed, while Access knowledge is not assumed. The Teaching Notes provide solutions and are organized to allow instructors to provide minimal guidance or fully annotated directions. [ABSTRACT FROM AUTHOR]