Accounting information and municipal bond net interest cost: An empirical evaluation

The objective of this study was to test the association between the surplus/deficit of selected Minnesota municipalities and the net interest cost of the general obligation bonds issued by these municipalities. This objective was accomplished by employing a pooled time-series design.A two-way analysis of variance was used to determine if there was a significant difference in the effect of net interest cost between positive and negative forecast errors. The ANOVA results of both tests indicate that the surplus/deficit is not correlated with increases/ decreases in the net interest cost of the bonds issued by a municipality. The results were unaffected by the exclusion of bond ratings as an independent variable.     

Pension ratios as “correlates” of municipal pension underfunding

Unlike the corporate sector, detailed estimates of unfunded pension liabilities for most local governments are not available. Thus, prior research on the association between unfunded pension liabilities and municipal creditor decisions (Copeland and Ingram 1983; Marks and Raman 1985) has implicitly assumed that certain pension ratios are good surrogates for municipal pension underfunding. In this paper, we rely on a theoretical model by Ehrenberg (1980) to test empirically the appropriateness of pension ratios as “correlates” of municipal pension underfunding. These ratios were found to be correlated with pension underfunding, although they accounted for only about 30 percent of the variance in the underfunding variable.     

A fundamental flaw of debt limitations for state and local governments

Debt limitations, though adopted with the noblest of intentions, have failed to reduce governmental borrowing because of the ease with which they can be circumvented. This article identifies a critical deficiency of debt limitations: the difficulty of developing a definition of debt that is broad enough to prevent governments from using subterfuges to increase borrowing capacity and yet is sufficiently narrow to enable them to carry out their assigned functions. It reviews the history of debt limitations and the judicial interpretations of them. It shows how courts have analyzed leases and other executory contracts that create debts so as to permit form to take precedence over economic substance.     

The importance of state accounting practices for creditor decisions

This paper examines the association between state government accounting practices and creditor decisions. Creditor decisions were surrogated by yield premiums and variances of the premiums on general obligation debt securities. Accounting practices were summarized from the Council of State Governments Survey. In addition to these practices, accounting ratios and bond ratings were included as independent variables in regression models. The results demonstrated that accounting practices were not directly associated with the bond risk and return measures but may have been indirectly related as a result of their effect on bond ratings.     

State regulation of accounting practices and municipal borrowing costs

This article examines the association between state regulation of accounting practices and municipal borrowing costs. The results demonstrate that stringent accounting regulations do have an effect on borrowing costs after abstracting the effects of other explanatory variables. The direction of the observed effect is difficult to assess due to presence of multicollinearity in the model. However, lower borrowing costs are suggested by the analysis.     

Class-action privileges and contingent legal fees: Investor and lawyer incentives to litigate and the effect on audit quality

The Cohen Commission recognized the importance of litigation incentives and recommended that research based upon an economic approach be conducted into the effects that litigation incentives can have on the auditing profession. By extending Simon (1981), an economic analysis of an auditing environment is presented wherein audit firms issue reports, representative investors make decisions based upon audit reports, and lawyers (as well as representative investors) play an active role in determining whether or not to initiate litigation against audit firms. The influence that alternative litigation privileges (i.e., class-action privileges with contingent legal fees and no class-action privileges with fixed legal fees) have on representative investor and lawyer incentives to litigate and on the equilibrium characteristics of this audit market are analyzed.     

Discovering an accountant's tax accrual workpapers: Should auditors join the priveleged few?

This article explores the legal controversy over the limits of the Internal Revenue Service's (IRS) power to summons documents in an investigation of corporate income tax liability. The controversy focuses upon IRS access to an independent auditor's tax accrual workpapers. Required by federal securities laws, these workpapers record the accountant's predictions of the likelihood of successful IRS challenges to aggressive corporate tax positions. Routine IRS access to the tax accrual workpapers would stifle management's candid disclosure of questionable tax positions to the auditors. This article defines the limits of an auditor's work-product privilege premised on the social need for full disclosure of a company's contingent tax liabilities to assure the setting aside of adequate reserves to cover those contingencies. While the privilege should serve to protect those investing in American businesses, its primary purpose is to maintain a public trust in the integrity of certified financial statements.     

Utilization of SFAS No. 14 disclosures in assessing operating risk

This paper examines the usefulness of segmental disclosures required by SFAS No. 14 in assessing the operating risk of the firm. It is shown that the segmental asset data required by SFAS No. 14 is theoretically linked to an assessment of operating risk. In addition, an empirical investigation is conducted to examine whether this new disclosure was material enough to cause a reassessment by market participants of the operating risk of the affected firms. Segmental disclosure policy implications of the findings of this study are also discussed.     

The economic rationale for the nature and extent of corporate financial disclosure regulation: A critical assessment

The regulatory framework for corporate financial disclosure has been the subject of a large literature, most of which has focused on the economic rationale for disclosure requirements. This extant economic analysis has not led to any definitive conclusions regarding the necessity for disclosure regulation nor has it provided public policy guidance as to the nature and extent of required corporate financial disclosure. It is evident that broader-based analysis and research incorporating relevant social and political (as well as economic) factors is necessary to gauge appropriate public policy for financial information disclosure.     

The investment tax credit in capital replacement: A simulation

Congressional intent in passing various versions of the investment tax credit has been to stimulate increased investment in capital goods. This paper examines the impact of ITC on the replacement component of investment from the standpoint of the individual firm. The simulations run assume that the firm incorporates correctly all tax effects, to arrive at the optimal replacement decision. The results imply that from the micro standpoint, the law does not necessarily generate the intended behavior. As implications for policy, further research in this area should focus on individual firm action rather than on macro models.     

Integrating human resource accounting into the public policy process: An illustration

Traditionally, public policy formulation has been accomplished through political compromise. In recent years, growing public pressure for austerity and accountability in the use of public resources has made the analytical approach to policy formulation and evaluation increasingly important. This exploratory study illustrates how the human resource accounting model can contribute to an objective and systematic evaluation of a complex public policy issue. The study considers the attrition of commissioned officers from the U.S. Army as a loss of human resources and examines the relative investment in human resources from two primary sources of commissioning. This type of systematic analysis provides valuable information for the policy maker in making logical decisions on human resource development.     

Economic,political, and civil indicators and reporting and disclosure adequacy: Empirical investigation

This study examined the international differences in reporting and disclosure adequacy and relates these differences to the economic and political environment of each country. The main hypothesis was that the reporting and disclosure adequacy is likely to differ with differences in the political, economic and demographic environment from different countries. While the results were not significant the paper indicates the need for research in a relatively unexplored area.     

A look at the public policy conflict regarding the discovery of accountants' tax accrual workpapers

This article focuses on the conflict in public policy between the need to provide the investing public with accurate information with regard to corporate financial statements and the need to provide the IRS with the necessary tools in order to assure corporate compliance with the tax laws of the country. The conflict arises because of the contention of the IRS that it is entitled to have access to an independent auditor's tax accrual workpapers on the one hand, and the contention by CPAs that such access will prevent adequate disclosure to the independent auditor. The article examines the policy questions on both sides of the issue and concludes that regardless of any decision by the Supreme Court in a pendingcase, Congress should pass legislation to resolve the conflict and clearly identify the scope of any previlage accorded with regard to tax accrual workpapers.     

Stochastic and nonstochastic determinants of changes in client-industry concentrations for large public-accounting firms

Market-concentration ratios of audits of large publicly held firms have been found to be high by Zeff and Fossum (1967), Rhode et al. (1974), and Campbell (1981). Both stochastic (random) forces and nonstochastic (deterministic) forces may cause increased concentration ratios. To determine the affects of stochastic forces on audit-concentration ratios, a computer simulation was developed using Gibrat's (1931) theorem. The results of the simulation indicate that the volatility of the concentration ratios may be affected by nonstochastic forces as well as by stochastic forces. The nonstochastic forces are described and discussed vis-á-vis the public-accounting profession's competitive environment.