Inventories,credit transactions,and the marginal effective tax rate

It is observed that marginal effective tax rates (METR), as conventionally calculated, can only consider working capital requirements to a limited extent. A formula is derived to incorporate inventory requirements into the calculation and, via a numerical example, it is shown that such an incorporation can radically alter METRs from those conventionally calculated. The analysis is extended to credit transactions without affecting the above conclusion. Thus, if METRs are to be used as a means of evaluating the effects of tax policy on the incentive to invest, working capital requirements need to be explicitly allowed for.     

Accounting and budgeting systems: The issue of congruency

The importance of designing an accounting system that is congruent with an organization's budgeting system has been noted in the literature. Unfortunately, in many government organization it is common to find incompatible budgeting and accounting systems. The purpose of this study is to investigate whether gearing the accounting information system to a zero-base budgeting system increases the perceived usefulness of the budgeting process. This issue is examined under conditions of both scare and abundant resources. Based on an empirical study, it is shown that the usefulness of a budgeting system to budget recipients may indeed be dependent on the accounting information system, conditioned on the availability of resources. Given the relationship between budgeting and public policy, implications of the study for the public policy making process are discussed.     

Failure prediction: Sensitivity of classification accuracy to alternative statistical methods and variable sets

The purpose of this study was to assess the sensitivity of the prediction of business failure to the use of different variable sets and different statistical methods. This objective was accomplished by comparing the performance of failure prediction models using four alternative variable sets on firms which failed from 1966–1975. The four sets of variables were those used by Altman (1968), Deakin (1972), Blum (1974), and Ohlson (1980). A linear discriminant model, a quadratic discriminant model, and a logit model were developed for each of the four variable sets. For a given variable sets, the linear and logit models had comparable misclassification rates and performed at least as well as the quadratic models. Using linear discriminant analysis or logit analysis, all four variable sets performed comparably.     

Systematic risk and the theory of the firm: A reexamination

A recent microeconomic model of the determinants of equity betas (Subrahmanyam and Thomadakis 1980) is generalized by including risky human capital in the market portfolio and allowing a general covariance structure between the model's sources of uncertainty. This provides an explanation of the ambiguous effect of operating leverage on beta by viewing human capital and equity contributors as risk sharers in the firm's output risk. This explanation may help to clarify the apparent conflict with the previous literature. The relationship between systematic risk and monopoly power is rederived and shown to depend upon a plausible condition on the correlation between wage rate and price uncertainty. Finally, the public policy implications of this analysis are presented.     

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.     

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.     

Tax reform: Analyzing a comprehensive income tax

This paper includes an analysis of the general costs and benefits associated with the introduction of a comprehensive income tax. The introduction of a comprehensive income tax may result in such benefits as simplicity, horizontal equity, and neutrality that may, in turn, be offset by the costs in vertical equity, implementation losses, and efficiency losses. The solution to the question of the desirability of the comprehensive income tax may turn upon the nature of these costs and benefits as well as the philosophy of tax reform that is adopted.     

Auditor independence and nonaudit services: Director views and their policy implications

The external auditor's role and relationship with an audit client are not purely matters of private concern between the two parties. The rationale for the external auditor's work—indeed a primary justification for the existence of the public accounting profession—arises from the need for reliable financial information in order for our economy to operate smoothly. Thus the auditor, in certifying financial statements, performs a quasi-public function. The necessary relationship between auditor and client is one of complete independence. In recent years public policymakers including the U.S. Congress have questioned the propriety of auditors' performing nonaudit services for their clients. This paper reports the results of an empirical study of U.S. corporate directors who considered the propriety of allowing a firm's auditors to perform various nonaudit service engagements.The results show, especially in the case of systems design, increasing director concern and a lack of overall consensus as nonaudit services approach 40 percent of the firm's audit fee. Policy implications of the findings are considered.     

Disclosure regulation and public policy a sociohistorical reappraisal

This study questions contemporary precepts concerning the SEC's disclosure system as being both ahistorical and asocial. The authors suggest that disclosure was but one of several modes for resolving the contradiction between an individualistic, market-based public philosophy and increasing economic concentration and centralization. When understood in these terms, the securities acts are seen not as fundamental changes in public policy but as part of an ongoing attempt to maintain an ideological, social, and economic status quo.     

The role of generally accepted reporting methods in the public sector: An empirical test

This study explores the role of standard or generally accepted accounting and reporting methods in the public sector. It differs from prior studies that address public sector accounting issues in that it considers more directly how the political process influences decisions to report financial information. The primary contention is that adopting standard reporting methods reduces costs to public officials that arise from factors that characterize political markets. Empirical evidence based on data from the state governments is consistent with this contention, but theoretical and methodological problems restrict our ability to ascertain which specific factors are relevant.     

The effects of tax provisions on long-run investment prospects

This paper examines the implications of the tax system on the long-run investment prospects for several classes of securities, including short-term debt, long-term debt, and equity. Combining apparently reasonable assumptions with tax provisions that are similar to those of the prevailing federal system, we indicate that equity may be the only investment medium that promises a positive real, after-tax return to a taxable investor.By modifying selected tax provisions that relate to investment activities, such that the recognition of unrealized appreciation is deferred and the investment itself leads to an immediate deduction, substantially different long-run implications are produced. In particular, under reasonable assumptions all classes of investments (with the possible exception of Treasury bills) appear to promise a positive real, after-tax return     

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.