Assessing Conformity with Generally Accepted Accounting Principles Using Expert Accounting Witness Evidence and the Conceptual Framework

To enhance understanding of the status of the Financial Accounting Standards Board's Conceptual Framework for Financial Reporting, we analyse important rules of evidence in United States (US) courts regarding the presentation of expert accounting witness testimony. We draw on this analysis to recommend the relocation of the Conceptual Framework in the US Generally Accepted Accounting Principles (GAAP) hierarchy. For empirical support, we explore how rules of evidence in the criminal trial in 2006 of Enron's two most senior executives affected assessment of whether Enron's financial reports conformed with the FASB's GAAP. We recommend that the FASB's Conceptual Framework should be included in authoritative literature as the uppermost authority, and that it be grounded closely in user needs and the ethical principles associated with meeting those needs. Further, we recommend that accounting expert witnesses adopt an overriding concern for objectivity and impartiality in assisting courts to understand complex accounting matters within the Conceptual Framework.     

Contracting in the shadow of the law

Economic models of contract typically assume that courts enforce obligations based on verifiable events (corresponding to the legal rule of specific performance). As a matter of law, this is not the case. This leaves open the question of optimal contract design given the available remedies used by the courts. This article shows that American standard form construction contracts can be viewed as an efficient mechanism for implementing building projects given existing legal rules. It is shown that a central feature of these contracts is the inclusion of governance covenants that shape the scope of authority and regulate the ex post bargaining power of parties. Our model also implies that the legal remedies of mistake, impossibility and the doctrine limiting damages for unforeseen events developed in the case of Hadley v. Baxendale are efficient solutions to the problem of implementing complex exchange.     

美国证券市场操纵认定标准研究

操纵在美国证券立法中没有明确的定义,执法和司法中以及学术界虽然都试图对操纵进行界定,但由于证券市场的复杂性,操纵行为的认定始终存在着很大困难.美国规范市场操纵行为的法律框架包括1933年证券法第17条,1934年证券交易法第9条、第10条以及证监会的相关规则.由于这些规定非常原则,对美国操纵行为认定标准的研究必须根据法院在不同时期所做出的判决进行.总体来说,经过一百多年的司法实践,美国的认定标准基本清晰,可供我国在修订证券法和执法、司法实践中参考.     

Shareholder access to manager‐biased courts and the monitoring/litigation trade‐off

Facilitating access to courts for outside shareholders is often viewed as a remedy against managerial opportunism. My model shows that, when courts are biased toward managers, reducing the barriers to shareholder suits can lower efficiency because it can lead to either excessive litigation or excessive monitoring of managers by shareholders. The latter effect implies that easy shareholder litigation may lead to a greater use of substitute mechanisms of corporate governance rather than more reliance on the judiciary. I also show that easy shareholder access to manager‐biased courts leads to the formation of more, rather than less, concentrated ownership structures.     

Accounting Standards and the Judiciary

The aim of this paper is to assess by means of a study of decided cases the evidential weight attached by the courts to Statements of Standard Accounting Practice (SSAPs) and the status of their provisions relative to statutory accounting rules. This issue is discussed with reference to the accounting requirements of both the Companies Act and the Taxes Act. The extent to which non-statutory accounting principles have acquired the status of binding precedents is also considered. The study reveals that SSAPs have considerable persuasive value as evidence of accounting practice but that expert evidence has not been rendered redundant. There is considerable evidence that the courts regard the determination of accounting principles as a question of fact rather than law where statutory provisions are not in point.     

Auditors' Liability, Vague Due Care, and Auditing Standards

This paper expands the set of previously considered liability rules to include a negligence liability rule with a vague specification of due care. Auditors who are negligent in conducting their audit are liable for losses that result from reliance on misstated financial statements. However, what constitutes negligence for auditors is not clearly specified in the law. Consequently, courts often resort to Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) as benchmarks for determining due care. A liability regime that consists of a vague negligence rule supports and amplifies the credibility of auditing standards. While auditing standards alleviate some of the vagueness that is inherent in the legal standard, they also form a lower bound on due care, since an audit of a quality that is lower than the quality that auditing standards require would be considered negligent. Thus, the vague specification of due care enables auditors to commit to audit quality as pronounced in auditing standards. This paper explores this link between professional standards and auditors' legal liability. It establishes that the commitment to auditing standards could not have been as credible as it is, if auditors' liability was determined based on the strict liability rule, or based on a negligence rule with a clearly specified due care, since under these two liability rules courts would not need to refer to auditing standards to establish fault. The paper also demonstrates that a legal regime where audit standards are used as a benchmark to evaluate negligence is not the same as a legal regime where due care is defined clearly. Therefore, previous studies that assumed a negligence regime with clear due care may have overstated the effort level that is induced by legal liability.     

Why Do Price Limits Exist in Stock Markets? A Manipulation‐Based Explanation

Numerous stock market regulators around the world impose daily price limits on individual stock price movements. We derive a simple model that shows that price limits may deter stock market manipulators. Based on our model's implications, we predict that regulators impose price limit rules for markets where the likelihood of manipulation is high. We present empirical evidence consistent with this hypothesis. Our study is the first to formally propose a manipulation‐based rationale for the existence of price limits in stock markets.     

AUDITOR'S SKILL,AUDITING STANDARDS,LITIGATION, AND AUDIT QUALITY

This paper introduces a model of the market for audit services in which auditors differ in their levels of skill, which may or may not be observable and capture differences in ability. The model captures the interplay amongst auditing standards, litigation, and auditors’ levels of skill, which determines auditors’ responses to auditing standards. The paper shows that the quality of audit supplied by any auditor is increasing in the auditor's level of skill regardless of whether or not auditors’ levels of skill are observable. An increase in the quality of audit prescribed by auditing standards is shown to induce some auditors endowed with low levels of skill to decrease the quality of their audits so that the average quality of audit and economic welfare may actually decline as auditing standards are raised. Auditors’ choices of audit quality are furthermore shown to be increasing in trial awards. Incentives for trials and out-of-court settlements are shown to depend crucially on whether or not auditors’ levels of skill are observable. Only when auditors’ levels of skill are unobservable do trials obtain with some probability. When auditors’ levels of skill are unobservable, the introduction of either restrictions on costs awarded by the courts or an imperfection in the courts’ technology is shown to lead the most skilled auditors to supply audits of a quality strictly exceeding the quality prescribed by the prevailing auditing standards. When the courts err often enough, the most skilled auditors having exercised due care furthermore make offers to settle when sued.     

Securitization and moral hazard: Evidence from credit score cutoff rules

A growing literature exploits credit score cutoff rules as a natural experiment to estimate the moral hazard effect of securitization on lender screening. However, these cutoff rules can be traced to underwriting guidelines for originators, not for securitizers. Moreover, loan-level data reveal that lenders change their screening at credit score cutoffs in the absence of changes in the probability of securitization. Credit score cutoff rules thus cannot be used to learn about the moral hazard effect of securitization on underwriting. By showing that this evidence has been misinterpreted, our analysis should move beliefs away from the conclusion that securitization led to lax screening.     

Tests of technical trading strategies in the emerging equity markets of Latin America and Asia

This study examines the potential profit of ten Variable Length Moving Average (VMA) technical trading rules in ten emerging equity markets in Latin America and Asia from January 1982 through April 1995. The average difference in buy − sell returns after trading costs for each rule and country are compared to a buy and hold strategy. Taiwan, Thailand and Mexico emerge as markets where technical trading strategies may be profitable. We find no strong evidence of profitability for the other markets. However, we find that 82 out of the 100 country–trading rule combinations tested in ten emerging markets, disregarding their statistical significance, correctly predict the direction of changes in the return series. These findings may provide investors with important asset allocation information.     

Cross-border insolvency law in India: Are the principles of comity of courts and inherent common law jurisdiction relevant?

Deliberations are in the final stages for enacting a cross-border insolvency law in India based on the UNCITRAL Model Law on Cross Border Insolvency 1997 (‘Model Law’). The cross-border insolvency regime in India will provide an avenue for recognising foreign insolvency proceedings in India. Although it is a matter of time before India adopts the Model Law, it is important to examine whether there remains an independent basis in addition to the Model Law for recognising and providing assistance to cross-border insolvency proceedings in India. This is crucial on account of the following reasons: first, the Model Law does not provide that it is the exclusive pathway for foreign creditors to seek remedies under domestic law. The Model Law, as reflected in Article 7, was intended by its drafters to be an additional gateway to those provided under local laws. The proposed Indian law in Article 5 of Draft Part Z of the Insolvency and Bankruptcy Code 2016 also does not depart expressly from this principle. Second, there may be instances where neither the ‘Centre of Main Interests’ nor an establishment of a corporate debtor is situated in India; therefore, assistance and cooperation in respect of such cross-border insolvency proceeding can only be based on the inherent common law jurisdiction, if available. Third, the cross-border insolvency framework in India will be premised on the requirement for reciprocity and, therefore, countries that do not meet the reciprocity requirement may find it beneficial if such an independent basis for recognition exists in India. This article argues that foreign representatives should be encouraged to explore the possibility of seeking assistance from the commercial courts in India under the common law principles governing cross-border insolvency and that the courts in India should be open to this possibility.     

Patent thickets,courts, and the market for innovation

We study how fragmentation of patent rights and the formation of the Court of Appeals for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the “pro‐patent shift” of the CAFC. We confirm these predictions empirically using a data set that covers patent suits in U.S. district courts during the period 1975–2000. Finally, we analyze how fragmentation affects total settlement delay, considering both the reduction in dispute duration and the increase in the number of patent negotiations.     

Legal enforcement,default and heterogeneity of project-financing contracts

This paper employs mechanism design to examine how imperfect legal enforcement impacts simultaneously the availability of credit for investment and interest rates. The analysis combines limited commitment, which encapsulates the idea that courts are imperfect, and asymmetric information about cash flows, which makes debt contracts optimal. Costly use of courts may be optimal, which differs from most limited commitment models, where punishments are merely threats, never actually applied in optimal arrangements. Paradoxically, liquidation by courts only happens in optimal arrangements when courts are imperfect. Credit constraints emerge, but even credit-constrained individuals do not borrow as much as they can. Consistent with stylized facts, wealthier individuals borrow at lower interest rates and run larger-scale enterprises. The reliability of courts has a positive effect on the scale of projects. However, its effect on interest rates is more subtle and depends on the degree of curvature of the production function.     

Using dimensions of moral intensity to predict ethical decision-making in accounting

The paper addresses the persistent problem of graphical communication in financial reporting. The lack of appropriate curriculum development for students' professional guidelines may arguably perpetuate poor practice. The multifaceted perceptual issues, strategic use and design issues involved in this visual medium for financial reporting are discussed. There are decision-making processes involved in using graphical displays. The paper presents a comprehensive set of guidelines along with practical insights for the effective use of graphical displays. It may serve as a critical (self)learning tool.     

Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

The European Union Draft Directive on a Preventive Restructuring Framework and Second Chance (the ‘Draft Directive’) provides rules for adopting reorganisation plans in order to avoid insolvency. The Draft Directive also provides rules on the related problem of interim financing. According to the Draft Directive, interim financing should be encouraged and not be made subject to claw back unless parties have committed fraud or acted in bad faith. The Draft Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Draft Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing reducing the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross‐collateralisation and aggressive loan‐to‐own strategies under the guise of interim financing. There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Draft Directive into a fully fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Draft Directive to cases of new security against new money necessary and used for the continuation of the business. Copyright © 2018 The Authors International Insolvency Review published by INSOL International and John Wiley & Sons Ltd.     

New development: The courts and multi-level governance—some comparative perspectives on the emerging jurisprudence of the UK Supreme Court

In federal systems the courts are accorded the important role of policing the boundaries of the constitutionally specified powers given to the legislature and the executive. The devolution statutes enacted by the UK parliament have created a semi-federal system, in which the courts increasingly have been called upon to adjudicate on whether sub-national legislative bodies have acted ultra vires. Following a comparative overview of the theory and practice of court adjudication in overseas systems of multi-level governance, the leading cases of the British Supreme Court and the House of Lords are considered. It is proposed that Britain—almost by default—has become a semi-federal court somewhat akin to the US Supreme Court and the German Bundesverfassungsgericht.     

The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks

Abstract

We develop market timing strategies and trading systems to test the intra-day predictive power of Japanese candlesticks at the 5-minute interval on the 30 constituents of the DJIA index. Around a third of the candlestick rules outperform the buy-and-hold strategy at the conservative Bonferroni level. After adjusting for trading costs, however, just a few rules remain profitable. When we correct for data snooping by applying the SSPA test on double-or-out market timing strategies, no single candlestick rule beats the buy-and-hold strategy after transaction costs. We also design fully automated trading systems by combining the best-performing candlestick rules. No evidence of out-performance is found after transaction costs. Although Japanese candlesticks can somewhat predict intra-day returns on large US caps, we show that such predictive power is too limited for active portfolio management to outperform the buy-and-hold strategy when luck, risk, and trading costs are correctly measured.     

Price volatility,international market links,and their implications for regulatory policies

Conclusions The October 1987 stock market crash spawned an abundance of research papers, as scholars attempted to explain what seemed at the time, and to some extent remains, an inexplicable event.Except for the period immediately around the crash, there is only meager evidence that international linkages across markets have become tighter over time. Yet the crash was worldwide in scope, and its similarity across countries was uncanny. Just on the face, this international similarity puts doubt to such explanations as particular macroeconomic events in one country, failure of a given country's market system, or simultaneous changes in underlying fundamentals (which were quite different across countries).Assigning the origination of the crash to one country cannot be entirely ruled out, however, because of the possibility of a non-fully revealing equilibrium contagion process of the type suggested by King and Wadhwani (1988). Such a process would allow a world-wide crash to begin by a particular news event or even by a market mistake in one country. Evidence in favor of this process is that international correlations of returns increased dramatically during the crash period. However, this increase is consistent with other explanations, such as transaction costs hindering international arbitrage except during periods of high volatility.Was the crash the bursting of a bubble? Some evidence seems to support this proposition: for example, in the majority of countries, the pre-crash period displayed significant serial dependence in stock returns, dependence that was definitely not present in the post-crash period. However, further work is necessary to ascertain whether this measured serial dependence is unusual relative to what one would have expected to find, even in a perfectly random process, by choosing a sample period that happened to culminate in a random peak. Ross (1987) shows that such ex post sample period selection will induce upward bias in estimates of serial dependence. Cross-country tests failed to detect this bias, but there are several ambiguities in the tests that will have to be resolved in future work.The crash is history. What implications, if any, does it have for regulatory policy? Is there evidence that popular regulations or rules would have mitigated the crash, or that they would decrease price volatility in general? There is very little evidence in favor of the efficacity of margin requirements, price limits, or transactions taxes. Despite a large number of empirical studies, no one has provided evidence that margin requirements have an impact on volatility. There has been at least one recent paper claiming the contrary, but a careful examination of its methods have uncovered enough problems to cast those results into doubt.As for price limits, there must be a very short-term impact on measured volatility, for the measured market price at a trading halt is likely to understate the direction of movement. Yet even for daily data, the cross-country evidence is slim that price limits reduce volatility, and there is no evidence at all that they work over periods as long as a week. In other words, trading halts caused by limits seem to have no effect on true volatility.Transaction taxes are inversely but insignificantly correlated with volatility across countries, and the effect is too questionable for taxes to be used with confidence as an effective policy instrument.     

Briys,Eric, and de Varenne,François,Insurance: From Underwriting to Derivatives: Asset Liability Management in Insurance Companies

Abstract

This paper uses economic principles to analyze alternative recognition schemes for end-of-period retirement plan liabilities; the candidates, using U.S. nomenclature, are the vested benefit obligation (VBO), the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO).

In competitive employment markets with rational contracting we are unable to justify projected costing (PBO-based) for typical pay-related defined benefit plans. Projected costing misrepresents the economic obligations incurred by shareholders and invites moral hazard.

Employee exposure to moral hazard may be minimized by exit costing (VBO-based) which recognizes only those benefits to which an exiting employee is entitled under the explicit benefit contract. But exit costing may not fully inform shareholders about the obligations that they have incurred under implicit contracts that extend beyond the plan document. Accrued costing (represented in the United States by the ABO) may better measure shareholders’ economic commitments.

Small differences between the ABO and the VBO may measure a human capital asset incented by delayed vesting and benefit eligibility. Large differences are a marker for frail benefit design and potential moral hazard.

Moral hazard options exercised by employers disappoint employees and may lead to unwelcome ex-post results-oriented repairs imposed by legislators, regulators and courts.