Using the standard-setting process to demystify the concepts statements: The case of SFAS 76

To illustrate the accounting standard-setting process and how conceptual consistency is lost during the negotiations involved in that process, Statement of Financial Accounting Standards (SFAS) 76 Extinguishment of Debt is used as a case study. Excerpts from actual “Comment Letters” sent to the FASB are used to highlight issues and stimulate discussion. Classroom results, wherein SFAS 76 was used, are summarized. While SFAS 76 as a case study was found to be an excellent vehicle for illustrating the problems faced by standard-setters and the role of the Conceptual Framework, any pronouncement could be used. The SFAS 76 case takes 20 or more minutes to use. However, the case can be substituted for some of the lecture on standard-setting so it does not have to expand the time needed to cover the topic.     

The FASB exposure draft on accounting for business combinations and intangible assets: an instructional assignment

Accounting standards are constantly evolving to meet the needs of a rapidly changing business environment and changes in accounting theory. Accounting students need to be familiar with the content of Exposure Drafts, since these documents reflect the Financial Accounting Standards Board's (FASB) position on current financial reporting issues. Students are generally not well versed on the standard setting process and how contextual factors affect this process. The purpose of this instructional assignment is to enhance students' understanding of how contextual factors affect the standard setting process within the context of the Exposure Draft on “Business Combinations and Intangible Assets.” The assignment requires that students examine the Exposure Draft and answer questions designed to elicit responses as to why the FASB is considering a new standard and the impact the standard would have on current accounting procedures and financial statements.     

Constructing, persuading and silencing: the rhetoric of accounting standards

Members of the Financial Accounting Standards Board (FASB) and its staff are continuously engaged in a variety of efforts to persuade individuals that the work of this entity is valuable, appropriate, useful and correct. In this paper, I focus upon the persuasive efforts that are employed in “official” accounting standards. These documents do more than simply detail new technical accounting requirements. The texts have been shaped to express a particular point of view about the significance of events and activities that occurred during the standard-setting process and contain numerous efforts to persuade readers to accept this perspective. In particular, I argue that the FASB employs rhetorical strategies in its accounting standards that construct (and attempt to persuade us) that a specific standard is “good”, that silence alternatives and possible criticisms of the standard and that construct the FASB as a “good” standard-setter. These strategies help to construct standards as technical products and thereby also work to maintain the myth of accounting objectivity.     

Strategy and accounting in a U.K. conglomerate

This paper sets out to explore various aspects of the relationship between the use of accounting information for performance reporting and control and the formulation and implementation of business and corporate strategy. It does this by means of a case study of the acquisition and subsequent management of “ELB Ltd” by “Conglom Inc.” The case gives an account of the structuring of relationships both between the Corporate centre and ELB senior management, and within ELB itself. A very complex picture of the relationship between strategy and accounting emerges. Although accounting results are often taken as a proxy for the relative success of strategy, the case suggests that in this respect accounts typically conceal as much as they reveal. Especially with a conglomerate structure it is quite possible for corporate financial “success” to be realized at the expense of the long term strategic positioning of individual unit companies. The paper illustrates how the sharing and integration of market knowledge required for the successful formulation and implementation of strategy can conflict with the conformity and distorted communication encouraged by the hierarchical use of accounting controls. It also describes some of the positive effects that can be realized from deliberate attempts to integrate strategic decision making with routine accountability.     

Professional accounting development in Nigeria: threats from the inside and outside

Over the years several, sometimes conflicting, theories attempting to explain the development of professions have emerged. The “functionalist” and “interactionist” theories have since lost the spotlight to a more critical approach based on the Weberian concept of closure. Limitations in the concept and practice of this neo-Weberain concept have led to suggestions that research into the sociology of professions, should also include historical analyses of professionalism that capture historical specificities with the aim of generating theory that sees beyond “just massive historical variation” [Collins, R. (1990). Changing conceptions in the sociology of the profession. In R. Torstendahl, & M. Burrage, The formation of professions: Knowledge, state and strategy. London: Sage Publications]. Such research should also investigate the structural conditions under which the professionalisation process takes place [Johnson, T. (1977). The profession in the class structure. In R. Scase, Industrial society: Class, cleavage and control. London: George Allen and Unwin.]. In order to achieve this, there is the need to critically study the relationship of the State and the profession [Klegon, D. (1978). The sociology of professions: an emerging perspective. Sociology of Work and Occupations, 5, 3, 259–283.] and to document more extensively, the process, rather than the product, of closure [Chua, W. F., & Paullaos, C. (1993). Rethinking the profession-state dynamic: the case of the Victorian Charter Attempt, 1885–1906, Accounting, Organizations and Society, pp. 128–691; Chua, W. F., & Paullaos, C. (1998). The dynamics of “closure” amidst the construction of market, profession, empire and nationhood: an historical analysis of an Australian Accounting Association. Accounting, Organizations and Society, 23 (2), 155–187; Ramirez, C. (2001). Understanding social closure in its cultural context: accounting practitioners in France (1920–1939), Accounting, Organizations and Society.]. Such is the approach of this article, which focuses on the development of the accounting professions in Nigeria. It critically examines the profession/ State dynamics that have helped shape the outcome of the various episodes in the history of the accounting profession in Nigeria. An important influence in this dynamics is the nature of government in place (i.e. military or civilian).     

Accounting for decisions and decisions for accounting

Behavioral decision theory (BDT) is concerned with “accounting for decisions”. The development of this interdisciplinary field is traced from the appearance of several key publications in the 1950s to the present. Whereas the 1960s saw increasing theoretical and empirical work, the field really started to flourish in the 1970s with the appearance of the review by Slovic & Lichtenstein (Organizational Behavior and Human Performance, pp. 549–744, 1971), and key papers on probabilistic judgment (Tversky & Kahneman, Science, pp. 1124–1131, 1974), and choice (Kahneman & Tversky, Econometrica, pp. 263–291, 1979). From the early 1980s to the present, BDT has seen considerable consolidation and expansion and its influence now permeates many fields of enquiry. After this brief history, eight major ideas or findings are discussed. These are: (1) that judgment can be modeled; (2) bounded rationality; (3) to understand decision making, understanding the task is more important than understanding the people; (4) levels of aspiration/reference points; (5) use of heuristic rules; (6) the importance of adding; (7) search for confirmation; and (8) thought as construction. Next, comments are addressed to differences between BDT and problem solving/cognitive science. It is argued that whereas many substantive differences are artificial, two distinct communities of researchers do exist. This is followed by a discussion of some major shortcomings currently facing BDT that include questions about the robustness of findings as well as overconcern with a few specific, “paradoxial” results. On the other hand, there are many interesting issues that BDT could address and several specific suggestions are made. Moreover, these issues represent opportunities for accounting research and several are enumerated. Finally, BDT presents “decisions for accounting” in the sense that scarce resources need to be allocated to different types of research that could illuminate accounting issues. The argument is made that BDT is one research metaphor or paradigm that has proved useful in accounting and that should be supported. Such support, however, may mean that some researchers may work on issues that, at first blush, might seem distant from accounting per se.     

An “American Dream” theory of corporate executive Fraud

In this paper, we first describe a “Broken Trust” theory that was introduced by Albrecht el al. [Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2004). Fraud and corporate executives: Agency, Stewardship and Broken Trust. Journal of Forensic Accounting, 5, 109–130] to explain corporate executive Fraud. The Broken Trust theory is primarily based on an “Agency” theory from economic literature and a “Stewardship” theory from psychology literature. We next describe an “American Dream” theory from sociology literature to complement Albrecht el al.'s (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a “Fraud Triangle” concept to explain corporate executive Fraud. Finally, we provide some anecdotal evidence from recent high profile corporate executive Fraud to explore the American Dream theory. We conclude our thoughts on corporate executive Fraud from a teaching perspective.     

A comparative analysis of the construct validity of coefficients in paramorphic models of accounting judgments: A replication and extension

This study adds to research which examines the construct validity of coefficients of cue importance in studies concerned with how decision-makers use accounting information in formulating judgments (see Larcker & Lessig, The Accounting Review, January, 1983, pp. 58–77; Selling & Shank, Accounting, Organizations and Society, 1989, pp. 65–77). Historically, accounting studies have modelled cue importance with almost exclusive reliance upon linear models. But as the Selling & Shank study indicates, inferring the importance of accounting cues through reliance upon only one kind of model can leave “method variance” undetected and raises threats to the construct validity of coefficients (see Cook & Campbell, Quasi-experimentation: Design and Analysis Issues for Field Settings, 1979, pp. 59–70). To the extent that cue importance appears similar across models, then the model coefficients are presumed more valid. While Selling & Shank compare linear models to process tracing models, we compare a linear model to an eigenvector-scaling routine known as the Analytic Hierarchy Process (see Saaty, The Analytic Hierarchy Process, 1980). As with Selling & Shank, we find that the importance of cues is sensitive to model choice, suggesting that more research is needed into method variance before judgments can be made with respect to the construct validity of linear coefficients in accounting studies.     

The recognition and measurement guidelines of FASB concepts no. 5

In making recognition and measurement decisions, accountants often encounter complex and controversial issues. They must decide what events to record, when to record the events, and how to properly measure the financial effects. A framework that could provide guidance for those difficult decisions would be helpful.In 1984 the FASB issued Statement of Financial Accounting Concepts No. 5 (SFAC No. 5) titled “Recognition and Measurement in Financial Statements of Business Enterprises” to meet this need for guidance. The document bears special significance because it may be the “end of the line,” representing the culmination of the efforts of the FASB to develop a theoretical basis for accounting [Kirk, 1984, p. 20]. In this article we review the recognition criteria established in SFAC No. 5 and present a flowchart that may be helpful to accounting educators as a portrayal of those criteria. The article also may be useful in classroom discussions of theory formulation since it indicates that the adoption of SFAC No. 5 took into consideration the diverse views of accountants, statement users, and reporting firms.     

The educational impact of unresolved conceptual issues in interest capitalization

In SFAS 34, the FASB adopted “avoidable interest” as the measurement objective for interest capitalization. This article discusses the compromise which resulted in the avoidable interest concept, the circumstances under which the compromise took place, and the effect it has had on textbook presentations of interest capitalization.     

The two faces of organizational information

Organizational information, i.e. “facts” given and taken, and inferences drawn and established by participants within an organizational situation, may be examined in terms of its import to the relationship between an organization and its environment. A “locus” for organizational information is established in which information is classified as: (a) either inner- or other-directed: (b) either internally- or externally-based; and (c) either self- or other-referencing. Examples of organizational information in each of the eight possible categories are readily identified. Much, if not most, organizational information is probably best regarded as “two-faced”, i.e. as the product of inner- and other-directed needs taken together. For this reason, the basis, or justification of any item of organizational information is often obscure. This is seen to have consequences for organizational self-learning and self-delusion, and for the maintenance of organizational credibility and organizational secrets.     

tay's as good as cay: Reply

In a recent comment on our published work [Lettau, M., Ludvigson, S., 2001. Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56, 815–850], Michael Brennan and Yihong Xia [2005. tay's as good as cay. Finance Research Letters 2, 1–14] advance the following argument: A “mechanistic” variable tay, where t is a linear time trend, forecasts stock returns. Since “t has no foresight,” the argument goes, the predictive power of this variable must be attributable to what they call “look-ahead bias.” The authors assert that cay is subject to the same look-ahead bias (generated because we use the full sample to estimate the cointegrating parameters in cay), implying that its forecasting power must be spurious. In this response, we explain why this critique is misplaced.     

Accounting and prudential regulation: from uncomfortable bedfellows to perfect partners?

Recent initiatives to improve the public information about individual firms have brought to the fore significant differences in perspective between accountants and prudential regulators. We examine the reasons for these differences and propose ways in which they could be reconciled within a broader framework aimed at identifying the type of information conducive to the proper functioning and stability of the financial system. We argue that such information should concern three characteristics: estimates of current financial condition; estimates of risk profile; and measures of the uncertainty surrounding those estimates. So far, efforts have mainly focused on the first characteristic, with the second having drawn attention only recently and the third having been largely neglected. We propose a strategy to reconcile different perspectives based on two principles: first, in the long-term, the “decoupling” of the objective of accurate financial reporting by the firm from that of instilling the desired degree of prudence in its behaviour; second, a “parallel transition” process towards that objective so that at all points the prudential measures can neutralise any undesirable implications of changes in financial reporting standards on financial stability.     

Auditors and base rates revisited

In their 1981 study “Are Auditors' Judgments Sufficiently Regressive?” [Journal of Accounting Research (Autumn 1981) pp. 323–349] Joyce & Biddle found that auditors underweighted base rates relative to a normative standard (Bayes' theorem), but appeared to be more sensitive to base rates than other subject groups. This study extends their results by addressing three questions raised by their findings: (1) Do auditors generally possess greater ability to recognize and utilize base rates than other decision makers? (2) Did the auditing context of the Joyce & Biddle experimental problems influence the results? and (3) Is it the framing of the experimental problems that influenced the apparent integration of base rates?Using students and auditors as subjects, the following five experiments replicate selected Joyce & Biddle experimental problems. The results suggest that it is the framing of the Joyce & Biddle experimental problem that drive their results rather than attributes of auditors or auditing context.     

Efficiency audit: An assembly of rationalities and programmes

This paper focuses on the insertion of accounting and auditing knowledge into wider areas of practice, and examines the processes of auditing change through studying the development of “efficiency auditing” using events in one jurisdiction, the Province of Alberta, Canada, as an exemplar. These developments are interpreted through use of Miller and Rose's (1990; Rose & Miller, 1992) theoretical concerns with governmentality, and especially the links between generally stated political rationalities and more specific programmes for action. In studying the association of ideas of efficiency with auditing, and the developing belief that efficiency could be investigated or procured through audit scrutiny, it is argued that these events can be understood in terms of an intersection between wider discourse (concerning, for example, best management practice, appropriate auditing roles, etc.) and local circumstance. The specific interpretations that result are understood as providing one set of conditions by which auditing (and accounting are linked to the social (Burchell et al., 1985). Further research (Radcliffe, 1995) attends to the logistics of how one might audit for efficiency, using fieldwork to trace the technologies which provide practitioners with particular mechanisms for action (Miller & Rose, 1990). © 1998 Elsevier Science Ltd. All rights reserved.     

Financial instruments with sports betting components: Marketing gimmick or a domain for behavioral finance?

We examine theoretically and experimentally a certain class of new financial instruments which are designed as lotteries on the outcome of prominent sports events like the Soccer World Cup 2006. From a theoretical point of view, sports betting products may be superior to a fixed rate investment because of heterogeneous expectations, risk-loving behavior of investors or additional non-monetary utility components. In comparison to the direct placement of bets at bookmakers’, sports betting products may be preferable in cases of hedonic framing. Our experimental section, however, reveals the limited practical relevance of these theoretical arguments for “average” decision makers. Despite this, financial instruments with sports betting components offer a certain profit potential due to the diversity of preferences across individuals. Summarizing, the issuance of sports betting products may actually be mainly driven by marketing aspects, nevertheless sports betting products may be considered to be “viable” niche products with low cost of capital for banks.     

On Accounting-Based Valuation Formulae*

This paper considers accounting-based valuation formulae. Its initial focus is on two problems related to residual income valuation (RIV). First, insofar valuation depends on theresent value of expected dividends per share, applying RIV requires clean surplus accounting on a per share basis. Awkwardly, equity transactions that change the number of shares outstanding generally imply eps ≠ Δ bvps − dps. A clean surplus equality holds only if one “re-conceptualizes” either end-of-period bvps or eps as a forced “plug”. Second, one cannot circumvent the per share issue by evaluating RIV on a total dollar value basis unless one introduces relatively subtle MM-type restrictions. In light of RIV’s unsatisfactory aspects, the paper proposes an alternative to RIV. This new approach maintains a strict eps-focus. It derives by replacing bvps _t in RIV with eps _{t +1} capitalized (i.e. divided by r). One obtains a formula such that the current market price equals next-period expected earnings capitalized plus the present value of expected abnormal earnings growth, referred to as AEG. A number of propositions then demonstrate the advantages of the AEG approach as compared to RIV. These results follow because eps _t+1 capitalized generally approximates market price better than bvps _t .*An earlier version of this paper was titled “Residual Income Valuation The Problems”.This revised version was published online in August 2005 with a corrected cover date.     

Image theory: An alternative description of audit decisions

Building upon an analysis of audit decisions by Waller & Felix (1984) [in Moriarty, S. and Joyce, E. (eds) Decision Making and Accounting: Current Research (Norman, OK: University of Oklahoma Press, 1984)], an alternative to the expected utility and “heuristics and biases” characterization of decision-making is presented. In this alternative, Image Theory, decisions are about adoption of goals and adoption of plans for attaining the goals, as well as about whether the plans are succeeding. The audit process is interpreted in terms of Image Theory and the salient research issues that this interpretation suggests are examined.     

The use of on-line summative assessment in an undergraduate financial accounting course

According to the Quality Assurance Agency [QAA (2006). Section 6: Assessment of students, Code of practice for the assurance of academic quality and standards in higher education. <http://www.qaa.ac.uk/>. Accessed 14.03.2007] “Assessment describes any processes that appraise an individual’s knowledge, understanding, abilities or skills” and is inextricably linked to a course or programme’s intended learning outcomes. Assessment also has a fundamental effect on students’ learning where it serves a variety of purposes including evaluation, feedback and motivation. Assessment also provides a performance indicator for both students and staff. Computer-aided assessment (CAA) offers an option for “sustainable assessment” and provides opportunities for creating innovative assessment practices that help engage students and increase their motivation for learning. This paper reports the findings of a qualitative study where a series of on-line summative assessments were introduced into a first-year financial accounting course. Feedback from students obtained from an evaluative survey and focus group interviews indicates that assessment played a significant role in the teaching/learning process. That is, students perceived a beneficial impact on learning, motivation, and engagement.