Rules,rogues, and risk assessors: Academic responses to Enron and other accounting scandals

Abstract

The recent accounting scandals in the USA and the resulting regulation of the US profession via the Sarbanes–Oxley Act have led to the resurrection of an old debate: principles vs. rules. We argue that such a debate is jejune and serves as little more than a diversion from discussing more substantive issues raised by events like Enron and Andersen. Accounting is not confronted by a choice of principles to the exclusion of rules or vice versa. Principles underlie any set of rules, and any implementation of principles will inevitably involve adopting some rules. We take issue with various analyses of the accounting scandals that rely too exclusively on the principles of neo-classical economics. We conclude by identifying four major obstacles impeding meaningful academic and educational treatment of the maladies of which Enron is merely a symptom.     

Working sick and out of sorts: a cross-cultural approach on presenteeism climate,organizational justice and work–family conflict*

Abstract

A climate of presenteeism has important effects on employee well-being and the organization itself. Our study, based on surveys of health sector employees in six different countries (Brazil, Ecuador, Lebanon, Portugal, Russia and Spain) examines whether organizational justice plays a mediating role in the relationship between a presenteeism climate in the organization and work–family conflict (WFC). Our results indicate that the perception of organizational justice and the presenteeism climate do influence WFC. Moreover, higher levels of WFC were found in non-Latin countries. This study contributes to the work attendance and life balance field by providing cross-cultural empirical evidence corroborating the effect of justice and presenteeism climate on the WFC.     

Orthogonalized factors and systematic risk decomposition

In the context of linear multi-factor models, this study proposes an egalitarian, optimal and unique procedure to find orthogonalized factors, which also facilitates the decomposition of the coefficient of determination. Importantly, the new risk factors may diverge significantly from the original ones. The decomposition of risk allows one to explicitly examine the impact of individual factors on the return variation of risky assets, which provides discriminative power for factor selection. The procedure is experimentally robust even for small samples. Empirically we find that even though, on average, approximately eighty (sixty-five) percent of style (industry) portfolios’ volatility is explained by the market and size factors, other factors such as value, momentum and contrarian still play an important role for certain portfolios. The components of systematic risk, while dynamic over time, generally exhibit negative correlation between market, on one side, and size, value, momentum and contrarian, on the other side.     

A sectoral analysis of the financial instability hypothesis

Hyman Minsky's Financial Instability Hypothesis (FIH) is applied to various North American Industrial Classification System (NAICS) industry groups, and it is found that some sectors develop much more closely in accordance with the FIH than others. Minsky categorized firms based on the relationship between cash flow and debt service requirements: hedge finance units, whose operating revenues are adequate to service current interest and principal on their debt; speculative finance units, which can meet interest payments but cannot pay down principal; and Ponzi finance units, which cannot meet current interest payments. The FIH is related to, as well as supportive of, Austrian Business Cycle (ABC) theory, because interest rates are negatively correlated with the proportion and market value of speculative firms in several sectors.     

Are supply chain management theories culturally constrained? An empirical assessment

Culture plays an increasingly important role in supply chain management as many manufacturing firms have linkages to suppliers and customers from various countries. In this paper we propose treating culture as an explanatory variable to test the assumption that existing theories are universally applicable. The primary research question was: Do purchasing theories built on samples from mainly North American companies with Anglo-Saxon cultures apply in other cultural contexts? We developed and tested a model where top management??s view of the purchasing function affects purchasing practices and manufacturing performance. The statistical results provide evidence that the engagement and efficacy of purchasing practices is highly dependent on culture. This finding has significant implications from the perspective of decision making in international supply chain management. Specifically, top managers across multiple cultures could decide to structure and evaluate the purchasing function similarly, but these decisions could lead to different practices and different outcomes depending on the culture.     

Strategic Incentives for Keeping One Set of Books in International Transfer Pricing

We study the equilibrium accounting and transfer pricing policies in a multinational duopoly with price competition in the final product market. We find that the firms in a duopoly can benefit from strategically using the same transfer price for tax and managerial purposes instead of using separate transfer prices for both objectives. According to our results, the practice of one set of books should be the prevalent accounting method in markets with a small number of competitors and similar products.     

Legitimating Inequality: Fooling Most of the People All of the Time

Over the three decades leading up to the crisis of 2008, inequality dramatically increased in the United States and Great Britain. What stands out, but is seldom noted, is that this occurred within democracies where the relative losers—the overwhelming majority—could in principle have used the political system to block or reverse rising inequality. Why did they not do so? A glance at history reveals that peoples have only very infrequently contested inequality because they were led to believe that their inferior status in terms of income, wealth, and privilege was just, that it was not really so bad, or that it was necessary for their future well‐being. Ideological systems legitimated a status quo of inequality, or in more modern times even increasing inequality. This article surveys the manner in which inequality has been historically legitimated, first predominantly by religion, then predominately by economic thought. Attention is then focused on the manner in which contemporary economic science and its popular interpretations in the media have served to legitimate inequality in the U.S. since the mid‐1970s. The article concludes with a reflection on the unique conditions that enable the legitimation of inequality to be delegitimated.     

The effect of latency variables on repeated measures inference applied to the measurement of risk-taking as a function of psychopathy

In numerous psychology studies, subjects are asked to perform some task a number of times, T. The effect of the choice of T on the associated inference, however, is usually not assessed. We investigate the appropriate choice of T empirically by using data collected in a study on the relationship between psychopathy and risk-taking in 90 inner city drug users enrolled in a residential treatment program. We show that, when studying this relationship, the latency variable usually discarded from the analysis behaves exponentially allowing a natural division of the study period 1, . . . , T into two distinct subperiods. These subperiods yield significantly different results—in the early period only (which we call “reactive”), subjects with high psychopathy scores exhibit lower sensitivity to reward and punishment in our risk taking experiment. The later period (which we call “stable”) shows no relationship between sensitivity to reward and punishment and psychopathic tendencies.     

SEMIPARAMETRIC VECTOR MEM

Financial time series are often non‐negative‐valued (volumes, trades, durations, realized volatility, daily range) and exhibit clustering. When joint dynamics is of interest, the vector multiplicative error model (vMEM; the element‐by‐element product of a vector of conditionally autoregressive scale factors and a multivariate i.i.d. innovation process) is a suitable strategy. Its parameters can be estimated by generalized method of moments, bypassing the problem of specifying a multivariate distribution for the errors. Simulated results show the gains in efficiency relative to an equation‐by‐equation approach. A vMEM on several measures of volatility justifies a joint approach revealing full interdependence. Copyright © 2012 John Wiley & Sons, Ltd.