DOCTORAL RESEARCH
Maureen H. Berry, Editor
UNIVERSITY OF ILLINOIS
All of the studies reviewed in this edition have to do, in one way or another, with impact assessments: the majority of them involving accounting regulation. We commence with the broad regulation of accounting practices by the federal government through specific legislation. Chow’s study of the impact of accounting regulation on investor wealth, although pointed towards the need for assessing the economic effects of accounting regulation, uses the 1933 and 1934 Securities Acts in testing his hypotheses. Johnson shifts the focus to management stewardship as he gathers data on specific accounting changes which firms introduced in response to the requirements of the Foreign Corrupt Practices Act of 1977.
The Treasury Department also plays a significant role in shaping accounting practice. Professional accountants and tax authorities have been battling over code language and application interpretations for decades, yet ambiguities and incongruencies persist. Lett provides strategic advice to both the Internal Revenue Service and taxpayers, based on his study of court decisions which distinguish tax-deductible business losses from nondeductible, unprofitable hobbies. Aharoni raises behavioral issues in his examination of the ways in which corporate taxation affects management’s choices between accounting alternatives. Beirne is concerned about other aspects of corporate tax policy: notably its neutrality and provisions for equality of treatment. These policy attributes are questioned in his review of the taxation of the undistributed income of controlled foreign corporations.
Turning to the profession’s own internal regulatory activities, the remaining four dissertations ask basic questions about required practices and obtain mixed results. Haselkorn evaluates pension expense accounting, as required by Opinion No. 8 of the Accounting Principles Board (APB) and concludes that it does not accomplish the Board’s stated objectives. Gean questions the APB’s position on the interperiod allocation of depreciation timing differences,
152 The Accounting Historians Journal, Fall, 1983
as expressed in Opinion No. 11, and finds general support for the Board among groups influential in the development of accounting standards. Barber, on the other hand, asks whether the format of the funds statement matches its intended purposes, finds that it does not, and develops a superior model. The final dissertation, by Clark, moves in to look at one area of the profession’s self-regula-tion, nonaudit accounting services. His review of the evolution of standards for unaudited financial statements, describing the 40 years which elapsed before the nonaudit function was segregated in 1979, provides one more testament to the slow deliberation with which the profession charts its progress
An Investigation of the Wealth Impacts of the 1933 and 1934 Securities Acts’ Financial Disclosure Requirements (University of Oregon, 1981; 42/05, p. 2184-A) by Chee Woo Chow. The burgeoning of mandated accounting standards in recent years has brought about an awareness of the need to consider their economic consequences. Thus, Chow was motivated to examine the nature and incidence of impacts on investors’ wealth which could be attributed to accounting regulations. Prior research has confined itself to searching for evidence of impacts on stock returns, without specifically investigating the root causes of these effects. Chow, however, looks into the reasons why these impacts occur and he broadens perspective by including bond returns in his inquiry.
The study’s theoretical justification rests on agency theory. Briefly put, this theory posits that contracts made between manage-ments, stockholders, and bondholders, moderate conflicts of interest and rely on accounting-determined numbers. If unanticipated changes are subsequently required in the groundrules for calculating these numbers, there could be effects on the nature of these contracts as well as financial implications. Any resulting changes in the wealth of the contracting parties would depend on the degree to which their interests conflict as well as the distinctive features of the contractual arrangement.
Chow tested these theoretical hypotheses on the Securities Acts of 1933 and 1934, using a control group of over-the-counter stocks and a treatment group of stocks and bonds listed on the New York Stock Exchange. Across three time Intervals, a control period, a favorable event period, and an unfavorable event period, he compared daily security returns, using non-parametric tests. He found that shareholder wealth was decreased, and bondholder wealth increased, by the 1933 Act. His predictions that contributing factors would include leverage, the number of accounting-based debt covenants, the tightness of these covenants, and firm size were moderately supported by regression tests. Chow also found that the 1934 Act’s sales disclosure requirement was the only factor affecting shareholder wealth. He attributes this to the fact that the 1934 Act’s other accounting provisions may well have been predictable a year earlier.
The Foreign Corrupt Practices Act of 1977: An Inquiry into the “Ac-counting Provisions” of the Act Including a Study of Explicit Responses by Corporations (Louisiana Tech University, 1981; 42/05, p. 2185-A) by Kenneth Lester Johnson. In 1977, the Congress passed the Foreign Corrupt Practices Act (FCPA) containing certain accounting provisions which were intended to preclude the possibility of overseas bribery being concealed by improper accounting practices. Little is known, however, about explicit responses which the FCPA may have evoked from companies potentially affected by the legislation. The main purpose of Johnson’s dissertation was to learn what the “Fortune 500” corporations have done in this area. First he reviewed the accounting literature for suggestions as to how corporations should respond to the FCPA’s accounting provisions.
He then synthesized them into twenty-seven recommended actions and incorporated them into a questionnaire. This was then mailed to the chief financial officer of 166 industrial corporations included in the “Fortune 500,” resulting in the return of 102 usable responses. The questions asked were classified into six topics: internal accounting Control, corporate code of conduct, independence and involvement of the corporate board of directors, enforcement of corporate policy, the role of auditors, and FCPA-related management information systems. The respondents were asked which of the twenty-seven recommended actions had been implemented before passage of the FCPA, which after, and which had not been implemented. The responses indicated that many of the actions listed in the questionnaire had been implemented and mainly before enactment of the FCPA. The motivation to initiate recommended actions is apparently inversely related to cost and degree of complexity, but directly related to the visibility of the action. Actions taken as a result of the FCPA included: “(1) Over 62 percent of respondents initiated a comprehensive review of internal accounting controls; (2) over 50 percent of respondents adopted, revised, expanded, or strengthened their codes of conduct; (3) about 6 percent of respondents took actions to increase the independence or involvement of the board of directors; (4) individual recommendations regarding cor-porate policy enforcement were adopted, on the average, by about 20 percent of respondents; (5) except for the fact that about 47 percent of respondents increased management’s attention to internal control reports, relatively few actions were taken that affected the role of auditors; (6) over 75 percent of respondents developed a formal system to keep management informed of developments related to the FCPA.”
An Empirical Investigation of Trade or Business Attributes of Quasi-Business Ventures Under the Internal Revenue Code (University of South Carolina, 1981; 42/05, p. 2185-A) by Samuel Lafayette Lett. A question frequently raised by the Internal Revenue Service is whether a taxpayer’s secondary venture is a business run for profit or a hobby. If the former, operating losses are deductible from income. Operating losses are not deductible, however, in the case of secondary ventures which are hobbies. The purpose of this dissertation was to identify distinguishing criteria which could be used for income tax purposes. The data base mainly consisted of Tax Court decisions and Lett used discriminant analysis to determine whether common factors appeared in the decisions which differentiated between businesses and hobbies.
As his sample, Lett selected 136 Tax Court cases decided during the period 1944 through 1979. He then specified 19 qualitative and three quantitative independent variables from data contained in the court decisions as well as drawn from Section 183 of the Internal Revenue Code. Quadratic models were developed and the criterion adopted for selecting the “best” model was selection by the Lach-enbruch (jackknife) holdout method of the highest classification accuracy among the models tested. Using this method, a linear discriminant model was selected, with five variables and a classification accuracy of 94.1 percent. The null hypothesis, which was rejected at the five percent level of significance, was: “discrimination between business and hobby activities for federal income tax purposes, based on the appearance of factors in the written opinion of Tax Court judges, is no more effective than random estimates based upon chance.” The best model identified the following key distinguishing factors: records, operational plans, changes in activity to improve profitability, the taxpayer’s expertise, and the amount of time spent on the activity by the taxpayer. To control for measurement errors which might introduce bias, three independent audits were porformed. This need was supported by the fact that two of the audits brought out numerous errors. No systematic bias was evident, however, from the models based on audit data.
The Impact of Taxation on Accounting (New York University, 1980; 42/01, pp. 283-4/A) by Amram Aharoni. This dissertation investigates the dual problem of how taxation affects both economic and information decision-making by corporate managers. The underlying theory posits that behavioral adaptations can be anticipated when changes in fiscal policy increase the transfer of resources from the private to the public sector. This could be particularly true in the case of corporate managers who are both individual consumers as well as executives financially motivated through corporate performance. One could expect that they would tend to make compensating accounting changes in order to achieve an optimal equilibrium of personal wealth, given new tax constraints.
The study commences with a review of major events in the history of corporate taxation and relates them to the development of some important accounting principles. It then goes on to assess how taxation affects economic decisions by corporate managers and the manifested effects on accounting, particularly on profits. The author next addresses the second part of his problem: taxation’s im-pact on information decision-making, by developing a model which shows how fiscal policy changes affect management choice among alternative accounting techniques. This model generated hypotheses which were later subjected to an empirical cross-sectional test, and the results generally supported the theory. Briefly stated: a manager’s choice was dichotomized to nonconformity or conformity. Under nonconformity, an increase in the effective corporate income tax rate triggers an increase in reported accounting earnings. Under conformity, the relationship between the tax rate and reported income will depend on the structure of management compensation plans. If, for example, a manager receives a relatively large stock option, a tax rate increase is associated with a reported earnings increase. If the option is relatively small, however, a tax rate increase would indicate that reported earnings would be increased if the bonus were small and decreased if the bonus were large.
Another strategy used by corporate managers is to lobby for changes in generally accepted accounting principles. Aharoni dem-onstrates that lobbying activities have an optimum level above which there is sensitivity to change in the corporate income tax rate. There is a positive relationship between the optimum level and the rate when a proposed accounting change deals with a non-conformity item. However, the sign of the correlation when a conformity issue is involved will depend on a firm’s management compensation plans as well as its effective tax bracket.
An Investigation into the Taxation of Undistributed Income Sections 951 Through 964 of the Internal Revenue Code: The Controlled Corporation (The University of Oklahoma, 1981; 42/02, pp. 769-70/A) by Thomas Joseph Beirne. This study should be of considerable interest to income tax historians, particularly in the area of international business. Beirne’s research problem concerned the relationship between the taxation of undistributed income and enactment of statutes which identified foreign corporations controlled by U. S. owners. Starting with the introduction of income taxation in 1913, Beirne traced the development of various laws which affected the taxation of both undistributed income and the income of U. S. controlled foreign corporations. He then analyzed certain events which occurred, and studies which were made, during the period 1953-1962 and compared the legislation which had been expected with that subsequently enacted. The following two decades or so were marked by legal contests. Beirne reviewed the most significant court cases during the period 1962-1980, noted the changes which occurred in sections 951 through 964 of the Internal Revenue Code, and attempted to relate these changes to the outcomes of certain cases. He then went on to analyze the effects on the overall tax rates of corporations with incomes from foreign subsidiaries, covering the period 1913-1980. This analysis included an assessment of the possible effect on corporate dividend policy of having a controlling interest in subsidiaries located in countries where tax rates were higher, or lower, than in the United States.
Beirne reached three main conclusions from his study. First, that the only attempts to tax undistributed income which have lasted in the long run are those intended to reduce the possibility of tax avoidance. Policies aimed at increasing federal revenues, or attempts to eliminate deferral privileges, have been neither popular nor successful. Secondly, that numerous court cases to test Code sections 951 through 964, during the period 1962 through 1980, mainly resulted in decisions in favor of the Internal Revenue Service. The taxpayers only prevailed in cases where tax avoidance was not a contributing factor. Thirdly, that the intent of the Kennedy Administration’s tax policy was to try to be neutral in terms of possible effects on management decision-making, and achieve equality of treatment by taxing similar types of income at similar rates. Neutrality with respect to corporate dividend policy does exist where foreign subsidiaries are operating in countries with tax rates equal to or higher than those in the United States, However, tax equality is obviated by the deferral privilege. In order to achieve both equality and neutrality in tax policy, Beirne suggests, the deferral privilege must be eliminated or else extended to corporations which operate overseas through branches rather than subsidiaries.
APB Opinion No. 8 and Fluctuation in Pension Expense: A Case Study in the Effectiveness of Accounting Regulation (The University of Chicago, 1981; 42/03, p. 1220-A) by Michael Haselkorn. As its title indicates, this dissertation evaluates the effectiveness of employer accounting for pensions, as required by Opinion No. 8 of the Accounting Principles Board (APB). Although APB Opinion No. 8 was intended to accomplish several objectives, the one tested in this study was that which aimed at eliminating fluctuations in reported pension expense which were not related to the employee group. Two sets of hypotheses were tested, the first being:
“H : The number of firms which have exhibited an increase in fluctuation of reported pension expense relative to payroll, after APB Opinion No. 8, is greater than or equal to the number of firms which have exhibited a decrease in fluctuation of reported pension expense, relative to payroll, after APB Opinion No. 8. H : The number of firms which have exhibited an increase in fluctuation of reported pension expense, relative to payroll, after APB Opinion No. 8, is less than the number of firms which have exhibited a decrease in fluctuation of reported pension expense, relative to payroll, after APB Opinion No. 8.”
The second set of hypotheses was developed for that aspect of the study which dealt with the use of pension expense as an agent for income smoothing: “H : For those firms having reduced fluctuation in reported pension expense relative to payroll, reported net in-
158 The Accounting Historians Journal, Fall, 1983 come fluctuated the same before and after APB Opinion No. 8. H : For those firms having reduced fluctuation in reported
pension expense relative to payroll, reported net income fluctuated more after APB Opinion No. 8 than before it.”
Haselkorn developed three measures of fluctuations applicable to pension expense: the square root of the average squared deviation from linear extrapolation of the series; the square root of the average squared deviation from parabolic extrapolation of the series, and the coefficient of variation. A fourth measure: the mean absolute error where the percentage change in pension expense was the dependent variable and the percentage change in payroll was the independent variable, used payroll as a measure of the employee group. The data base used were CRSP tapes for the period 1959 through 1974 and the firms included in the sample were those, num-bering 86, which met the selection criteria and disclosed annual pension expense and payroll data for each year.
The time interval was divided into two periods: the first, 1959-1966, before APB Opinion No. 8 came into effect; and the second, 1967-1974. Using a paired sample design, the results in the second time period were subtracted from those in the first time period for each company. The Wilcoxon signed ranks test was used to evaluate the differences. It was found that there were more increases than decreases in fluctuations under all four of the measures employed. Consequently, the first null hypothesis could not be rejected. As to the possible income-smoothing aspect of pension expense, eighteen firms were found to have decreased fluctuation in reported pension expense relative to payroll. In testing the second set of hypotheses, the null could be rejected at a significant level under each of the four measures. Haselkorn warns, however, that the ceteris paribus assumption could be questioned and that these results, therefore, should be treated cautiously. The author’s major conclusion was that one of the main objectives of APB Opinion No. 8 was not achieved. He put forward two possible contributing factors: a lack of full comprehension and consistent application of the Opinion, and that the Opinion did not affect actuarial assumptions, particularly the interest assumption.
A Study of the Desirability of Deferred Tax Accounting for Depreciation Timing Differences (Georgia State University, 1981; 42/05, p. 2184-A) by Gilbert Farrell Gean. In 1967, the Accounting Principles Board (APB) issued Opinion No. 11 which mandated comprehensive interperiod tax allocation. This requires that the tax effects of timing differences between the net income per income statement, and that calculated in the corporate tax return, including those attributable to depreciation policies, must be assigned to the appropriate accounting periods. The APB’s decision not to exclude depreciation timing differences has evoked criticism on the grounds that it contributes to the disproportionate increase in deferred tax credit accounts, as compared with other growth trends reflected in financial statements. Prior research has shown that in many balance sheets examined, the deferred tax credit rarely decreases. Consequently, the argument raised by the APB’s critics has some intuitive support.
Gean’s research question was concerned with whether or not there are differences in attitudes towards the treatment of depreciation timing differences among those groups influential in the development of accounting standards, namely: accounting academicians, partners from the “Big Eight” public accounting firms, controllers of the “Fortune 500” companies, and senior investment officers. Accordingly, he formulated the following hypotheses:
1. There are no significant differences among the mean scores of influence groups as to attitude toward allocating the tax effects of depreciation timing differences. 2. There are no significant differences among the mean scores of influence groups as to attitude toward alternatives to allocating tax effects of depreciation timing differences. 3. There are no significant differences among the mean scores of influence groups as to belief about the conceptual nature of income taxes. 4. There are no significant differences among the mean scores of influence groups as to attitude toward interperiod allocation of tax effects of timing differences. 5. There are no significant differences among the mean scores of influence groups as to the attitude toward the deferred method of applying the interperiod tax allocation principle.
To test these hypotheses, Gean developed a questionnaire, con-taining twenty-five items of requested information, which was based on theoretical and empirical propositions gleaned from the accounting literature. This questionnaire was then mailed to a randomly selected sample of 610 members of the designated influence groups. Based on the responses, Gean developed a personal profile of the respondents, computed from the descriptive statistics supplied. Their general attitudes and beliefs were drawn from frequency distributions, means, and modal responses to the twenty-five questions. Each of the null hypotheses was tested by analysis of variance. Least significant difference posterior analysis was performed for each null rejected, in order to identify a .05 alpha level of significance for differences between mean responses of pairs of groups. The Bartlett-Box F technique was used to measure and compare differences in variability of responses within each influence group. Gean’s overall conclusions were that his respondents generally supported the APB’s position. However, there was variability in the attitudes and beliefs of the different groups, particularly among the practitioners, about this topic.
The Funds Statement Redesigned to Fulfill the Objectives of Financial Reporting by Business Enterprises (The University of Texas at Austin, 1981; 42/03, pp. 1233-4/A) by James Philip Barber. This study had two major goals: to determine what requirements with respect to the statement of source and application of funds (the funds statement) were contained in Statement of Financial Accounting Concepts No. 1, and to design statements to meet such requirements. The basic objectives of the funds statement were included in the Trueblood Committee report as well as the Financial Accounting Standards Board (FASB) Discussion Memorandum (DM) on funds flows. The main goal was perceived to be the presentation of information which would be helpful for statement users to assess the prospects for future cash flows to investors and creditors through the reporting entity. Additional objectives were seen as reporting on management stewardship of resources, and reporting on changes in and claims to these resources. These main and additional objectives formed the basis for the two models which Barber constructed: a statement of cash flow and a statement of financial activities.
The statement of cash flow explains the net change in cash during the period both from earnings as well as from investing and financing activities. The net change from earnings was developed by converting income statement items to cash flow, keeping to the income statement format. The statement of financial activities explains the excess over internally-generated funds of financing required during the period by contrasting the net changes in non-operating resources with operating activities. Barber then designed a controlled model which contained three elements: the two model statements just described; traditional financial statements; and funds statement revisions previously proposed by certain other re-searchers who had also followed the thinking expressed by the Trueblood Committee or the FASB. An assessment was then made of the relative usefulness of each of the three elements through an item-by-item comparative analysis. The specific accounting topics included in this analysis were: inflation accounting, installment sales, interest capitalization, change in accounting principle, and accounting for pensions. Barber’s conclusion was that the two model statements he had designed were superior to those previously put forward, in terms of usefulness and being more easy for users to understand.
Evolution of Unaudited Financial Statements’ Standards (University of Missouri-Columbia, 1980; 42/02, p. 752-A) by Wilbur Rhea Clark. Accounting services include the preparation of financial statements without performing an audit. Because, however, the layman mentally associates the public accounting profession with auditing, there may be a user propensity to place more reliance on unaudited statements than is intended. As a result, professional accountants have been expressing a need for separate nonaudit standards ever since the AlCPA’s Committee on Auditing Procedure issued the first Statement on Auditing Procedure (SAP) in October 1939. The profession’s first attempt to segregate the nonaudit function did not come about until the publication of Statement on Standards for Accounting and Review Services (SSARS) No. 1 by the AlCPA’s Accounting and Review Services Committee, which took effect after June 30, 1979.
Clark’s dissertation had three main goals, namely, to determine the extent to which: SSARS No. 1 satisfied certain concerns expressed over its exposure draft; subjects concurred with changes made before the final statement was issued; and subjects’ concerns were not addressed in either the exposure draft or the final version of SSARS No. 1. Data was gathered into two stages. First a questionnaire was sent to a random sample of practitioners, asking for their opinions on the SSARS exposure draft. The responses provided part of the input for the second questionnaire, which also contained information about changes which were made in the final version of SSARS No. 1. The responses to the first questionnaire contained the following major concerns. Concerning the compilation section of the draft: (1) reference to generally accepted auditing standards (GAAS); (2) negative assurance, and (3) inadequecy of corroborative inquiry and analytical procedures.
The final version made no changes in the draft’s review section and consequently the initial concerns raised about it persisted. As for the revised compilation section, respondents to the second questionnaire, in general, considered the compilation procedures to be an improve-ment and were pleased that the reference to generally accepted accounting principles had been eliminated. In conclusion, Clark suggested the following areas for additional research: cost/benefit analysis of compilation, review, and audit; distinguishing review services from audit services; and the impact of accounting firm size on questionnaire responses.
