Daniel B. Thornton

Accounting as simulacrum and hyperreality: perspectives on income and capital

This paper draws on two independent strands of literature—Baudrillard’s orders-of-simulacra theoretic and financial accounting theory—to investigate the ontological status of information in accounting reports. It draws on Baudrillard’s concepts of simulacra, hyperreality and implosion to trace the historical transformations of the accounting signs of income and capital from Sumerian times to the present. It posits that accounting today no longer refers to any objective reality but instead circulates in a ‘‘hyperreality’’ of self-referential models. The paper then examines this conclusion from the viewpoint of recent clean surplus model research and argues that the distinction between income and capital is arbitrary and irrelevant provided the measurement process satisfies the clean surplus relation. Although accounting is arbitrary and hyperreal, it does impart a sense of exogeniety and predictability, particularly through the income calculation. Therefore, it can be relied on for decisions that do have real, material and social consequences. The paper ends with some implications of Baudrillard’s theoretic for accounting, reflections on accounting’s implications for Baudrillard’s theoretic and suggestions for future research. # 1999 Elsevier Science Ltd. All rights reserved.

Meta-Analysis and the Accounting Literature: The Case of Audit Committee Independence and Financial Reporting Quality

We conduct a meta-analysis (MA) of the association between audit committee (AC) independence and financial reporting quality (FRQ). Although we cannot reliably aggregate results across studies in a statistical sense because of inconsistencies in defining FRQ and the absence of replication studies, quantitative review techniques yield three conclusions: (1) The use of different FRQ measures in the AC independence literature explains about half of the variation in results across studies. (2) Audit committees are more effective at enhancing audit quality (e.g. through averting going-concern reports and auditor resignations) than they are at fostering financial statement quality (e.g. by making high quality accruals and avoiding restatements). AC independence can even reduce apparent financial statement quality by identifying the need for restatements and remedial, abnormal accruals. (3) Financial statement quality and audit quality are complementary contributors to FRQ. The statistical and methodological difficulties we encounter lead us to posit that the dearth of MA studies in accounting and auditing stems from similar difficulties in applying MA to other topics. We present evidence consistent with publication biases and perverse researcher incentives being responsible for the difficulties.

FAS 133 Option Fair Value Hedges: Financial-Engineering and Financial-Accounting Perspectives

The attempt of the Financial Accounting Standards Board (FASB) to provide consistent and logical accounting treatment for hedging transactions, in the form of FAS 133, continues to generate controversy. Under the new rules, many kinds of hedges do not cause problems, but a variety of difficulties still remain. One of the more significant ones involves how the changes in the current value of an option used in a hedge are to be treated. In some cases, changes in an options time value are supposed to enter into earnings, which can produce spurious earnings volatility during the period of a hedge. Bodurtha and Thornton describe the situation under FAS 133 and then propose two possible solutions. One is to suggest a change in the rule that would remove the problem. Their “financial engineering solution” would not depend on a rule change, but would introduce new types of derivatives whose contingent cash flows could be organized in such a way as to qualify for hedge treatment under the current rules, but would remove the artificial earnings volatility that would otherwise occur with a standard option hedge.

INFORMATION AND INSTITUTIONS IN THE CAPITAL MARKET

Abstract In the capital market information and institutions are logically coordinate concepts. The paper argues that it is impossible to derive a complete view of the role played by capital market institutions without constructing a theory of information, a theory of institutions, and a theory of how the two are related. Consideration is given to existing epistomological and methological approaches to information and institutions. On this basis a new approach is outlined and its relevance to accounting demonstrated by analysing one major problem currently facing the accounting profession.

Costs of Accounting to Lenders: Canadian Evidence

Abstract Do new accounting pronouncements impose costs on firms with accounting-based restrictions in their public lending agreements? Previous studies have not found significant, adverse share price reactions to such pronouncements. This paper posits that management is concerned with the total costs of the monitoring policies used for reporting to lenders, and that share price reactions are likely to comprise only a small portion of those costs. The episode of mandatory lease capitalisation in Canada is used to test some predictions that are consistent with this expanded view of the costs of accounting to lenders. Lessees ‘public lending agreements were examined to see if they stipulated restrictions based on accounting numbers; and, if they did, whether the constraints were based on GAAP (generally accepted accounting principles) or TAP (tailored accounting principles). The evidence strongly supports the hypothesis that there are costs of accounting to lenders; but these costs are unlikely to be observe...

The Impact of Disclosures of Internal Control Weaknesses and Remediations on Investors' Perceptions of Earnings Quality†

We hypothesize and find that firms making SOX-mandated disclosures of material weaknesses in internal control over financial reporting (ICOFR) exhibit lower investor-perceived earnings quality (IPEQ) than nondisclosers. We measure IPEQ using e-loading, a market-returns–based representation of earnings quality developed by Ecker, Francis, Kim, Olsson, and Schipper (2006). Firms do not exhibit decreases in IPEQ after initially disclosing material weaknesses. This is consistent with investors having anticipated ICOFR strength based on observable firm characteristics. However, firms exhibit increases in IPEQ after receiving their first clean audit reports that confirm the remediation of previously disclosed weaknesses. This indicates that, although investors do not find initial weakness disclosures to be incrementally informative, SOX motivates firms to remediate weak controls and provides a venue for credible remediation disclosures, thus enhancing investors’ perception of financial reporting reliability. These findings are consistent with the existence of regulatory benefits associated with SOX’s internal control disclosure and audit requirements.

Different Conceptual Accounting Frameworks for Public and Private Enterprises: An Analysis of Canada's IFRS Transition and Suggestions for International Empirical Work

Prior accounting research, coupled with demographic data relating to the current needs of financial statement users, suggests that Canada’s strategy of adopting IFRS for public firms while retaining a classic conceptual framework based on reliability, conservatism and verifiability for private enterprises is a rational strategy that confers a comparative advantage on Canada’s private enterprises relative to their peers in other countries. I propose research projects that could examine that inference as a testable hypothesis, thereby providing evidence standard setters could weigh in determining whether the strategy is worth preserving. I also explain why conservatism can co-exist with unbiased fair values of private enterprises’ equity securities and their derivatives.

Pricing in Auction Markets for Collectibles: Theory and Experimental Evidence

This study investigates the pricing of alternative assets called collectibles, which comprise artwork, wine, antiques, and other similar assets. A model of an auction market for collectibles is induced from the results of prior empirical studies. The model incorporates some key characteristics of professional and non-professional investors who attend auctions of collectibles. Some additional predictions of the model are then confirmed using data derived from an experiment involving human subjects. The experimental results indicate: 1. Art enthusiasts derive utility from both financial returns and the pleasure associated with holding collectibles; hence they are willing to pay a premium — called a pleasure premium — to own collectibles. This direct confirmation of the existence of the pleasure premium is consistent with postulates contained in prior research. 2. Heterogeneous expectations on the part of non-professionals attending auctions make it likely that at least some non-professionals overbid for collectibles, making it unlikely that professionals will purchase them. 3. Pleasure premia included in the bids of non-professionals further reduce the probability of professionals purchasing collectibles at auctions and reduce the returns that are likely to be realized by successful bidders. 4. Overbidding by non-professionals forces professionals out of the market, ensuring that investments in collectibles return less than zero net present value; the probability of this occurring escalates rapidly as the number of non-professionals attending the auction increases, reaching virtual certainty at about ten. The results are consistent with prior studies indicating that investors who hold collectibles as investments derive little in the way of return benefits.