John E. McEnroe

An examination of attitudes involving cash flow accounting: Implications for the content of cash flow statements

Abstract This research surveyed the attitudes of financial analysts, investment advisors, accounting professors and accountants (public and private) towards certain cash flow accounting (CFA) disclosures that extend beyond the requirements of the various international cash flow pronouncements discussed in this paper. In general, the financial analysts and investment advisors were significantly more receptive toward the role of CFA in external financial reporting than were the other two groups. Both the financial analysts and the investment advisors were supportive of the proposal for the disclosure of the accounting number “operating cash flow per share” in annual reports. The findings suggest that perhaps in the U.S., the SEC and the FASB should allow more latitude in the reporting of CFA and permit this disclosure. The results are also relevant on an international level to countries that are either reviewing their cash flow reporting requirements or involved in initial deliberations involving cash flow

Perceptions of the Effect of Sarbanes-Oxley on Earnings Management Practices

A key objective of the Sarbanes-Oxley Act (SOA) was the restoration of public confidence in the integrity of audited financial statements. One section of SOA (Section 302) requires the chief executive officer(s) and the principal financial officer(s) to certify in each quarterly or annual report filed with the Securities Exchange Commission (SEC) that the financial statements fairly present the financial condition and results of operations for the periods presented in the reports. An important distinction is that the SEC explicitly states that fair presentation is not limited to a reference that the statements have been presented in accordance with generally accepted accounting principles (GAAP). As such, it would follow that this aspect of SOA would place a higher standard of quality on the financial information than in the past and that GAAP can no longer be used as a safe harbor defense for earnings management practices. I surveyed CFOs of the Fortune 500 firms and audit partners for the thirty-three largest audit firms by revenue as to whether they perceived that SOA significantly reduced various earnings management practices in audited financial statements in general. The results suggest that the respondents perceived that SOA reduced earnings management in only four of fifteen cases, and as such, contribute to the body of survey research involving earnings management.

Substance over form in auditing and the auditor's position of public trust

Abstract Auditors are placed by society in a special position of public trust. In their public role auditors are required to base their opinions on the substance rather than the form of the transactions underlying accounting numbers. An argument using the economics of trust (implicit contract theory) is constructed to show why it is required by society that auditors opine on substance. Forces exist, however, that deflect the auditor from fulfilling his or her public role into a “rule-dominated” practice in which substance is neglected. An empirical study confirms that auditors neglect substance and perceive little exposure to litigation in doing so. It is concluded that if auditors continue on their current path, their legitimacy before society will eventually erode to nothing.

An examination of the auditing standards promulgation process involving SAS No. 69

Abstract Our paper examines the development of Statement on Auditing Standards No. 69 . ( AICPA, 1992a ). The Statement arose in part due to a jurisdictional dispute between the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) involving the promulgation of generally accepted accounting principles (GAAP) ( AICPA, 1991a , p. 2). We considered all of the comment letters to the exposure draft (ED) of the Statement in an effort to determine if there are certain biases present in the audit standard-setting process involving the success of achieving an organizationss comments (proposed modifications) being integrated into the final Statement. The results did not support the thesis that an advantage accrues to national public accounting firms or other public accounting firms which have an employee serving on the Board. However. in the case of three influential organizations which are external to the American Institute of Certified Public Accountants (AICPA) and whose domain of control was threatened by the proposed SAS: the FASB, GASB, and the National State Auditors Association (NSAA), the success rate of comment integration was statistically significant.

Are Multiple Analyst Earnings Forecasts Better Than the Single Forecast

This study investigates the impact of multiple information sources. Specifically, we examine whether single and multiple earnings forecasts may differentially influence investors’ expectations. We focus on two main aspects of investors’ expectations: (a) predictions of future EPS and (b) subjective confidence about their own predictions. We conduct an experiment where we hold information content constant and ask participants to evaluate multiple earnings forecasts or a single earnings estimate. Results from the experiment suggest that multiple information sources improve participants’ confidence, and participants are most confident when they receive multiple earnings forecasts with no variability. However, their confidence diminishes when variability in the multiple forecasts increases. Evidence from this study indicates that multiple information sources outperform the single source only when multiple reports have highly consistent information.

An Examination of Voting Behavior of the ASB

The system by which auditing standards are promulgated has resided in the private sector since 1939. The members of the Auditing Standards Boards (ASB), unlike the Financial Accounting Standards Board (FASB), retain formal affiliations with their parent organizations during their tenure on the ASB. As a result, this process has been criticized by the late Senator Metcalf and others. One of Metcalf s allegations was that large accounting firms dominate the audit standard-setting process through their employees that serve on the ASB. Accordingly, this study examines certain voting behavior of the ASB in an effort to determine if the board members are acting as agents of their parent organizations or, rather, as independent rule makers. The results do support the proposition that in casting certain votes, the board members are acting in an agency capacity.

An Examination of the Perceptions of Auditors and Chief Financial Officers of Various Regulations Introduced by the Dodd–Frank Financial Reform Bill

Abstract The Dodd–Frank Wall Street Reform and Consumer Protection Act calls for substantially increased government regulation. Whether those regulations are, in some sense, appropriate is a function of whether the benefits of the increased regulation exceed the costs. Those costs and benefits, however, are probably impossible to measure, at least at this early stage of the implementation of the Dodd–Frank reforms. On the other hand, financial professionals who regularly deal with governmental regulations probably have a good sense of the costs and benefits based on their own experience with other similar regulations. This chapter reports the result of a survey of high-level auditors and CFOs regarding their perceptions of the costs and benefits of the main parts of the financial regulatory reform incorporated into the Dodd–Frank legislation. It concludes that there is support among these individuals for some aspects of Dodd–Frank, but no consensus.

AN ANALYSIS OF THE ACCOUNTING PROFESSION’S OLIGARCHY: THE AUDITING STANDARDS BOARD

Abstract The Auditing Standards Board (ASB), a committee of the American Institute of Certified Public Accountants (AICPA) has been granted the authority to promulgate auditing standards in the United States. Unlike the members of the Financial Accounting Standards Board (FASB), ASB members are all AICPA volunteers and are not required to sever ties with their employers. In its present mode of operation, the ASB brings in revenue for the exclusive benefit of members of the profession as well as creating a legal defense in the case of a lawsuit arising from an audit. Abbott (1988) refers to this as a jurisdictional claim. Over the past quarter of a century, there have been many critics of the ASB, but the accounting profession resisted making any significant changes in either the Board’s composition or its operations. Given this background, this paper involves the following sections: a review of the auditing standard-setting process, criticisms and recommendations for a change in the ASB’s operations, benefits to the profession of the current structure, and a call for a restructuring of the ASB in light of the recently signed Sarbanes-Oxley Act of 2002.

Voting patterns of big eight representatives in setting accounting and auditing standards

Abstract The “Big Eight” accounting firms are alleged to dominate the setting of accounting and auditing standards. This paper identifies the recent criticisms and reviews the standard setting procedures of the APB, FASB, and the ASB. The results of five empirical studies designed to investigate the alleged domination issue are summarized. The conclusion drawn is that there is no empirical evidence to indicate that the Big Eight collectively govern the accounting and auditing standard-setting process.

A new look at auditors' reactions toward substance versus form in financial reporting

A decade ago, we conducted a study (reported inMartens McEnroe, 1992) with the result that auditors neglected substance over form and perceived little exposure to litigation in doing so. The theoretical basis of the previous paper was implicit contract theory. We have had occasion to change our analysis since the previous work; in this paper we focus on the commodification of audits, and trace the neglect of substance over form to that commodification. We present evidence that recent actions by the SEC have altered the perception of auditors that the letter of GAAP (Generally Accepted Accounting Principles) is an aegis against litigation, and that audits which do not opine on substance over form are perfectly marketable commodities. We find, however, that audits which do not opine on substance vs. form are extant, and we cannot conclude that a change in the conditions of production of the audit commodity has occurred or is imminent.