Mary S. Stone

The effect of fiscal stress and balanced budget requirements on the funding and measurement of state pension obligations

Abstract We examine the extent to which fiscal stress and state balanced budget restrictions affect the funding of state public employee retirement systems. Our results indicate a negative relation between pension funding levels and measures of both: (a) state fiscal stress and (b) the existence of balanced budget requirements. Our finding that fiscally stressed states meet balanced budget requirements through reduced funding of pensions raises public policy concerns over the fiscal integrity of employee pension funds in the public sector and the effectiveness of balanced budget requirements. Additionally, we find evidence that choice of pension discount rate is associated with states’ fiscal condition and the requirement to balance the budget. Our findings are consistent with the proposition that fiscally stressed states that are required to balance their budgets both underfund their pensions and select discount rates which obscure the underfunding.

Why do companies purchase timely quarterly reviews

Abstract The SEC encourages companies to have their quarterly financial information reviewed by an independent accountant prior to filing Forms 10-Q (i.e., timely review). Many companies, however, choose to have their quarterly data reviewed only at year-end. Companies contracting for timely reviews are hypothesized to be seeking a higher level of monitoring because of higher internal and external agency costs. Empirical analyses support this hypothesis. The likelihood that a company purchases timely reviews is significantly associated with several proxies for internal and external agency costs.

An Examination of Substitution among Monitoring Devices: The Case of Internal and External Audit Expenditures

Much of the agency literature assumes that various monitoring devices are partial substitutes in reducing total agency costs. In particular, internal and external auditing often are characterized as monitoring devices that should be partial substitutes. We argue that reliable evidence of this relation is lacking because prior studies using cross-sectional archival data have not carefully considered the implications of microeconomic theory of substitution for the models estimated. Our analysis leads to a reexamination of the relation using time-series data. We find no evidence that systematic substitution of internal for external auditing (or vice versa) occurred during the period 1989–1993. Further analysis indicates that the relative prices of internal and external auditing inputs did not change during the period. Therefore a necessary condition for substitution to occur did not exist. Although we do not detect substitution with our sample, the analysis and methodology we develop contribute to the literature by enhancing researchers’ understanding of substitution among monitoring methods.

Firm financial stress and pension plan continuation/replacement decisions

Abstract This paper examines the proposition that firms switching to defined contribution plans after asset recaptures were more financially stressed than firms continuing defined benefit plans after recaptures. The examination was motivated by statements concerning the accounting and public policy implications of switching. The theoretical basis for the inquiry comes from the labor economics literature. The results of comparisons of dividend paying ability, financial stress scores, and prerecapture and postrecapture pension plan formulas for firms switching to defined contribution plans and for firms continuing defined benefit plans indicate that the switching firms were less able to pay dividends and were more financially stressed.

Would Switching to Timely Reviews Delay Quarterly and Annual Earnings Releases

The SEC recently issued a proposal to modernize and clarify the regulatory structure of securities offerings. The proposal would allow companies to access capital markets on an almost continuous basis but would require strengthening of the role of independent accountants and other gatekeepers in the registration process. The Commission is seeking comment on whether it “should add to the proposed practices the fact than an independent accountant performed a timely review under SAS 71 of an issuers quarterly financial information” (SEC, 1998, p. 231). This is the most recent of several proposals, made by the SEC and others, that provides incentives for companies to purchase quarter-end (timely) reviews of their quarterly data. Some managers who currently have their quarterly earnings reviewed only at year-end (retrospective reviews) argue that having a timely review would delay interim earnings releases. Proponents of timely reviews deny that this would occur, and assert that shifting certain review procedures into interim periods would decrease the time needed to release annual earnings.We estimate the quarterly and annual reporting lags that would occur if companies currently selecting retrospective reviews switched to timely reviews. Our results indicate that quarterly earnings release lags would increase, as opponents of mandatory timely review have argued. Switching to timely review would reduce annual earnings release lags only when interim earnings contain unusual components.

The role of SEC materials in the course curriculum: Update and extension

Abstract This research updates and extends earlier work by Ketz and Kunitake (1985) by providing survey evidence on (a) the coverage that currently is given to SEC-related topics in undergraduate and graduate curricula, and (b) the importance practicing accountants and financial managers attribute to classroom coverage of various SEC-related topics. Survey responses were received from 129 certified public accountants, 59 financial managers, and 154 accounting program administrators. Results indicate that practitioners consider coverage of SEC topics less important than communication skills, about as important as computer integration and ethics, and somewhat more important than international accounting. There appears to be little support for a separate course devoted to SEC topics. In addition, we find perceptual differences among respondents concerning what constitutes “SEC materials”. We conclude the paper by offering some suggestions as to how SEC topics can be integrated into existing accounting courses.

Crisis Communication in the Banking Industry: Countrywide's Use of Image Restoration Strategies

Abstract This case study analyzes Countrywide Financial’s responses to its recent financial crisis and illustrates the use of communication theory and image restoration strategies by utilizing several crisis response frameworks. The study uses a critical analysis methodology to examine the communication strategies employed by Countrywide, a large mortgage lending company in order to attempt to restore its image. The authors look at excerpts from media stories, carefully examine the language used by company representatives in response to the banking crisis, and categorize the corporate communications into various strategies as defined in the crisis communication literature. Countrywide faced several crisis situations during the period of this study, including the subprime mortgage crisis, public criticism of its CEO’s executive compensation package, allegations of insider trading, and financial difficulties. Corporate responses are critical in determining what amount of damage is done to the firm’s image during a crisis. Countrywide responded to these situations most often using the strategies of image bolstering, reducing the credibility of its accuser, and minimizing the crisis (Benoit, 1995). Through these communications, the company attempted to appear well established and untarnished. It also criticized the media, the courts, and the regulators in an attempt to reduce their credibility. Countrywide made no deliberate attempt to admit fault or to take measures to prevent the problem from reoccurring.