School of Accounting Research
Abstract Report 2020
Does Ex Ante Severance Pay Affect the Timeliness of Bad News Disclosure? The Role of Managerial Exit Costs
The extant literature documents a positive association between ex ante severance pay and the timeliness of bad news disclosure, suggesting that the provision of severance pay is consistent with efficient contracting. Relying on empirically unexplored theory, we investigate whether and how managerial exit costs affect the role of severance pay in curbing bad news withholding. Overall, our findings support the theoretical prediction that a “one-size-fits-all” structure of severance agreements undermines the potential of severance pay to benefit shareholders.
Sponsors: Oklahoma State University, University of Nebraska-Lincoln, San Diego State University
PI/PDs: Bryan G. Brockbank
University of Nebraska-Lincoln: Herita T. Akamah
San Diego State University: Sydney Shu
Charitable CEOs and Earnings Management
CEOs of public companies may serve of boards of non-profit organizations out of intrinsic motivation, reflecting a preference for the well-being of others. Alternatively, CEOs may serve on non-profit boards to increase moral reputation or manage their public image. We find that firms with CEOs serving on boards of non-profit organizations are associated with higher discretionary accruals, consistent with these firms engaging in more income-increasing earnings management. We also find these firms engage in more tax avoidance activities. Our findings suggest that on average, CEOs service on non-profit boards is driven by public image concerns and not intrinsic motivation.
Sponsors: Oklahoma State University, Northeastern University, Bentley University
PI/PDs: Bryan G. Brockbank
Northeastern University: Jaehan Ahn, Udi Hoitash
Bentley University: Rani Hoitash
Do Non-GAAP Exclusions Impact the Extent to Which Current Returns Reflect Future Earnings Information?
Motivated by regulators’ concerns about non-GAAP financial measures and building on research that finds more informative disclosures allow current stock returns to better reflect future earnings, I examine whether non-GAAP earnings exclusions enhance or garble the future earnings news captured in current stock returns. Utilizing Amazon Mechanical Turk (MTurk), I collect non-GAAP earnings data from 2003 to 2012 and measure managers’ non-GAAP exclusions relative to three comparable earnings: 1) GAAP earnings before extraordinary items, 2) GAAP earnings from operations, and 3) analyst-adjusted “street earnings.” Finally, I find that consistent non-GAAP reporting is associated with more future earnings information reflected in current stock returns.
Sponsor: Oklahoma State University
PI/PD: Bryan G. Brockbank
Real Earnings Management and Innovation-Intensive Companies
Prior research suggests firms engage in real earnings management activities, including cutting research and develop expenses, to achieve earnings benchmarks. Decreasing research and development expenditures is associated with less firm-level innovation in the future, measured using patents and patent citations (Bereskin et al. 2017). We examine whether innovation-intensive firms are willing to sacrifice potential long-term innovation benefits in order to meet short-term earnings benchmarks. We find that innovation-intensive firms engage in the same level of real earnings management around earnings benchmarks, suggesting that these firms are willing to sacrifice future innovation for short-term achievement.
Sponsor: Oklahoma State University
PI/PDs: Bryan G. Brockbank, Kent Hu
The Effect of Analyst Conservatism on Earnings Management
Little is known about the impact of conservative analysts on firm management. We examine whether a specific analyst characteristic, conservatism (which has an effect on how the market responds to analyst forecast revision), all affects management’s financial reporting decisions. We find that firms with a more conservative analyst following engage in less income-increasing earnings management, with the effect only noticeable in poor information environments. Next, we consider meeting or beating earnings estimates and financial statement restatements; our findings suggest that managers of firms with more conservative analyst followings tend to manage earnings “within GAAP.”
Sponsors: Oklahoma State University, University of Nebraska-Kearney
PI/PDs: Bryan Brockbank, Jaclyn Prentice
University of Nebraska-Kearney: Matt Bjornsen
Managerial Ability and the Accuracy of the Going Concern Opinion
Current audit guidance directs the auditor to modify their opinion in the presence of significant doubt about their client’s ability to continue as a going concern. This paper examines whether managerial ability influences the accuracy of auditors’ going concern information signal. Considering prior research indicates that the auditor’s opinion provides important information to the market, this finding has important public interest implications regarding the signaling of bankruptcy risk to investors and creditors by auditors’ going concern opinion.
Sponsors: Oklahoma State University, Mississippi State University
PI/PDs: Bradley P. Lawson, Don Herrmann
Mississippi State University: Nathan R. Berglund
Reorganization of the PCAOB’s Auditing Standards
The PCAOB’s final rule to reorganize its own auditing standards, along with the standards issued by the AICPA, into a single integrated system became effective December 31, 2016. The previous system required auditing professionals to understand and know two sets of overlapping standards with different organizational structures and referencing systems. The reorganized standards codify both sets of standards into one comprehensive set of standards with a single referencing system. Although the content of the reorganized standards is not different from the previous standards, the purpose of the reorganized standards is to make it easier for auditing professionals to navigate, apply, and reference the auditing standards applicable to publicly traded companies and broker-dealers.
Sponsor: Oklahoma State University
PI/PDs: Bradley P. Lawson, Angela Spencer
Updates and Comparisons Regarding Changes to the Audit Reporting Model in the US, UK, and EU
In May 2016, the Public Company Accounting Oversight Board (PCAOB) proposed some of the most significant changes to the audit report since the report was adopted in the 1940s. Among other things, the changes would require auditors to disclose within the audit report critical audit matters (CAMs), which are matters that are communicated to the audit committee and that involved especially challenging, subjective, or complex auditor judgement. Although the PCAOB’s latest proposal is not final, the changes are similar to standards already adopted by the International Auditing and Assurance Standards Board (IAASB).
Sponsor: Oklahoma State University
PI/PDs: Bradley P. Lawson, Angela Spencer, Vivian O’Hara
A Survey on Firms’ Implementation of COSO’s 2013 Internal Control – Integrated Framework
Many firms began implementing COSO’s 2013 Internal Control – Integrated Framework in 2014. We survey accounting professionals at U.S. firms to examine views concerning the framework and its impact on key areas related to internal controls. Our analyses provide insight into five specific topics important to the framework and its 17 principles.
Sponsors: Oklahoma State University, University of Central Oklahoma
PI/PDs: Bradley P. Lawson, Leah Muriel
University of Central Oklahoma: Paula Sanders
The Changing Structure of the Audit Market in the Oil & Gas Industry
This study provides evidence regarding the major structural changes in the audit market for the U.S. oil and gas industry. Regulators, standard-setters, and audit clients, both inside and outside the U.S., have expressed concerns regarding the structure of the market for audit services; in particular, concentration levels among audit service providers. Using auditor and audit fee data for publicly traded firms in the U.S. oil and gas industry, overall, this study finds a changing audit market in this industry with a predominant shift towards non-Big 4 firms.
Sponsor: Oklahoma State University
PI/PD: Bradley P. Lawson
Audit Market Structure and Audit Pricing
Extant literature finds mixed evidence on the association between audit market concentration and audit fees. We re-examine this issue using a large sample of U.S. audit clients covering 90 Metropolitan Statistical Areas (MSAs) spanning 2000-2013. We find that audit market concentration is associated with significantly higher audit fees, consistent with the concerns of regulators and managers. We also find that concentration is associated with higher audit quality for first-year engagements, but only if the auditor does not lowball on the engagement. Our results are relevant to the ongoing debate regarding the consequences of increased concentration within the U.S. audit market.
Sponsors: Oklahoma State University, Michigan Technological University
PI/PDs: Bradley Lawson
Michigan Technological University: Daniel Eshleman
Improvements in Audit Quality under PCAOB Auditing Standard No. 5
We examine changes in audit quality associated with the issuance of Auditing Standard No. 5 (AS5). In contrast to Auditing Standard No. 2 (AS2), AS5 introduces a “top-down, risk-based” approach allowing auditors to place greater focus on higher risk accounts that are more subject to misstatements. Overall, using financial restatements as our proxy for audit quality, we find that audit quality improves following the issuance of AS5.
Sponsor: Oklahoma State University
PI/PDs: Bradley P. Lawson, Michelle Draegar, Don Herrmann,
The Earnings Quality Information Content of Dividend Policies and Audit Pricing
Recent studies indicate dividends are associated with higher quality earnings. Our study extends the literature by examining whether dividends’ information is associated with auditors’ assessment of their clients’ earnings quality. Our results show that auditors charge lower fees to dividend-paying clients than to non-dividend-paying clients and the average fee discount ranges from 6.0-10.6 percent. We contribute to the literature by showing that auditors reflect the earnings quality information content of firms’ dividend policies in their pricing decisions.
Sponsors: Oklahoma State University, Texas A&M University
PI/PDs: Bradley P. Lawson
Texas A&M University: Dechun Wang
PCAOB Proposes Significant Changes to Auditor’s Reporting Model
The PCAOB recently proposed significant changes to the audit report. These changes would impact the financial reporting and auditing process for companies’ management, audit committees, and auditors. The proposals require auditors to disclose company-specific critical audit matters and expand their evaluation of other information outside the audited financial statements. The objective is to increase the value of the audit report, but some suggest the proposals could change the fundamental nature of the audit process, the scope of the audit opinion, and significantly increase audit-related costs.
Sponsor: Oklahoma State University
PI/PDs: Bradley P. Lawson, William C. Schwartz, Jr.
Does the Dodd-Frank Act Affect the Informativeness of Credit Rating Changes? Evidence from Audit Pricing
In an effort to improve the transparency of the credit rating process and create accountability for misleading ratings, the Dodd-Frank Act significantly altered credit rating agencies’ regulatory and legal environment. This study investigates whether Dodd-Frank influences the extent to which auditors incorporate credit ratings into their audit pricing decisions. Auditors are a unique consumer of credit ratings because they use credit rating information to help assess client risk, but have access to the same private information as credit ratings agencies. We find that auditors incorporate more information from credit rating changes into their pricing decisions after Dodd-Frank became effective.
Sponsors: Oklahoma State University, Texas A&M University
PI/PDs: Bradley P. Lawson
Texas A&M University: Sean McGuire, Dechun Wang
Taxable Income and Firm Performance: Evidence from Future Cash Flows
Prior literature provides mixed results as to whether taxable income is positively related to stock returns or negatively valued by investors. Our study adds to this area of literature by testing whether taxable income predicts future cash flows. This testing approach allows us to examine the usefulness of taxable income as a firm performance measure without confounding concerns of market efficiency and discount rate assumptions. We find that taxable income positively predicts future pre-tax cash flows, suggesting that taxable income provides incremental information to book income regarding firm performance.
Sponsors: Oklahoma State University, University of Florida, University of Oklahoma
PI/PDs: Bradley P. Lawson
University of Florida: Michael Mayberry
University of Oklahoma: Bradley Blaylock
Does audit committee reporting need to be improved? Evidence from a large-scale textual analysis?
The SEC is considering expanding audit committee reporting requirements to include greater disclosure of the audit committee’s oversight of the external auditor. To provide insight into whether additional reporting requirements are needed we (1) perform a large-scale textual examination of the characteristics and time trends of over 35,000 US firms’ audit committee report disclosures issued between 2004 and 2015 and (2) explore whether investors find such reports useful. In sum, our findings suggest that there is a need to improve the usefulness of audit committee report disclosures.
Sponsors: Oklahoma State University, Colorado State University, University of Texas
PI/PDs: Bradley P. Lawson
Colorado State University: Michelle Draegar
University of Texas: Jaime J. Schmidt
The Consequences of Audit Market Structure on Financial Analysts’ Information Environment
Audit market structure remains a concern for both regulators and academics due to the potential impact of competition (or lack of) on audit and financial reporting quality. However, studies of audit market structure and financial reporting quality provide mixed results. Testing this association provides evidence on the topic without having to separate the constructs of financial reporting quality and audit quality. We find that concentration improves analysts’ forecast accuracy and decreases dispersion, which is consistent with studies suggesting that higher audit market concentration improves audit and financial reporting quality. Our results further our understanding of audit market structure and its impact on financial disclosure quality.
Sponsors: Oklahoma State University, Texas State University, University of Las Vegas, Nevada
PI/PDs: Bradley P. Lawson
Texas State University: Mikhail Sterin
University of Las Vegas, Nevada: Chuong Do
A Reexamination of the Relation between CSR and Firm Performance: The Effect of KLD and ASSET4 Databases on CSR Research
We re-examine the findings in “Signaling through Corporate Accountability Reporting” by Lys et al. (2015) using the KLD Corporate Social Responsibility (CSR) ratings in place of the ASSET4 ratings used in their study. We find a positive relation between future firm performance and the optimal CSR expenditure, in contrast to the deviation from optimal found by Lys et al. (2015). This result implies that the optimal level of CSR expenditure is a good economic investment and is associated with increases in future financial performance.
Sponsors: Oklahoma State University, University of North Texas
PI/PDs: Teresa Lightner
University of North Texas: Linh Le
The Security Market Impact of IRS Tax Settlements
Corporate tax return information is proprietary and highly confidential. Hence, when the IRS challenges the accuracy of a firm’s tax return, investors generally are not aware of an IRS audit or the settlement details unless the company discloses the information. We investigate whether the stock market has sufficient information to incorporate the effect of an IRS tax settlement into stock price. Specifically, we examine whether the stock market fully incorporates increases in or release of firms’ tax cushion resulting from the settlement of an IRS audit.
Sponsors: Oklahoma State University, University of Oklahoma
PI/PDs: Teresa Lightner
University of Oklahoma: Fran Ayres
Tax Aggressiveness and the Tax Risk Disclosure
We examine the variation of the Tax Risk disclosure that companies include in their 10K. We use Direct Edgar to examine the influences and determinates for disclosing taxes as a business risk and investigate the relation between the Tax Risk disclosure and tax aggressiveness. In addition, we analyze whether management adds this disclosure in response to an event such as, Tax Cuts and Jobs Act, a tax-related restatement, or material weakness. Also, we examine whether companies that employ their auditors as their tax provider are more likely to disclose less than if the company employs another firm.
Sponsor: Oklahoma State University
PI/PDs: Teresa Lightner, Jaclyn Prentice
How Do Auditors Respond to FCPA Risk?
Using a sample of public firm FCPA violations, we investigate how auditors respond to FCPA risk. We find that audit fees are higher for FCPA violators beginning in the violation period with an additional increase during the period in which regulatory investigations occur. Fees exhibit a greater sensitivity to payables and SG&A expenses for FCPA violators than for non-violators, suggesting that auditors adapt their procedures for accounts that have the highest likely FCPA risk.
Sponsors: Oklahoma State University, American University, University of Kansas
PI/PDs: Bradley P. Lawson, Leah Muriel
American University: Gerald Martin
University of Kansas: Michael S. Wilkins
Does the reporting of critical audit matters affect nonprofessional investors’ perceptions of audit quality?
The Public Company Accounting Oversight Board (PCAOB) recently adopted a new auditing standard that would require the auditor to report critical audit matters (CAMs) in the body of the audit report. This new standard will lengthen the audit report but may also provide investors with cues about the quality of the audit. We find that the disclosure of a CAM does not directly affect the quality of the audit.
Sponsors: Oklahoma State University, Clemson University, Mississippi State University
PI/PDs: Leah Muriel
Clemson University: Brian T. Carver
Mississippi State University: Brad S. Trinkle
An examination of neutralization and information availability on the likelihood to commit fraud
Much of the focus of anti-fraud measures has been on internal control procedures, but internal controls alone have not been effective at preventing all fraud. We examine whether the timing of the presentation of neutralization techniques and the availability of information via the accounting information system (AIS) influences individuals’ likelihood of committing fraud. We find that individuals who receive neutralization statements before making a decision on a fraudulent act, report a lower likelihood of committing fraud. Overall, our findings suggest that organizations’ can reduce fraud by exposing employees to statements that cause them to think about the whether the action is acceptable.
Sponsors: Oklahoma State University, Universidad Adolfo Ibanez
PI/PDs: Leah Muriel, Bradley P. Lawson
Universidad Adolfo Ibanez: Nelson Carrasco
Reward, Retaliation Protection, and the Unintended Consequences for Whistleblowing
We investigate how internal protection from retaliation (provided by the organization), external protection from retaliation (provided by the Securities and Exchange Commission (SEC), and the opportunity of an external reward (provided by the SEC) affect intentions to report fraud. Concerns have been expressed whether rewards will lead to bypassing internal reporting. We find evidence of an unintended consequence to external protection. We do not find compelling evidence of spillover effects; internal protection is not associated with external reporting and reward is not associated with internal reporting. We also find evidence that auditing experience reduces the influence of reward on reporting intentions.
Sponsors: Oklahoma State University, Universidad Adolfo Ibanez, The University of Tennessee
PI/PDs: Leah Muriel
Universidad Adolfo Ibanez: Nelson Carrasco
The University of Tennessee: Robert M. Fuller
Collaborative tenure and earnings management
There continues to remain an empirical question as to whether “coziness” or longer timeserving together between the auditor and client has undesirable consequences in financial reporting. We introduce a new measure of tenure which allows for a more comprehensive analysis of situations where the auditor is more likely to grow closer to management because of their shared time together. We analyze the collaborative tenure of the auditor and the CEO. We provide evidence that longer collaborative tenure between the CEO and the auditor is associated with lower positive discretionary accruals (i.e., less earnings management).
Sponsors: Oklahoma State University, Universidad Adolfo Ibanez
PI/PDs: Leah Muriel
Universidad Adolfo Ibanez: Nelson Carrasco
A Survey on Firms’ Implementation of COSO’s 2013 Internal Control – Integrated Framework
Many firms began implementing COSO’s 2013 Internal Control – Integrated Framework in 2014. This study surveys U.S. accounting professionals, primarily from large publicly traded firms, to examine views concerning the framework and its impact on key areas related to internal controls.
Sponsors: Oklahoma State University, University of Central Oklahoma
PI/PDs: Leah Muriel, Bradley P. Lawson
University of Central Oklahoma: Paula Sanders
Conflict Mineral Disclosure Requirements
Under the Dodd-Frank Act, U.S. publicly traded companies are now required to provide disclosures related to conflict minerals. These are specifically the minerals of tin, tantalum, tungsten, and gold that are obtained from the Democratic Republic of Congo and adjoining countries. Although a portion of the requirements were struck down and ruled as unconstitutional, certain inquiry and other due diligence measures are still required to be filed annually with the Securities and Exchange Commission (SEC). In addition, if a company voluntarily chooses to provide certain additional information, it will trigger a requirement for an independent audit of the Conflict Minerals Report filed with the SEC.
Sponsor: Oklahoma State University
PI/PD: Leah Muriel
Audit Fees and Investor Perceptions of Audit Characteristics
We investigate how audit fee disclosures affect investor perceptions of audit characteristics. We find evidence that when audit fees are presented to investors with supplementary contextual information indicating that the fees are low, average, or high (as compared to industry averages), investors perceive audit quality and auditor effort as being low, average, or high, respectively. When not provided with any additional information concerning the audit fee (similar to the present state of disclosures), investors assess audit quality and auditor effort as being average. This latter finding provides important insight regarding investors’ current perceptions of auditor independence, particularly in the absence of relative or comparative audit fee information.
Sponsors: Oklahoma State University, Florida State University, Northeastern University, University of Tennessee
PI/PDs: Leah Muriel
Florida State University: Allison K. Beck
Northeastern University: Colin D. Reid
University of Tennessee: Robert M. Fuller
Does accounting firm involvement in a breach of the PCAOB inspection process impact non-professional investor perceptions?
We examine investors’ perceptions when auditors’ may be perceived to exhibit higher or lower trustworthiness (by the presence or absence of a breach in the PCAOB inspection process) and higher or lower expertise (via inspection deficiency rates). Using a structural equation model, we find that both the presence of a breach in the inspection process and a higher inspection deficiency rate are associated with lower confidence in the audit opinion and this in turn is associated with an increase in perceived investment risk.
Sponsors: Oklahoma State University, DePaul University, University of Louisville
PI/PDs: Leah Muriel
DePaul University: Stephani A. Mason
University of Louisville: Dereck Barr-Pulliam
Real earnings management by benchmark-beating firms: Implications for future profitability
Prior studies document both an improvement and in the future operating performance of firms engaging in real earnings management (REM) to meet earnings benchmarks. We find that small firms, whose information environments are less robust, use REM to signal positive future performance, but large firms do not.
Sponsors: Oklahoma State University, Colorado State University, Kansas State University
PI/PDs: Sandeep Nabar
Kansas State University: Brooke Beyer
Colorado State University: Eric Rapley
Macroeconomic effects of aggregate accounting conservatism: A cross-country analysis
This paper examines whether aggregate conditional and unconditional conservatism are associated with economic growth. Prior studies find that conditional conservatism improves contracting efficiency, but that unconditional conservatism has either a neutral or detrimental impact on contracting. We find that conditional conservatism is associated with higher level of growth in Gross Domestic Product and Gross Domestic Product per Capita. By contrast, unconditional conservatism shows no or negative association. Our study contributes to the ongoing debate on the desirability of accounting conservatism, and also extends the literature on the macroeconomic effects of aggregate financial reporting attributes.
Sponsors: Oklahoma State University
PI/PDs: Sandeep Nabar, Chuong Do
The Impact of Benefit Plan Audits on the Financial Statement Audit
We explore the implications of benefit plan audits for the financial statement audit. We find that performing a benefit plan allows audit firms to get a “foot in the door” with potential financial statement audit clients. Further, we find that companies that engage the same audit firm for both their benefit plan and financial statement audits have a lower likelihood of misstatements, shorter audit report lags, and a lower likelihood of switching the financial statement auditor. Our findings speak to the continued debate over effective market expansion of audit providers, audit quality determinants, and audit efficiencies.
Sponsors: Oklahoma State University, Michigan State University, University of Arkansas
PI/PDs: Jaclyn Prentice
Michigan State University: Kenneth L. Bills
University of Arkansas: Gary F. Peters
Does Insider Trading Affect Auditors’ Risk Assessments? Evidence from Audit Pricing
Audit regulations require auditors to consider insider trading as part of their risk assessment. Companies file Form 4 with the SEC when insiders trade. We find that the number of requests for Form 4 in the SEC EDGAR online system is positively associated with audit fees. In addition, audit fees are higher among companies with net insider selling, relative to companies with net insider buying. We find that officer net selling drives this relation. These results suggest that auditors’ risk assessments are sensitive to information reflected in insider trading, consistent with regulatory requirements for auditors to consider non-traditional risk characteristics.
Sponsors: Oklahoma State University and Texas Tech
PI/PDs: Jaclyn Prentice
Texas Tech: Sabrina Chi
IT Environment Quality and Effectiveness of Controls over the Tax Function and Income Tax Avoidance
If a firm’s information technology (IT) environment is not able to handle tax complexities, then the firm’s financial accounting for income taxes is at risk for errors. We find that having an IT-related material weakness hinders tax avoidance and is positively associated with a likelihood of having a tax-related MW. We find that firms having a CFO with IT expertise are positively associated with tax avoidance. This suggest that firms with higher quality IT environments are more likely to have effective tax-related controls and more effective tax avoidance efforts.
Sponsors: Oklahoma State University, Texas Tech, University of California – Irvine, and University of Arkansas
PI/PDs: Jaclyn Prentice
Texas Tech: Sabrina Chi
University of California – Irvine: Morton Pincus
University of Arkansas: Vernon J. Richardson
Goodbye and hello: audit quality, the Big 4, and acquiring consulting practices
The largest accounting firms have been acquiring consulting practices for the last
decade. I find that the audit quality of the companies being audited by the accounting
firm acquiring a large consulting practice decreases in the year of the acquisition,
but this result reverses in the subsequent period. This finding suggests accounting
firm management may be distracted in the year of the acquisition and then in the subsequent
year audit quality improves as accounting firms are better able to utilize consulting
practices’ specialized knowledge.
Sponsor: Oklahoma State University
PI/PD: Jaclyn Prentice
Tax Aggressiveness and the Tax Risk Disclosure
We examine the variation of the Tax Risk disclosure that companies include in their
10K (Item 1A - risk factors). We examine the influences and determinates for disclosing
taxes as a business risk and investigate the relation between the Tax Risk disclosure
and tax aggressiveness. In addition, we analyze whether management adds this disclosure
in response to an event such as, Tax Cuts and Jobs Act, a tax-related restatement,
or material weakness. Also, we examine whether companies that employ their auditors
as their tax provider are more likely to disclose less than if the company employs
another firm.
Sponsor: Oklahoma State University
PI/PDs: Jaclyn Prentice, Teresa Lightner
The Effect of Analyst Conservatism on Earnings Management
Little is known about the impact of conservative analysts on firm management. We examine whether a specific analyst characteristic, conservatism (which has an effect on how the market responds to analyst forecast revision), all affects management’s financial reporting decisions. We find that firms with a more conservative analyst following engage in less income-increasing earnings management, with the effect only noticeable in poor information environments. Next, we consider meeting or beating earnings estimates and financial statement restatements; our findings suggest that managers of firms with more conservative analyst followings tend to manage earnings “within GAAP.”
Sponsors: Oklahoma State University, University of Nebraska-Kearney
PI/PDs: Bryan Brockbank, Jaclyn Prentice
University of Nebraska-Kearney: Matt Bjornsen
A Review of the Literature on Accounting for Derivatives
The manner in which firms utilize derivatives have changed in interesting way over time. Furthermore, the accounting for derivative instruments has also evolved over time. This papers reviews the accounting literature on the accounting for derivatives. The goals include describing the contributions and implications of key papers in the literature. Additionally, the paper will tie (or attempt to tie) the literature together and discuss differing results. Finally, the paper will identify areas that are ripe for future research.
Sponsors: Oklahoma State University, University of Georgia
PI/PDs: William C. Schwartz, Jr.
University of Georgia: John Campbell
Why Do Firms Forego Value-Maximizing Investments to Fund Their Defined Benefit Pension Plans?
In recent years some firms with defined benefit pension plans have been offering lump-sum payout to employees in order to remove their pension obligations from the financial statements. Firms are also purchasing annuities for employees that opt out of the lump-sum offer. Additionally, there is some evidence that firms are allocating more of their pension assets to fixed income investments. These phenomenon are intriguing in an environment where the Federal Reserve has explicitly stated its intentions to raise interest rates. Specifically, this seems to be the worst time to invest in fixed income pension assets and to offer buyouts/annuities because as rates rise the value of these assets will decline.
Sponsor: Oklahoma State University
PI/PDs: William C. Schwartz, Jr., Abbie Sadler
Customer Concentration Risk for Profit versus Loss Firms
Prior research indicates a positive association between customer concentration and cost of equity capital and cost of debt. The cost of financing increases for firms that are more likely to lose key customers. We extend this literature by re-examining the cost of financing (debt and equity) when firms are partitioned by profit versus loss. Prior literature shows that loss firms have lower cumulative abnormal returns than profit firms. We expect that profit firms will have lower financing costs than loss firms and that the positive association between customer concentration and cost of financing will be lower for profit firms and higher for loss firms.
Sponsors: Oklahoma State University, Penn State University
PI/PDs: William C. Schwartz
Penn State University: Harry Feng
The market pricing of negative special items through time: An unintended consequence of regulation change?
Prior research concludes that the implications of negative special items (NSIs) for future earnings are more fully reflected than earnings before NSIs. Our evidence suggests that U.S. regulatory changes resulted in dramatic increases (decreases) in NSI reporting frequency. Our evidence suggests that regulations governing the financial reporting of NSIs resulted in unintended consequences by impairing the ability of market participants to understand the future earnings implications of these items.
Sponsors: Oklahoma State University, University of Alabama, West Virginia University
PI/PDs: Craig A. Sisneros
University of Alabama: Thomas J. Lopez
West Virginia University: Trevor Sorenson
Empirical Implications of Incorrect Tax Rate Assumptions
The objective of this study is to explore the potential empirical consequences of assuming an incorrect tax rate in adjusting earnings-related measures. In so doing, we focus our investigation on special items given their prevalence in the prior literature and the wide variation in tax rate assumptions. Importantly, our evidence suggests that extreme tax rate assumptions (zero or the highest statutory rate) can be especially problematic and that firm-specific tax rates, such as effective or marginal tax rates, exhibit less bias in several contexts.
Sponsors: Oklahoma State University, University of Texas at Dallas, University of Alabama
PI/PDs: Craig A. Sisneros
University of Texas at Dallas: William M. Cready
University of Alabama: Thomas J. Lopez, Shane R. Stinson
Evaluating pedagogy in educating business majors: an empirical analysis of teaching accounting without debits and credits
An upper-level intermediate accounting course taught at two large universities in the United States provides a natural experimental setting to examine whether teaching debits/credits in the introductory financial accounting course matters. Students in the upper-level course fall into two groups: those who learned debits/credits in the introductory course and those who weren’t. Regression results show that the prior knowledge of debits/credits offers only a mild advantage in the first mid-term exam, but not thereafter. These results suggest that teaching debits and credits in the introductory accounting course does not provide any advantage in learning the material of upper-level accounting course.
Sponsors: Oklahoma State University, Wichita State University
PI/PDs: Craig A. Sisneros
Wichita State University: Atul Rai
Preparing Accountants for Lifelong Self-Assessment and Development
Despite calls by the profession to increase the diversity of competencies accounting graduates possess, there remains a gap in student awareness and attainment of these skills. This experiential learning opportunity benefits students by increasing awareness of necessary professional competencies, improving critical and reflective thinking skills, and developing a plan to take initiative and ownership for acquiring necessary skills for success as an accounting professional and thus, developing a lifelong learning mindset.
Sponsors: Oklahoma State University, The University of Tampa, University of Missouri Kansas City, Purdue University Northwest
PI/PDs: Angela Wheeler Spencer
The University of Tampa: Maureen Butler
University of Missouri Kansas City: Kimberly Swanson Church
Purdue University Northwest: Gail Hoover King
Resources to Implement Experiential Education in Accounting
Experiential education can facilitate student critical thinking and problem-solving improvement. However, this method is more than learning by doing as this method requires students to Do, Reflect, Think, and Act. Instructors transitioning from lecture to experiential delivery may be discouraged by additional planning and preparing required. This paper provides resources to help accounting instructors adopt or design experiential learning activities for their courses. We explain the background and features of experiential learning, identify relevant accounting specific experiential resources, and provide step-by-step examples adapting existing accounting course activities to an experiential learning model.
Sponsors: Oklahoma State University, The University of Tampa, University of Missouri Kansas City
PI/PDs: Angela Wheeler Spencer
The University of Tampa: Maureen Butler
University of Missouri Kansas City: Kimberly Swanson Church
Operating Leases: A Descriptive Analysis
Considering recent changes in accounting for leases, we analyze those industries and firms expected to be most heavily impacted by operating lease capitalization. We estimate that both those industries and firms most heavily impacted by recognition will also experience the greatest increase in reliability. We also find that those firms and industries may experience detrimental effects due to relatively high levels of existing debt and tendency to use operating leases to increase existing debt capacity. Overall, however, we find that the bulk of the effects from lease recognition will likely be confined to a relatively small subset of firms.
Sponsors: Oklahoma State University, University of Mississippi
PI/PDs: Angela Wheeler Spencer
University of Mississippi: Zach Webb
Special Purpose Vehicles and Audit Fees
We document a positive and increasing relationship between use of special purpose vehicles (SPVs) and audit fees. Specifically, we find that use of SPVs, on average, increases audit fees by more than 9% while firms with the highest number of SPVs experience audit fees which are over 41% higher than firms without SPVs. Overall, our results suggest that auditors price the additional work and risk associated with client utilization of these structures. Evidence provided here is important in better understanding costs associated with use of SPVs and the effects of unique forms of complexity on audit fees.
Sponsors: Oklahoma State University, University of Mississippi, University of Wisconsin-Whitewater
PI/PDs: Angela Wheeler Spencer
University of Mississippi: Zach Webb
University of Wisconsin-Whitewater: Robert T. Yu
Derivatives Use: Real Activities Manipulation and Manager Ability
Derivative use after the implementation of SFAS 133 (now ASC 815) resulted in significant earnings volatility. Given the negative impact of this volatility, firm managers have an incentive to smooth earnings through real activities manipulation. Using a sample of non-financial firms for the period 2001-2013, this study examines the impact of hedge ineffectiveness and trading gains/losses on real activities manipulation post ASC 815 and whether manager ability impacts such manipulation. We find that hedge ineffectiveness and trading gains/losses increase the level of total real activities manipulation.
Sponsors: Oklahoma State University, University of Louisville, Georgia Southern University, University of Texas Pan-American
PI/PDs: Angela Wheeler Spencer
University of Louisville: Carolyn Callahan
George Southern University: Stephanie Hairston
University of Texas Pan-America: Ji Woo Ryou
Population Heterogeneity and Corporate Tax Compliance
This study examines the empirical relationship between population heterogeneity and corporate tax compliance. In recent years, some political movements have called for the establishment of social welfare policies similar to those found in Scandinavian countries. Opponents of the movement have argued that the relative homogeneity of Scandinavian countries is a prerequisite for successful tax policies featuring high tax rates. In addition, studies in economics find conflicting evidence about whether diversity is beneficial or detrimental for public goods provision. This study contributes to both the policy and academic debates. The results suggest that public policy pertaining to public goods needs to take into account population characteristics.
Sponsor: Oklahoma State University
PI/PDs: Scott White, Chuong Do
Measuring the Cost of Repatriation Taxes: Evidence from Bonds
We examine the extent to which the tax cost of accessing undistributed foreign earnings (UFE) affects bond yields and bond issuance spreads. Repatriation tax costs are unique because they include both recognized deferred tax liabilities and unrecognized potential liabilities for UFE designated as permanently reinvested earnings (PRE). We examine whether the tax costs of accessing UFE affect debt pricing. Overall, our findings suggest that capital market participants are more sophisticated in their pricing of repatriation tax liabilities than is documented by prior research.
Sponsors: Oklahoma State University, University of Oklahoma, University of Nebraska-Lincoln, Auburn University
PI/PDs: Scott White
University of Oklahoma: Bradley S. Blaylock
University of Nebraska-Lincoln: Jimmy F. Downes
Auburn University: Mollie E. Mathis
MINDSETS AS THE FOCAL POINT OF 21st CENTURY ACCOUNTING EDUCATION
Competency-based frameworks for accounting education have become fashionable. However, with current technological advances and complex changes, many competencies are being automated, commoditized, and/or becoming obsolete. Drawing from the “mindset” work in various literatures, we highlight important mindsets that accounting graduates should possess. A mindset is a mental attitude or way of thinking. Given the obligation of CPAs to protect the public trust, we treat the “public interest mindset” as foundational. Other desirable mindsets include 1) personal and professional growth; 2) critical thinking; and 3) global.
Sponsors: Oklahoma State University, University of Dayton, University of Cincinnati
PI/PDs: Audrey Gramling
University of Dayton: Sridhar Ramamoorti
University of Cincinnati: Natalia Mintchik