Accounting and Auditing Research

Tools and Strategies 9th Edition

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 Weirich, Accounting & Auditing Research, 9th Edition

CHAPTER 6
OTHER RESEACH DATABASES AND TOOLS
Discussion Questions

1.CCH’s Accounting Research Manager includes accounting and auditing information, as well as
SEC materials, and separate libraries for governmental and internal control sources. Specific
libraries that are included vary depending upon one’s subscription.

2.Research for governmental accounting depends on the government at issue. GASB’s

governmental accounting standards for state and local governments in the United States are
available in GARS Online at GASB’s website: www.gasb.org for accounting program
faculty and students at subscribing institutions.). The FASAB Handbook of federal
accounting standards is freely provided by the FASAB at www.fasab.gov.

3.Example of the advantages of S&P’s Capital IQ can include researching many private
companies or acquring bond information.

4.Use Mergent Online when seeking industry comparisons, researching foreign companies, or
when it’s the best available financial research database.

5.The Thomson database covers over 90% of the world’s stock market value and includes
records for more than 30,000 active companies representing over 50 countries.

6.The Audit Analytics database provides detailed research on over 150,000 active audits and
more than 10,000 accounting firms. Accounting firms can use the database by creating a peer
group of prospective clients, benchmarking their periodic disclosures, monitoring the peer
group for major events, creating comprehensive due diligence reports, or tracking the
business relationships of potential clients.
7. Use the Factiva database when looking for business and financial information.

8. Hoovers Online is distinguishable from other databases which provide corporate information
by seeking to provide objective information, instead of relying on what a company’s
corporate staff might issue.

9. ABI/Inform Global includes international professional publications, academic journals, and

trade magazines. Business Source Premier is used to access periodicals, peer-reviewed
journals, trade generals, general business magazines, and other reports.

10. Conducting international business research is assisted by going to the website GlobalEDGE. Its Reference Desk
has a Global Resource Directory which organizes research categories by Multi-Country, Statistical Data
Sources, Rankings, Organizations, and Publications.

11. The Guidestar database provides access to federal tax returns of almost 2 million tax-exempt organizations.

12. Before hiring a local construction company to remodel one’s house, one should acquire data
about that company having problems from various databases. The most important database to
 Weirich, Accounting & Auditing Research, 9th Edition

check is PACER to determine what legal activities the company has had in either bankruptcy
court or federal court. Additionally, a state court database is likely to exist, although it might
provide only skeleton advice. The state might also have a database related to complaints
against contractors. Because settlements might involve withdrawing the complaint, this
database is probably not as reliable as legal databases.

13. Financial ratios found in Nexis Uni® database are found by selecting Companies and then
Company Dossier. Search for the particular company of interest. A snapshot of the company
appears, but more information, such as the financial ratios are accessible by selecting
financial information on the left side of the screen. Scroll down after the presentation of the
financial statements to view the ratios.

14. Nexis Uni® database provides only a small subset of information compared to the Lexis
Advance database.

15. Advantages of using a new emerging legal database include using new technologies, such as
various data analytic abilities in the database. Disadvantages include the possibility that an
emerging database is discontinued because it is bought out or not as extensive as other
databases.

EXERCISES

1. The FASAB’s exposure drafts are presented at its website under the tab for board activities,
documents for comment. Exposures drafts are issued for public comment on proposed new
accounting standards. Available exposure drafts are posted on the FASAB.gov website in
2017, includes one on the topic of Budget and Accrual Reconciliation.

2. GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for
State and Local Governments issued in 2015, reduced the GAAP hierarchy to two categories
of authoritative GAAP. Previously, four categories existed under GASB Statement 55, The
Hierarchy of Generally Accepted Accounting Principles for State and Local Governments
issued in 2009. Because the FASB and GASB have a common parent organization, pressure
existed for GASB to codify the sources of accounting and make the accounting sources either
authoritative or non-authoritative, similar to the type of change enacted by the FASB in 2009.
3. FASB ASC 815 provides accounting standards on derivatives and hedging. ASC 815-10-00
provides references and links to the related Accounting Standards Updates (ASUs) for
accounting for derivatives and other subtopics. For example, ASU 2016-06 issued in March
2016 discusses the updates on contingent put and call options in debt instruments.

NOTE: Most accounting students can access the academic view of the FASB’s “Accounting
Standards Codification” by going to http://aaahq.org/FASB/Access.cfm. One finds the
answer either by drilling down in the Codification, using an advanced keyword search on
unfunded pensions, or researching archieved GAAP and then using the cross-reference in the
Codification. Using the drill down approach, one selects expenses, compensation, retirement
 Weirich, Accounting & Auditing Research, 9th Edition

benefits, pensions. Using the advanced search in the upper right of the Codification’s screen
search for all key words in the phrase phrase “unfunded pension,” rather than the exact
phrase.

4. Walmart’s gross profit margin increased from 24.8% in 2015 to 25.6% in 2017, according to
S&P’s database. However, EBITDA, EBIT, and net income were decreasing every year.
Although Walmart remained profitable, it was not as profitable as it was in 2015.

Databases with ratio analysis of company financial statements include Mergent Online,
Standard & Poor’s Capital IQ, LexisNexis Academic, and Morningstar. Walmart’s ratio
analysis (ROA, ROE, and ROI) decreased from 2015 to 2017. ROA indicates how
effectively assets are being used to produce profit. ROE indicates how effectively the
stockholders’ investment is being used to produce profit. ROI is annualized income
expressed as a percentage of average invested capital. Current ratio is the current assets
divided by current liabilities.

Walmart 1/31/2017 1/31/2016 1/31/2015

ROA % 7.1 7.5 8.3
ROE % 17.4 17.8 19.9
ROI % 10.9 11.1 12.3

5. Alexander & Baldwin operates primarily as a real estate company. But its major operations
also include Transportation and Agribusiness. The company is engaged in ocean freight
transportation, property development and management in Hawaii and on the U.S. mainland,
and producing sugar cane and coffee in Hawaii. Competitors found in a database will depend
on the database used. Those listed could include Barnwell Industries and Castle & Cooke.
NOTE: The competitors are usually not divided by different major lines of business.

6. The largest financial fraud discovered in the first half of 2016 was Logitech International
agreed to pay a $7.5 million penalty for fraudulently inflating its fiscal year 2011 financial
results to meet earnings guidance and committing other accounting-related violations during
a five-year period. NOTE: Students will probably have different answers for a case involving
cyber fraud, such as the SEC “announced fraud charges against 11 former executives and
board members at Superior Bank and its holding company involved in various schemes to
conceal the extent of loan losses as the bank was faltering in the wake of the financial crisis.”
Students often use a Google search on the internet or sometimes use an article index
database, such as ABI/Inform, to find the fraud. Encourage the students to use commercial
databases to search through leading professional sources, such as The Wall Street Journal.

7. The Mergent Online database provides several useful financial ratios, such as the profitability
ratios, liquidity ratios, ratio for debt management and asset management,
as well as cash flow per share and book value per share data. Different subscriptions to
Mergent Online may include more ratios. On the other hand, S&P Capital 1Q provides not
 Weirich, Accounting & Auditing Research, 9th Edition

only the same financial ratios Mergent Online provided but also a much more detail ratios
and other helpful financial ratios such as the growth over prior year. However, Mergent
Online database is easier to read and it provides 15 years of financial ratios where S&P
Capital 1Q only provides up to 5 years.

8. From profitability ratios generated by Mergent Online for Wells Fargo for the 5-year period
from 2012 to 2016, Wells Fargo’s profitability has a continuous decrease in return on asset
and return on equity. As a result, Wells Fargo’s efficiency in use of its assets is slower from
year to year. Since 2015, Wells Fargo’s profitability dropped and its debt to equity increased
from 1.03 to 1.28, where cash flow per share dropped from 2.88 to 0.03, therefore; the
company is financing mostly through debts and the use of assets is not as efficient as in 2015.

The following ratios are from Mergent Online. Wells Fargo’s operational and financial
indicators improved from 2008 to 2012 as the U.S. economy and stock market recovered
from the most serious financial crisis since the Great Depression of the 1930s.

Wells Fargo & Co.

Profitability Ratios 12/31/2016 12/31/2015 12/31/2014
ROA % (Net) 1.18 1.32 1.43
ROE % (Net) 11.15 12.3 13.01

Per Share 12/31/2012 12/31/2011 12/31/2010

Cash Flow per Share 0.03 2.88 3.35

9. In 2003 19 year-old Elizabeth Holmes founded Theranos. The company operated as a blood-
testing business. It was valued at $9 billion at that time as a privately held company not
traded on any stock exchange. However, in October 2015, The Wall Street Journal published
an investigation of Theranos claiming the company wasn’t using its own blood analysis
machines to do many of the tests and not all lab test results were accurate. Since then, several
executives left the company and the board of directors was reworked. In July 2016, the
company was banned by the federal regulators from owning or operating a medical
laboratory for at least two years and could no longer continue operating its California lab. In
October 2016, Theranos laid off 340 employees and exited the business of running a
laboratory. See Mathew Herper, “The Decline and Fall of Elizabeth Holmes and Theranos,”
Forbes, Oct. 8, 2016.

10. IBM’s first footnote explains its significant accounting principles.

The SEC website with its EDGAR database provides various financial reports and it required
several clicks to get to the IBM’s 10-K. It is not always easy to find the notes to financial
statements or a specific part of the financial statements due to its length as a single web page
in the actual 10-K. The interactive data page provides a sidebar with headings for different
parts, so using it is much easier to locate the first footnote.
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Students might use “last10k.com” as a commercial database to locate IBM’s first footnote in
its 10-K annual report for 2016. This website provides a quick search tool for any company’s
10-K annual report for the last 10 years, and allows a user to locate any parts of the 10-K
with a drop-down list.

Advantages of commercial databases over the SEC’s EDGAR database are most noticeable
in providing ratios and analysis. The SEC’s EDGAR database provides only the raw financial
statements. However, disadvantages of commercial databases include that they often do not
provide all of the information from the SEC filings by the company. For example, most
commercial databases will not provide footnotes or other non-financial information contained
in the 10K filing.

11. Journal of Accountancy, published by the AICPA, has many articles using the keyword
"derivatives.” One example was written by Tysiac, K. (2016). “FASB Proposal Would
Improve Hedge Accounting, AICPA Committee Says.” Journal of Accountancy. The article
explained that the FASB issued a Proposed Accounting Standards Update on ASC 815 in
order to simplify and improve the current hedge accounting model.

12. Chevron’s annual report (10-K) filed with the SEC describes include some discussions
relating to the company’s environmental liability, such as in the discussion of legal
proceedings. Federal laws in the United States affecting environmental liability disclosure
include the Clean Air Act Amendments of 1990; the Environmental Response,
Compensation, and Liability Act of 1980; and the Conservation and Recovery Act of 1976. A
google search can find a list of archived GAAP on the accounting for environmental
liabilities. This includes SFAS No. 5, Accounting and Reporting for Loss Contingencies,
SEC Staff Accounting Bulletin 92, regarding “accounting and disclosure obligations for
contingent environmental liabilities.” Also, FIN 14, Reasonable Estimation of the Amount of
a Loss, and AICPA SOP 96-1, Environmental Remediation Liabilities are relevant
authorities.

13. The Blackstone Group’s stock price in 2016 ranged from just under $23 to more than $29.
Information on the Blackstone Group was more readily available than most private equity
firms because this Limited Partnership is publicly traded on the NYSE.

According to Bloomberg, Blackstone had a fund which lost 15 percent in the January to June
period in 2016 and the fund was closed after it lost 24% in 2016. Information on this private
equity firm is more readily available than information for most private equity firms is
because Blackstone’s private equity business is one of the largest private equity firms with
over $100 billion in assets under management.

14. Uber, originally known as UberCab, was founded in 2009 as a black-car service. It became
popular by offering affordably priced ride services and allowing users to request rides via
their smartphone. Uber began service in 2010 in San Francisco.
 Weirich, Accounting & Auditing Research, 9th Edition

Uber’s business model was based on the ideas of a tech company having drivers as
independent contractors. However, lawsuits against Uber, particularly in California and
Massachusetts called into question whether Uber drivers are really employees. Thus, Uber
might have to pay additional costs such as employee benefits, minimum wage, overtime,
their share of state and local payroll taxes, workers compensation, etc. Uber paid $100
million to settle the California and Massachusetts lawsuits in 2016. The company was
allowed to continue classifying drivers as independent contractors but it had to provide
additional protections for its drivers.

Other legal issues arose as Uber’s rapid expansion resulted in disregard for various state and
local laws. Uber doesn’t require background checks like taxi services and some Uber
contractors have been charged with sexually assaulting customers and various other torts so
there is additional concern regarding Uber’s liability for its drivers. In 2017, Uber was sued
by Alphabet (parent company of Google) for allegedly stealing self-driving technology. In
January, the company paid $20 million to settle a trade commission lawsuit.

15. State Farm Group insurance is a private company, owned by policyholders who purchase
insurance. Therefore, there is minimal financial information available on the EDGAR
database. However, databases on private companies such as one by S&P, provide financial
information for State Farm Group. State Farm Group’s ROA and Return on Capital declined
from 2012 to 2015, however, ROE was up from 2012. While Gross Margin has varied
minimally over that time period, net income margin has varied more dramatically going from
nearly 5% in 2012 and 2013 to only 2.6% in 2014 back to 5% in 2015.

State Farm’s company website shows results for different segments. State Farm’s property-
casualty (P-C) companies and breaks results down by segments such as auto, homeowner,
life, bank and mutual funds. For example, property-casualty showed total revenue increased
by .5% from 2015 to 2016, as it was $75.7 billion in 2015 and $76.1 billion in 2016. Results
for underwriting losses included $2.1 billion in 2015 and $5.5 billion in 2016, therefore
underwriting losses increased by 62%. The underwriting losses were offset by investment
income of $4 billion in 2015 or $4.4 billion in 2016, therefore investment income increased
by 10%. Overall, the property-casualty companies showed net income of $0.4 billion in
2016, compared to $6.2 billion in 2015, a decrease of approximately 93%. This was partially
due to realized capital gains from corporate mergers in 2015. The company’s website also
showed mini-annual reports, which are only one page of summarized results.

16. Yahoo’s growth rate from 2015 to its sale to Verizon in 2016 declined as trends in
technology changed. During the first half of 2013, however, Yahoo stock outperformed the
market.

Verizon planned to buy Yahoo! for approximately $4.8 billion in July 2016, in December
2016 Verizon wanted to change the terms of the acquisition due to Yahoo!’s data breach.
Growth rate perspectives can arise from a variety of factors such as revenue, net income, EPS
using S&P’s database. Revenue growth increased in 2015 by 7.6%, however it was negative
prior to 2015, and it also increase 4% during 2016. However, gross profit growth and
EBITDA growth was negative in 2015 and 2016.
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On January 1, 2015, Yahoo had a stock price of $50.17, which shifted dramatically over the
next year reaching lows in the mid $20 range and ultimately was $38.85 around the
acquisition date announcement; therefore, there was a decline in the stock price of 22%.

There were a variety of reasons for the decline in stock price including significant declines in
EPS and declines in net income, profit margin, ROA and ROE over the period. Additionally,
Yahoo underperformed compared to competitors in revenue growth, debt to equity and net
profit margin. However, the sale yielded a higher stock price.

17. An analyst’s note on Ford Motor Company provided in S&P’s database, written by Efraim
Levy, recommended buying Ford Motor Company stock on March 25, 2017, when the price
was $11.42 and the 12-month target price was $14.00. The analyst’s report covers valuation,
risk, management and stewardship, and financial health. Thus, the report summarized Ford
Motor Company’s business, financial information, industry outlook, and analyst
recommendations. Interestingly, the report indicated future declines in revenue and profits
are expected due to industry factors including Brexit’s influence on demand and various
internal factors. After the company was selected, click on a Research option in the left-hand
column to find analyst reports. NOTE: Students may have various answers to this question,
depending on the database and analyst report used.

18. This question asks students to identify the accounting and business databases at their
university’s particular library. Students are asked to prepare a few PowerPoint slides to
explain and illustrate one such database.

Accounting Research Tools

19. GAAP Concept Statement No. 5 is Recognition and Measurement in Financial Statements of
Business Enterprises. The purpose of financial reporting is to communicate information to
those outside an entity. It addresses criteria for an items’ recognition in financial statements
and or notes and the objective of financial reporting. The Concept Statement was last
modified in 2008.

20. AICPA’s Audit and Accounting Manual is found at HF5667. This manual details advice and
provides examples for performing an audit. AICPA reference books are accessible in the
AICPA’s online subscription database or for purchase at the AICPA Store.

Government Accounting Databases

21. GASB Concept Statement No. 6 is entitled Measurement of Elements of Financial

Statements. The Concept Statement explains the purpose of the reporting is to establish
measurement concepts for the elements of the financial statements. The statement discusses
both measurement approaches and attributes. Measurement approaches consider the point in
time an element is reported, while attributes consider the characteristics of the element, such
as asset or liability characteristics. Further discussion includes whether to measure items at
initial cost or at current value. The statement was modified in March 2014.
 Weirich, Accounting & Auditing Research, 9th Edition

22. SFFAS No. 49 discusses disclosure requirements for public-private partnerships. It was
issued on April 27, 2016 and is effective for the period beginning after September 30, 2018.
The purpose of the statement is to establish principles regarding public-private partnerships
(P3) disclosure requirements in general-purpose federal financial reports. Essentially the
statement helps users identify if a transaction is a P3 arrangement and then it explains the
applicable disclosures.

Financial Research Databases

23. Music industry is a broad term; it is not specifically identified as an industry in many
databases. In 2017, Wikipedia identified the three largest companies in the music industry as
(1) Universal Music Group, (2) Sony Music Entertainment, and (3) Warner Music Group.
The student’s specific answer is not as important as the student discussing their search
process.

The music industry consists of several different industries, such as the digital music recorder
industry. Market cap measures size of a company by the number of shares outstanding
multiplied by the stock price per share. As of 2016, the largest market caps in this industry
are for Focusrite Plc, Hanpin Electron Co. Ltd., and YaHorng Electronic Co. Ltd. According
to S&P, YaHorng had the highest revenues in 2016, but the company had a lower market
cap. Focusrite had the lowest revenues but the highest market cap. Focusrite and Hanpin have
experienced revenue and net income growth over the five preceding years; however,
YaHorng had seen revenue declines.

24. The North American Industry Classification System (NAICS) Code for property and casualty
insurance is 524126. after googling for NAICS codes and using the WebSite
www.census.gov/eos/www/naics, the Code is found by drilling down on finance and
insurance.

General Business Databases

25. An overview of RealNetworks provided in Wikipedia on the internet explains that

RealNetworks is a provider of Internet media delivery software and services. The company
released RealPlayer 15 in November 2011, which “allows users to transfer video, music and
photos between their computers and mobile devices.” As with many corporate websites,
changes occur so that the requested information on the number of registered users is no
longer readily accessible on RealNetworks website.

25. Students must access an overview of the Korean company Samsung’s products and then
explain the significance of its Galaxy Note 7 line of products. The Galaxy Note 7 was
discontinued due to customer safety concerns regarding the device overheating and
exploding. Customers were encouraged to backup their data, switch off their device, and
replace the device. Samsung product information and information regarding Galaxy Note 7 is
available on Samsung’s website. Databases can then help find relevant articles on the
problem.

26. The GlobalEDGE resource desk has several international business resources recommended
including statistical sources, such as:
 Weirich, Accounting & Auditing Research, 9th Edition

1. GlobalEDGE Database of International Business Statistics (DIBS) which provides

a comprehensive source of international statistical data
2. International Finance Corporation (ICF) which provides information for over 100
countries, including information on business regulation and entrepreneurship.

Many international business resources are recommended in GlobalEDGE. Under the tab for
Reference Desk is a resource directory. The student should list three international business
resources recommended for statistical sources, such as a searchable statistical database
provided by the United Nations Statistics division.

Legal Databases

27. Students might find several different answers of finding a recent article from the Journal of
Accountancy that discusses “money laundering,” such as one in 2016 entitled “U.S. Anti-
Money Laundering Regulations Well-Developed, Analysis Finds.”

Often, articles with the search term in the title may provide the most relevant articles, but one
should check more recent articles with slightly different names to remain current with the
topic. Using ABI/Inform Global, a recent article is entitled “What CPAs Need to Know
About Organized Crime,” R. A. Wolverton (2012). Many “News digests” in the Journal of
Accountancy mention the concept of “money laundering.” A few articles have the term
money laundering in the title, such as “Money Laundering: Ring Around the White Collar,”
written by J. Wells, 2003 and “The CPA's Role in Fighting Money Laundering,” written by
Abel and Gerson in 2001.

28. One can go to the SEC website page for Accounting and Auditing Enforcement Releases
(AAER) and search for documents containing the term “fraud.” Two recent Accounting and
Auditing Enforcement Releases (AAER) that address revenue recognition are:
1. AAER No. 3860 from February 24, 2017 (discussing a CPA firm which failed to
follow PCAOB or GAAS standards in conducting its audits).
2. AAER No. 3814 from October 18, 2016 (discussing an oil and gas company that
fraudulently reported tax expense where the auditors failed to perform required
audit procedures which would have uncovered the fraud).

29. The SEC brought a civil action against Samuel and Charles Wyly alleging various securities
law violations. The Wyly brothers established a group of offshore trusts and subsidiaries to
trade shares of public companies, of which a Wyly was on the board, and failed to disclose
their ownership of the companies. The jury issued a verdict on 9 out of the 10 claims,
including securities fraud under section 10(b) of the 1934 act and 17(a) of the 1933 act and
several other violations. Therefore, the Wyly brothers had to disgorge their trading profits
connected with the violations.

30. Using data analytics, auditors can examine larger external data sets much faster than
previously. Recent advances have improved the interfaces between the client and auditor data
systems and improved various interfaces that facilitate data extraction. Now during the risk
assessment stage of an audit, data is analyzed for understanding processes and controls.
Many analyses are applied more widely. For example, risks highlighted might enable
 Weirich, Accounting & Auditing Research, 9th Edition

auditors to drill down in further detail as part of an audit’s substantive testing. See ICEAW,
Data Analytics for External Auditors: International Auditing Perspectives, part of the
International Auditing perspective series, 2016.