© Case 17-1 Two Viewpoints on Accounting Standards The proponents of neoclassical, marginal economia ie Chapter 4) maintain that ., mandatory accounting an@-auditing standards “inbit contracting arrangements ! 9 and the ability to report on company operations. Opponents of this view argue "that market forces alone cannot be relied on to produce the high-quality informa- tion required by society. (¢- tettheowt Stavrglerdo » Required: Present arguments support both viewpoints. What is your opinion? [Hint: You may wish to consult Richard Leftwich, “Market Failure Fallacies and Accounting ~ Information,” Journal of Accounting and Economics (December 1980): 193-221; and Steven Johnson, “A Perspective on Solomon’s Quest for Credibility in Financial Reporting,” Journal of Accounting and Public Policy 7, no. 2 (1988): 137-54.]© Case 17-2 Ethical Dilemma Barbara Montgoriiery is a first-year auditor for Coppers and Rose, a large public” accounting firm. She has been assigned to the audit of Lakes Brothers, a clothing retailer with retail outlets throughout the United States. This audit has proved troublesome in the past, and during a staff meeting preceding the audit, Robert Cooley, the supervisor on the audit, says: “We are going to be required to:work several hours ‘off-the-clock’ each week until this audit is completed.” He also observes that the client is putting a great deal of pressure on the firm to maintain an acceptable level of fees. Barbara has just been to staff training school, where it was emphasized that not charging a client for hours actually worked is a violation of Coppers and Rose’s employment policy, a violation that could cause her to be dismissed. She also knows that only staff personnel are paid overtime and that supervisors are evaluated on successfully completing audits within allowable budgets. Barbara discusses the issue with John Reed, a second-year staff accountant. John says, “Don't worry, if you go along nobody will find out and Robert will give you a good evaluation.” John also says that Robert is very highly regarded by the senior members of the firm and is likely to be promoted to manager in the near ces Required: a. Is it ethical for Barbara to work hours and not charge them to the cient? b. Use the six-step approach outlined in this chapter to resolve this ethical DN dilemma. K\ * Case 17-8 Code of Professional Conduct Cettified public accountants have imposed on themselves a rigorous cade of pro- fessional conduct. Required: a. Discuss the reasons that the accounting profession adopted a code of profes- sional conduct. b. One rule of professional ethics adopted by CPAs is that a CPA cannot be an__ officer, director, stockholder, representative, or agent of any corporation engaged in the practice of public accounting, except for the professional corporation form expressly permitted by the AICPA. List the arguments sup- porting the rule that a CPA’s firm cannot be a corporati‘ “@ Case 1-2 Accounting Ethics When the’FASB issues new standards, the implementation daté is frequently 12 months from date of issuance, and early implementation is encouraged. Becky Hoger. controller, discusses with her financial vice president thé need for early implementation of a standard that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the standard will adversely affect the reported net income for the year, he discourages Hoger from implementing the standard until it is required. Required: ( a. What, if any, ethical issue is involved in this case? b. Is the financial vice president acting improperly or immorally? ©. What does Hoger have to gain by advocacy of early implementation? d. Who might be affected by the decision against early implementation? (CMA adapted)Agency theory provides an explanation for the development B accounting theory. Required:© Case 4-8 Financial Statement Disclosure Current accounting for leases requires that certain leases be capitalized. For capital leases, an asset and the associated liability are recorded. Whether or not the lease is capitalized, the cash flows are the same. The rental payments are set by contract and are paid over time at equally spaced intervals. Required: a. Ifone of the objectives of financial reporting is to enable investors, creditors, and other users to project future cash flows, what difference does it make whether we report the lease as a liability or simply describe its terms in footnotes? Discuss. EmH b. The efficient market hypothesis states that all available information is impounded in security prices. In an efficient capital market, would it make a difference whether the lease is reported as a liability or simply described in footnotes? Explain. ~G-When there are debt covenants that restrict a company’s debt to equity ratio and when debt levels rise relative to equity, management may be motivated to structure leasing agreements so that they are not recorded as capital leases. Discuss this motivation in terms of agency theory.© Case 2-7 Relevance versus Reliability Good Company purchased a used machine by issuing 1,000 shares of its common Stock to the seller, Good’s stock is traded on the NYSE. On the date of purchase, its price was quoted at $42 per share, making the value of the stock issued to chase the machine equal to $42,000 (1,000 shares x $42), Good had the chine appraised, The appraiser estimates its value at $50,000. According to SFAC No. 2, amounts reported in published financial statements should satisfy the qualitative characteristics of relevance and reliability. You are an investor trying to decide whether to invest in Good common stock. Which yalue—$42,000 or $50,000—is more relevant to your decision to invest? Which is more reliable? Explain your answers to both questions. In your answer, describe what relevance and reliability mean and how each valuation is thus more relevant or more reliable than the other.‘ase 3-5 International versus U.S. Standards ider U.S, GAAP, property, plant, and equipment are reported at historical cost of accumulated depreciation. These assets are written down to fair value when termined that they have been impaired. Someao TAS, TAs 16 A number of other countries, including Australia, Brazil, England, Mexico, and ‘Pore, Permit the revaluation of Property, plant, and equipment to their current -of the balance sheet date Aprimary argument against revaluation is the lack of objectivity in arriving at current/ cost estimates, particularly for old assets that either will or cannot be replaced with similar assets or for which no comparable or similar assets are currently available for purchase. Required: a. Discuss the qualitative concept of comparability. In your opinion, would the financial statements of companies operating in one of the foreign countries listed above be comparable to a U.S. company’s financial statements? Explain. b. Discuss the concept of reliability. In your opinion, would the amounts reported by U.S. companies for property, plant, and equipment be more or less reliable than the current cost amounts reported by companies in England, Mexico, or elsewhere? ¢. Discuss the concept of relevance. In your opinion, would the amounts reported by U.S. companies for property, plant, and equipment be more or less relevant than the current cost amounts reported by companies in England, Mexico, or elsewhere? \Ee ey MEE Tae eee rma el he Advantages and Disadvantages of Harmonization ee Case The advantages and disadvantages of harmonizing accounting standards were summarized in this chapter. Required: 4, Expand on these advantaggS and disadvantages. [Hint: You may wish to con- sult John N. Tumer, “International Harmonization: A Professional Goal” Jann nal of Accountancy (January 1983): 58-59; and Richard K. Goeltz, “International Accounting Harmonization: The Impossible (and Unnecessary?) Dream," (Aounting Horizons (March 1991), 85-88.)