Knowledge that Transforms

Abstract Reviews the book "Governmental Accounting: Procedures and Practices, 1985," 2nd ed., by Cornelius E. Tierney and Philip T. Calder.

Abstract ABSTRACT: The most widely-held securities in America (and also the world during the 1920s were the stocks and bonds of Kreuger & Toll, Inc., a Swedish match conglomerate. The company was founded and headed by Ivar Kreuger. The reason Kreuger's securities were so popular was that they were sold in small denominations and paid high dividends. Dividends of over 20 percent annually were paid on both stocks and bonds. Unfortunately, these dividends were paid mostly out of capital, not profits. Kreuger was essentially operating a giant pyramid scheme, which was hidden from the investing public by Kreuger's insistence that financial statements not be audited. He preached a philosophy that secrecy was paramount to corporate success. The bankruptcy of the company in 1932 was the largest on record and resulted in numerous changes in financial reporting. Articles in magazines and newspapers kept Americans aware of the extent of the fraud scheme at the same time Congress was considering the passage of a federal securities law. Thus, the timing of the bankruptcy and the corresponding media coverage made it politically expedient to pass laws that would make it difficult for similar schemes to be successful in the future. Such laws were indeed passed, and the Congressional committee reports specifically refer to Kreuger. The hypothesis of this paper is that the Ivar Kreuger fraud contributed significantly to the passage of the securities acts.

Abstract Reviews the book "An Introduction to the Securities and Exchange Commission," by Larry Gene Pointer and Richard G. Schroeder.

Abstract ABSTRACT: In a recent issue of The Accounting Review, Stone and Bublitz (SERB) [1984] report on the frequency of data collection errors for the 1981 FASB computer tape containing FAS 33 disclosures for 1979 and 1980. This paper extends their work by examining the problems encountered when using a subsequent version of that data base in conjunction with the Compustat and Value Line historical cost data bases. Failure of the data bank user to reconstruct the difference between historical cost and current cost amounts in the supplementary disclosures of a firm's annual report is designated as an error. Errors in income and depreciation expense for a filtered sample of 171 firms are reported for the years 1979 through 1982. An error rate for income in 1981 of 12.9 percent and error rates for depreciation ranging from 23.4 to 39.8 over the four years seem to suggest that manual checking of annual reports is necessary when using these amounts.

Abstract Reviews the book "A Common Body of Professional Knowledge for Internal Auditors: A Research Study," by Michael J. Barrett, Gerald W. Lee, S. Paul Roy and Leticia Verastegui.

Abstract ABSTRACT: Rising hospital costs are of increasing concern to government and industry. The growth and financial success of for-profit hospitals (FPs) in an industry that was once solely populated by nonprofit hospitals (NPs) have suggested that FP business practices may be a more cost-effective way to manage health care services, However, studies using accounting and other operating data yield conflicting and ambiguous conclusions that do not resolve questions about relative performance of FPs vs. NPs. A comparison of FP and NP financial statements suggests that current financial reporting methods can be misleading, or at best of little help, in assessing the performance and cost structure of the two types of hospitals. The key problem is that financial statements prepared according to present standards do not provide sufficient information for accurate comparative analysis of FPs and NPs. Additional data about volume and output mix and about the financial impact of differences in legal status are needed to make hospital financial statements relevant and useful for understanding and containing health care costs.

Abstract Reviews the book "Managing Foreign Exchange Exposure," by Donald H. Drury and Vihang R. Errunza.

Abstract Reviews the book "Accounting for Portfolio Investments: A Research Study," by

Abstract Reviews the book "Handbook of Internal Accounting Controls," by Wanda A. Wallace.

Abstract ABSTRACT: This study tests the proposition that the 20 percent ownership percentage criterion for application of the equity method influences firm investment decisions. A sample distribution of firm investment positions indicates an unusually heavy concentration of positions at or near 20 percent. The characteristics of 19 to 19.99 percent investees (carried at cost) are then contrasted with 20 to 20.99 percent investees (carried at equity) on dimensions of profitability and earnings covariability. The results suggest that the extent-of-holding dimension of firm investment decisions is influenced by the ownership criterion. This finding implies that the underlying standard (APB 18) has an economic consequence. This result should be of interest to accounting scholars, as well as of potential value to the FASB as it reconsiders accounting standards for consolidations and the equity method.