Communication theory

Reviews the book "Accounting Programs and Business Systems: Case Studies," by Frank J. Clark and Robert L. Gray.

The development of generalized computer-audit programs makes an important contribution to the further advancement of the public accounting profession. as it builds a favorable image of the profession, reduces audit time for clerical operations, reemphasizes the importance of professional judgment, instills self-confidence into auditors, and attracts more well- qualified personnel into the profession. To allow auditors of tomorrow an opportunity to appreciate the potential of generalized computer-audit programs, the author has prepared one such program, dubbed as AUDIT-AID. The use of AUDIT-AID has indicated to students the significance of professional judgment, the importance of review of internal control, and the place of computers in auditing.

Many accountants hold profit maximization as the objective of the corporation. It is argued that this assumption implies equating stockholders' interest to the corporate interest, equating profit generation to corporate self-sufficiency, and equating economic theorems to corporate motivation, On all three points, references are cited from various disciplines to suggest the inadequacies of this assumption. On the other hand, the hypothesis of survival and growth has been defended from logical, biological, and sociological points of view. Although profit as a basic objective is rejected, its role as a subordinate objective in the implementation of survival is recognized. The need for further research in exploring the implications of this hypothesis to accounting is acknowledged.

Under the entity concept, alternative accounting procedures are designed to permit a corporation to change its strategy for survival in the light of its economic and financial outlook. To this extent alternative accounting procedures have financial implications. In as much as the funds statement is a report of a corporation's financial operations, it is argued that all income determinants that are subject to alternative treatment need be included in the funds statement on the strength of their having financial implications. This argument is submitted as the reason why some non-fund adjustments receive prominent attention in funds statement preparation and why others do not.

Under the entity concept, financial statements are considered to be means through which a corporation's point of view is made known. As a corporation moves from one stage of development to another, changes in accounting procedures are needed so as to depict properly its changes in outlook and strategy for survival. So long as disclosures are made, and if coupled with education and/or public accountants' evaluations, it is contended that the use of alternative accounting procedures will not only make financial statement presentation more revealing and meaningful, but also permit corporations at different stages of development to compete for financial competence. The use of alternative accounting procedures is thus consistent with a corporation's objective of survival.

This article focuses on the income taxes and income tax allocation under the entity concept. Corporate income taxes under the entity concept are commonly viewed as a distribution of income. The following statement, by a Committee of the American Accounting Association, is a representative expression of this view. If the management does nothing, other things being equal, the reported net income for subsequent years will drop, assuming the wage rate in effect in each year is the basis for computing labor cost. Income taxes, as a cost, are subject to managerial control and reduction. From management's standpoint, an effective way to reduce income taxes is through a continual program of plant modernization. So long as it follows such a program, the amount of income tax cost will he and should be low. If and when it abandons such a program, the amount of taxes will be and should be high. The amount of income taxes, in other words, is a reflection of management's effectiveness in controlling income taxes as a cost.

Under the entity concept, the corporation is an institution in its own right and a competent party to contract. In contracting for capital supplied by stockholders, the only significant representation made by the corporation is for it to agree to pay dividends when and if declared. From this, it is deduced that, in a stock issue, the offering price constitutes consideration for the right to receive future dividends. Furthermore, it is argued that stockholders do not have a claim to capital thus supplied so long as the corporation remains a going concern, an implicit assumption of the entity concept. From these, it is concluded that capital supplied by stockholders becomes the equity of the corporation. It is also argued that the acceptance of this view will not retard the stockholders' supplying capital to the corporation and that the payment of dividends is consistent with the corporation's striving to survive and to maintain an attractive investment atmosphere. On the contrary, the acceptance of this view tends to remove an area of inconsistency related to the treatment of retained earnings under the entity concept.

This article studies the role of risk arbitrageurs in takeovers and the source of their advantage. We show how the presence of arbitrageurs affects the value of the target shares, since arbitrageurs are more likely to tender. Therefore an arbitrageur has the informational advantage of knowing he bought shares. In equilibrium, the number of arbitrageurs buying shares and the price they pay are determined endogenously. We also present several empirical implications, including the relationship among trading volume, takeover premium, liquidity of the shares, and the number of risk arbitrageurs investing in one particular deal.