[From time to time over the last 25 years, the Accounting Principles Board (APB), the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) have debated whether successful efforts (SE) or full cost (FC) accounting provides investors (creditors) with the more informative accounting numbers and thus should be mandated for all oil and gas firms.1 (See Deakin 1989 and Collins, Rozeff and Salatka 1982, for a description of regulatory events surrounding the SE versus FC controversy.) This debate is related to the notion of "quality of earnings" which has received some attention both in the popular press (Donelly 1990; O'Glove 1987) and in the academic accounting literature (Collins and Salatka 1993 on foreign currency accounting; Pincus and Wasley 1992 on Lifo/Fifo; and Carroll, Collins and Johnson 1993 on Lifo/Fifo). Results from the academic literature suggest that certain accounting procedures appear capable of producing superior quality earnings numbers which are highly valued (priced) by the market, while some other accounting procedures are not. The current study provides further insight into the potential effects of accounting policy choice on earnings quality by examining whether SE and FC earnings are priced differently by the market. Despite the regulatory interest in the quality of SE versus FC accounting, there is relatively little evidence on whether investors evaluate SE and FC accounting numbers differently. Harris and Ohlson (1987) found that SE firms exhibit higher market-to-book coefficients than FC firms, a result consistent with Sunder's (1976) finding that the SE method produces more conservative net assets and income numbers than the FC method. Ayres and Rayburn (1991) regress annual security returns on annual earnings changes and supplemental reserve information variables for SE and FC firms and find that SE firms have higher coefficients on the earnings change variable than FC firms. This study provides evidence on the quality issue by comparing the earnings response coefficients (ERCs) of SE and FC firms surrounding their quarterly earnings announcement dates over the 1982-1990 period. Short event windows are selected for analysis to accentuate SE versus FC effects: timing differences between accounting numbers related to different methods of cost recognition (such as SE and FC) tend to decline over longer horizons. Predictions are based on Ramakrishnan and Thomas' (1992) argument that the FC method imparts considerable price-irrelevant elements to earnings by capitalizing and amortizing exploration costs associated with dry holes (which have no future cash flow generating ability). SE accounting's immediate recognition of dry hole costs occurs in the same period in which the market would react to the information about the unproductive exploration activity. This is consistent with SE earnings being viewed as better quality earnings than FC earnings. According to this view of earnings quality, a high quality earnings number is generated when valuation relevant events are recognized in the same fiscal period in which they are recognized in returns (see, for example, Lev 1989). This notion of earning quality also implies that SE ERCs are likely to be larger than FC ERCs. The main finding of the study is that SE ERCs are, on average, greater than FC ERCs over the entire sample period. Unlike some prior studies, empirical tests in this paper control for the potentially confounding effects of exploration activity, growth, risk, earnings predictability and earnings persistence on ERCs. Ayres and Rayburn (1991), who found long-window SE ERCs to be larger than FC ERCs, control for potential risk and size effects but not for other factors; Spear (1993) also does not examine the effects of potentially confounding factors in his research design.2 However, the main finding is sensitive to time-partitions. SE ERCs, on average, exceed FC ERCs during 1982-1985 but not during 1986-1990. The latter period is one of relative decline in the level of exploration activity due to a dramatic oil price decline in 1986. The consequent drop in exploration activity led to the examination of time partitions because differences across SE and FC numbers are accentuated when the level of exploration activity is high. It is interesting to observe that FC firms have smaller ERCs despite having, on average, the same persistence in their reported earnings as SE firms. This apparent puzzle is again explained in the analysis of Ramakrishnan and Thomas (1992). FC firms achieve persistence in their reported earnings series by deferral and amortization of dry hole costs which are price-irrelevant in periods subsequent to the outlay. In effect, one observes the persistence of accounting accruals rather than persistence that reflects cash flows. The ERC results support the notion that the market attaches no value to persistence created by accounting accruals. In the context of Ramakrishnan and Thomas' (1992) analysis, ERCs increase in persistence only when that persistence reflects underlying economic characteristics (i.e., cash flow effects).]

Reports on the market reactions to earnings announcements of successful efforts (SE) and full cost (FC) firms in the oil and gas industry. Insight into research design; Differences between SE and FC firms; Research design considerations; Earnings persistence tests.

Canadian firms that list securities on U.S. stock exchanges are generally required to provide a reconciliation of reported income measured using Canadian generally accepted accounting principles (GAAP) to reported earnings measured using U.S. GAAP. This paper examines both the magnitudes and the information content of the reported reconciliations between CanadianGAAP income and U.S.GAAP income. Two recent studies of cross-country GAAP differences do not address U.S.-Canada differences because of perceived similarities between GAAP in the two countries (Amir, Harris, and Venuti [1993] and McQueen [1993]). If U.S.-Canada GAAP differences are in fact unimportant, then no further examination is warranted. Professional bodies, however, are

This study conducts a local analysis of the relation between market structure and audit fees. The research question of interest to us is how audit fees are determined by each practicing local office, after taking into account the auditor's own position in a local market and the influence exerted by his or her clients. Appealing to the economic theories of monopoly and monopsony power, we hypothesize a positive audit fee‐concentration relation, and a negative audit fee‐client influence relation. Results indicate that auditor market concentration is positively associated with the non‐Big 6 audit fees but is unrelated to the Big 6 audit fees. Evidence is mixed concerning the client influence hypothesis. When this construct is proxied by the number of rival auditors operating within a geographic area centered on the municipality, the prediction of negative audit fee‐client influence relation is strongly supported for both groups of auditors. Results are much weaker using measures developed based on the relative importance of a municipal client to its auditor's audit portfolio. The issues addressed in this study are important at a time when the Canadian municipal sector is undergoing major changes because of municipal amalgamation, altering the underlying market structure for audit services and the bargaining position of a municipality vis‐Ã‐vis its auditor. More broadly speaking, our analysis implies that when assessing an auditor's report for signs of client pressure, the professional oversight bodies and regulatory authorities need to consider the relative, rather than the absolute, bargaining position of the client in question.

The 1991 amendment to the auditor appointment requirement of section 86 of the Ontario Municipal Act removes certain barriers to entry into the Ontario municipal audit market. The purpose of this study is to provide evidence that the amendment has enhanced competition in this market. The results indicate that there is a general reduction in the real municipal audit fees compared with the pre-amendment levels, and that the market has become more contestable following the amendment. Notwithstanding the heightened competition, the Big 6 audit firms continue to command audit fee premiums over the non-Big 6 audit firms. This suggests that Big 6 audit fee premiums possibly reflect brand name reputation rather than monopoly/oligopoly rents.

The 1991 amendment to the auditor appointment requirement of section 86 of the Ontario Municipal Act removes certain barriers to entry into the Ontario municipal audit market. The purpose of this study is to provide evidence that the amendment has enhanced competition in this market. The results indicate that there is a general reduction in the real municipal audit fees compared with the pre‐amendment levels, and that the market has become more contestable following the amendment. Notwithstanding the heightened competition, the Big 6 audit firms continue to command audit fee premiums over the non‐Big 6 audit firms. This suggests that Big 6 audit fee premiums possibly reflect brand name reputation rather than monopoly/oligopoly rents.

Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cours de la période s’échelonnant de 1973 à 2005 est associée aux facteurs suivants : 1) les propriétés prévisionnelles croissantes des résultats de l’exercice en ce qui a trait aux flux de trésorerie futurs et 2) les propriétés prévisionnelles décroissantes des résultats de l’exercice en ce qui a trait aux résultats futurs. Les auteurs constatent également que l’utilité des résultats pour expliquer le cours des actions par rapport aux valeurs comptables est en relation positive avec la fiabilité, mais non avec la pertinence. Les résultats de l’étude se vérifient pour l’échantillon constant et l’échantillon intégral, à la fois dans les analyses sur échantillon et hors échantillon, et ils résistent à l’utilisation d’autres indicateurs de pertinence, de fiabilité, d’utilité des résultats et de prudence. Les conclusions des auteurs au sujet des relations entre la prudence, la pertinence, la fiabilité et l’utilité semblent accréditer l’existence d’un compromis entre pertinence et fiabilité et paraissent indiquer que l’adoption d’un nombre croissant de normes comptables prudentes pourrait être préjudiciable à l’utilité des résultats en raison d’une incidence négative sur la fiabilité.

This research reports that an increasing level of accounting conservatism over the 1973–2005 period is associated with: (1) an increase in the ability of current earnings to predict future cash flows and (2) a decrease in the ability of current earnings to predict future earnings. We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples in both in‐sample and out‐of‐sample analyses and are robust to the use of alternative measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations among conservatism, relevance, reliability, and usefulness suggest a trade‐off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards has a possible adverse impact on earnings usefulness through a negative effect on reliability.