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CASES
CASE 1-1 STANDARD-SETTING: “A POLITICAL ASPECT“
(This case provides an opportunity to view some of the political aspects of standard
setting.)
a. The hierarchy of accounting qualities in SFAC No. 2 includes neutrality as one of the
verifiable, subject to representational faithfulness, and neutral.
a particular direction.”
b. Costs of transactions do exist whether or not the FASB mandates their recognition
in financial statements. The markets may not be able to recognize these costs in
c. Much of the standard setting in the U.S. is in the private sector. A major role in the
private sector has been played by The American Institute of Certified Public
Accountants. Since 1973 the primary role in the private sector has been played by
The Financial Accounting Standards Board.
existing financial reporting practices.”
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ACT?
(This case addresses the role of the Emergency Economic Stabilization Act of 2008
and the subsequent role of the SEC and the FASB).
a. This is an opinion question:
congress?
that the SEC should have acted sooner.
CASE 1-3 INDEPENDENCE OF ACCOUNTING STANDARD-SETTERS
a. Standard setters have traditionally resisted using accounting standards as a fiscal
policy tool. Standard setters have tried to use standards as a neutral and objective
measurement of the financial performance of public companies.
financial system?
Note: In an Op Ed in the Washington Post, author A. Levitt, a former SEC chair,
clearly disapproved of FASB’s expedited due process for new fair value guidance in
FAS 157-e.
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CASE 1-4 LOOKING OUT FOR INVESTORS
opportunity to discuss that role).
a. Mary Schapiro addresses some of the cost of over-regulation as stifling of
internal controls related to Sarbanes-Oxley.
b. Under-regulation can result in inefficient capital markets. To ensure that capital
1. First, structured effectively
2. Second, that they’re fed by timely and reliable information
professionals
c. This is an opinion question.
CASE 1-5 FLYING HIGH
(This is a good case to discuss revenue recognition and compare program accounting
with the percentage of completion and completed contract method of revenue
recognition used by contractors.)
a. It would be difficult to separate contracts that contain provisions to earn incentive
b. It appears that Boeing Company is using a completed contract method for
commercial airplanes. It does not represent a difficult situation in determining sales,
represent a long period of time.
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the notes would be objective.
CASE 1-6 CENTERED IN HAWAII
(This is a good case to discuss revenue recognition.)
a. “In general, the Company recognizes revenue when persuasive evidence of an
b. Voyage Revenue Recognition.
Yes, this could represent a challenge of matching cost with revenue.
c. Yes.
Appears to be a type of percentage–of-completion method.
d. 1. Generally on closing date, “adequate initial and continuing investments have
2. Percentage-of-completion method.
Used when there is material continuing post-closing involvement.
e. In general, recognizing revenue as rent over the time of the lease.
CASE 1-7 GOING CONCERN?
a. The going-concern assumption is that the entity in question will remain in business
for an indefinite period of time.
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b. Yes. The potential problem is that the firm may not be able to continue in business
c. This disclosure puts the user of the statements on warning that the statements may
be misleading if the company cannot continue as a going concern.
CASE 1-8 ECONOMICS AND ACCOUNTING: THE UNCONGENIAL TWINS
a. No. Per Kenneth E. Boulding:
“Ritual is always the proper response when a man has to give an answer to a
question, the answer to which he cannot really know. Ritual under these
b. No. Per Kenneth E. Boulding:
“The wise businessman will not believe his accountant although he takes what his
accountant tells him as important evidence. The quality of that evidence, however,
c. Per Kenneth E. Boulding:
“It is the sufficient answer rather than the right answer which the accountant really
seeks.”
Boulding indicates that accounting does not need to be accurate in order to serve a
CASE 1-9 I OFTEN PAINT FAKES
(This case is intended to serve as a forum for discussing the accuracy of financial
statements prepared using generally accepted accounting principles.)
a. Accounting reports prepared using generally accepted accounting principles are not
exactly accurate. They are intended to be sufficient to aid in making informed
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b. No, accountants do not paint fakes. But, it may take an understanding of generally
CASE 1-10 OVERSIGHT
(This case reviews selected sections of the Sarbanes-Oxley Act.)
a. Securities and Exchange Commission
c. The Public Company Accounting Oversight Board oversees the audits and related
matters of public companies that are subject to the securities laws, and related
d. Title 1
Sec. 101
(b) Duties of the Board
The Board shall, subject to action by the Commission under section 107, and
section – –
(1) register public accounting firms that prepare audit reports for issuers, in
accordance with section 102;
(3) conduct inspections of registered public accounting firms, in accordance
with section 104 and the rules of the Board;
(4) conduct investigations and disciplinary proceedings concerning, and
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(5) perform such other duties or functions as the Board (or the Commission,
by rule or order) determines are necessary or appropriate to promote high
(6) enforce compliance with the Act, the rules of the Board, professional
standards and the securities laws relating to the preparation and issuance
(7) set the budget and manage the operations of the Board and the staff of the
Board
e. Public accounting firms that prepare or issue, or participate in the preparation or
issuance of, any audit report with respect to any issuer.
f. Sec 104
(a) In General – The Board shall conduct a continuing program of inspections to
assess the degree of compliance of each registered public accounting firm
involving issuers.
g. Sec 103
(a) (1) …amend or otherwise modify or alter, such auditing and related
attestation standards, such quality control standards, and such ethics
standards to be used by registered public accounting firms in the
h. Sec 106
(a) (1) In General
Any foreign public accounting firm that prepares or furnishes an audit
report with respect to any issuer, shall be subject to this act and the rules
organized and operates under the laws of the United States or any state,
except…
i. Recognition of Accounting Standards
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(1) In General – In carrying out its authority under subsection (a) and under
principles established by a standard setting body…
j. Funding
1. The “Board” – annual accounting support fee for the Board (among issuers)
k. Title 11
Sec 201
Non-audit service excluded
(1) bookkeeping or other services related to the accounting records or financial
statements of the audit client;
(2) financial information systems design and implementation;
Tax services for an audit client
Only if the activity is approved in advance by the audit committee of the issuer, in
accordance with subsection (i)
l. Title IV
Sec 404 Management Assessment of Internal Controls
reporting; and
(2) contain an assessment, as of the end of the most recent fiscal year of
the issuer, of the effectiveness of the internal control structure and
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CASE 1-11 REGULATION OF SMALLER PUBLIC COMPANIES
avoid the SEC regulations.
Companies could also decide to go private, which would reduce the number of
securities available to the public.
CASE 1-12 STABLE FUNDING
(This case provides for a discussion of the importance of stable funding for standard
setters.)
Sarbanes-Oxley.
b. The Dodd-Frank Act recognized the importance of sufficient and stable resources by
independence of GASB).
(Note: This fee has likely been established).
CASE 1-13 RULES OR FEEL?
with the U.S. rules-based GAAP.)
apply the rules and using their professional judgment. Some maintain that
result in fewer lawsuits.
b. This is an opinion question. Several reasons for giving up U.S. GAAP should be
given along with several reasons for not giving up U.S. GAAP.
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CASE 1-14 PCAOB ENFORCEMENT – IFRS STANDARDS
environment.)
a. It will be more difficult for the PCAOB to enforce standards under an IFRS
environment.