<p class="MsoBlockText" style="line-height: normal; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">The annual and industry-based behavior of deferred tax balances is analyzed and the accounting theory and procedures required by the FASB are examined in the context of the unit problem. The unit problem involves the selection of the appropriate perspective (either individual or aggregate) for applying measurement and recognition conventions to phenomena of interest. From an individual event perspective, the FASB's conclusions regarding liability recognition are inconsistent with the definition of liabilities found in the Statement of Financial Accounting Concepts No. 6. In addition, the use of inconsistent perspectives by S109 creates disagreements with the FASB&rsquo;s position, where both the individual and aggregate perspectives are used simultaneously as the basis of the FASB's decisions. The impact of eliminating deferred taxes and adjusting the liability and stockholders equity balances on the debt-to-equity (DTE) ratio is computed for each year and 20 industries in the COMPUSTAT database (1997 &ndash; 2006). The change results in significant decreases in DTE each year and in all industries.</span></span></p>

<p>This study examines the theory underlying the current accounting and reporting standards for deferred taxes. Given the goal of global accounting convergence and under the proposed condorsement approach, the FASB and the IASB have a historic opportunity to revise the existing deferred tax accounting standards. Thus, it is warranted to illustrate the financial consequences of using the proposed flow-through (where tax expense is equal to the statutory tax liability) approach versus the asset-liability method of accounting for deferred taxes. We achieve this objective by computing the change in the debt-to-equity (DTE) ratios for the 2004-2010 period when net deferred tax balances are eliminated and corresponding adjustments are made in the total liability and stockholders equity balances. Based on our observations, we propose that the underlying issue in accounting for deferred taxes is the unit problem and argue that deferred taxes do not represent assets and liabilities as defined by accounting standards.<strong></strong></p>

Examines the impact of developments in accountant liability on audit practice. Focuses on analysis of the impact of legal liability on different size accounting firms (classified by revenue generated) with respect to number and professional characteristics of audit personnel, form of practice, audit policies, categories of clientele, and the importance of client characteristics relevant to acceptance of engagements. Contributes to the literature by empirically addressing issues concerning accountant liability previously addressed theoretically and anecdotally. Results of the study show a slight reduction in the average number of audit personnel. In addition, results reveal that significant importance is placed on the client’s reputation for integrity, financial strength, the internal control system, and industry as factors influencing willingness to accept an engagement. Support is found for the emergence of greater concentration in the audit field, along with increases in audit fees and costs. While all audit firms (with the exception of medium‐size audit firms in two client categories) are less willing to accept audit clients, firms with smaller audit practices appear least inclined to accept audit engagements.

<p class="MsoBlockText" style="line-height: normal; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">The study examines the deferred tax accounting theory and procedures required by the FASB in the context of the unit problem. The unit problem involves the selection of the appropriate perspective (either individual or aggregate) for applying measurement and recognition conventions to phenomena of interest. From an individual event perspective, the FASB's conclusions regarding liability recognition are inconsistent with the definition of liabilities found in the Statement of Financial Accounting Concepts No. 6. In addition, the use of inconsistent perspectives by S109 creates disagreements with the FASB&rsquo;s position, where both the individual and aggregate perspectives are used simultaneously as the basis of the FASB's decisions. The study argues that the income tax accounting issue should be viewed from an aggregate perspective and concludes that the flow-through method of accounting for income taxes should be adopted. The impact of eliminating deferred taxes and adjusting the liability and stockholders equity balances on the debt-to-equity (DTE) ratio is computed for the entire COMPUSTAT database (20 years). For the 817 firms that persist throughout the 20-year period, each year, the net deferred tax balance for each company is compared to the balance in the previous year, with increases (53%) outnumbering decreases (32%), and the remainder (15%) showing no change. In addition, the average annual net deferred tax balances of entire sample show increases for the 15 of the 20 years examined and the balances for persisting firms show increases for 17 of the 20 years examined. Finally, the relative size of the net deferred tax balances as a percentage of total assets and total liabilities for both the overall sample and the persisting firms range from 4.1% to 5.8% of total assets and from 7.9% to 11.8% of total liabilities. Statistical results show that the decreases in the DTE ratio are significant for each year, with an overall average decrease of 19%. Thus, the flow-through method results in significant changes in a key ratio that is used in the financial evaluation of most companies. Conversely, the DTE ratios currently used in the financial evaluation of companies are flawed because the net deferred tax balances are included in liabilities, when it is clear that these accounts do not meet the liability criteria specified in accounting theory.</span></span></p>

No abstract