Real options, enforcement of goodwill/intangibles rules, and associated behavioural issues
| Pages | 330-351 |
| Date | 06 July 2015 |
| Published date | 06 July 2015 |
| DOI | https://doi.org/10.1108/JMLC-02-2014-0008 |
| Author | Mike Nwogugu |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Real options, enforcement of
goodwill/intangibles rules, and
associated behavioural issues
Mike Nwogugu
Independence Layout, Enugu, Enugu State, Nigeria
Abstract
Purpose – The purpose of this paper is to introduce new economic psychology theories that can
explain fraud, misconduct and non-compliance that may arise from the implementation and
enforcement of accounting standards codication (ASC) 805/350, international nancial reporting
standards (IFRS) 3R and IAS-38.
Design/methodology/approach – The approach is entirely theoretical. The paper analyzes existing
theories about real options and enforcement of regulations/statutes, and introduces new psychological
biases that can arise.
Findings – The real options approach suggested for handling the enforcement of goodwill/intangibles
regulations is not effective.
Research limitations/implications – The research is limited to international accounting standards
board (IASB)/IFRS and nancial accounting standards board (FASB) accounting standards.
Originality/value – The critiques and theories developed in the paper can be used in the analysis of
selection of disputes for litigation, anti-corruption programs and regulation of transactions that are
susceptible to fraud.
Keywords Enforcement, Goodwill/Intangibles, Selection of disputes
Paper type Research paper
1. Existing literature
Although the existing literature on accounting for goodwill/intangibles, and on
enforcement of regulations is substantial, there has not been much research on the
relevance of the real options theory (ROT) to enforcement and litigation decisions.
Goodwill and the associated impairment and/or amortization have substantial and
critical information content, which is not being disclosed properly. There remains
signicant contention about goodwill impairment and required testing. Schultze (2005),
Sevin and Schroeder (2005) and Hennings et al. (2011) found signicant evidence that
there is substantial information content in identication and reporting of goodwill
impairments and in the selection of goodwill amortization periods. Petty and Guthrie
(2000),Dunse et al. (2004),Sevin and Schroeder (2005),Hennings et al. (2011), Schultze
(2005), Shoaf and Zaldiva (2005),Mosca and Viscolani (2004),Davis (2005) and Churyk
(2005) found evidence that statement of nancial accounting standards (SFAS) #142 is
not consistent with market valuations. Wyatt (2005) and Wong & Wong found
signicant economic and behavioural effects from accounting recognition/
non-recognition of intangibles. Davis (2005) and Shoaf and Zaldiva (2005) found that
SFAS #142 and the goodwill impairment calculations are not efcient or accurate.
The current issue and full text archive of this journal is available on Emerald Insight at:
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JMLC
18,3
330
Journalof Money Laundering
Control
Vol.18 No. 3, 2015
pp.330-351
©Emerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-02-2014-0008
Comiskey and Mulford (2008) and Ketz (2004) found that the accounting rules for
negative goodwill are sub-optimal.
Marzo (2011/2012) analyzed the usefulness of ROT in valuing intangible assets (IAs),
and presented some criticism of ROT. Hegarty et al. (2004) discussed various issues that
arose from enforcement of accounting standards in the World Bank’s Accounting And
Auditing ROSC Program. United Nations (2008) discussed problems and issues inherent
in the practical implementation of accounting and auditing standards.
Segovia et al. (2009) analyzed the impact of principles-based versus rules-based
standards on auditors’ willingness to allow client-company staff some
discretion/exibility in reporting practices and to how the possibility of pressure from
the client company and/or opposing pressure from the US Securities and Exchange
Commission (SEC) affects auditors’ decision behavior, and based on a sample of 114
experienced auditors, they found that:
• auditors are more willing to allow clients to manage earnings under rules-based
standards;
• these results are persistent even under external pressure; and
• more experienced auditors are less willing to allow clients who exert high
pressure to engage in liberal accounting disclosure, while SEC pressure has more
effect on less experienced auditors.
Pomerot (2010) analyzed the impact of regulatory scrutiny on auditors’ approach to
engaging in discussions with managers over the appropriate treatment for material
transactions and the nancial reporting consequences of these discussions, and found that:
• the impact of regulatory scrutiny on auditors’ interaction approach depends on
managers’ commitment to their preferences;
• regulatory scrutiny can both discourage and stimulate auditors’ willingness to
respond to managers’ accounting preferences; and
• auditors actively dispute preferences proposed by less committed managers but
auditors are reluctant to respond to preferences proposed by committed managers,
this suggests that auditors limit information sharing in anticipation of a dispute.
Gibbins et al. (2008) used a sample that consisted of chief nancial ofcer (CFO) – audit
partner dyads to examine the assumption that the roles played by each side and the
nature of the relationships are similar across negotiations, and found that:
• the CFO’s actions and expectations in these shadow’ negotiations appear to dene
the auditor’s role and the relationship’s parameters, but both can evolve over time;
• the audit partners want to be in the “ideal” relationship where they assume the
role of the “expert advisor” (as opposed to a “police ofcer”) but they seemingly
have no explicit strategy to move the relationship toward a “proactive” (rather
than “reactive”) state;
• the audit partner is always the “relationship manager” whose job it is to see that
client management remains “happy”;
• these roles and relationships negotiated in the “shadows” also affect the set of
alternative accounting treatments considered during negotiations; and
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Goodwill/
intangibles
rules
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