The impact of SEC scrutiny on financial statement reporting of in-process research and development expense [An article from: Journal of Accounting and Public Policy]

This digital document is a journal article from Journal of Accounting and Public Policy, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
We document the effect of SEC scrutiny on how firms report in-process research and development costs (IPRD), and investigate an important but previously unexamined means by which the SEC can influence financial reporting--oversight from the Office of the Chief Accountant, and the review and comment process in the Division of Corporation Finance. We examine restatements of previously expensed IPRD following the 1998 guidance provided by Chief Accountant Lynn Turner, who communicated his opposition to ''excessive write-offs of In-Process Research and Development costs,'' and Chairman Arthur Levitt, who voiced his concerns about earnings management. Restatements reduce the IPRD expense on average by 62%, and increase pre-tax income by 142%, with a median change of 32%. As well, in a sample of 582 acquisitions accounted for as purchases that included IPRD in SIC industry 737 (computer programming and software), mean IPRD charges shrank 71% as a percentage of assets acquired in the years following Chief Accountant Turner's guidance. The results demonstrate the potent impact SEC opinions about proper accounting practice can have on companies' financial reporting, even when the agency is not formally setting new standards.