The Effect of Management Advisory Services by Certified Public Accountants on the Users of

219 Pages·2017·8.72 MB·English

LLoouuiissiiaannaa SSttaattee UUnniivveerrssiittyy
LLSSUU DDiiggiittaall CCoommmmoonnss
LSU Historical Dissertations and Theses Graduate School
1970
TThhee EEffffeecctt ooff MMaannaaggeemmeenntt AAddvviissoorryy SSeerrvviicceess bbyy CCeerrttiififieedd PPuubblliicc
AAccccoouunnttaannttss oonn tthhee UUsseerrss ooff FFiinnaanncciiaall SSttaatteemmeennttss..
Pierre Louis Titard
Louisiana State University and Agricultural & Mechanical College
Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_disstheses
RReeccoommmmeennddeedd CCiittaattiioonn
Titard, Pierre Louis, "The Effect of Management Advisory Services by Certified Public Accountants on the
Users of Financial Statements." (1970). LSU Historical Dissertations and Theses. 1893.
https://digitalcommons.lsu.edu/gradschool_disstheses/1893
This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It
has been accepted for inclusion in LSU Historical Dissertations and Theses by an authorized administrator of LSU
Digital Commons. For more information, please contact [email protected].
71-6613
TITARD, Pierre Louis, 1939-
THE EFFECT OF MANAGEMENT ADVISORY SERVICES BY
CERTIFIED PUBLIC ACCOUNTANTS ON THE USERS OF
FINANCIAL STATEMENTS.
The Louisiana State University and Agricultural
and Mechanical College, Ph.D., 1970
Accounting
University Microfilms, Inc., Ann Arbor, Michigan
© 1971
PIERRE LOUIS TITARD
ALL RIGHTS RESERVED
THE EFFECT OF MANAGEMENT ADVISORY SERVICES
BY CERTIFIED PUBLIC ACCOUNTANTS ON THE
USERS OF FINANCIAL STATEMENTS
A Dissertation
Submitted to the Graduate Faculty of the
Louisiana State University and
Agricultural and Mechanical College
in partial fulfillment of the
requirements for the degree of
Doctor of Philosophy
in
The Department of Accounting
*>y
Pierre Louis Titard
B.S., Louisiana State University, 1961
M.B.A., Louisiana State University, 1962
August, 1970
ACKNOWLEDGEMENT
The writer wishes to acknowledge the valuable assistance given
by Dr. James W. Pattillo, Associate Professor of Accounting, in pre­
paring this dissertation. He also wishes to thank Dr. C. Willard
Elliott, Associate Professor of Accounting; Dr. William E. Swyers,
Associate Professor of Accounting; Dr. Loren C. Scott,' Assistant
Professor of Economics; Dr. Robert A. Rentz, Jr., Assistant Professor
of Business Finance; and Dr. Stanley W. Preston, Professor Emeritus
of Business Finance. .
The writer is also indebted to the many members of the
accounting profession and the financial community whose cooperation
made possible this dissertation.
ii
TABLE OP CONTENTS
Page
ACKNOWLEDGEMENT.............................................. ii
LIST OP TABLES................................................ vii
ABSTRACT...................................................... ix
CHAPTER
I. INTRODUCTION................. 1
Background........................... 1
The Problem . .................. . . . . . . . . . . 4
Competence ...................................... 5
Independence................. 7
Area of Discussion for This Study.................. 12
Organization of the Study.......................... 15
II. THE NATURE OP MANAGEMENT ADVISORY SERVICES.......... 19
Management Advisory Services Defined .............. 19
Definition by AICPA.............................. 19
Definition by Other Writers ...................... 20
Previous Survey as to the Nature of MAS............. 22
Management Advisory Services— As Practiced by CPAs . 27
Purpose . . . . . . . . . . . . . . . . . . . . . . 27
Survey Sample and Questionnaire Construction . . . 28
Results of the Survey............................ 29
Management Advisory Services— As Viewed by Users of
Financial Statements .................... 34
Purpose . . . . . . . . . ........................ 34
iii
iv
CHAPTER Page
Survey Sample.................................... 36
Results of the Survey . . ........................ 38
Comparison of the Surveys.......................... 44
Summary ............... 43
III. THE ECONOMICS OF MANAGEMENT ADVISORY SERVICES ........ 47
Purpose . . . . . . 47
Supply and Demaud ...................... . 48
Demand..................... 48
Supply.......................................... 55
The MAS Market Structure......... 59
Pure Competition................... 60
Monopolistic Competition ........................ 64
Monopoly and Oligopoly .......................... 65
Summary of Market Structures .................... 66
Economic Advantage of CPAs to the Client.......... 67
The Effect of Limiting CPAs in M A S ................ 69
Summary .................................. . . . . . 71
IV. THE QUESTION OF INDEPENDENCE........................ 73
Purpose............................................ 73
Attitude of the AICPA.............................. 73
Previous Empirical Research ........................ 76
Study by Schulte................................ 77
Study by Briloff............................... 82
Ad Hoc Committee on Independence ........... . 86
Discussion by Other Writers . . . . ................ 90
1956 — 1959 .................................... 91
1960 — 1964 .................................... 95
1965 — Present ........................ 102
V
CHAPTER Page
Independence Questions in Survey of C P A s .......... 108
Summary............................................ 111
V. THE ATTir-DE OF FINANCIAL STATEMENT USERS............ 112
Purpose............................................ 112
Sample Selection .................................. 112
Questionnaire Construction . . . . . .............. 116
Questionnaire Objective ....................... . 116
Construction of Specific Questions .............. 117
Methodology of- Requesting Replies.................. 124
Analysis of Replies............................ 125
Question Number 2 ................................ 126
Question Number 3 .............. . 127
Question Number 5 ................................ 128
Question Number 6 . . .......................... 137
Question Number ^ ................................ 140
Question Number 8 ................................ 142
Question Number 9 ................................ 148
Summary............................................ 150
VI. THE SEC AND MANAGEMENT ADVISORY SERVICES............ 152
Purpose............................................ 152
Pronouncements by the SEC.......................... 153
Regulation S - X .............................. 153
Accounting Series Release No. 8 1 ................ 154
Unofficial Pronouncements .......................... 156
Summary .................................. . . . . . 159
VII. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS ............ 161
The Problem.......... 161
Objectives of the Dissertation.................... 162
vi
CHAPTER Page
The Nature of MAS ..................... 163
The Economics of M A S .............................. 165
The Question of Independence .............. 166
The Attitude of Financial Statement Users........... 169
The SEC and MAS.................................... 174
Overall Conclusions and Recommendations ............. 175
SELECTED BIBLIOGRAPHY....................................... 178
APPENDICES.................................................... 186
A. Letters of Transmittal and Questionnaire to CPA Firms . 187
B. Letters of Transmittal and Questionnaire to Financial
Analysts and Executives ..................... 193
C. Selected Comments from Question Number 9 201
LIST OP TABLES
Table Page
2-1 FIRMS SPECIFYING POSSIBLE CATEGORIES OF MANAGEMENT
SERVICE THAT GENERALLY WOULD NOT FALL WITHIN SCOPE
OF C P A .............................................. 24
2-2 TYPES OF MAS WHICH CPA FIRMS OFFER— LISTED ALPHA­
BETICALLY ............................................ 31
2-3 TYPES OF MAS WHICH CPA FIRMS OFFER— LISTED ACCORDING
TO FREQUENCY........................................ 32
2-4 SUMMARY OF RESPONSES FROM FINANCIAL COMMUNITY.......... 37
2-5 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
KNOW OR THINK THAT CPAS PERFORM— LISTED ALPHA­
BETICALLY ....................... 39
2-6 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
KNOW OR THINK THAT CPAS PERFORM— LISTED ACCORDING
TO FREQUENCY........................................ 40
2-7 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
KNOW OR THINK THAT CPAS PERFORM— RESPONSES CLASSIFIED
BY TYPES OF FIRMS.................................... 41
3-1 FIRMS INDICATING CATEGORIES OF MANAGEMENT SERVICE IN
WHICH INCREASING FUTURE DEMAND WAS ANTICIPATED AND
THE RELATIVE IMPORTANCE OF EACH CATEGORY............ 49
3-2 FIRMS INDICATING THEIR OWN REACTIONS AND CLIENTS'
REACTIONS TO ENGAGEMENTS PERFORMED BY CONSULTANTS
OUTSIDE ACCOUNTING PROFESSION ........................ 53
3-3 PERCENTAGE OF GROSS BILLINGS THAT MAS FEES REPRESENT . . 58
5-1 FREQUENCY WITH WHICH FINANCIAL STATEMENTS ARE ANALYZED
OR REVIEWED................ ........................ 126
5-2 FINANCIAL COMMUNITY'S AWARENESS THAT CPAS PROVIDE MAS . . 128
5-3 RESPONDENTS» INDICATION THAT, SOME MAS MAY RESULT IN
SOME LOSS OF AUDIT INDEPENDENCE...................... 129
vii
viii
Table Page
5-4 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
THINK MAY RESULT IN SOME LOSS OF AUDIT INDEPENDENCE-
LISTED ALPHABETICALLY................................ 133
5-5 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
THINK MAY RESULT IN SOME LOSS OF AUDIT INDEPENDENCE-
LISTED ACCORDING TO FREQUENCY........................ 134
5-6 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
THINK MAY RESULT IN SOME LOSS OFA UDIT INDEPENDENCE—
RESPONSES CLASSIFIED BY TYPES OF FIRMS .............. 135
5-7 EFFECT ON CONFIDENCE IN AUDIT REPORT WHEN THE SAME CPA
PROVIDES MAS AND PERFORMS AUDIT— BASED ON 77
RESPONDENTS.......................................... 138
5-8 EFFECT ON CONFIDENCE IN AUDIT REPORT WHEN THE SAME CPA
PROVIDES MAS AND PERFORMS AUDIT— BASED ON 156
RESPONDENTS.......................................... 139
5-9 EFFECT ON CONFIDENCE IN AUDIT REPORT WHEN MAS AND AUDIT
FUNCTIONS ARE CONDUCTED BY DIFFERENT PERSONNEL . . . . 141
5-10 OPINIONS REGARDING PROHIBITION OF SOME MAS FOR AUDIT
CLIENTS WHEN THERE IS NO SEPARATION OF PERSONNEL
PERFORMING FUNCTIONS............................... 143
5-11 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
THINK SHOULD BE PROHIBITED ASSUMING SAME AUDIT AND
MAS PERSONNEL........................................ 145
5-12 OPINIONS REGARDING PROHIBITION OF SOME MAS FOR AUDIT
CLIENTS WHEN THERE IS A SEPARATION OF PERSONNEL
PERFORMING FUNCTIONS ................................ 147
5-13 TYPES OF MAS WHICH FINANCIAL EXECUTIVES AND ANALYSTS
THINK SHOULD BE PROHIBITED ASSUMING DIFFERENT AUDIT
AND MAS PERSONNEL.................................... 149