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NINTH
ACCOUNTING & AUDITING RESEARCH EDITION

TOOLS & STRATEGIES

Thomas R. Weirich
Central Michigan University

Thomas C. Pearson
University of Hawaii
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Natalie T. Churyk
Northern Illinois University

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EDITORIAL DIRECTOR Michael McDonald

AQUISITIONS EDITOR Emily Marcoux
EDITORIAL MANAGER Gladys Soto
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ISBN: 978-1-119-37374-2 (PBK)

ISBN: 978-1-119-37360-5 (EVALC)

Library of Congress Cataloging-in-Publication Data:

Names: Weirich, Thomas R., author. | Pearson, Thomas C., author. | Churyk,
Natalie T., author.
Title: Accounting & auditing research : tools & strategies / by Thomas R.
Weirich, Thomas C. Pearson, Natalie T. Churyk.
Other titles: Accounting and auditing research
Description: Ninth edition. | Hoboken, NJ : John Wiley & Sons, 2017. |
Revised edition of Accounting & auditing research : tools & strategies,
[2014] | Includes index. |
Identifiers: LCCN 2017030734 (print) | LCCN 2017036163 (ebook) | ISBN
9781119373612 (pdf) | ISBN 9781119373629 (epub) | ISBN 9781119373742 (pbk.)
Subjects: LCSH: Accounting—Research. | Auditing—Research.
Classification: LCC HF5630 (ebook) | LCC HF5630 .W39 2017 (print) | DDC
657.072—dc23
LC record available at https://lccn.loc.gov/2017030734

The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN on the back cover
differs from the ISBN on this page, the one on the back cover is correct.

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CONTENTS

PREFACE IX
ABOUT THE AUTHORS XIII

1 INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH 1

What is Research?, 2
Research Questions, 3
Nature of Professional Research, 5
Critical Thinking and Effective Communication, 7
Economic Consequences of Standards Setting, 7
Role of Research in the Accounting Firm, 7
Skills Needed for the CPA Exam and Practice, 9
Overview of the Research Process, 11
Step One: Identify the Relevant Facts and Issues, 11
k Step Two: Collect the Evidence, 12 k
Step Three: Analyze the Results and Identify the Alternatives, 13
Step Four: Develop a Conclusion, 14
Step Five: Communicate the Results, 14
Data Analytics in Accounting and Auditing Research, 14
Summary, 16
Discussion Questions, 16
Exercises, 17
Appendix: Research Focus on the CPA Exam, 17

2 CRITICAL THINKING AND EFFECTIVE WRITING SKILLS FOR THE PROFESSIONAL

ACCOUNTANT 21
Critical Thinking Skills, 21
Levels of Thinking, 23
Universal Elements of Reasoning, 26
An Example of Using Critical Thinking Skills, 27
Effective Writing Skills, 28
Writing as a Process, 29
Punctuation Primer, 30
Improved Writing Skills Required, 33
Active Voice, 33
Short Sentences, 33
Definite, Concrete, Everyday Language, 34
Tabular Presentation, 34
iii

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iv CONTENTS

Limited Jargon and Technical Terms, 34

No Multiple Negatives, 35
Elements of Plain English, 35
Writing Effective Texts, e-mails, and Letters, 36
Writing Memos to the File, 37
Summary, 38
Discussion Questions, 38
Exercises, 39

3 THE ENVIRONMENT OF ACCOUNTING RESEARCH 41

The Accounting Environment, 41
The SEC and the Standard-Setting Environment, 42
Rules-Based vs. Principles-Based Accounting Standards, 43
Financial Accounting Standards Board, 44
FASB Strives to Simplify Standards, 45
Content of Authorities, 45
FASB Due Process, 46
FASB Conceptual Framework Project, 48
Statements of Financial Accounting Concepts Nos. 1–8, 49
American Institute of Certified Public Accountants (AICPA), 49
Governmental Accounting Standards Board, 50
k Other Organizations Influencing Standard Setting, 52 k
U.S. Generally Accepted Accounting Principles (U.S. GAAP), 54
The FASB Accounting Standards CodificationTM , 55
Using Authoritative Support, 56
Reading an Authoritative Pronouncement, 57
Accounting Choices Have Economic Consequences, 59
Summary, 59
Discussion Questions, 60
Exercises, 60

4 FINANCIAL ACCOUNTING RESEARCH TOOLS 61

Accounting Research Online, 62
Database Research Strategies, 62
Step One: Define the Information Needed, 62
Step Two: Determine the Sources to Search, 62
Step Three: Use Appropriate Search Methods, 63
Step Four: View the Results and Manage the Information, 63
Step Five: Communicate the Search Results, 63
FASB Accounting Standards CodificationTM Research System, 63
The Research Process, 65
Locating U.S. GAAP Using the Codification, 68
Examples Using the Codification, 68
SEC Accounting for Public Companies, 68
SEC Regulations and Sources, 69

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Contents v

The SEC’s Published Views and Interpretations, 70

SEC Staff Policy, 71
Accessing SEC Filings and Regulations, 72
Cases to Practice Accounting Research, 74
Data Analytics for the Accounting Researcher, 74
Summary, 75
Discussion Questions, 75
Exercises, 76
Knowledge Busters: The Codification, 78
Appendix: CPA Exam—Financial Accounting Simulations, 81
Document Review Simulation, 84

5 THE ENVIRONMENT OF INTERNATIONAL RESEARCH 86

International Accounting Environment, 86
International Accounting Standards Board (IASB), 88
IASB Authorities, 90
IASB Due Process, 91
Interpretations Committee Due Process, 92
IASB’s Conceptual Framework, 92
Principles-Based Accounting Standards, 93
IFRS Funding, Regulation, and Enforcement, 94
k International Financial Reporting Standards (IFRS) Research, 95 k
IFRS Hierarchy, 95
Electronic International Financial Reporting Standards (eIFRS), 96
Summary, 100
Discussion Questions, 100
Exercises, 101
Knowledge Busters, 102

6 OTHER RESEARCH DATABASES AND TOOLS 103

Other Database Research Strategies, 103
Step One: Define the Information Needed, 104
Step Two: Determine the Sources to Search, 104
Step Three: Use Search Techniques and Tools, 105
Step Four: View the Results and Manage the Information, 105
U.S. Accounting Research Tools, 106
Leading Publishers of Global Financial Information, 106
Commercial Accounting Databases, 107
AICPA’s Reference Sources, 108
U.S. Government Accounting Databases, 108
GASB’s Government Accounting Research SystemTM (GARS Online), 109
Federal Accounting Standards Advisory Board Handbook of
Authorities, 109
Financial Research Databases, 109
S&P Capital IQ, 111

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vi CONTENTS

Mergent Online, 112

Thomson ONE, 113
Other Financial Databases and Sources, 113
Financial Research Challenges, 114
Business Research Databases and Tools, 115
Article Index Databases, 115
International Business Sources, 116
Specialized Research, 116
Massive Legal Research Databases, 117
LexisNexis and its Lexis Advance, 117
Nexis UniTM Replaces LexisNexis Academic, 118
Westlaw, 119
Emerging Legal Databases: Bloomberg Law and Fastcase, 119
Summary, 120
Discussion Questions, 120
Exercises, 121
Appendix 6A-1: Website Addresses, 122

7 TAX RESEARCH FOR COMPLIANCE AND TAX PLANNING 124

Tax Planning Concepts and Tax Research Goals, 124
Tax Research Goals, 125
k Tax Research Challenges, 126 k
Specialized Tax Research Databases, 127
Thomson Reuters Checkpoint®, 128
Primary Tax Authorities, 128
The Code, 129
Treasury Regulations, 131
Steps in Conducting Tax Research, 137
Step One: Investigate the Facts and Identify the Issues, 137
Step Two: Collect the Appropriate Authorities, 137
Step Three: Analyze the Research, 140
Step Four: Develop the Reasoning and Conclusion, 142
Step Five: Communicate the Results, 143
Evolving Professional Concerns and Changes, 145
Professional Standards for Tax Services, 147
Data Analytics in Tax Research, 149
Summary, 150
Discussion Questions, 150
Exercises, 150
Knowledge Busters, 153
Appendix 7A-1: Website Addresses, 154

8 ASSURANCE SERVICES AND AUDITING RESEARCH 155

Assurance Services, 156
Consulting Services and Standards, 156

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Contents vii

Attestation Services and Standards, 158

Auditing Standard-Setting Environment, 160
Auditing Standard-Setting Process, 161
Auditing Standards Board (ASB), 161
Public Company Accounting Oversight Board (PCAOB), 165
International Auditing & Assurance Standards Board (IAASB), 167
AICPA Online Professional Library, 167
AICPA Code of Professional Conduct, 169
Auditing Standards in the Public Sector, 171
RIA Checkpoint, 172
Compilation and Review Services, 174
Role of Judgment and Professional Skepticism in Accounting and
Auditing, 175
Economic Consequences, 175
Data Analytic in Auditing Research, 176
Summary, 177
Discussion Questions, 177
Exercises, 178
Data Analytics Cases, 178
Appendix: CPA Exam Audit Simulation, 179

k 9 REFINING THE RESEARCH PROCESS 181 k

Method for Conducting Research, 181
Step One: Identify the Issues or Problems, 183
Step Two: Collect the Evidence, 184
Step Three: Analyze the Results and Identify Alternatives, 188
Step Four: Develop a Conclusion, 188
Step Five: Communicate the Results, 189
Lessons Learned for Professional Practice, 190
Remain Current in Knowledge and Skills, 190
International Complexities in Practice, 192
Developing Professional Skills Needed for Practice, 192
Summary, 193
Discussion Questions, 193
Exercises, 193
Appendix 9A-1: Sample Brief Memorandum Using IFRS, 194
RE: Sony’s Goodwill and Segment Reporting, 194
Facts, 194
Issues, 194
Conclusions, 195
Authorities on goodwill, 195
Authorities on segment disclosure, 195
Application of authorities, 196
Appendix 9A-2: Abbreviations and Websites for Accounting, Auditing,
and Tax, 196

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viii CONTENTS

10 FORENSIC ACCOUNTING RESEARCH 202

Definition of Fraud, 203
Types of Fraud, 204
The Fraud Triangle, 206
Overview of a Financial Statement Fraud Examination, 207
Step One: Identify the Issue and Plan the Investigation, 209
Step Two: Gather the Evidence and Complete the Investigation
Phase, 209
Step Three: Evaluate the Evidence, 210
Step Four: Report Findings to Management or Legal Counsel, 210
Business Investigations, 211
Computer Technology in Fraud Investigations, 212
Data-Mining Software, 212
Data Analytics, 213
Public Databases, 214
The Internet, 217
Fraud Investigation Regulations, 217
Summary, 218
Discussion Questions, 218
Exercises, 218

k INDEX 219 k

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PREFACE

Dramatic changes have occurred in the accounting and business environment, especially over
the last decade, and data analytics have affected all areas of accounting and business practices.
U.S. GAAP was condensed in the FASB Accounting Standards Codification™, accounting
standards have changed faster than ever, mastery of international financial reporting standards
became important, auditing standards at the PCAOB continued to evolve in new directions, a
“clarity project” reformed many auditing standards for nonpublic companies, authorities that
accountants must research generally continued to expand, and the need for specialized online
database research skills continued to increase. Even dramatic changes in the CPA examination
have occurred so that simulations are 50 percent of most sections of an exam that is now more
focused on critical thinking skills and analysis.
In response to the changes, understanding how to perform accounting, auditing, tax, and finan-
cial related research is more important than ever. Students and young professionals need practice
applying knowledge of research techniques to problems or issues allowing them to develop effec-
tive research and analysis skills without fear of penalties that increasingly apply in the real world.
Success in the profession depends on one’s ability to effectively and efficiently research, analyze,
k communicate, and master other key business skills. k
Accounting & Auditing Research: Tools & Strategies, Ninth Edition is an invaluable,
step-by-step guide to practical professional research, both in understanding the authorities that
govern effective methodology for research and the professional research environment. This
text focuses on today’s professional research using online databases, supplemented with other
tools in conducting research and analysis. The text is more user friendly and powerful than
ever. The subtitle, Tools and Strategies, hints at the text’s awesome integration of teaching
and learning capabilities. Thus, as described below, Accounting & Auditing Research: Tools &
Strategies helps users develop skills to find authoritative solutions to accounting, auditing, fraud
investigations, tax, and business problems.
Accounting & Auditing Research: Tools & Strategies, Ninth Edition helps develop various
skills through reading and practice in applying the information presented. The text reemphasizes
the knowledge needed for practical skill development. For example, the text enhances the reader’s
critical thinking and effective writing skills through text examples and chapter exercises. Research
and analysis skills are also developed by completing exercises presented at the end of each chapter.
The skills developed in this text help prepare students to conduct research for their future careers
and for the CPA Examination task-based simulations and document review questions.

New, Revised, and Expanded Features of the Ninth Edition

This Ninth Edition of Accounting & Auditing Research has been carefully updated as to new
developments in the authoritative literature including end-of-chapter case studies for financial
and international research, and further adds data analytics perspectives throughout. The authors
believe that data analytics will have a significant impact on the accounting profession including
research as discussed and illustrated throughout this new edition of the text. This edition
also presents an expanded chapter on tax research and revised chapters especially on various
online databases. While the emphasis of Accounting & Auditing Research: Tools & Strategies
remains on providing useful guidance and information in conducting practical professional
ix

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x PREFACE

research, enhancements and updates reflect significant changes in accounting research sources,
technological advancements, and common professional practices.
Revised for greater effectiveness and readability, the text has enhanced the research tips, quick
facts, and problems for assisting the learning process. Research Tips presented in sidebar boxes
throughout the text help in doing common research tasks effectively and efficiently. Quick Facts
sidebar boxes summarize and expand on chapter concepts to provide new and useful research
information. Various exercises are presented at the end of each chapter to reinforce the material
and further develop one’s skills. The Ninth Edition provides powerful insights and learning tools
for developing high-quality applied professional research.

Major Research Databases Utilized in This Edition

™
ACL (Educational Version)—This audit software package is one of the most widely used audit
software packages in the world. Both auditors and fraud examiners, as well as most accounting
firms and internal audit departments, use it. Access through the text’s website is provided by a
downloadable executable file of the full educational version.
AICPA Library—This invaluable database, as presented in Chapter 8, includes a comprehensive
collection of the AICPA literature consisting of Professional Standards, Accounting Trends and
Techniques, Technical Practice Aids, Auditing and Accounting Guides, and Audit Alerts.

®
Checkpoint —This professional tax database is covered extensively in Chapter 7. The database
contains a comprehensive research library for primary sources and secondary sources in federal
taxation, as well as various specialized libraries.
EDGAR—This database is updated and hosted by the SEC. It allows for extensive research of
k company filings. k

e-IFRS—This database is extensively covered in Chapter 5 and is used to examine international

standards (IFRS).

™
FASB CODIFICATION RESEARCH System—This database enables comprehensive, but not
complete, research on accounting issues for the private sector.

®
IDEA —This versatile research database is a powerful data analysis tool used for more effective
audits.

®
Nexis Uni —This versatile research database is subset of the widely recognized commercial
LexisNexis® databases. Both databases are presented in Chapter 6. In addition to various topical
areas of law, the database has a business library that provides extensive information on public
companies.

Accounting Curriculum Development of Research and Analytical Skills

Adopted over the years by many universities, Accounting & Auditing Research: Tools & Strategies
has also assisted many public accounting firms and corporations in their staff training programs.
The text guides the reader, step-by-step, through the research process. Faculty recognizing the
essential need to incorporate research and analytical skills in the accounting curriculum will want
their students to use this text for a comprehensive and systematic approach for students to learn
research skills and analysis needed in the profession.
This text has versatile usage in most areas of the accounting curriculum. Many faculty assign
the text to supplement traditional accounting courses, such as intermediate accounting, advanced
accounting, governmental accounting, auditing, theory, tax, or other courses. Alternatively,
Accounting & Auditing Research: Tools & Strategies, Ninth Edition provides the information,
insights, and research opportunities for a separate accounting and auditing research course.

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Preface xi

Thomas R. Weirich
Central Michigan University
Thomas C. Pearson
University of Hawaii
Natalie Churyk
Northern Illinois University

Acknowledgments
The authors greatly appreciate all the faculty members and former students who have used
previous editions of this text and provided valuable suggestions for this new edition. The
numerous accounting firms who have incorporated this text into their staff training programs are
also appreciated.
Mahalo is extended to all those entities granting copyright permission to use screen images
to enhance the readers’ ability to understand. These entities include the ACL Services Ltd.,
American Institute of Certified Public Accountants, Financial Accounting Foundation, IFRS
Foundation, LexisNexis, and Thomson Reuters.
Special thanks go to our supportive spouses and other family members, who provided encour-
agement during the writing of this edition. Finally, we appreciate the work of the professional
staff at Wiley who have also enhanced this text.

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ABOUT THE AUTHORS

Thomas R. Weirich
Thomas R. Weirich, PhD, CPA, is currently the Jerry & Felicia Campbell Endowed Professor
of Accounting at Central Michigan University and former chair of its School of Accounting. He
earned a doctorate in accountancy from the University of Missouri, Columbia, as well as MBA
and BS degrees from Northern Illinois University. Dr. Weirich has public accounting experience
with both an international firm and a local firm. He has served as the Academic Fellow to the
Office of Chief Accountant at the U.S. Securities and Exchange Commission and a Faculty in
Residence position with Arthur Andersen, LLP, in their Business Fraud and Investigative Services
Division. Dr. Weirich has also served as a consultant to the Public Oversight Board’s Panel on
Audit Effectiveness and as an expert witness for the SEC and other organizations.
Professor Weirich is the coauthor of four textbooks and has written numerous articles in
academic and professional journals and assisted others, such as by serving on the Editorial
Advisory Board to the Journal of Accountancy and the Journal of Forensic Accounting Research.
Professor Weirich has received many teaching and professional awards, including the School of
Accounting/Beta Alpha Psi’s Outstanding Teaching Award, Ameritech/SBC Teaching Award,
k College of Business Dean’s Teaching Award, the Michigan Association of Governing Boards’ k
Distinguished Faculty Award, the Michigan Association of CPAs’ Distinguished Achievement
in Accounting Education Award, and the Michigan Association of CPAs Accounting Teaching
Excellence Award.
Extensive service has been performed for national, state, and local committees, such as
the American Accounting Association’s Education Committee, the SEC Liaison Committee,
the AICPA’s SEC Regulation’s Committee, and National Association of State Boards of
Accountancy (NASBA) CPA and Education committees. He is currently serving on the AICPA’s
Board of Examiners and the Auditing Subcommittee for the CPA Exam. Dr. Weirich has also
served as mayor of Mt. Pleasant, Michigan, and spent many years on its City Commission. He
also served as chair of the Michigan Board of Accountancy.

Thomas C. Pearson
Thomas C. Pearson, LLM, JD, CPA, is a professor of accounting at the University of Hawaii
at Manoa and former director of its School of Accountancy. He earned two masters of letters of
law in tax from New York University and the University of Denver, a doctorate of jurisprudence
and MBA from Vanderbilt University, and an AB from Dartmouth College. Professor Pearson
received the George A. Katz Memorial Award in Securities Law in 2005. He has previously taught
at the University of Wyoming and National Taiwan University. He has previous work experience
at Hospital Corporation of America.
Professor Pearson has published nearly 50 articles or books, including articles in the
Stanford Journal of Law, Business & Finance, North Carolina Journal of International Law and
Commercial Regulation, and the Review of Banking and Financial Law. He has also published in
leading accounting academic publications such as Accounting Horizons, Journal of Accounting
Education, and Journal of the American Taxation Association.
His numerous teaching awards include the University of Hawaii’s Board of Regents Teaching
Excellence Award and the Outstanding Achievement in Education Award by the Hawaii Society
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xiv ABOUT THE AUTHORS

of CPAs. He has served as president of the Shidler College of Business Faculty Senate and on
numerous university committees. He has also served on Hawaii’s Tax Review Commission and
is involved in several professional organizations.

Natalie Tatiana Churyk

Natalie Tatiana Churyk, PhD, CPA, is the William F. Doyle Endowed Professor of Accountancy
at Northern Illinois University where she teaches in the MAS program. She earned her doctorate
in accounting with a finance cognate from the University of South Carolina. She received her
BS in accounting and her MBA with a specialization in finance from California State University,
Long Beach. Dr. Churyk has public accounting experience with a local California firm.
Professor Churyk is the Editor-in-Chief of the Journal of Accounting Education. She has pub-
lished over 40 journal articles in academic and professional journals including Journal of Business
Research, Journal of Forensic and Investigative Accounting, Journal of Accounting Education,
Advances in Accounting Behavioral Research, Journal of Accountancy, Strategic Finance, and
CPA Journal. Professor Churyk has received research grants from PricewaterhouseCoopers, the
Institute of Management Accountants, and her university.
Her professional service includes the following positions within the American Accounting
Association’s (AAA) Teaching, Learning and Curriculum Section—President (2016–2018), Vice
President (2014–2016), Treasurer (2009–2013), and Membership Chair (2008–2011). Her service
also includes various other president, chair, and membership positions within AAA’s Midwest
Region, Forensic and Investigative Accounting section, and at the AAA national level.

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Introduction to Applied Professional

Research
1
L E A R N I N G O B J E C TI V E S
After completing this chapter, you should understand:
• The importance of research in the daily activities of the professional accountant.
• The definition and nature of professional accounting research.
• The navigation steps to narrow one’s research.
• The U.S. Securities and Exchange Commission’s view on the importance of research.
• The role of research within a public accounting firm or within an accounting
department of a business or governmental entity.
• The basic steps of the research process.
k k
• The importance of critical thinking and effective communication skills.
• The role of data analytics in accounting and auditing research.
• The importance of research on the U.S. Certified Public Accountant (CPA) exam.

Today’s accounting professionals, like other professionals, are witnessing a major transforma-
tion due to changes in the law, new services, technologies, and an ever increasing number of
professional standards. In the altered accounting and auditing landscape brought about by these
dramatic changes, understanding how to perform accounting, auditing, tax, and business research
is more important than ever. To develop effective skills in research and analysis, students and pro-
fessionals need to apply their knowledge of research to everyday practical problems. In addition
to accounting, auditing, and tax compliance, accountants are involved in such services as attes-
tation reviews, forensic accounting, fraud examinations, and tax planning. Listening effectively
and understanding opposing points of view are also critical skills for accountants, who often
must present and defend their views through formal and informal communications. Professional
research and communication skills are essential in this environment.
Varying views and interpretations exist as to the meaning of the term research. In the account-
ing profession, research points to what accounting practitioners do as a normal, everyday part of QUICK FACTS
their job. In today’s environment, to become proficient in accounting, auditing, and tax research, Accounting research
they must possess the skills required to use various professional databases, which are increasingly combines the use of
available on the web. Using professional databases for research is even required in the CPA exam. accounting theory
The professional accountant, whether in public accounting, industry, or government, fre- and existing author-
quently becomes involved with the investigation and analysis of an accounting, auditing, or itative accounting
tax issue. Resolving these issues requires formulating a clear definition of the problem, using literature.

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2 INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH

professional databases to search for the relevant authorities, reviewing the authoritative literature,
evaluating alternatives, drawing conclusions, and communicating the results. This research
process often requires an analysis of very complex and detailed issues, and researching such
issues challenges the professional’s critical thinking abilities. The professional must therefore
possess the expertise to understand the relevant facts and render a professional judgment,
even when no single definitive answer or solution exists. In such cases, the researcher applies
professional judgment in the development of an answer to the issue or problem at hand.

What is Research?
Professional accountants conduct applied research primarily to practice issues. The objective of
conducting any type of research, including professional accounting, auditing, and tax research,
is a systematic investigation of an issue or problem utilizing the researcher’s professional judg-
ment. Here are two cases of generalized research problems that serve as examples of the types of
research questions confronting the accounting practitioner:

1. A client is engaged in land sales, primarily commercial and agricultural. The company
recently acquired a retail land sales project under an agreement stating that, if the company
did not desire to pursue the project, the property could be returned with no liability to the
company. After the company invests a considerable amount of money into the project, the
state of the economy concerning the market for retail land sales declines, and the company
decides to return the land. As a result, the client turns to you, the CPA, and requests the proper
accounting treatment of the returned project. At issue is whether the abandonment represents
k a disposal of a segment of the business, an unusual and nonrecurring extraordinary loss, or k
an ordinary loss. The client may also want to understand the tax consequences.
2. A controller for a construction contracting company faces a problem. The company pays
for rights allowing it to extract a specified volume of landfill from a project for a specified
period of time. How should the company classify the payments for such landfill rights in its
financial statements?1

Research is often classified as either theoretical or applied. Theoretical research investigates

questions that appear interesting to the researcher, generally an academician, but that may have
little or no current practical application. Theoretical researchers attempt to create new knowledge
in a subject area, sometimes using empirical data based on experimentation or observation. For
example, a theoretical researcher may conduct a controlled experiment to investigate the hypoth-
esis that the U.S. Securities Exchange Commission’s Regulation Fair Disclosure (FD) on public
management earnings forecasts is asymmetric.2 Thus, theoretical research adds to the body of
knowledge and may ultimately contribute directly or indirectly to practical problem solutions.
Theoretical research using empirical research studies based on experimentation or observation are
frequently reviewed and evaluated by standard-setting bodies in drafting authoritative accounting
and auditing pronouncements.
Applied research, the focus of this text, investigates an issue of immediate practical importance.
One type of applied research is known as a priori (before-the-fact) research, which is conducted
before the client actually enters into a transaction. For example, assume that a public accounting
firm needs to evaluate a client’s proposed new accounting treatment for environmental costs. The
client expects an answer within two days on the acceptability of the new method and its impact on

1
AICPA, Technical Practice Aids.
2
Heflin, Frank, William Kross, and Inho Suk, “Asymmetric Effects of Regulation FD on Management Earnings Forecasts”, The
Accounting Review, 91, no. 1 (Jan 2016)

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Research Questions 3

the financial statements. In such a case, a member of the accounting firm’s professional staff would
investigate to determine whether the authoritative literature addresses the issue. If no authoritative
pronouncement exists, the accountant would develop a theoretical justification for or against the
new method.
Applied research relating to a completed event is known as a posteriori (after-the-fact) QUICK FACTS
research. For example, a client may request assistance preparing his or her tax return for a
transaction that was already executed. Frequently, many advantages accrue to conducting a priori Professional
rather than a posteriori research. For example, if research reveals that a proposed transaction will accountants conduct
primarily applied
have an unfavorable impact on financial statements, the client can abandon the transaction
research related to
or possibly restructure it to avoid undesirable consequences. These options are not available, practice issues.
however, after a transaction is completed.
Society needs both theoretical and applied research. Both types of research require sound
research design to effectively and efficiently resolve the issue under investigation. No matter
how knowledgeable professionals become in any aspect of accounting, auditing, or tax, they will
always face research challenges. However, using a systematic research approach will greatly help
in resolving the problem.

Research Questions
Individual companies and CPA firms conduct research to resolve specific accounting, auditing,
and tax issues, either for themselves or for clients. The results of this research may lead to new
firm policies or procedures in the application of existing authorities. In the research process, the
practitioner/researcher must answer the following basic questions:
k 1. Do I have complete knowledge to answer the question, or must I conduct research to consult k
RESEARCH TIPS
authoritative references?
Successful research
2. What is the tax law or authoritative literature? requires asking and
answering various
3. Does the law or authoritative literature address the issue under review?
questions to find and
4. Where can I find the law or authoritative literature and effectively and efficiently develop apply relevant
a conclusion? authorities.

5. Where can I find international accounting and auditing standards?

6. If no law or authoritative literature directly addresses the topic, what approach do I follow
in reaching a conclusion?
7. What professional databases or other sources on the Internet should I access for the research
process?
8. If more than one alternative solution exists, what alternative do I select?
9. Can I utilize data analytic tools to assist my research?
10. How do I document my findings or conclusions?
The purpose of this text is to provide an understanding of the research process and the research
skills needed to answer these questions. The whats, whys, and hows of practical professional
accounting, auditing, and tax research are discussed with an emphasis on the following topics:
• How do I research effectively?
• How do I apply a practical research methodology in a timely manner?
• What are the generally accepted accounting principles, auditing standards, and tax authorities?

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4 INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH

• What constitutes substantial authoritative support?

• What are the available sources of authority for accounting, auditing, and tax?
• What databases are available for finding relevant authorities or assisting in researching a
problem?
• What role does the Internet (the information superhighway) have in the modern research
process?
In conducting research for an issue or question at hand, one of the primary tools utilized in
financial accounting research is the Financial Accounting Standards Board (FASB) Codification
SystemTM (discussed in detail in Chapter 4). In addition to understanding the Codification’s struc-
ture, navigating through the authoritative literature is necessary to analyze a variety of questions
or issues. A useful instrument to help focus or narrow your research is a navigation guide such as
the one depicted in Figure 1.1.
In navigating the literature or Codification, researchers should first focus on the functional
area(s) that will guide them to the appropriate professional literature and/or database, as well as
the authoritative body that issued the related literature. For instance, is the problem or issue under
review a financial accounting question, managerial accounting issue, or technical Securities and
Exchange Commission (SEC) problem? Once the functional area is determined, the next step in
the navigation is to determine the broad categorization of the topic, such as an asset, revenue, or
expense issue. Then focusing on the subtopic allows for further segregation and navigation of the
issue. For example, if the topical area is an expense issue, the subtopic might relate to cost of
sales, compensation, or research and development.
The final phase in the navigation process is to focus on the section or nature of the content,
k which is often a recognition, measurement, or disclosure issue. For instance, if the functional area k
is financial accounting, the topic is assets, and the subtopic is financial instruments, the section
or nature might address the proper measurement of the financial instrument either at cost or fair
value. The navigation guide is explained in detail later in the text.
Also presented in the text is a practical research approach, along with discussions of various
research tools and demonstrations of the approach using a number of end-of-chapter questions

Functional Area
Financial Accounting and Reporting
SEC Issues
Taxation
Managerial Accounting
Audit/Attestation
Governmental/Not-for-Profit Accounting
Other Areas

Topic (Issue)
Assets
Liabilities
Equity
Revenues
Expense
Subtopics
Cost of Sales
Compensation
R&D
etc.
Section
Recognition
Measurement
Disclosure

FIGURE 1.1 Research Navigation Guide.

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Nature of Professional Research 5

ACCOUNTING GUIDANCE
Standard Setter Responsibility
Federal Accounting Standards Advisory Board Responsible for accounting standards for federal
(FASAB) government entities
Financial Accounting Standards Board (FASB) Responsible for accounting standards for private
and public companies
Governmental Accounting Standards Board Responsible for accounting standards for state
(GASB) and local government entities
International Accounting Standard Board (IASB) Responsible for the issuance of International
Financial Reporting Standards
U.S. Securities & Exchange Commission (SEC) Responsible for accounting and disclosure
standards for public companies in addition
to standards of the FASB

AUDIT GUIDANCE
American Institute of CPAs (AICPA) Responsible for auditing standards for private
company audits
Governmental Accountability Office (GAO) Responsible for audits of governmental entities
International Auditing & Assurance Board (IAASB) Responsible for the establishment of international
auditing standards
Public Company Accounting Oversight Board Responsible for auditing standards for public
(PCAOB) company audits

TAX GUIDANCE
k Primary tax sources Items for research k
Statutory sources the Internal Revenue Code, the U.S. Constitution,
and tax treaties
Administrative sources Treasury Regulations, Revenue Rulings, and
Revenue Procedures
Judicial sources Case decisions from the various courts

FIGURE 1.2 Authoritative Guidance for Research.

and exercises. The text also addresses the importance of critical thinking and effective writing
skills that the researcher should possess and utilize in executing the research process. Specific
tips on developing these skills are presented in subsequent chapters.
As you read the following chapters, Figure 1.2 presents an overview of the accounting, auditing
and tax guidance that you will encounter in conducting your research.

Nature of Professional Research

This text focuses on applied research, known as professional accounting research. Today’s prac-
titioner must conduct research effectively and efficiently to arrive at appropriate and timely con-
clusions regarding the issues at hand. Effectiveness is critical in order to confirm:

• The proper recording, classification, and disclosure of economic events.

• Compliance with authoritative pronouncements.
• The absence of preferable alternative procedures.

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6 INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH

Efficiency is needed to meet deadlines and manage research costs. Additional examples of
issues frequently encountered by the practitioner include such questions as:

QUICK FACTS • What are the accounting, auditing, or tax implications of a new transaction?
The accounting • Does the accounting treatment of the transaction conform to generally accepted accounting
researcher is an principles (GAAP)?
investigator with
strong analytical and
• Does the tax treatment conform to the law?
communication skills. • What are the disclosure requirements for the financial statements or tax returns?
• What is the auditor’s responsibility when confronted with supplemental information presented
in annual reports but not as part of the basic financial statements?
• What responsibilities and potential penalties do tax accountants face?
• How does an accountant proceed in a fraud investigation?

RESEARCH TIPS
Responding to these often complicated questions has generally become more difficult and
time-consuming as the financial accounting and reporting requirements, auditing standards, and
Conducting research tax authorities increase in number and complexity. The research process is often complicated
requires the use of further when the accountant or auditor researches a practical issue or question for which no appli-
electronic databases
cable authoritative literature exists.
often available on
the web.
As a researcher, the accountant should possess certain desirable characteristics that aid in
the research process: inquisitiveness, open-mindedness, thoroughness, patience, and persever-
ance.3 Inquisitiveness is needed while gathering the relevant facts to obtain a clear picture of the
research problem. Proper problem definition or issue identification is the most critical compo-
k nent in research. An improperly stated issue usually leads to the wrong conclusion, no matter k
how carefully the research process is executed. Likewise, the researcher needs to be open-minded
and avoid drawing conclusions before the research process is completed. A preconceived solu-
tion can result in biased research in which the researcher merely seeks evidence to support the
position rather than searching for the most appropriate solution. The researcher must carefully
examine the facts, obtain and review authoritative literature, evaluate alternatives, and then draw
conclusions based on the research evidence. The execution of an efficient research project requires
thoroughness and patience. This requirement is emphasized both in the planning stage, where
all relevant facts are identified, and in the research stage, where all extraneous information is
controlled. Finally, the researcher must work steadfastly in order to finish the research on a
timely basis.
Perhaps the most important characteristic of the research process is its ability to add value to
the services provided. A professional auditor not only renders an opinion on clients’ financial
statements but also identifies available reporting alternatives that may benefit them. A profes-
sional tax accountant not only prepares the returns but also suggests tax planning for future
transactions. The ability of a researcher to provide relevant information becomes more important
as the competition among accounting firms for clients intensifies and the potential significance
and enforcement of penalties become increasingly common. Researchers who identify reporting
alternatives that provide benefits or avoid pitfalls will provide a strong competitive edge for their
employers. Providing these tangible benefits to clients through careful and thorough research is
essential in today’s accounting environment.

3
Wanda Wallace, “A Profile of a Researcher,” Auditor’s Report, American Accounting Association (Fall 1984): 1–3.

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Role of Research in the Accounting Firm 7

Critical Thinking and Effective Communication

Researchers need to know how to think; that is, they must identify the problem or issue, gather the
relevant facts, analyze the issue(s), synthesize and evaluate alternatives, develop an appropriate
solution, and effectively communicate the desired information. Such abilities are essential for
the professional accountant in providing services in today’s complex, dynamic, and changing
profession. In this environment, the professional accountant must possess the ability not only
to think critically, which includes being able to grasp a variety of contexts and circumstances,
but also apply and adapt various accounting, auditing, tax, and business concepts and principles
to the circumstances in order to develop the best solutions. The development and nurturing of
critical thinking skills will also contribute to the lifelong learning that today’s professionals need
to nurture.
RESEARCH TIPS
Research efforts may culminate in memos or work papers, letters to clients, journal articles,
or firm reports. Whatever its form, the dissemination of your research will require effective com- Successful research
munication skills for both oral presentations and written documents. Your research output must requires critical
demonstrate coherence, conciseness, appropriate use of Standard English, and achievement of the thinking and effective
communication.
intended purpose. Critical thinking and effective writing skills are the focus of Chapter 2.

Economic Consequences of Standards Setting

It is often desirable, if not necessary, to investigate the economic consequences of accounting
standard setting. Without this exploration, the establishment of a particular accounting standard
may produce unintentional or unforeseen economic consequences. And accounting standards can
k have far-reaching economic consequences, as was demonstrated by the Financial Accounting k
Standards Board (FASB) in addressing such issues as restructuring costs, financial instruments
and fair value accounting, stock options, and postemployment benefits. Difficulties sometimes
arise in the proper accounting for the economic substance of a transaction within the current
accounting framework.
Because financial statements must conform to GAAP, the standard-setting bodies, such as the
FASB or Governmental Accounting Standards Board (GASB), conduct research on the economic
impact of any proposed standard. For example, the handling of off-balance sheet transactions has
sometimes encouraged the selection of one business decision over another, producing results that
may be less oriented to the users of financial statements.
In today’s complex business and legal environment, the accounting and auditing researcher
should understand the economic and social impact that accepted accounting alternatives may have
on society in general and on individual entities in particular. Such economic and social concerns
are becoming a greater factor in the evaluation and issuance of new accounting standards, as
discussed more thoroughly in Chapter 4.

Role of Research in the Accounting Firm

Although accountants often conduct research in education, industry, and government, the partic-
ularly important areas for a public accounting firm are accounting, auditing, and tax. Reflecting
today’s society, significant changes have occurred in the accounting environment. The practitioner
today requires increased knowledge because of the heightened complexity of many business trans-
actions, the proliferation of new authoritative pronouncements, and advances in technology. As
a result, practitioners should possess the ability to conduct efficient research. An accountant’s

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8 INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH

responsibility to conduct accounting/auditing research is analogous to an attorney’s responsibility

to conduct legal research. For example:

QUICK FACTS • A lawyer should provide competent representation to a client. Competent representation
requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for
The accounting the representation.4
practitioner may be
held liable for • A California court interpreted the research requirement to mean that each lawyer must have the
inappropriate or ability to research the law completely, know the applicable legal principles, and find “the rules”
incomplete which, although not commonly known, are discovered through standard research techniques.5
accounting or tax Thus, in the California case, the plaintiff recovered a judgment of $100,000 in a malpractice
research. suit that was based on the malpractice of the defendant in researching the applicable law.
• The U.S. Securities and Exchange Commission has also stressed the importance of effective
accounting research through an enforcement action brought against an accountant. In Account-
ing and Auditing Enforcement Release No. 420, the SEC instituted a public administrative
proceeding against a CPA. The SEC charged that the CPA failed to exercise due care in the
conduct of an audit. The enforcement release specifically stated the following:

In determining whether the [company] valued the lease properly, the [CPA] failed to consult perti-
nent provisions of GAAP or any other accounting authorities. This failure to conduct any research
on the appropriate method of valuation constitutes a failure to act with due professional care.

Thus, the professional accountant must possess the ability to use relevant sources to locate
applicable authoritative pronouncements or law and to ascertain their current status. Due to the
expanding complex environment and proliferation of pronouncements, many accounting firms
k k
have created a research specialization within the firm. Common approaches used in practice
include the following:

RESEARCH TIPS 1. The staff at the local office conducts day-to-day research, whereas industry-specific ques-
tions are referred to industry specialists within the firm.
At times, conducting
research will require 2. Selected individuals in the local or regional office are designated as research specialists, and
consulting with all research questions within the office or region are brought to their attention for research.
research specialists.
3. The accounting firm establishes at the firm’s executive office a centralized research function
that handles technical questions for the firm as a whole.
4. The firm maintains computerized files of previous research to provide consolidated expertise
on how the firm has handled issues in the past.
The task of accurate and comprehensive research is often complex and challenging. However,
one can meet the challenge by becoming familiar with the suggested research process to solve
the accounting, auditing, or tax issues.
Figure 1.3 depicts a more in-depth look at a typical organizational structure for policy
decision-making and research on accounting and auditing matters in a multioffice firm that
maintains a research department. The responsibilities of a firm-wide accounting and auditing
policy decision function include:
• Maintaining a high level of professional competence in accounting and auditing matters.
• Developing and rendering high-level policies and procedures on accounting and auditing
issues for the firm.

4 Model Rules of Professional Conduct of the American Bar Association, Rule One.
5 Smith and Lewis, 13 Cal. 3d 349, 530 P.2d 589, 118 Cal Rptr. 621 (1975).

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Skills Needed for the CPA Exam and Practice 9

Firm’s Policy Committee This committee evaluates

on significant accounting and
Accounting and Auditing Issues auditing issues and renders
high-level firm policy
decisions on those issues.

Executive Subcommittee The subcommittee makes

ongoing policy decisions
regarding accounting and
auditing issues.

Research Group
The working units interpret
the firm’s policies on
Accounting Auditing accounting and auditing
Principles Standards matters after careful and
Unit Unit comprehensive research.

FIGURE 1.3 Organizational Framework for Policy Decision-Making and Research Within a Typical
Multioffice Accounting Firm.

• Disseminating the firm’s policies and procedures to appropriate personnel within the firm on
a timely basis.
• Supervising the quality control of the firm’s practice.
Research plays an important role in this decision-making process. A CPA firm’s policy com-
k k
mittee and executive subcommittee, as shown in Figure 1.3, generally consist of highly competent
partners with many years of practical experience. The policy committee’s primary function is to
evaluate significant accounting and auditing issues and to establish firm-wide policies on these
issues. The executive subcommittee’s function is to handle the daily ongoing policy (lower-level)
decisions for the firm as a whole. The responsibility of the accounting and auditing research per-
sonnel is to interpret firm policies in the context of specific client situations. Frequently, technical
accounting and auditing issues that arise during the course of a client engagement are resolved
through research conducted by personnel assigned to the engagement. When a local office cannot
resolve a research matter satisfactorily, assistance is requested from the firm’s specialized research
units. These units conduct careful and comprehensive research in arriving at the firm’s response
to technical inquiries. This response is then disseminated to the various geographic offices of the
firm for future reference in handling similar technical issues.
Practical accounting and auditing research is not confined to public accounting firms. All
accountants should possess the ability to conduct effective research and develop logical and
well-supported conclusions on a timely basis. The basic research process is similar whether the
researcher is engaged in public accounting, management accounting, governmental accounting,
auditing, or even taxation.

Skills Needed for the CPA Exam and Practice

In the licensing of a new CPA, state laws or regulations typically require a combination of edu-
cation, examination, and experience. State legislatures, state boards of accountancy, the Pub-
lic Company Accounting Oversight Board (PCAOB), and the American Institute of Certified
Public Accountants (AICPA) have strived to assure the professional competencies of CPAs. The
role that a CPA plays in society is so significant that several years ago the AICPA Board of Exam-
iners identified certain skills that the beginning CPA must possess in order to protect the public

k
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