Please select the alphabet below:
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AA Arthur Andersen LLP, based in Chicago, was once one of the “Big Five” accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations. In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm’s handling of the auditing of Enron, an energy corporation based in Texas which later failed. The other national accounting and consulting firms bought most of the practices of Arthur Andersen. Although the verdict was subsequently overturned by the Supreme Court of the United States, it has not returned as a viable business. One of the few revenue-generating assets that the Andersen firm still has is The Q Center, a conference and training facility outside of Chicago. The former consultancy arm of the firm, now known as Accenture, which had split from the accountancy side in 1987 and renamed themselves after splitting from Andersen Worldwide in 2000, continues to operate and has become one of the largest multinational corporations in the world.
AAA American Accounting Association.
AABA Association for Accountancy and Business Affairs.
AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions.
AAT Association of Accounting Technicians.
Abacus A Journal of Accounting, Finance and Business Studies; An Australian scholarly accounting journal. Established by Raymond John Chambers in 1965, Abacus is published in three issues annually by Blackwell Publishing, on behalf of the University of Sydney’s Accounting Foundation. It is available in print and online formats. The journal’s notes (available at its Web link) state that it provides “a vehicle for the expression of independent and critical thought on matters of current academic and professional interest in accounting, finance and business. The journal reports current research; critically evaluates current developments in theory and practice; analyses the effects of the regulatory framework of accounting, finance and business; and explores alternatives to, and explanations of, past and current practices.” Although primarily geared toward accounting, it also has extensive coverage of auditing. Its coverage is international. Web link: www.blackwellpublishing.com/journals/ABACUS.
ABB Activity Based Budgeting.
ABC Activity Based Costing.
ABC agreement A contract between an employee and a brokerage firm outlining the rights of the firm purchasing an NYSE membership for that employee.
Ability to pay Refers to the borrower’s ability to make interest and principal payments on debts. See: Fixed charge coverage ratio. In context of municipal bonds, refers to the issuer’s present and future ability to create sufficient tax revenue to fulfill its contractual obligations, accounting for municipal income and property values. In context of taxation, notion that tax rates should be determined according to income or wealth.
Abnormal returns The component of the return that is not due to systematic influences (market-wide influences). In other words, the abnormal returns is the difference between the actual return and that is expected to result from market movements (normal return). Related: excess returns. Above par See: Par.
abnormal spoilage Avoidable waste, scrap, and defective goods arising from manufacturing processes. In contrast to normal spoilage, abnormal spoilage is not considered to be an inherent part of a manufacturing process, and it tends to be expensed as incurred.
ABO Accounting, Behavior and Organizations (Section of the AAA).
ABO Reporter The A U.S. accounting newsletter. Published twice a year by the Accounting, Behavior and Organizations (ABO) Section of the American Accounting Association, the newsletter is available in both print and online formats. It includes announcements and calls for papers for publication in the ABO journal Behavioral Research in Accounting. Web link: http://business.baylor.edu/Charles Davis//abo/rptr home.htm.
above the line In a position in an income statement that directly affects net income. The “line” is the point in the income statement that separates items that determine net income from items that determine funding and the distribution of net income. Traditionally, Generally Accepted Accounting Principles 2 • absolute risk (GAAP) around the world have distinguished between exceptional items, treated above the line, and extraordinary items, treated below the line. In recent years, however, GAAP has tended to move toward encouraging both these categories of unusual expenses to appear above the line, and thereby to directly affect earnings per share.
Absolute advantage A person, company or country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another person, company or country. Absolute form of purchasing power parity A theory that prices of products of two different countries should be equal when measured by a common currency. Also called the “law of one price.”
Absolute Physical Life The period of use after which an asset has deteriorated to such an extent that it can no longer be used.
Absolute priority Rule in bankruptcy proceedings requiring senior creditors to be paid in full before junior creditors receive any payment.
absolute risk A risk unaffected or unmitigated by internal controls.
Absorbed Used in context of general equities. Securities are “absorbed” as long as there are correspondingorders to buy and sell. The market has reached the absorption point when further assimilation is impossible without an adjustment in price. See: Sell the book.
Absorption costing A costing method that allocates all manufacturing costs to units of inventory or other measures of output. Normally required by most systems of Generally Accepted Accounting Principles, absorption costing takes account of both direct (or variable) costs and manufacturing overheads. The overheads are typically allocated to cost centers and then absorbed into units of inventory at predetermined rates. Nonmanufacturing costs (both fixed and variable) are expensed as incurred and are not absorbed into inventory valuation.
Abusive tax shelter A limited partnership that the IRS judges to be claiming tax deductions illegally. Accelerated cost recovery system (ACRS) Schedule of depreciation rates allowed for tax purposes.
Academy of Accounting Historians A U.S. organization dedicated to accounting history. Established in 1973, the academy’s activities include conferences, research programs, and the publication of monographs, newsletters (or “notebooks”), and the Accounting Historians Journal. Although primarily geared toward accounting, the academy’s work frequently covers auditing. Membership is internationally based. Web site: accounting.rutgers.edu/raw/aah.
ACAUS Association of Chartered Accountants in the United States.
ACCA Association of Chartered Certified Accountants.
ACCA Internal Audit Bulletin A British internal auditing newsletter. Published online by the Association of Chartered Certified Accountants (ACCA), the quarterly bulletin covers internal auditing news and events in an international context. Web link: www.accaglobal.com/publications/audit.
Accelerated depreciation Any depreciation method that produces larger deductions for depreciation in the early years of an asset’s life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.
accelerated method A cost allocation method that provides for larger amounts in earlier time periods. The rationale for using an accelerated method is that the economic activity of the underlying assets or circumstances occurs most intensively in the earliest time periods. For example, under accelerated amortization the cost of a long-term asset is expensed more heavily in the early years of its useful economic life, on the grounds that the asset is characterized by rapidly diminishing efficiency, or is subject to a high risk of early obsolescence. Where amortization costs are deductible for tax purposes, accelerated methods of depreciation offer accelerated tax benefits.
Acceleration clause A contract stating that the unpaid balance becomes due and payable if specific actions transpire, such as failure to make interests payments on time.
Accenture® An international management consulting, technology services, and outsourcing organization. Formerly known as Andersen Consulting, Accenture.
Acceptance Contractual agreement instigated when the drawee of a time draft “accepts” the draft by writing the word “accepted” thereon. The drawee assumes responsibility as the acceptor and for payment at maturity. See: Letter of credit and banker’s acceptance.
Accommodative monetary policy Federal Reserve System policy to increase the amount of money available to banks for lending. See: Monetary policy.
account 1. A record of financial transactions within a general ledger for an individual asset or liability, or for an area of revenue or expenditure. Normally expressed in monetary terms, accounts are the recording mechanisms through which the transactions of double entry bookkeeping are effected. Accounts are summarized into a trial balance en route to the preparation of financial statements. Some accounts, known as memorandum accounts, are designed to be maintained separately from the double entry bookkeeping process.; 2. A summary of the financial transactions between two parties. For example, relations between a bank and its customers are normally controlled through individually numbered accounts. Accounts of this nature are normally summarized in formal, periodic statements between the two parties: the bank statement is the classic example.
Account In the context of bookkeeping, refers to the ledger pages upon which various assets, liabilities, income, and expenses are represented.; In the context of investment banking, refers to the status of securities sold and owned or the relationship between parties to an underwriting syndicate. In the context of securities, the relationship between a client and a broker/dealerfirm allowing the firm’s employee to be the client’s buying and selling agent. See: Account executive; account statement.
Account Ad Valorem Duty An imported merchandise tax expressed as a percentage.
Account balance Creditsminus debits at the end of a reporting period.
Account executive The brokerage firm employee who handles stockorders for clients. See: Broker.
Account Party Party who applies to open a bank for the issuance of a letter of credit.
Account reconciliation The reviewing and adjusting of the balance in a personal checkbook to match your bank statement.
Account statement In the context of banking, refers to a summary of all balances. In the context of securities, a summary of all transactions and positions (long and short) between a broker/dealer and a client. See also: Option agreement.
accountability The condition of being responsible for an action, asset, entity, procedure, or process. Individuals with accountability are usually required to justify their actions or decisions in the areas they monitor or safeguard. Modern corporate governance is dedicated to defining organizational accountability, and to establishing suitable mechanisms for its enforcement and reporting. A board of directors effects a large part of its accountability for stewardship of a corporation to investors and other stakeholders through the mechanism of published financial statements. It is sometimes noted that chains of accountability generally run upward through organizational structures, in contrast to chains of delegation of authority, which tend to run downward. Audits are often depicted as central to accountability: auditing has been described as a means of “securing the accountability of individuals and organisations” (Flint, 1988, 3), and it has been claimed that “Without audit, no accountability; without accountability, no control; and if there is no control, where is the seat of power?. . . great issues often come to light only because of scrupulous verification of details” (W. J .M MacKenzie, foreword to Normanton, 1966). See also agency theory.
AccountAbility An international not-for-profit organization dedicated to the promotion of sustainability and corporate accountability. Based in London, and founded in 1986, AccountAbility’s full name is the Institute of Social and Ethical Accountability. Its activities include publications, research, public policy initiatives, and the promulgation of formal assurance standards for sustainability.
AccountAbility • 3 broke away from the now-defunct Big Five accounting firm Arthur Andersen in 2000, after an acrimonious corporate divorce. Accenture has a huge global presence, with more than 75,000 employees around the world. Web site: www.accenture.com.
Accountancy A British professional accounting magazine. The monthly magazine of the Institute of Chartered Accountants in England and Wales, Accountancy is available in print and online formats. The magazine focuses on professional developments and news in the fields of accounting, auditing, and taxation, with particular focus on the United Kingdom. Web site: www.accountancymag.co.uk.
Accountancy A British term for accounting.
accountancy reporting. The standards, known as the AA1000 framework, are intended to encourage stakeholder participation in corporate activities. Web site: www.accountability.org.uk.
Accountancy Foundation An accounting regulatory authority in the United Kingdom. Established in 2000, the Foundation is headquartered in London. Its Web site states that its “overriding objective is to maintain and enhance the standards of work and of conduct of accountants working in the United Kingdom and the Republic of Ireland.” Its structure of subsidiary bodies—the Auditing Practices Board (APB), the Ethics Standards Board, and the Investigation and Discipline Board—is overseen by a Review Board. At the time of writing, the Financial Reporting Council was taking over the duties of the Accountancy Foundation. Web site: www.accountancyfoundation.com.
Accountancy Ireland An Irish accounting magazine. Published bimonthly by the Institute of Chartered Accountants in Ireland, the magazine is available in both print and online formats. It focuses on professional developments and news in the fields of accounting, auditing, and taxation, with emphasis on Ireland and (to a lesser degree) the European Union. Web link: www.icai.ie/Publications/lp-accire.cfm.
Accountancy S.A. A South African accounting magazine. Published monthly by the South African Institute of Chartered Accountants, it is available in.
Accountancy, Business, and the Public Interest A British scholarly accounting journal. Established in 2002, the journal’s founding editors were Christine Cooper of the University of Strathclyde, Glasgow, and Prem Nath Sikka of the University of Essex. Published twice a year in online format by the Association for Accountancy and Business Affairs, the journal is available free of charge. It follows the objectives of its parent organization by providing a forum for critical analysis of auditing and accounting practices. Reformist in tone, and reflecting many concerns of the critical accounting movement, its coverage focuses on the United Kingdom. Web site: http://visar.csustan.edu/aaba/aabajournalpage.htm.
accountant An individual who performs accounting duties. Some of the accountant’s responsibilities may overlap with those of the bookkeeper, in terms of the recording of individual financial transactions, but the accountant’s terms of reference tend to be the wider of the two. Among other things, the accountant may prepare, audit, or analyze financial statements; analyze costs; prepare taxation schedules; or perform operational consulting services. Most accountants derive their authority from membership of professional organizations such as the American Institute of Certified Public Accountants and the Institute of Management Accountants. Membership of professional accounting bodies tends to require examination success, periods of relevant experience, or a combination of both.
Accountant The A British accounting newsletter. Published monthly by Lafferty Publications, the newsletter claims to be the world’s oldest accounting serial. It is available in both print and online formats. The newsletter’s Web page states that it “reports on the development of accounting standards and corporate reporting practices world-wide, auditor liability, increasing competition, the policies and politics of professional bodies and all the major issues which face accountants in today’s complex marketplace.” Its coverage is international, and the auditing content tends to focus on external auditing. Web link: www.lafferty.com/newsletter/newsletter 02 publication.asp?PubID=TA.
Accountant’s opinion A signed statement from an independent public accountant after examination of a firm’s records and accounts. The opinion may be unqualified or qualified. See: Qualified opinion.
Accounting A broad term that encompasses the preparation, analysis, and audit of financial information. The many specialisms of accounting include auditing, consulting, cost accounting, financial accounting, management accounting, public accounting, public sector accounting, and taxation. Although accounting covers many disciplines, professional accounting retains a rather dull image—an old joke (quoted in Fox, 2003, 181) has defined an “extroverted accountant” as “one who stared at the client’s shoes while speaking instead of staring at his own shoes.”
Accounting and Auditing Organization An accounting and auditing body dedicated to the promotion of Islamic principles for financial institutions. Established in 1991 and headquartered in Bahrain, the AAOIFI is an affiliated member of the International Federation of Accountants. Its Web site describes its primary focus as the preparation of “accounting, auditing, governance, ethics and Shari’a standards for Islamic financial institutions.” Its membership is internationally based, and includes investment banks and accounting organizations. To meet the requirements of Shari’a law and the traditions of Islamic finance, the AAOIFI issues English-language accounting and auditing standards, details of which are available from the AAOIFI Web site. Web site: www.aaoifi.com.
Accounting and Business Research A British scholarly accounting journal. Established in 1970, the journal is published quarterly by the Institute of Chartered Accountants in England and Wales. It is available in print format only. The journal focuses on research into aspects of accounting and auditing, with the latter’s emphasis on external auditing. Its coverage is international, but with special focus on the United Kingdom. Web site: www.icaew.co.uk.
Accounting earnings Earnings of a firm as reported on its income statement.
Accounting Education: An International Journal A British scholarly accounting journal. Established in 1992, the journal is published quarterly by.
accounting equation the Assets = liabilities + capital. Under the conventions of double entry bookkeeping, each accounting transaction has at least one debit entry and at least one credit entry of equal value. At any moment, the mathematical integrity of bookkeeping can be established by reference to the accuracy of the accounting (or balance sheet) equation. In the balance sheet, assets are recorded through debit entries, and liabilities and capital (or equity) through credit entries. While the accounting equation shows that a balance sheet balances, it does not indicate whether individual transactions have been booked to the appropriate accounts.
Accounting exposure The change in the value of a firm’s foreign currency-denominated accounts due to a change in exchange rates.
Accounting Foundation An Australian accounting organization housed within the University of Sydney. Established in 1982, the foundation oversees the publication of the journal Abacus, manages the activities of the Pacioli Society, and funds accounting-related research and scholarships. Its Web site states that its objectives include cooperation between “industry, commerce and the accounting profession to promote excellence in all fields of accounting and financial management in Australia.” Its activities are wider than this would suggest, however, and it encourages international academic links. Web link: www.econ.usyd.edu.au/content.php?pageid=567.
Accounting Hall of Fame An institution that honors contributions to accounting and auditing. Established by Ohio State University in 1950, the Accounting Hall of Fame is located in the university’s Fisher College of Business, and its Web site describes its purpose as follows: To be “honoring accountants who have made or are making significant contributions to the advancement of accounting since the beginning of the twentieth century.” It describes the types of services to accounting expected of its inductees: “[C]ontributions to accounting research and literature, significant service to professional accounting organizations, wide recognition as an authority in some field of accounting, advancement of accounting education, and public service.” The Ohio State University Press also publishes works of some of the Hall of Fame members. The nominating board is international in character, and individuals honored in the Hall of Fame include Raymond John Chambers and Robert Kuhn Mautz. Web link: http://fisher.osu.edu/hall.
Accounting Historians Journal AU.S. referred accounting history journal. Established in 1974 and published semi-annually by the Academy of Accounting Historians, the journal is available in print format only. Its editorship changes annually. This highly scholarly journal disseminates research into aspects of accounting history, including a significant emphasis on auditing history. The journal’s notes declare its aim of embracing “all subject matter related to accounting history, including but not limited to research that provides an historical perspective on contemporary accounting issues.” Its coverage is international. Web link: http://accounting.rutgers.edu/raw/aah.
Accounting History An Australian referred accounting history journal. Established in 1996 and published semi-annually by the Accounting History Special Interest Group of the Accounting and Finance Association of Australia and New Zealand, it is available in print format only. The journal’s coverage is international, and it frequently covers the history of auditing. Web site: www.aaanz.org.
Accounting Horizons
Accounting insolvency Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.
Accounting liquidity The ease and quickness with which assets can be converted to cash.
Accounting Principles Board (APB) The forerunner to the Financial Accounting Standards Board (FASB). Established in 1959 by the American Institute of Certified Public Accountants, the APB functioned until 1973. (It replaced the Committee on Accounting Procedure, which had operated from 1936 to 1959.) The APB issued accounting standards in the form of Opinions and accruals basis • 9; Statements. On its creation in 1973, the FASB adopted the APB’s pronouncements, and has gradually revised or replaced them with its own standards.
Accounting Review The A U.S. scholarly accounting journal. Established in 1926, the journal is published quarterly by the American Accounting Association, in both print and online formats. The journal is a forum for research into aspects of accounting, and auditing topics are frequently covered. Its scope is international, but with focus on the United States. Web link: http://raw.rutgers.edu/raw/aaa/pubs/acctrev.htm.
accounting standard Rules and guidance on accounting practice. Along with legislation and custom, accounting standards are the foundation of Generally Accepted Accounting Principles. In recent years, the term accounting standard has been largely superseded by financial reporting standard. The latter term is intended to cover not only accounting rules for the recognition, measurement, and disclosure of financial statement items, but also the disclosure of additional information like earnings per share and executive remuneration.
Accounting Technology® A U.S. accounting magazine. Founded in 1987, Accounting Technology is published in 11 issues a year by the Accountants Media Group, a division of Thomson, as part of the WebCPA framework. Its focus is on developments in accounting-related software and technology, with particular emphasis on technologies to support public accounting. Web site: www.webcpa.com/accountingTechnology.
Accounting Today® AU.S. accounting magazine. Founded in 1987, Accounting Today is published biweekly by the Accountants Media Group, a division of Thomson, as part of the WebCPA framework. Its coverage focuses on accounting, tax, and external auditing in the United States. Web site: www.webcpa.com/accountingtoday.
Accounting & Business A British professional accounting magazine. Published monthly by the Association of Chartered Certified Accountants, the magazine is available in both print and online formats. It covers a range of business and accounting topics, with frequent articles on auditing. Its coverage is international, but with emphasis on the United Kingdom. Web link: www.acca.co.uk/publications/accountingandbusiness.
Accounting, Auditing and Accountability Journal A British scholarly accounting and auditing journal. Established in 1988, the journal is published in five issues a year by MCB University Press in Bradford, England. It is available in print and online formats. The journal’s notes declare its focus to be research into “the interaction between accounting/auditing and their socioeconomic and political environments,” and claim that the journal “challenges conventional wisdom, explores alternatives and offers new perspectives.” Its coverage is international. Web site: www.mcb.co.uk.
Accounting, Business, and Financial History A British scholarly accounting history journal. Established in 1990, the journal is published in three issues a year by Routledge. It is available in print and online formats. The journal focuses on accounting history, and includes regular coverage of auditing history. Its notes state that its focus includes investigation of “the inter-relationship between accounting practices, financial markets and economic development.” Its coverage is international. Web link: www.tandf.co.uk/journals/routledge/09585206.html.
Accounting, Organizations and Society A British scholarly accounting journal. Established in 1976, it is published in eight issues a year by Elsevier Science in both print and online formats. The journal’s notes describe its concern “with all aspects of the relationship between accounting and human behaviour, organizational structures and processes, and the changing social and political environment of the enterprise,” and its areas of focus include “the social role of accounting” and “behavioural aspects of budgeting, planning and investment appraisal.” Its coverage is international, and it frequently contains auditing topics. Web link: www.elsevier.nl/inca/publications/store/4/8/6.
accounts payable Short-term, invoiced liabilities owed for the supply of goods or services. Accounts payable balances are classified as a current liability in the balance sheet. Further reading: Banks (2001).
Accounts payable Money owed to suppliers.
Accounts receivable Money owed by customers.
accounts receivable Short-term, invoiced amounts due from customers for the supply of goods or services. Accounts receivable are classified as a current asset in the balance sheet—when their recoverability becomes doubtful, an allowance for bad debts is created.
Accounts receivable financing A short-termfinancing method in which accounts receivable are collateral for cash advances. See: Factoring.
Accounts receivable turnover The ratio of netcreditsales to averageaccounts receivable, which is a measure of how quickly customers pay their bills.
Accredited investor Refers to an individual whose net worth, or joint net worth with a spouse, exceeds $1,000,000; or whose individual income exceeded $200,000 or whose joint income with a spouse exceeded $300,000 in each of the 2 most recent years and can be expected to meet that income in the current year. More details of the definitions for investors other that individuals are found in Regulation D of the Securities and Exchange Commission.
Accreting Swap An interest rate swap in which the notional principal amount increases over time, for example as with a construction loan provided in tranches as each stage of the project is completed.
Accretion (of a discount) In portfolio accounting, a straight-line accumulation of capital gains on a discount bond in anticipation of receipt of par at maturity.
Accrual Accounting Convention An accounting system that tries to match the recognition of revenues earned with the expenses incurred in generating those revenues. It ignores the timing of the cash flows associated with revenues and expenses.
Accrual basis In the context of accounting, practice in which expenses and income are accounted for as they are earned or incurred, whether or not they have been received or paid. Antithesis of cash basis accounting.
Accrual bond A bond on which interest accrues but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.
accruals basis The matching of revenues and expenses to the periods in which they are earned or incurred. In contrast to a cash basis approach, which.
accrued assets recognizes revenues and expenses in line with the receipt or payment of cash, an accruals basis of accounting is based on the timing of the underlying transaction. For example, when interest payable to a bank is incurred evenly over a year, but payment falls due only at the year-end, the accruals basis of accounting requires recognition of the interest expense on a monthly basis. Most systems of Generally Accepted Accounting Principles require an accruals basis of accounting. The accruals basis operates through the mechanisms of accrued revenue, unearned revenue, accrued expenses, and prepaid expenses. Deliberate bending or circumvention of the accruals concept is a common creative accounting technique.
Accrued benefits The pension benefits earned by an employee according to the years of the employee’s service.
Accrued discount Interest that accumulates on savings bonds from the date of purchase until the date of redemption or final maturity, whichever comes first. Series A, B, C, D, E, EE, F, I, and J are discount or accrual bonds, meaning principal and interest are paid when the bonds are redeemed. Series G, H, HH, and K are income bonds, and the semiannual interest paid to their holders is not included in accrued discount.
accrued expense An unpaid expense incurred and recognized in a financial reporting period, and recorded as a liability at the end of that period. In line with the accruals basis of accounting, accrued expenses are matched with the accounting periods to which they relate, and are held within either current or long-term liabilities until the related cash payment is made. For example, an unpaid, long-term rental cost would be expensed over the periods to which it related, and an appropriate, accumulated balance would be recorded on the balance sheet within accrued expenses until the item was fully settled in cash.
Accrued interest Applies mainly to convertible securities. Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond’s price plus “acc.
accrued liabilities An alternative term for accrued expenses.
Accrued market discount The rise in the market value of a discount bond as it approaches maturity (when it is redeemable at par) and not because of falling marketinterest rates.
accrued revenue Revenue earned and recognized in a financial reporting period, for which the related cash has yet to be received. The accrued revenue is recorded as either a current or long-term asset at the end of the financial reporting period, in line with the accruals basis of accounting. For example, revenue on a contract to supply goods or services over several years would be recognized in progression with completion of the contract, and an appropriate, accumulated accrued revenue balance recorded on the balance sheet until the amounts were settled in cash.
Accumulate Broker/analyst recommendation that could mean slightly different things depending on the broker/analyst. In general, it means to increase the number of shares of a particular security over the near term, but not to liquidate other parts of the portfolio to buy a security that might skyrocket. A buy recommendation, but not an urgent buy.
Accumulated Benefit Obligation (ABO) An approximate measure of the liability of a pension plan in the event of a termination at the date the calculation is performed. Related: Projected benefit obligation.
Accumulated dividend A dividend that has reached its due date, but is not paid out. See: Cumulative preferred stock. Accumulated profits tax A tax on earnings retained in a firm as a way for the principals to defer personal income taxes.
Accumulation In the context of corporate finance, refers to profits that are added to the capital base of the company rather than paid out as dividends. See: Accumulated profits tax. In the context of investments, refers to the purchase by an institutional broker of a large number of shares over a period of time in order to avoid pushing the price of that share up. In the context of mutual funds, refers to the regular investing of a fixed amount while reinvesting dividends and capital gains.
Accumulation area A range within which a buyer accumulatesshares of a stock. See: On-balance volume and distribution area.
ACFE Association of Certified Fraud Examiners.
acid test 1. The ratio of current assets to current liabilities. The acid test ratio is a quick means of assessing an entity’s liquidity, and its alternative names include the “quick” ratio and the “liquid” ratio. Only liquid current assets are used in the ratio—normally cash, cash equivalents (such as marketable securities), and accounts receivable. Inventory is usually excluded from current assets, owing to the time delay typically required to convert inventories into cash. Prepaid expenses are also typically excluded from liquid current assets in the ratio calculation. 2. Any critically important test. The term “acid add value • 11 test” derives from the use of nitric acid to test for gold. By extension, it has come to refer to the testing of any important activity.
Acid test ratio Also called the quick ratio, the ratio of current assetsminusinventories, accruals, and prepaid items to current liabilities.
ACL Audit Command Language.
Acquired surplus The surplus acquired when a company is purchased in a pooling of interests combination, i.e. the net worth not considered to be capital stock.
Acquiree A firm that is being acquired.
Acquirer A firm or individual that is purchasing another firm or asset.
Acquisition When a firm buys another firm.
acquisition 1. The purchase of an asset, service, or legal right. 2. The purchase of an organization, or the obtaining of operational or legal control of an organization. In contrast to the generally voluntary nature of mergers, acquisitions are often made against the wishes of the management of the acquired organization. Under most forms of Generally Accepted Accounting Principles (GAAP), the accounting treatment of corporate acquisitions normally gives rise to goodwill, which is the difference between the consideration paid by the acquiring company and the fair value of the net assets acquired. Acquired entities are consolidated into the group financial statements of the parent organization. Most forms of GAAP tend to strictly differentiate between mergers and acquisitions, owing to the vastly different accounting treatment for both categories of business combination. In most jurisdictions, large corporate acquisitions that concentrate market power and reduce competition are frequently reviewed by regulatory authorities. Further reading: Davison (2001); Selim et al. (2002).
Acquisition cost Refers to the price (including the closing costs) to purchase another company or property. In the context of investments, refers to price plus brokerage commissions, of a security, or the sales charge applied to load funds. See: Tax basis.
acquisition cost The purchase price of an asset, service, legal right, or entity.
Acquisition of assets A merger or consolidation in which an acquirerpurchases the selling firm’s assets.
Acquisition of stock A merger or consolidation in which an acquirerpurchases the acquiree’sstock.
Across the board Movement or trend in the stock market that causes all stocks in all sectors to move in the same direction.
Act of state doctrine This doctrine says that a nation is sovereign within its own borders, and its domestic actions may not be questioned in the courts of another nation.
Acting in concert Investors working together and performing identical actions to attain the same investment goal.
Active account Refers to a brokerage account in which many transactions occur. Brokerage firms may levy a fee if an account generates an inadequate level of activity.
Active bond crowd Refers to members of the bond department of the NYSE who trade the most bonds. Antithesis of cabinet crowd.
Active box Securities that are held in safekeeping and are available as collateral for securing brokers’loans or customers’ marginpositions.
Active fund management An investment approach that purposely shifts funds either between asset classes (asset allocation) or between individual securities (security selection).
Active income Income from an active business as opposed to passiveinvestment income according to the U.S. tax code.
Active Management The pursuit of investmentreturns in excess of a specified benchmark.
Active portfolio strategy A strategy that uses available information and forecasting techniques to seek better performance than a buy and holdportfolio. Related: Passive portfolio strategy.
Active Return Return relative to a benchmark. If a portfolio’sreturn is 5%, and the benchmark’s return is 3%, then the portfolio’s active return is 2%.
Active Risk The risk (annualizedstandard deviation) of the activereturn. Also called the tracking error.
activity based budgeting (ABB) Abudgeting methodology that focuses on an organization’s cost-incurring activities and operations. See activity based costing.
activity based costing (ABC) A costing method that uses an organization’s activities and operations to allocate costs to products. In contrast to absorption costing methodologies, which use production volumes as a cost driver, activity based costing (ABC) uses activities as cost drivers. Cost drivers typically used in ABC costing to charge costs to products include the number of machine hours used, or the quantity of weight handled in a production process. Major aspects of ABC philosophy are the notions that (i) activities drive costs and (ii) product markets drive activities. Further reading: Gunasekaran (1999); Keller (1997).
Actual market Used in context of general equities. Firm market. Antithesis of Subject market.
Actuals The physical commoditiesunderlying a futures contract. Cash commodity, physical asset.
actuary An individual who undertakes mathematical and statistical analysis of the risks and probability estimates that underlie insurance schemes and pension plans. Actuarial estimates are used to establish pension plan contributions, funding requirements, insurance premiums, and related matters.
ACUA Association of College and University Auditors.
ad valorem tax An indirect tax whose rate is based on a proportion of the value of the item taxed. The Latin term ad valorem means “in proportion to the value,” and ad valorem principles are often used in property taxes and customs duties.
Ad valorem tax A type of tax calculated based on percentage of gross or stated value. For example, VAT.
ADBG African Development Bank Group.
add value
Additional bonds test A test for ensuring that bondissuers can meet the debt service requirements of issuing any new additional bonds.
Additional hedge A protection against fallout risk in the mortgage pipeline.
Additional Paid In Capital A value that is often included in the contributed surplus account in the shareholders’ equity section of a company’s balance sheet. The account represent the excess paid by an investor over the par-value price of a stock issue. Additional paid-in-capital can arise from issuing either preferred or common stock. Usage: For example, assume that a company issues 1 million shares with a par value of $50 per share. When the shares are purchased by investors, however, they pay $70 per share – a premium of $20 over par value. When the capital received from this issue is recorded, $50 million ($50*1 million) will be allocated to a share capital or paid-in-capital account. The excess $20 million ($20*1 million) will be allocated to the contributed surplus account as additional paid-in-capital. Some companies will choose to separate additional paid in capital from contributed surplus on their balance sheets..
Adequacy of coverage A test that measures the extent to which the value of an asset is protected from potential loss either through insurance or hedging.
Adjustable rate Applies mainly to convertible securities. Refers to interest rate or dividend that is adjusted periodically, usually according to a standard market rate outside the control of the bank or savings institution, such as that prevailing on Treasury bonds or notes. Typically, such issues have a set floor or ceiling, called caps and collars that limits the adjustment.
Adjustable-rate mortgage (ARM) A mortgage that features predetermined adjustments of the loaninterest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loaninterest rate and/or payment rate caps.
Adjustable-rate preferred stock (ARPS) Publicly tradedissues that may be collateralized by mortgages and MBS.
Adjusted balance method Method of calculating finance charges that uses the account balance remaining after adjusting for all transactions posted during the given billing period as its basis. Related: Average daily balance method, previous balance method, past due balance method.
Adjusted basis Price from which to calculate and derive capital gains or losses upon sale of an asset. Account actions such as any stock splits that have occurred since the initial purchase must be accounted for.
Adjusted debit balance (ADB) The account balance for a margin account that is calculated by combining the balance owed to a broker with any outstanding balance in the special miscellaneous account, and any paper profits on short accounts.
Adjusted exercise price Term used in options on Ginnie Mae (Government National Mortgage Association) contracts. The final exercise price of the option accounts for the coupon rates carried on Ginnie Maemortgages. For example, if the standard GNMA mortgage has an 9% yield, the price of GNMA pools with 13% mortgages in them is altered so that the investor receives the same yield.
Adjusted gross income (AGI) Gross income less allowable adjustments, which is the income on which an individual is taxed by the federal government.
Adjusted present value (APV) The net present value analysis of an asset if financed solely by equity (present value of unlevered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leveraged buyout.
adjustment A change or modification to an account, transaction, or financial statement. Adjustments may be made to correct errors, or to allocate revenues or expenses in line with the accruals basis of accounting. Adjustments to financial statements may arise as a result of errors discovered during an external audit, or as a result of an event after the balance sheet date.
Adjustment bond A bondissued in exchange for outstanding bonds when a corporation facing bankruptcy is recapitalized.
Administrative pricing rules IRS rules used to allocate income on export sales to a foreign sales corporation.
Advance Increase in the market price of stocks, bonds, commodities, or other assets.
advance 1. A prepayment toward the purchase of goods or services, or toward the costs of expenses like salaries. The accruals basis of accounting requires the matching of advances to appropriate accounting periods through the mechanisms of prepaid expenses and unearned revenue. 2. A loan.
Advance commitment A promise to sell an asset before the seller has lined up purchase of the asset. This seller can offsetrisk by purchasing a futures contract to fix the sales price approximately.
Advance Computerized Execution System (ACES) Refers to the Advance Computerized Execution System, run by Nasdaq. ACES automates trades between order entry and market makerfirms that have established trading relationships with each other. Securities are designated as specified for automatic execution.
Advance funded pension plan A pension plan in which funds are set aside in advance of the date of retirement.
Advance refunding In the context of municipal bonds, refers to the sale of new bonds (the refundingissue) before the first call date of old bonds (the issue to be refunded). The refunding issue usually specifies a rate lower than the issue to be refunded, and the proceeds are invested, usually in governmentsecurities, until the higher-rate bonds become callable. See: Refunding escrow deposits.
Advancement Money or property given to a person by the deceased before death and intended as an advance against the beneficiary’s share in the will.
Advances in Accounting A collection of scholarly accounting essays. Founded in 1983, Advances in Accounting is published annually by Elsevier Science in print format only. Its notes describe its mission in the following terms: “[T]o provide a forum for discourse among and between academic and practicing accountants on issues of significance to the future of the discipline.” It frequently covers external auditing topics. Web link: www.elsevier.com/inca/tree/?key=B1AA.
Advances in International Accounting A collection of scholarly accounting essays. Founded in 1988, the journal is the international counterpart of Advances in Accounting. It is published annually by Elsevier Science in print format only, and it frequently examines external auditing. Web link: www.elsevier.com/inca/publications/store/6/2/0/9/7/2.
Adverse opinion An independent auditor’s opinion expressing that a firm’sfinancial statements do not reflect the company’sposition accurately. See also: Qualified opinion.
adverse opinion An external auditor’s opinion that an entity’s financial statements do not conform with Generally Accepted Accounting Principles, or do not offer a fair presentation of the entity’s financial position, the results of its operations, or changes in cash flows. Under most systems of Generally.
Adverse selection Refers to a situation in which sellers have relevant information that buyers lack (or vice versa) about some aspect of product quality.
adverse variance An alternative term for unfavorable variance.
Advising bank Corresponding bank in the beneficiary’s country to which an issuing bank sends a letter of credit.
Advisory letter A newsletter offering financial advice to its readers.
AFC
Affidavit of Loss A sworn statement describing the particulars and circumstances of the loss of securities. This affidavit is required before a Bond of Indemnity can be issued and the securities replaced.
affiliate 1. An organization in which another entity holds a significant but not controlling interest. An affiliate contrasts with a subsidiary, as the latter is consolidated into the financial statements of a controlling holding company or parent organization. 2. An organization related to another through their common control by a holding company or parent organization.
Affiliate Relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiaries of a third company. See: Subsidiaries, parent company.
Affiliated corporation A corporation that is an affiliate to the parent company.
Affiliated person An individual who possesses enough influence and control in a corporation as to be able to alter the actions of the corporation.
Affirmative covenant A bond covenant that specifies certain actions the firm must take.
Affirmative obligation A New York Stock Exchange rule that governs the behavior of specialists. Affirmative obligation is the mandate of the specialists to step in and act as either the buyer or the seller when public investor orders exist do not match up naturally. Also known as positive obligation. Related: negative obligation.
Affordability index An index that measures the financial ability of consumers to purchase a home.
African Development Bank Group (ADBG) An international financial institution dedicated to economic development in Africa. Established in 1964, the ADBG is headquartered in Abidjan in the Ivory Coast. (At the time of writing, political instability in the Ivory Coast has forced the ADBG to temporarily relocate its administrative functions to Tunisia.) The ADBG comprises three institutions—the African Development Bank, the African Development Fund, and the Nigeria Trust Fund. It fulfills its mission of economic development in Africa through financial and technical assistance to developing countries, and in 2003 it was supported by 77 countries from around the world. Web site: www.afdb.org.
After acquired clause A contractual clause in a mortgage agreement stating that any additional mortgageable property attained by the borrower after the mortgage is signed will be regarded as additional security for the obligation addressed in the mortgage.
Aftermarket See: Secondary market.
After-hours dealing or trading Securitiestrading after regular trading hours on organized exchanges.
After-tax basis The comparisonbasis used to analyze the net after-tax returns on a corporate taxable bond and a municipal tax-free bond.
After-tax profit margin The ratio of net income to net sales.
After-tax real rate of return The after-tax rate of return minus the inflation rate.
AGA Association of Government Accountants.
Against the box See: Selling short against the box.
Aged fail An account between two broker/dealers that remains intact 30 days after the settlement date. The receiving firm must adjust its capital as it can no longer treat this account as an asset.
Agencies See: Federal agency securities.
Agency In context of general equities, buying or selling for the account and risk of a customer. Generally, an agent, or broker, acts as intermediary between buyer and seller, taking no financial risk personally or as a firm, and charging a commission for the service. The broker represents a customer buyer/seller to a customer seller/buyer and does not act as principal for the firm’s own trading account. Antithesis of principal. See: Dealer.
agency 1. An alternative term for agency theory. 2. An organization that performs intermediary services, such as hiring personnel or providing security services.
Agency bank A form of organization commonly used by foreign banks to enter the US market. An agency bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank. It is also the financial institution that issuesADRs to the general market.
Agency basis A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms.
Agency cost view The argument that specifies that the various agency costs create a complex environment in which total agency costs are at a minimum with some, but less than 100%, debtfinancing.
agency costs The negative effects described in agency theory of an agent acting in self-interest to the detriment of a principal. For example, managers in a corporation may seek to enhance their own status and remuneration in defiance of the corporation’s best interests. Inefficiencies arising from discrepancies between the self-interests of principals and agents may be qualitative or quantitative.
Agency costs The incremental costs of having an agent make decisions for a principal.
Agency incentive arrangement A means of compensating the broker of a program trade using benchmarkprices for issues to be traded in determining commissions or fees.
Agency pass-throughs Mortgage pass-through securities whose principal and interest payments are guaranteed by government agencies, such as the Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), a.
Agency problem Conflicts of interest among stockholders, bondholders, and managers.
Agency securities Securitiesissued by federally related institutions and U.S. government-sponsored entities. Such agencies were created to reduce borrowingcosts for certain sectors of the economy, such as agriculture.
Agency theory The analysis of principal-agent relationships, in which one person, an agent, acts on behalf of another person, a principal.
agency theory The relationship between two parties, a principal and an agent, in which the latter represents or acts on behalf of the former. Agency costs may arise if the goals of a principal and agent are not congruent: an 14 • agent agent, in other words, may be tempted to act in self-interest to the detriment of the principal. The relationship between a corporation’s investors and its management is often described in terms of principal and agent, in so far as a corporation’s managers act as agents on behalf of investors. The monitoring of the proper functioning of this relationship between investors and management is frequently portrayed as the main purpose of external auditing: the audit fee is often viewed as “the cheapest form of insurance against defaults in the principal- agent relationship in corporate activity” (Lee, 1993, 125). However, the notion of the role of the modern external auditor as an impartial referee in corporate agency relationships has been challenged by the critical accounting movement, and by advocates of stakeholder theory who bring more players into the web of relations and responsibilities created by corporations. Some commentators on corporate governance suggest that a company’s board of directors acts as the main monitoring body of the agency relationships between investors and managers, and that the appointment of external auditors is simply one means of supporting the agency function carried out by the board of directors. However, other commentators bracket the board of directors with an organization’s management as agents who act on behalf of investors. Further reading: Berle and Means (1932); Chwastiak (1999); Jensen and Meckling (1976).
agency theory Accepted Auditing Standards, external auditors are obliged to explain the reasons for an adverse opinion, which applies only to material items that could mislead financial statement users. An adverse external audit opinion can damage a corporation’s public image by sending shock waves through its stockholders and the wider investing community. For this reason, adverse opinions are relatively rare for large corporations, and external auditors tend to prefer to persuade an organization’s management to amend financial statements to avoid an adverse opinion. Compare disclaimer, qualified opinion, and unqualified opinion.
Agent A party appointed to act on behalf of a principal entity or person. In context of project financing, refers to the bank in charge of administering the project financing.
agent An individual who, in agency theory, accepts responsibilities to represent or act on behalf of a principal.
Aggregate exercise price The exercise price multiplied by the number of shares in a put or callcontract. The option premium is excluded in the aggregate exercise price. In the case of options traded on debt instruments, the aggregate exercise price is the exercise price of the underlying security multiplied by its face value.
Aggregation Process in corporate financial planning whereby the smaller investment proposals of each of the firm’s operational units are aggregated and effectively treated as a whole.
Aggressive Growth Hedge Fund In the context of hedge funds, a style of management that focuses primarily on equities that are expected to have strong earnings growth.
Aggressive growth mutual fund A mutual fund designed for maximum capital appreciation that places its money in companies with high growth rates.
Aggressively Used in context of general equities. For a customer it means working to buy or sell one’s stock, with an emphasis on execution over price. For a trader it means acting in a way that puts the firm’scapital at higher risk through paying a higher price, selling cheaper, or making a larger short sale or purchase than the trader would under normal circumstances.
aging of balances
Aging schedule A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to determine if customer payments are keeping close to schedule.
Agreement among underwriters A contract among participating members of a syndicate that defines the members’ proportionate liability, which is usually limited to and based on the participants’ level of involvement. The contract outlines the payment schedule on the settlement date. Compare: Underwriting agreement.
Agreement corporation Corporationchartered by a state to engage in international banking: so named because the corporation enters into an “agreement” with the Fed’s Board of Governors that it will limit its activities to those permitted by an Edge Act Co.
Ahead of itself In context of general equities, refers to equities that are overbought or oversold on a fundamental basis.
Ahead of you Used for listed equity securities. At the same price but entered ahead of your order/interest, usually referring to the specialist’s book. See: Behind,matched orders,priority,stock ahead.
AIA Association of International Accountants.
AICPA American Institute of Certified Public Accountants.
aid Government assistance in the form of cash, goods, or services. Government aid to a country’s industrial sectors or geographical regions ranges from grants to tax breaks to technical assistance. International aid includes the transfer of resources from developed to developing countries, which can also take a number of forms, such as cash transfers, or technical and military assistance.
AIMR Association for Investment Management and Research.
AIMR Performance Presentation Standards Implementation Committee The Association for Investment Management and Research (AIMR) Performance Presentation Standards Implementation Committee is charged with the responsibility to interpret, revise, and update the AIMR Performance Presentation Standards (AIMR-PPS(TM) for portfolio performance presentations.
Air Freight Consolidator An air freight carrier that does not own or operate its own aircraft but ships its cargo with actual equipment operating carriers. Consolidators issue house air waybills to their customers and receive master air waybills from the actual carriers.
Air pocket stock A stock whose price drops precipitously, often on the unexpected news of poor results.
Alien corporation A company incorporated under the laws of a foreign country regardless of where the company conducts its operations.
All equity rate The discount rate that reflects only the business risks of a project, distinct from the effects of financing.
All in Refers to an issuer’sinterest rate after accounting for commissions and various related expenses.
All or none order (AON) Used in context of general equities. A limited price order that is to be executed in its entirety or not at all (no partial transaction), and thus is testing the strength/conviction of the counterparty. Unlike an FOK order, an AON order is not to be treated as cancelled if not executed as soon as it is represented in the trading crowd, but instead remains alive until executed or cancelled. The making of “all or none” bids or offers in stocks is prohibited, and the making of “all or none” bids or offers in bonds is subject to the restrictions of Rule 61. AON orders are not shown on the specialist’s book because they cannot be traded in pieces. Antithesis of any-part-of order. See: FOK order. FOK: fill or kill order.
All Ordinaries Index The major stock price index in Australia. The capitalization weighted index is made up of the largest 500 companies as measured by market capitalization that are listed on the Australian Stock Exchange. The index was developed with a base value of 500 as of 1979.
All Risk Insurance Marine cargo insurance which covers most perils except strikes, riots, civil unrest, capture, war, seizure, civil war, piracy, loss of market, and inherent vice.
Allied Crude Vegetable Oil Refining Corporation See the great salad oil swindle.
Allied member A partner or stockholder of a firm that is a member of the NYSE, the partner or stockholder is not personally a member of the NYSE.
Alligator spread The term used to describe a spread in the optionsmarket that generates such a large commission that the client is unlikely to make a profit even if the markets move as the investoranticipated.
Allocational efficiency The effectiveness with which a market channels capital toward its most productive uses.
Allocation-of-income rules US tax provisions that define how income and deductions are to be allocated between domestic source and foreign source income.
Allotment The number of securities assigned to each of the participants in an underwriting syndicate.
allowance for bad debts A reduction in the value of accounts receivable. One or more general ledger accounts are used to record allowances for bad debts, which represent the value of accounts receivable whose ultimate collection is in doubt. The allowance may be for specific accounts receivable balances, or it can be a general allowance based on a percentage of accounts receivable. In the latter case, an aging of balances allows different allowance rates to be applied on the basis of receivables’ overdue dates. The allowance for bad debts is offset against accounts receivable in the balance sheet, and movements on the allowance are reflected in the income statement. The creation of an allowance suggests that the corresponding customer balance may ultimately be received (i.e., the receivable is doubtful rather than irrecoverable). Allowances for bad debts are reversed when initially doubtful balances are subsequently collected. Where a receivable is known with certainty to be irrecoverable (e.g., if a customer is bankrupt), the balance is normally eliminated by a write-off.
All-in cost Total costs, explicit and implicit.
All-in-rate Rate used in charging customers for accepting banker’s acceptances, consisting of the discount interest rate plus the commission.
All-or-none underwriting An arrangement whereby a securityissue is cancelled if the underwriter is unable to resell the entire issue.
Alpha Measure of risk-adjusted performance. An alpha is usually generated by regressing the security or mutual fund’sexcess return on the S&P 500 excess return. The beta adjusts for the risk (the slope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a return of 25%, and the short-terminterest rate is 5% (excess return is 20%). During the same time the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected excess return given the risk is 2 x 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis points. Alpha is also known as the Jensen Index. Related: Risk-adjusted return.
Alpha equation Regression usually run over 36-60 months of data: Return-Treasury bill= alpha + beta (S&P 500 – Treasury bill) + error. The alpha is the intercept. Note that the benchmark does not necessarily have to be the S&P 500. A mutual fund specializing in international investment might be benchmarked to a broader world market index, such as the MSCI World Index.
Alphabet stock Categories of common stock of a corporation associated with a particular subsidiary resulting from acquisitions and restructuring. The various alphabetical categories have different voting rights and pay dividends tied to the operating performance of the particular divisions. See also: Tracking stocks.
Alternative investments Usually refers to investments in hedge funds. Many hedge funds pursue strategies that are uncommon relative to mutual funds. Examples of alternative investment strategies are: long– short equity, event driven, statistical arbitrage, fixed income arbitrage, convertible arbritage, short bias, global macro, and equity market neutral. May also refer to the high frequency style of commodity trading advisors who often employ technical and quantitative tools for intraday investments.
Alternative Minimum Tax (AMT) A federal tax aimed at ensuring that wealthy individuals, estates, trusts, and corporations pay a minimal level income tax. For individuals, the AMT is calculated by adding adjusted gross income to tax preference items.
Alternative mortgage instruments Variations of mortgageinstruments such as adjustable-rate and variable-rate mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used variations.
Alternative order Used in context of general equities. Order giving a broker a choice between two courses of action, either to buy or sell, never both. Execution of one course automatically eliminates the other. An example is a combination buy limit/ buy stop order, where the buy limit is below the current market and the buy stop is above. If the order is for one unit of trading, when one part of the order is executed on the occurrence of one alternative, the order on the other alternative is to be treated as cancelled. If the order is for an amount of more than one unit of trading, the number of units executed determines the amount of the alternative order to be treated as cancelled. Sometimes known as One Cancels the Other. Also see: Either-or order.
alternative procedures The adoption of additional audit tests when planned audit procedures prove impossible or ineffective. For example, external auditors frequently circularize an organization’s customers to obtain documentary evidence of the existence and accuracy of accounts receivable balances. If the responses to a circularization are disappointing, the auditor may adopt alternative auditing tests to verify accounts receivable balances. These additional tests may include (i) the tracing of transactions recorded in sales invoices to inventory delivery documentation and (ii) the matching of cash subsequently received to receivable balances at a specific date.
American Accounting Association allocation The identification of costs or revenues with specific activities, assets, liabilities, or time periods. An example of the time allocation of costs is the recognition of amortization expenses over an asset’s useful life. An example of the allocation of costs to activities is the identification of production overheads to manufactured products in absorption costing methodologies. The term allocation is frequently used to refer to the identification of an entire cost or revenue with a single, corresponding activity, asset, liability, or time period— in contrast, the term apportionment can be used to refer to the division of costs and revenues between various items. However, the two words are often used interchangeably.
American Accounting Association (AAA) A U.S. scholarly accounting organization. Headquartered in Sarasota, FL, the AAA was established in 1916 as the American Association of University Instructors in Accounting. It has used its current name since 1936. Its Web site states that its mission is “to 16 • American Institute of Certified Public Accountants foster world-wide excellence in the creation, dissemination and application of accounting knowledge and skills.” Its activities include the promotion of accounting research and teaching, and a vigorous publication program that includes monographs and scholarly journals. See the entries for the Accounting Review, Accounting Horizons, Auditing: A Journal of Practice and Theory, and Behavioral Research in Accounting. The AAA also publishes newsletters, including the ABO Reporter and the Auditor’s Report. Web site: www.aaahq.org.
American Association of Individual Investors (AAII) A not-for-profit organization to educate individual investors about stocks, bonds, mutual funds, and other financial instruments.
American Depositary Receipt Fees Fees associated with the creating or releasing of ADRs from ordinary shares, charged by the commercial banks with correspondent banks in the international sites.
American Depositary Receipt Ratio The number of ordinary shares into which an ADR can be converted.
American Depositary Receipt (ADR) Certificates issued by a US depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR’s are “sponsored,” the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR. “Unsponsored” ADRs do not receive such assistance. ADRs are subject to the same currency, political, and economic risks as the underlying foreign share. Arbitrage keeps the prices of ADRs and underlying foreign shares, adjusted for the SDR/ordinary ratio essentially equal. American depository shares (ADS) are a similar form of certification.
American Depositary Share (ADS) Foreign stock issued in the US and registered in the ADR system.
American Institute of Certified Public Accountants (AICPA) The principal professional accounting organization in the United States. The AICPA was established in 1887, and it is headquartered in New York, with offices in New Jersey and Washington, DC. Individual U.S. states license Certified Public Accountants (CPAs), but the AICPA is the public accountants’ national association. The AICPA’s Web site states that its mission is “to provide members with the resources, information, and leadership that enable them to provide valuable services in the highest professional manner to benefit the public as well as employers and clients.” It is a highly influential organization and its activities include the provision of technical guidance to its members and contributions to national and international accounting issues. It also sets the uniform CPA examination, runs an Antifraud and Corporate Responsibility Center, and maintains an active publishing program. Its publications include a number of journals, magazines, and newsletters: the CPA Letter, In Our Opinion, the Journal of Accountancy, and The Practicing CPA. Prior to 1973 the AICPA set U.S. accounting standards through the Committee on Accounting Procedure (1936 to 1959) and the Accounting Principles Board (from 1959 to 1973). Accounting standards are now the responsibility of the Financial Accounting Standards Board (FASB) and, for the public sector, of the Governmental Accounting Standards Board. U.S. auditing standards are set by the Auditing Standards Board, which is an AICPA committee, supported by the Audit and Attest Standards Team. Web site: www.aicpa.org.
American National Standards Institute (ANSI)®
American option An option that may be exercised at any time up to and including the expiration date. Related: European option.
American shares Securitiescertificatesissued in the US by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.
American Society of Women Accountants (ASWA) A U.S. professional accounting organization for women. Formed in 1938, the ASWA aims to promote the interests of women in the accounting profession. On its Web site, the ASWA states its mission to be as follows: “To enable women in all accounting and related fields to achieve their full personal, professional and economic potential and to contribute to the future development of their profession.” The ASWA had more than 4,000 members in 2003. Web site: www.aswa.org.
American Standard Code for Information Interchange (ASCII) A standardized code that facilitates communication between different brands and types of computer.
American Stock Exchange (AMEX) Stock exchange with the third highest volume of trading in the US. Located at 86 Trinity Place in downtown Manhattan. The bulk of trading on AMEX consists of index options (computer technology index, institutional index, major market index) and shares of small to medium-sized companies are predominant. Recently merged with Nasdaq See: Curb.
American-style option An optioncontract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded equity options are American style.
Amman Financial Market (AFM) Established in 1976, the AFM is the only stock exchange in Jordan.
Amman Stock Exchange The only agency authorized as a formal market for tradingsecurities in Jordan.
amortization A cost allocation method used to record the reduction in value of an asset over time. The classic case of amortization is the matching of the cost of an item of property, plant, and equipment to its useful life. Assets generally lose value as a result of wear and tear, damage, and obsolescence, and amortization methodology is based on the matching of an asset’s cost to the periods of time in which the asset generates economic benefits. The term depreciation is often used when referring to tangible assets, and the term amortization when referring to intangible assets, but in practice the terms are often used synonymously. Amortization accounting can be on a straight-line basis, with regular fixed expenses, or on a reducing balance or accelerated method in which larger amortization charges occur in earlier time periods. Accelerated amortization is often justified on the grounds of an asset’s intensive use in the early years of its life—a sum of the digits methodology is sometimes used for this purpose. There are also other, sophisticated amortization accounting methods that attempt to closely match an asset’s costs to fluctuations in economic value over its life. These include revaluations of an asset’s historic cost. Amortization can be calculated on the full cost of an asset, but the costs of many assets are adjusted to reflect any resale or residual value. To take a simple example, an asset that costs $100,000 with a useful life of 10 years, and no residual value, would be amortized at a rate of $10,000 a year on a straightline basis. In many countries, amortization rates are fixed by legislation, but Generally Accepted Accounting Principles in most English-speaking countries allow a corporation’s management to base amortization rates on reasonable estimates of assets’ useful lives. 18 • analytical review.
Amortization The repayment of a loan by installments.
Amortization factor The pool factor implied by the scheduled amortization assuming no prepayments.
Amortizing interest rate swap Swap in which the principal or notional amount declines over time.
Amount outstanding and in circulation All currency issued by the Bureau of the Mint and intended as a medium of exchange. Coins sold by the Bureau of the Mint at premium prices are not included; uncirculated coin sets sold at face value plus handling charge are included.
Amsterdam Exchange (AEX) Exchange that comprises the AEX-Effectenbeurs, the AEX-Optiebeurs (formerly the European Options Exchange or EOE) and the AEX-Agrarische Termijnmarkt. AEX-Data Services is the operating company responsible for the dissemination of data from the Amsterdam Exchange via its integrated Mercury 2000 system.
AMTEL Used in context of general equities. In-house message system entered and displayed through Quotron A page.
Analyst Employee of a brokerage or fund management house who studies companies and makes buy-and-sell recommendations on stocks of these companies. Most specialize in a specific industry.
analytical review An auditing technique that focuses on analysis of the movements in account balances over time, and on assessing the reasonableness of financial statement items. At the level of financial statements, an auditor’s analytical review typically focuses on changes over time in high-level balances and ratios. It also includes assessments of the interrelationships between items in financial statements. For example, if an organization’s revenues double in size from one financial reporting period to the next, then (all things being equal) one would expect the level of accounts receivable to increase significantly between the two time periods. If accounts receivable did not follow the trend of revenues, analytical review might highlight this apparent inconsistency as an area for further investigation. The analytical review of financial statements may also comprise comparisons with the financial data of similar organizations—for example, an industry average of payroll cost per employee is a common benchmark to assess the reasonableness of payroll costs. At the level of the general ledger, analytical review procedures typically involve a scanning of entries in an account for evidence of unusual items, and the analysis of variances between actual and budgeted balances. Auditors’ analytical review procedures are intended to highlight potential, material misstatements in the general ledger or in financial statements. As a high-level audit technique, analytical review usually raises (rather than answers) questions, and therefore tends to be a means of identifying areas for further review. For this reason, analytical review is often a key element in the audit planning process, though it is considered a valuable substantive auditing test in its own right. Further reading: Glover et al. (2000); Lin et al. (2003).
And interest An indication that the buyer will receive accrued interest in addition to the price quoted for a bond.
Andean Pact A regional trade pact that includes Venezuela, Colombia, Ecuador, Peru, and Bolivia.
Anderson, Urton L. (born 1951) A U.S. academic, author, and internal auditing specialist. Professor of Accounting at the University of Texas at Austin, Anderson has authored several authoritative internal auditing texts and has participated in the professional developments of the Institute of Internal Auditors (IIA). His writings include a contribution to the IIA’s Research Opportunities in Internal Auditing (Anderson, 2003) and the IIA research report Quality Assurance for Internal Auditing (1983). Anderson chaired the Internal Auditing Standards Board in 2003. Further reading: Anderson (1983); Anderson (2003) Web link: www.mccombs.utexas.edu/dept/accounting/faculty/ua.html.
Ankle biter Stock issued with a market capitalization of less than $500 million.
Announcement date Date on which particular news concerning a given company is announced to the public. Used in event studies, which researchers use to evaluate the economic impact of events of interest.
Annual basis The technique in statistics of taking a figure covering a period of less than one year and extrapolating it to cover a full one year period. The process is known as annualizing.
Annual effective yield See: Annual percentage yield.
Annual exclusion A tax rule allowing the deduction of certain income from taxation.
Annual fund operating expenses For investmentcompanies, the management fee and “other expenses,” including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketingcosts are also included.
Annual meeting Meeting of stockholders held once a year at which the managers of a companyreport to the stockholders on the year’s results.
Annual percentage rate (APR) The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.
Annual percentage yield (APY) The effective, or true annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate, raising it to the number of periods in a year and then subtracting one. For example, a 1% per month rate has an APY of 12.68% (1.01^12 -1).
Annual rate of return There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (APR). The annual percentage yield (APY) includes the effect of compoundinginterest.
Annual renewable term insurance See: Term insurance.
Annual report Yearly record of a publicly heldcompany’sfinancial condition. It includes a description of the firm’s operations, as well as balance sheet, income statement, and cash flow statement information. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.
annualization The restatement of an item to reflect a 12-month period. Annualization is common in financial planning and taxation calculations, which often require extrapolation of costs and revenues to cover a full fiscal year. Annualization calculations are normally performed on a simple, straightc01. appreciation • 19; line basis, in which costs or income are deemed to accrue evenly. For example, if an expense of $10,000 occurs in one month, it may be annualized to $120,000 simply by multiplying by 12. Compare calendarization.
Annualized gain If stock X appreciates 1.5% in one month, the annualizedgain for that stock over a twelve month period is (12 x 1.5%) = 18%. Compounded over the 12 month period, the gain is (1.015)^12 -1 = 19.6%.
Annualized holding-period return The annual rate of return that when compoundedt times generates the same t-period holding return as actually occurred from period 1 to period t.
Annualizing See: Annual basis.
Annuitant An individual who receives benefits from an annuity.
Annuitize To commence a series of payments from the capital that has accumulated in an annuity. The payments may be a fixed amount, for a fixed period of time, or for a lifetime.
annuity Periodic payments of a constant amount that continue until a specified maturity date. Compare perpetuity.
Annuity certain An annuity that pays a specific amount on a monthly basis for a set amount of time.
Annuity due An annuity with n payments, where the first payment is made at time t = 0, and the last payment is made at time t = n – 1.
Annuity factor Present value of $1 paid for each of t periods.
Annuity in arrears An annuity with a first payment one full period hence, rather than immediately.
Annuity starting date The date when an annuitant starts receiving payments from an annuity.
ANSI American National Standards Institute 296 • Abbreviations.
Anticipated holding period The period of time an individual expects to hold an asset.
Anticipation Paying what is owed before it is due (usually to save interest charges).
Antidilutive effect Result of a transaction that increases earnings per common share (e.g., by decreasing the number of sharesoutstanding).
Antigreenmail Greenmail refers to the agreement between a large shareholder and a company in which the shareholder agrees to sell his stock back to the company, usually at a premium, in exchange for the promise not to seek control of the company for a specified period of time. Antigreenmail provisions prevent such arrangements unless the same repurchaseoffer is made to all shareholders or approved by shareholder vote. There are some states that have antigreenmail laws.
Antitrust laws Legislation established by the federal government to prevent the formation of monopolies and to regulate trade.
antitrust laws Legislation designed to encourage an efficient market. Antitrust laws are intended to combat the activities of monopolies and cartels, and to enhance competition in a market. Antitrust laws originated in the United States: The Sherman Antitrust Act of 1890 was landmark legislation that made monopoly or the restraint of trade illegal. The 1890 Act reflected growing public opinion in the late nineteenth century that legislation could be used to control the imperfections of free-market economies. The term antitrust was adopted because “trust” was a common term for monopoly in the nineteenth century. Other landmark U.S. antitrust laws include the Clayton Act of 1914, the Robinson-Patman Act of 1936, and the Celler-Kefauver Act of 1950. Antitrust laws have spread around the world: The concept has been introduced into Italy, for example, where the term “antitrust” has been directly adopted from English into the Italian language.
Anti-Persistence In R/S Analysis, an anti-persistent time series reverses itself more often than a random series would. If the system had been up in the previous period, it is more likely that it will be down in the next period and vice versa. Also called pink noise, or 1/f noise. See: Persistence, R/S Analysis, Hurst Exponent, Joseph Effect, Noah Effect.
Any-interest-date A call provision in a municipal bondindenture that establishes the right of redemption for the issuer on any interest payment due date.
Any-or-all bid Often used in risk arbitrage. Takeoverbid in which the acquireroffers to pay a set price for all outstanding shares of the target company, or any part thereof; contrasts with two-tier bid.
Any-part-of order In context of general equities, order to buy or sell a quantity of stock in pieces if necessary. Antithesis of an all-or-none order (AON).
APB Accounting Principles Board also Auditing Practices Board.
application control A control over an aspect of a computer program. Application controls may be either programmed or manual, and they are designed to ensure the accuracy and completeness of data and transactions. Examples of application controls include the validation of data input and the verification of batch totals. Auditors test the correct functioning of application controls through the use of representative test data.
apportionment See allocation.
appraisal 1. The quantitative evaluation of an investment (or potential investment), or of any asset or liability. Appraisals are often central to decisionmaking processes: Adue diligence appraisal process, for example, usually proceeds a corporate acquisition. 2. The evaluation—qualitative or quantitative— of an activity, control, procedure, or employee. Many manufacturing operations have product appraisal procedures embedded in their quality control processes, while employee appraisals form part of most modern human resources practices.
Appraisal ratio The signal-to-noise ratio of an analyst’sforecasts. The ratio of alpha to residualstandard deviation.
Appraisal rights A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently.
Appreciation Increase in the value of an asset.
appreciation The increase in value of an asset. Most systems of Generally Accepted Accounting Principles set out strict rules for the recognition in financial statements of the amounts by which assets—typically land, property, and securities—may appreciate. Contrast depreciation. 20 • approval.
Appropriation request Formal request for funds for capital investment project.
approval 1. An alternative term for authorization. 2. Acceptance. In commerce, goods sent to a customer on approval are sent for examiniation without an obligation to purchase.
Approved list A list of equities and other investments that a financial institution or mutual fund is allowed to invest in. See: Legal list.
APS Auction Preferred Stock. A type of Dutch Auction Preferred Stock (Goldman Sachs product).
Arab Society for Certified Accountants (ASCA) A regional, Arabiclanguage accounting organization. The ASCA was formed in 1984 in London. Its Web site states that its main objective is “to advance the science of accountancy, financial management and associated or connected subjects as applied to all or any of the professional services provided by accountants . . . throughout the Arab world.” The ASCA’s activities include a certification program, and accounting and auditing publications in Arabic. Web site: www.ascasociety.org.
Arbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. Usage: Given the advancement in technology it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds..
arbitrage The exploitation of price differentials on an asset traded in two or more markets. One benefit often claimed of arbitrage is its role in bringing about price equilibrium between markets. For example, the opportunities given to consumers in the European Union to purchase goods throughout Europe has tended to narrow price differentials for many consumer goods between individual European countries. Prices are known with certainty in arbitrage, and it is therefore a less risky activity than speculation. Assets typically subject to arbitrage include currencies and commodities.
Arbitrage bonds Municipalityissuedbonds issued intended to gain an interest rate advantage by refunding a higher-rate bond in ahead of their call date. Lower-rate refunding issue proceeds are invested in Treasuries until the first call date of the higher-rate issue.
Arbitrage Pricing Theory (APT) An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments. The APT implies that there are multiple risk factors that need to be taken into account when calculating risk-adjusted performance or alpha.
Arbitrageur One who profits from the differences in price when the same, or extremely similar, security, currency, or commodity is traded on two or more markets. The arbitrageur profits by simultaneously purchasing and selling these securities to take advantage of pricing differentials (spreads) created by market conditions. See: Risk arbitrage,convertible arbitrage,index arbitrage, and international arbitrage.
Arbitrage-free option-pricing models Yield curve option-pricing models.
arbitration Quasi-judicial recourse to an independent individual or organization to settle a dispute between two or more parties. Arbitration is often used to settle commercial, labor, and political disputes, and it is an alternative to civil law proceedings. Arbitration has a long history—it was used extensively in classical Rome. Arbitration decisions can be either binding or nonbinding, depending on the terms of reference agreed to by the parties.
Are you open? Used in context of general equities. “Can a new customer still participate on opposing side of the trade from that which the first customer initiated?”, Inquiring as to whether any portion of that trade is still available See: Open.
Arithmetic average (mean) rate of return Arithmetic mean return.
Arithmetic mean return An average of the subperiod returns, calculated by summing the subperiod returns and dividing by the number of subperiods.
arithmetic progression A sequential pattern of numbers with differences of equal size between consecutive numbers. An example is 1, 3, 5, 7, and so on. Contrast geometric progression.
Arizona Stock Exchange A single price auction exchange for equity trading that allows anonymous buyers and sellers to trade at low transactioncosts.
Arms index Also known as a TRading INdex (TRIN). The index is usually calculated as the number of advancing issues divided by the number of declining issues. This, in turn, is divided by the advancing volume divided by the declining volume. If there is considerably more advancing volume relative to declining volume this will tend to reduce the index (i.e. increase the denominator). Hence, a value less than 1.0 is bullish while values greater than 1.0 indicate bearish demand. The index often is smoothed with a simple moving average.
Arm’s length price The price at which a willing buyer and a willing unrelated seller would freely agree to transact or a trade between related parties that is conducted as if they were unrelated, so that there is no conflict of interest in the transaction.
arm’s length transaction Atransaction at fair market value between unrelated parties, or a transaction made as if it were between unrelated parties— for example, “All the sales between the corporation’s overseas branches are made at arm’s length.”
Around us Used in context of general equities. See: Away from you.
Arranger The senior tier of a syndication. This implies the entity that agreed and negotiated the project financing structure. Also refers to the bank or underwriter entitled to syndicate the loan or bondissue. Also known as the lead underwriter.
Arrearage In the context of investments, refers to the amount by which interest on bonds or dividends on cumulative preferred stock is due and unpaid.
arrears Overdue liabilities or payments.
Arthur Andersen (AA) A former member of the Big Five accounting firms. Arthur Andersen collapsed in 2002 following the Enron corporate scandal. Founded in Chicago in 1913 as Andersen, DeLany & Company, the firm adopted Arthur Andersen • 21 the name Arthur Andersen in 1928. It enjoyed incredible growth, success, and prestige in the twentieth century. Ironically, given the circumstances of its demise, AA was initially noted for its principled stand on the correctness of accounting methodology, even at the risk of losing clients. The firm was also famous for the sophistication of its consulting and management advisory services. Amid the rather faceless world of the large accounting firms, the AA culture was perceived as uniquely differentiated. The culture was reinforced by a strong internal training program that inculcated intense organizational loyalty and conformity. Skeptical or jealous outsiders were known, tongue-incheek, to refer to the stereotyped image of the clean-cut, white-shirted, earnest Arthur Andersen employee as an “Android.” Following decades of phenomenal growth, the last few years of the firm were troubled ones, and its once-proud image became increasingly tarnished. First, a power struggle that led to a bitter divorce between the firm’s profitable consulting division and the auditing-driven remainder of the business was played out in full media glare: The result was the independence in 2000 of Andersen Consulting, later to become Accenture. More seriously, and fatally, one insider identified a corrosion of values at the heart of the firm. From its status as “a great and venerable American institution” and “a global symbol of strength and solidity” with over 80,000 employees worldwide, AA allegedly became an organization that placed fee maximization ahead of professional integrity, to the extent that some of its auditing employees “forgot that the true purpose of their job was to protect the investing public” (Toffler and Reingold, 2003, 7). To an extent, the questions raised over AA’s approach to auditing reflect a more general malaise in the external auditing profession in the early twentyfirst century. However, a series of accounting scandals that engulfed AA clients seemed to point to particular problems at the firm: Severe problems at the operations of the Baptist Foundation of Arizona, Sunbeam, Delorean, and Waste Management were forerunners to the massive accounting scams at Enron and WorldCom. The Enron affair led to a criminal indictment for AA, and in June 2002 a federal grand jury found the firm guilty of obstructing justice in official investigations of Enron. The shredding of thousands of Enronrelated documents played a major part in the jury’s decision-making process. The firm’s reputation was seriously undermined: Even the U.S. President is reported to have joked (in relation to weapons inspections prior to the second Gulf War of 2003): “The good news is that [Saddam Hussein is] willing to have his nuclear, biological, and chemical weapons counted. The bad news is he wants Arthur Andersen to do it” (quoted in Fox, 2003, 294). Amid allegations of conflicts of interest between auditing and the supply of management advisory services (not to mention accusations of poor auditing 22 • articles of incorporation and the large-scale destruction of auditing records) Arthur Andersen collapsed in 2002. The Enron and AA scandals prompted U.S. legislators to pass the Sarbanes-Oxley Act in 2002, in an attempt to reform corporate governance and thereby restore investor confidence. Further reading: Jeter (2003); 207-212; Schwartz and Watkins (2003); Spacek (1989); Toffler and Reingold (2003).
articles of incorporation Legal documents required for the establishment of a U.S. corporation. The articles form part of a corporation’s charter, and they set out its mission and range of activities.
Articles of incorporation Legal document establishing a corporation and its structure and purpose.
Artificial currency A currency substitute, e.g., special drawing rights (SDRs).
Artificial Intelligence The creation of models that mimic thought processes. See: Neural Networks, Fuzzy Logic, and Genetic Algorithms.
ASB Auditing Standards Board.
ASCA Arab Society for Certified Accountants.
Ascending tops A chart pattern that depicts that each peak in a security’s price over a period of time is higher than the preceding peak. Antithesis of descending tops.
ASCII American Standard Code for Information Interchange.
Asian Currency Units (ACU) Dollar deposits held in Singapore or other Asian centers.
Asian Development Bank A financial institution established in 1966 to reduce poverty in the Asia-Pacific region. The bank is headquartered in Manila, Philippines and consists of 61 member countries.
Asian Development Bank (ADB) An international financial institution dedicated to economic development in Asia. Established in 1966 and headquartered in Manila in the Philippines, the ADB’s activities focus on financial and technical assistance to Asian developing countries. In 2003 the ADB was supported by 61 countries from around the world. Web site: www.adb.org.
Asian dollar market Asian banks that collect deposits and make loansdenominated in US dollars.
Asian option Option based on the average price of the underlying assets during the life of the option.
Asia-Pacific Economic Cooperation Pact (APEC) A loose economic affiliation of Southeast Asian and Far Eastern nations. The most prominent members are China, Japan, and Korea.
Ask This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buyshares of stock; also called the offer price.
Asked price The lowest price that any investor or dealer has declared that he/she will sell a given security or commodity for. For over-the-counter stocks, the ask is the best quoted price at which a Market Maker is willing to sell a stock. For mutual funds, the ask is the net asset value plus any sales charges. also called or asking price or offering price or ask.
Asked to bid/offer Used in context of general equities. Usually a seller (buyer) looking to aggressively sell (buy) stock, usually asking for a capital commitment from an investment bank.
Aspirin Australian Stock Price Riskless Indexed Notes. Zero-coupon four-year bonds repayable at face value plus the percentage increase by which the Australian stock index of all ordinaries (common stocks) rises above a predefined level during the given period.
Assay Metal purity test to confirm that the metal meets the standards for trading on a commodities exchange (commodities exchange center).
Assessed valuation The value assigned to property by a municipality for the purpose of tax assessment. Such an assessed valuation is important to investors in municipal bonds that are backed by property taxes.
assessment 1. The financial appraisal of an existing or potential investment. 2. A nonquantitative evaluation of an activity, control, process, or procedure. 3. A formal tax calculation.
Asset Any possession that has value in an exchange.
asset A resource expected to provide future economic benefits. Assets possess a number of characteristics: (i) they provide economic benefits; (ii) they are under the control of an individual or organization; (iii) their existence is certain, although they can be intangible (like goodwill or intellectual capital); and (iv) they tend to be quantifiable (although the valuation of intangible assets can be problematic). Generally Accepted Accounting Principles around the world usually set strict criteria for the recognition and valuation of assets. In particular, the recognition of many intangible assets, such as brands, are severely restricted. An asset is recorded as a debit entry under the conventions of double entry bookkeeping, and short-term assets are usually referred to as current assets. Contrast liability.
Asset activity ratios Ratios that measure how effectively the firm is managing its assets.
Asset allocation decision The decision regarding how an institution’s funds should be distributed among the major classes of assets in which it may invest.
Asset allocation mutual fund A mutual fund that rotates among stocks, bonds, and money marketsecurities to maximize return on investment and minimize risk.
Asset classes Categories of assets, such as stocks, bonds, real estate, and foreign securities.
Asset Depreciation Range System A range of depreciable lives the IRS allows for particular classes of assets.
Asset for asset swap Creditors exchange the debt of one defaultingborrower for the debt of another defaulting borrower.
Asset management account Account at a brokerage house, bank, or savings institution that integrates banking services and brokerage features.
Asset play A company with assets that are not believed to be accurately reflected in its stock price, making it an attractive buy or play.
Asset pricing model A model for determining the required or expected rate of return on an asset. Related: Capital asset pricing model and arbitrage pricing theory.
Asset stripper A corporate raider (company A) that takes over a target company (company B) in order to sell large assets of company B to repay debt. Company A calculates that the net, selling off the assets and paying off the debt, will leave the raider with assets that are worth more than what it paid for company B.
asset stripping A pejorative term for the deliberate depletion of assets in an organization. Asset stripping often occurs following an acquisition (definition 2), when an acquirer believes that the breakup of a purchased organization’s.
Asset substitution Occurs when a firm invests in assets that are riskier than those that the debtholders expected.
Asset substitution problem Arises when the stockholders substitute riskierassets for the firm’s existing assets and expropriate value from the debtholders.
Asset swap An interest rate swap used to alter the cash flow characteristics of an institution’s assets in order to provide a better match with its liabilities.
Asset turnover The ratio of net sales to total assets.
Asset value The net market value of a corporation’sassets on a per-share basis, not the market value of the shares. A company is undervalued in the market when asset value exceeds market value.
Assets A firm’s productive resources.
Assets requirements A common element of a financial plan that describes projected capital spending and the proposed uses of net working capital.
Assets-in-place Property in which a firm has already invested.
Asset-based financing Methods of financing in which lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of, their financing.
Asset-coverage test A bond indenture restriction that permits additional borrowing if the ratio of assets to debt does not fall below a specified minimum.
Asset/equity ratio The ratio of total assets to stockholder equity.
Assignment The receipt of an exercise notice by an optionswriter that requires the writer to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.
Assignment of proceeds Arrangement that allows the original beneficiary of a letter of credit to pledge or turn over proceeds to another, typically end supplier.
Assimilation The public absorption of a new issue of stocks once the stock has been completely sold by underwriter. See: Absorbed.
Association for Accountancy and Business Affairs (AABA) A British reformist organization that focuses on accounting and auditing. The AABA’s Web site states its objectives to include the following: To “advance the public interest by facilitating critical scrutiny of commercial and non-commercial organisations . . . to facilitate critical scrutiny of professional bodies . . . and to campaign for such reforms as will help to secure greater openness and democracy, protect and further the rights of stakeholders and to make disclosures where necessary.” The organization’s activities include the publication of monographs. It also has an online journal, Accountancy, Business, and the Public Interest. AABA trustees include Professor Prem Nath Sikka and the British Member of Parliament Austin Mitchell, both leading figures in the critical accounting movement. The AABAis a fearless critic of auditing practices, especially those of external auditing, as can be gained by the titles of some of its monographs: Auditors: Holding the Public to Ransom (Cousins et al., 1998), and Dirty Business: The Unchecked Power of Major Accountancy Firms (Mitchell and Sikka, 2002). Web site: visar.csustan.edu/aaba/aaba.htm Further reading: Cousins et al. (1998); Mitchell and Sikka (2002); Mitchell et al. (1998).
Association for Investment Management and Research assets can enhance their overall value. This may be the case when the value of a corporation’s common stock has fallen below the value of its separate, tangible assets. Less commonly, the term asset stripping may also be a tactical (or even malicious) means of avoiding a corporate takeover. An organization that is the target of an unwelcome acquisition bid, for example, may take the extreme measure of depleting its assets to make it less attractive to a potential acquirer. See also poison pill.
Association for Investment Management and Research (AIMR®)
Association Francophone de Comptabilité (AFC) A French-language academic accounting association. Based in Paris, and founded in 1980, the AFC provides a French-language forum for international researchers and educators of accounting, auditing, and related areas. Its activities include conferences, study workshops, and publication of the journal Comptabilité, Contrôle, Audit. Web site (French only): www.afc-cca.com.
Association of Accounting Technicians (AAT) A British professional accounting organization. The AAT was established in 1980 by combining two previously existing associations: The Association of Technicians in Finance and Accounting, and the Institute of Accounting Staff. The AAT’s Web site states that its vision is “to be a strong, visible and respected body for accounting technicians; to offer internationally recognised membership and qualifications, which are valued by the public, employers and the business world.” Most of the AAT’s members work in industry, and after AAT certification many members proceed to the examinations of the Association of Chartered Certified Accountants or other members of the United Kingdom’s Consultative Committee of Accountancy Bodies. The AAT has over 100,000 international members, including students, and it is an associate member of the International Federation of Accountants. Web site: www.aat.co.uk.
Association of Certified Fraud Examiners (ACFE) An international professional body dedicated to combating fraud. Based in Austin, TX, and founded in 1988 by Joseph T. Wells, the ACFE had approximately 28,000 members in 2003. The ACFE mission, as stated on its Web site, is “to reduce the incidence of fraud and white-collar crime and to assist the Membership in its detection and deterrence.” The association’s activities include education, publications, and a certification program. Web site: www.cfenet.com.
Association of Chartered Accountants in the United States (ACAUS) A professional organization for U.S.-based chartered accountants. ACAUS was founded in 1985, and in 2003 it had approximately 5,000 members. Headquartered in New York, ACAUS groups together accountants from the United Kingdom, Australia, Canada, Ireland, New Zealand, and South Africa. Web site: www.acaus.org.
Association of Chartered Certified Accountants (ACCA) A British professional accounting organization. The ACCA has existed in a variety of forms and under a series of names since the early 1900s: It obtained a royal charter in 1974, and took its current name in 1996. Headquartered in London,
Association of College and University Auditors (ACUA) AU.S.-based, international organization dedicated to internal auditing in the higher education sector. Founded in 1958 and headquartered in West Hartford, CT, the ACUA’s activities include professional guidance, conferences, and networking. Web site: www.acua.org.
Association of Government Accountants (AGA®) A U.S. professional public sector accounting organization. Founded in 1950 as the Federal Government Accountants Association, the association adopted its current name in 1975. It is headquartered in Alexandria, VA. The AGA’s Web site states that it “serves government accountability professionals by providing quality education, fostering professional development and certification, and supporting standards and research to advance government accountability.” Its activities include publication of the quarterly Journal of Government Financial Management and a monthly newsletter, Government Financial Management TOPICS. The AGA membership stood at approximately 18,000 in 2003. Web site: www.agacgfm.org.
Association of International Accountants (AIA) A British-based professional accounting organization. Headquartered in Newcastle, England, the AIA was founded in 1928 and incorporated four years later, in 1932. The AIA was recognized in 1994 as a Recognised Qualifying Body for external auditors in the United Kingdom, and it registered its first company auditor in 1998. 26 • Association of News Media Internal Auditors Most AIA members, however, work outside public accounting. The association’s Web site states that it “promotes and supports the advancement of the accounting profession both in the UK and internationally.” The AIA’s magazine International Accountant appears quarterly. The AIA membership totalled 14,500 (including 10,000 students) in 2003, with a strong international dimension, as its name suggests. Web site: www.aia.org.uk.
Association of International Accountants • 25 the ACCA’s members have traditionally been accountants in business, with a focus on cost and management accounting, though the association’s members also work in a wide range of accounting and auditing roles. The ACCA is one of the United Kingdom’s five Recognised Qualifying Bodies for external auditors. Many British internal auditors are ACCA members. The ACCA’s Web site states that its mission is, among other things, to “provide quality professional opportunities to people of ability and application throughout their working careers” and to “promote the highest ethical and governance standards.” The association’s publications range from magazines and newsletters—the ACCA Internal Audit Bulletin and Accounting & Business—to a respected series of research monographs. The ACCA’s certification program has a high international profile, and it attracts a large number of students around the world, especially in the former British colonies of Hong Kong and Malaysia. Members carry the designatory letters ACCA or FCCA, the latter representing fellowship and determined by seniority. The ACCA’s international membership (including students) exceeded 300,000 in 2003. Web site: www.acca.co.uk.
Association of News Media Internal Auditors (NMIA) networking, newsletters, and an annual conference. Web site: www.nmianews.org.
Association of Southeast Asian Nations (ASEAN) A loose economic and geopolitical affiliation that includes Singapore, Brunei, Malaysia, Thailand, the Philippines, Indonesia, and Vietnam. Future members are likely to include Burma, Laos, and Cambodia.
Assumed interest rate Rate of interest used by an insurancecompany to calculate the payout on an annuitycontract.
Assumption Becoming responsible for the liabilities of another party.
assurance 1. A positive declaration on an audit objective. Assurance can cover a wide range of matters, from the fair presentation of financial statements to the effective operation of internal controls. Assurance does not offer the certainty of a guarantee; indeed, to offer absolute assurance in an auditing context is generally unfeasible, owing to the existence of risk. It has been observed that auditors “can never be 100 per cent certain of the information on which their opinion or report is based” (Flint, 1988, 112). Auditors therefore tend to form their judgments on the results of a mixture of sample testing of large audit populations and compliance testing of procedures and internal controls. Neither of these categories of audit testing offers absolute assurance. Auditors, in consequence, tend to prefer to use the term “reasonable assurance.” The term assurance has become increasingly popular following its use in the American Institute of Certified Public Accountants’ 1997 report Serving the Public Interest: A New Conceptual Framework for Auditor Independence (AICPA, 1997). The report identified various means of improving the quality of financial reporting and related information. 2. In the United Kingdom, a branch of the insurance industry in which policies compensate the death of the policy holder. Further reading: AICPA (1997); Gray and Gray (2000).
ASWA American Society of Women Accountants.
ASX Derivatives and Options Market (ASXD) Options markettrading options on more than 50 of Australia’s and New Zealand’s leading companies.
asymmetric information A mismatch of the depth and quality of information between two or more parties to a transaction or contractual arrangement. A classic example of asymmetric information frequently discussed in economic literature is that found in markets for secondhand automobiles. The purchaser of a used car is normally at a significant information disadvantage in comparison to the seller. The concept of caveat emptor is of particular relevance in such circumstances. Between a principal and an agent, agency costs can be audit • 27 exacerbated by asymmetries of information, as an agent may be tempted to exploit detailed knowledge of a transaction or organization to the disadvantage of a principal.
Asymmetric information Information that is known to some people but not to other people.
Asymmetric taxes When participants in a transaction have different net tax rates.
Asymmetric volatility Phenomenon that volatility is higher in down markets than in up markets.
Asymmetry A lack of equivalence between two things, such as the unequal tax treatment of interest expense and dividend payments.
AS/NZS Joint Standard 4360: Risk Management A risk assessment standard issued by the joint Standards Australia/Standards New Zealand Committee. The standard first appeared in 1995 and was revised in 1999. It has had a major international impact on risk management methodology and theory. Further reading: AS/NZS 4360 (1999).
At par A price equal to nominal or face value of a security. See: Par.
At risk The exposure to the danger of economic loss. Frequently used in the context of claiming tax deductions. For example, a person can claim a tax deduction in a limited partnership if the taxpayer can show it is at risk of never realizing a profit and of losing its initial investment. See: Value at risk.
At the bell In context of general equities, at the opening or close of the market. See: MOC Order.
At the close order In the context of securities, an all or nonemarket order that is to be executed at the closing price of the security on the exchange. If the execution cannot be made under this condition, the order is to be treated as cancelled. In the context of futures and options, refers to a contract that is to be executed on some exchanges during the closing period, a period in which there is a range of prices.
At the figure In context of general equities, at the whole integer price (excluding the fraction) closest to the side of the market (bid/ask) being discussed. At the full.
At the full Used in context of general equities. At the figure.
At the market See: Market order.
At the opening order In context of general equities, market order or limited price order that is to be executed at the opening (and corresponding price) of the stock or not at all, and any such order or portion thereof not so executed is to be treated as cancelled.
Athens Stock Exchange Greece’s only major securities market. Greek language only.
Athens Stock Exchange (ASE) Greece’s principal stock exchange.
attest 1. To declare that financial statements offer a fair presentation of an organization’s financial position, results of operations, and cash flows. Attestation is a form of audit assurance and it is normally formalized in the form of an audit report. 2. To sign a legal document, as a witness to the genuineness of the signatures of the party or parties to a transaction.
attorney’s letter In external auditing, a letter addressed to the attorney of a client to request details of litigation and other legal matters. The external auditor uses an attorney letter to obtain audit evidence of the existence and materiality of contingent liabilities.
Attractor In non-linear dynamic series, an attractor defines the equilibrium level of the system. See: Point Attractor, Limit Cycle, and Strange Attractor.
Attribute bias The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividend yield, high book value ratio, or membership in a particular industry sector.
attribute sampling Astatistical method that analyzes the occurrence of a qualitative characteristic in a population. For example, an auditor may analyze an organization’s disbursements to assess the occurrence of non-authorized items: The attribute in this case is the nonauthorization of individual disbursements. The occurrence rate of authorization in a sample can be extrapolated to the entire population of disbursements, subject to precision errors inherent in sampling methodologies. Attribute sampling is common in compliance testing.
At-the-money An option is at the money if the strike price of the option is equal to the market price of the underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at the money.
auction The sale of an item by competitive bidding.
Auction Market Preferred Stock (AMPS) A type of Dutch Auction Preferred Stock (A Merrill Lynch product).
Auction markets Markets in which the prevailing price is determined through the free interaction of prospective buyers and sellers, as on the floor of the stock exchange.
Auction rate preferred stock (ARPS) Floating rate preferred stock, whose dividend is adjusted every seven weeks through a Dutch auction.
audit An independent review of an asset, liability, activity, organization, or set of financial statements. Audits are usually performed to support or refute defined audit objectives, and normally result in an audit opinion on the matter under review. There is no single, satisfactory definition of auditing, but the following examples illustrate widely held interpretations of the term: (i) “Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties” (American Accounting Association, 1973). (ii) “Auditing is a human evaluation process to establish the adherence to certain norms, resulting in an opinion (or judgment)” (Schandl, 1978, 4). (iii) “The purpose of the audit is to investigate and review the actions (or inaction), decisions, achievements, statements or reports of specified persons with defined responsibilities, to compare these actions, etc. with some norm, and to form and express an opinion on the result of that investigation, review or comparison” (Flint, 1988, 20). (iv) An audit is a means of “monitoring the behavior of agents” in the context of agency theory” (Lee, 1993, 23). 28 • audit The term audit is used widely, and it includes the following: (i) external audit, (ii) internal audit, (iii) environmental audit, (iv) financial audit, (v) operational audit, (vi) clinical audit, (vii) management audit, and (viii) social audit. It has been claimed that auditing is “an old science with well-established principles” (Ridley and Chambers, 1998, xx). There is evidence of auditing practices that date from classical empires of Rome and China, which created elaborate civil services to monitor and report on government finances. Some commentators even claim that auditing practices date from the very dawn of literate civilization: “According to earliest Mesopotamian records dating back to 3600 BC, scribes used to prepare summaries of financial transactions. These were separate from the lists of amounts handled and which others had prepared. . . . Tiny marks, dots, and circles indicated the painstaking comparison of one record with another—marks that have survived the centuries and that auditors still use to tick off their verification of records. Thus were born two control devices still used around the world: division of duties, and provision for the review of another’s work” (Sawyer and Vinten, 1996, 23). In England in the Middle Ages, many of the parties interested in manorial audits were illiterate and audits were usually presented orally. As a result, the modern English word “audit” came into use, derived from the Latin verb audire (“to hear”). Despite auditing’s long history, the discipline’s dramatic and apparently inexorable rise since World War II has been met with disapproval by some commentators, who see it as a symptom of a decline in trust between individuals and organizations. The external audit, for example, has been described as “the principal means by which accountability is attempted when trust in relationships disappears” (Lee, 1998, 219). Others have portrayed auditing as a parasitical activity: “The “audit society is a symptom of the times, coincidentally a fin de siècle, in which a gulf has opened up between poorly rewarded ‘doing’ and highly rewarded ‘observing’ ” (Power, 1997, 147). Some commentators have also drawn attention to an alleged obscurity at the heart of auditing theory— for example, auditing has been described as “paradoxical, tense and subjective” (Frecknall Hughes et al., 1998, 98). Concerns over the substance of auditing theory may reflect discomfort with the sheer variety of social practices that have adopted the term “audit.” However, notwithstanding the frequency of criticisms of auditing’s social and political functions (e.g., in the writings of the critical accounting movement), auditing practices have been adopted by most private and public sector organizations. Further reading: American Accounting Association (1973); Flint (1988); Lee (1993); Power (1997); Schandl (1978); Wolnizer (1987) audit approach • 29.
audit agenda 1. An alternative term for audit program. 2. An alternative term for audit schedule.
Audit and Attest Standards Team Agroup within the American Institute of Certified Public Accountants (AICPA). The AICPAWeb site states that the team “directs and supports the development of auditing, attestation, accounting and review services, and quality control standards.” The team supports the work of the AICPA’s Auditing Standards Board, and it produces nonauthoritative interpretative and implementation guidance for U.S. auditing standards. Web link: www.aicpa.org/members/div/auditstd/about1.htm.
audit approach The strategy for an audit, or the manner of conducting an audit. Deciding a suitable audit approach is an essential part of the audit planning process, and a common decision is the balance to be adopted between compliance and substantive testing. An audit approach is often determined by, among other factors, (i) the nature of the auditee, (ii) the time available for the audit, (iii) the level of cooperation of the auditee, and (iv) the sophistication of systems of internal control. See also ”black box” audit approach. 30 • audit assignment.
audit assignment A discrete, separately identifiable audit. Compare special assignment.
audit assumption A presumption or judgment that underpins an audit or an audit test. Unlike postulates of auditing, which are of general validity, an audit assumption is specific to an auditing assignment. Examples of audit assumptions include the judgment that an auditee is telling the truth, and the judgment that (from the findings of compliance testing) the vast majority of an organization’s disbursements are appropriately authorized.
audit charter See internal audit charter.
Audit Command Language™ (ACL™) Audit-related software produced by ACL Services Ltd. This software ranges from data accuracy tools to data extraction and analysis mechanisms. Web link: www.acl.com.
audit committee A committee of a board of directors (or similar governing body) that oversees an organization’s auditing and financial reporting. Under most systems of corporate governance, audit committees tend to be comprised of outside directors to encourage independence and to minimize potential conflicts of interest. Typical activities of audit committees include reporting to the board of directors on the oversight of (i) financial reporting, (ii) the internal control environment, (iii) the work of external and internal auditors, (iv) external audit fees, (v) the appropriateness of accounting policies, and (vi) risk management procedures. Further reading: AICPA (2000); Klein (2002); Raghunandan et al. (2001); Rezaee et al. (2003); Spira (2002); Verschoor (2000); Verschoor (2002).
audit competence The ability and credentials of an individual who aspires to undertake auditing. It has been written that “the first requirement for the authority of auditors is competence. Audit competence requires both knowledge and skill, which are the products of education, training and experience” (Flint, 1998, 48). The auditing professional bodies seek to define and monitor their members’ audit competence.
audit cycle The process of conducting an audit or a series of audits over time. In external auditing, the audit cycle tends to be scheduled in several important phases: (i) interim visits to perform analytical and compliance reviews; (ii) attendance at physical inventory counts; (iii) visits at (or shortly after) financial period-ends to perform detailed substantive testing; and (iv) the finalization of the audit. From year to year, the audit cycle may envision different areas of.
audit department An alternative term for internal audit function.
audit engagement 1. An alternative term for audit assignment. 2. The process of agreeing to a contract for the services of an external auditor.
audit evidence Information that supports or refutes an audit objective. Lee (1993, 172) distinguishes between “evidence (the overall basis for audit reporting) and evidential material (the various means by which auditors construct their evidence to support their conclusions),” but in general usage the term audit evidence is used in both contexts. Audit evidence can be gathered from a wide variety of sources, ranging from documentary information to oral testimony to the observation of procedures. For example, an auditor wishing to substantiate the existence and accuracy of an organization’s accounts receivable balances at a specific date may turn to the following sources of evidence, among others: (i) detailed general ledger transactions; (ii) original sales invoices; (iii) inventory dispatch information; (iv) confirmation letters from customers; (v) the matching of cash received to specific accounts receivable balances; and (vi) discussions with management and employees. The interpretation of evidence is a fundamental aspect of auditing, and it has been suggested that “Deductive reasoning is by far the most important and also the most difficult source of audit evidence” (Flint, 1988, 113–114). Auditors tend to record the evidence used to support their judgments and opinions in formal working papers. Further reading: Maroney and Bedard (1997); Ratliff and Johnson (1998).
audit guide 1. An alternative term for audit program. 2. An alternative term for auditing standard or the interpretative literature of Generally Accepted Auditing Standards.
Audit News A British external auditing newsletter. Issued by the Professional Standards Directorate of the Institute of Chartered Accountants in England and Wales, the newsletter is published in two or three issues a year. It is available online, and it focuses on external auditing developments and regulations in the United Kingdom. Web link: www.icaew.co.uk/index.cfm?AUB=TB2I 3321.
audit objective 1. The purpose of an audit. Audits are normally performed to support or refute specific objectives. The external audit of an organization, for example, typically has the following main objectives: “To obtain evidence that the organization’s financial statements conform with Generally Accepted Accounting Principles, and offer a fair representation of the entity’s financial position, the results of its operations, and changes in cash flows.” If sufficient audit evidence is gathered to confirm these objectives, the external auditor can issue an unqualified opinion. (Secondary objectives of an external audit may include the identification of material fraud, or serious weaknesses in internal controls.) The objectives of internal auditing tend to be more varied than those of external auditing: This reflects the wide remit of internal auditing, through financial and operational audits to compliance and consulting reviews. 2. The purpose of a specific audit test. It is generally considered best practice to state an objective (or objectives) for each individual audit test, and to conclude on the objectives after sufficient audit evidence has been gathered to perform the test. For example, an audit work paper may start as follows: “To obtain evidence that bank balances are accurately stated and correctly classified in the general ledger.” It may finish as follows: “objectives achieved.” The formal stating of objectives for each audit test encourages the focus of auditing work in contributing to the overall objective of the audit. If the objectives of a specific test are not met, then alternative tests may be required.
audit opinion An auditor’s conclusion on the extent to which audit evidence refutes or confirms an audit objective. Independence is considered to be central to the credibility of audit opinions, especially in the context of an external audit: “An auditor’s opinion is no more than an opinion, but it must be believed to be an informed opinion honestly held” (Flint, 1988, 47). For external auditing, see unqualified opinion, qualified opinion, adverse opinion, disclaimer, and negative assurance. and professional associations” and describes its mission as follows: To “develop a complete ‘utility’ on the World Wide Web for audit related information, products, and services.” AuditNet offers many services to its users, including online standard audit programs, job recruitment listings, and travel resources. Web site: www.auditnet.org.
audit plan 1. An alternative term for audit program. 2. An alternative term for audit schedule (definition 1).
audit planning The steps taken to prepare for an audit. Planning is tailored to the circumstances of individual audits, but typically includes some or all of the following: (i) information gathering to establish the background and circumstances of an entity or activity to be audited; (ii) discussions with an auditee to ascertain material facts; (iii) a risk assessment of the area under audit; (iv) logistical arrangements for visiting the location of an audit; and (v) analytical review of an organization’s financial statements and trial balance. The professional standards of both external and internal auditors requires careful planning, and the audit planning process normally results in a formal audit program that sets out the scope of audit work.
audit point Asection of an audit report that comprises one or more audit recommendations.
audit program A document that sets out audit tests. It is generally considered best practice to conclude an audit planning process with a formal, written program of audit tests, but in practice audit programs vary significantly in detail and sophistication. At one extreme, an audit program may simply be a bulletpoint list of audit tests. At the other extreme, an audit program may give extensive guidance on the performance of sequential audit tests, including the names of individual auditors responsible for each test. audit risk • 35.
audit quality The good performance and positive characteristics of an audit. It has been suggested that audit quality “depends on both technical competence and independence” (Beattie et al., 2001, 14), and external auditing quality is often assessed by peer review. Compare quality audit.
audit recommendation In an audit report, a proposed action to remedy a problem or potential problem. Audit recommendations addressed to auditees normally form the basis of internal auditors’ reports, while external auditors tend to communicate their recommendations for improvements in procedures and internal controls in the form of a management letter.
audit report A document that summarizes the findings of an audit. An external audit report sets out an audit opinion. Most systems of Generally Accepted Auditing Standards have standardized formats for external audit reports and require explanations of any unqualified opinion (such as an adverse opinion, a disclaimer, or a qualified opinion). The content and style of internal audit reports are largely at the discretion of individual internal audit functions. All audit reports, however, should follow basic criteria of “clarity, precision, unambiguity, and comprehensiveness in disposal of the [audit’s] terms of reference” (Flint, 1988, 121). Public skepticism over the usefulness of the boilerplate language used in external audit reports has a long history. It is reflected, for example, in this humorous and poetic audit report spoof of the 1950s (quoted in Chambers, R. J., 1995, 91): We have audited the balance sheet and here is our report: The cash is overstated, the cashier being short; The customers’ receivables are very much past due, If there are any good ones, they are very, very, few; The inventories are out of date and practically junk, And the method of their pricing is very largely bunk; According to our figure the enterprise is wrecked… But subject to these comments, the balance sheet’s correct. Further reading: Walker (1997).
audit risk 1. In external auditing, the risk of giving an inappropriate audit opinion on the fair presentation of an organization’s financial statements. The sampling of transactions and the compliance testing of controls cannot offer cast-iron guarantees that all irregularities have been identified, though external audit risk can be mitigated by (i) careful audit planning, (ii) representation letters from management, and (iii) adequate malpractice insurance. External audit risk is sometimes analyzed into three components—inherent 36 • audit rotation risk, control risk, and detection risk—that can be quantified and multiplied together. Audit risk is assessed in order to direct audit tests at the areas of highest risk: “Generally, the higher the assumed risk, the more stringent the audit action” (Lee, 1993, 177). 2. In internal auditing, the risk of overlooking or misinterpreting material matters of concern. The matters under consideration may be quantitative or qualitative.
audit rotation The periodic changing of external auditors. Some countries— Italy and Spain, for example—have traditions of requiring listed corporations to rotate auditors after a defined time period (typically five or seven years) in an attempt to encourage external auditor independence. Rotation of auditors can be costly, however, in terms of the disruption and inefficiencies arising from the learning curve of a newly appointed auditor unfamiliar with an organization’s activities. Audit rotation can refer to changes of audit firms or changes of audit partners from a single firm.
audit schedule 1. A formal list of auditing assignments determined by an internal audit function’s planning process. The audit schedule’s coverage may extend to long-term planning of three, five, or more years. 2. An alternative term for work paper.
audit shop An alternative term for internal audit function.
audit society A term coined by Michael Power to denote allegedly pervasive and negative influences of auditing practices in modern life. Power has elaborated the concept in, among other writings, The Audit Society: Rituals of Verification (1997), and has offered further reflections in the essay “The audit society—second thoughts” (Power, 2000). The notion of the audit society has links to the polemical theories of the critical accounting movement, and it is notable for disputing “official” justifications of the utility of auditing practices offered by the discipline’s professional associations. The concept of the audit society is complex and multifaceted, and only a handful of characteristics are summarized here. Michael Power casts doubt on the theoretical validity of standard auditing philosophies, suggesting that auditing is more a social construct rather than a scientific practice: “Auditability cannot be defined; it is negotiated” (1997, 81). He is also suspicious of many of the claims made of the utility of auditing, like the operational auditing notion of the Three E’s of economy, efficiency, and effectiveness. He suggests instead that auditing is often more parasitical than useful: The “audit society is a symptom of the times, coincidentally a fin de siècle, in which a gulf has opened up between poorly rewarded ‘doing’ and highly rewarded ‘observing’” (1997, 147). Power also claims that auditing fails frequently to live up to its audit trail • 37 own promises, descending instead into a hollow, self-serving activity of limited value to organizations: “At worst auditing tends to become an organizational ritual, a dramaturgical performance” (1997, 141). He also interprets the expansion of auditing as an indication of institutional and cultural decline, writing that the audit society “can be understood as a label for a loss of confidence in the central steering institutions of society, particularly politics. So it may be that a loss of faith in intellectual, political and economic leadership has led to the creation of industries of checking which satisfy a demand for signals of order” (2000, 188). Power’s depiction of the audit society is an articulate challenge to conventional wisdom of the utility of auditing, and it has been debated in great detail in the academic auditing literature. A special issue of the International Journal of Auditing (Vol. 4, No. 1, 2000) was devoted to its analysis. For many, Power’s arguments explain some of the roots of external auditing’s expectations gap. Further reading: Power (1994b); Power (1994c); Power (1997); Power (2000).
audit software 1. Computer software programs used to gather and evaluate audit evidence. Audit software can be used in several evidence-gathering ways, including (i) data sorting, (ii) sampling analysis, (iii) the performance of walk-through tests, (iv) the production of exception reports of nonstandard transactions, and (v) the generation of confirmation letters. See also computer assisted audit techniques. 2. Computer software programs used to document an audit. Audit software for this purpose includes the following standardized tools: (i) work papers, (ii) audit planning templates, (iii) flowcharting software, and (iv) audit report formats.
audit step 1. An alternative term for audit test. 2. An individual measure or action within an audit test. For example, the performance of a circularization of customers is a step within an audit test to establish the existence and accuracy of an organization’s accounts receivable balances.
audit test An action or procedure to gather and evaluate audit evidence. Audit tests are normally formalized in audit programs, and they may be classified into (i) substantive and (ii) compliance testing. Analytical review procedures are normally classified within substantive testing, and walk-through tests within compliance testing. The auditing of populations of transactions or other items is normally performed through the use of sampling techniques. See also inspection and observation.
audit trail An information flow that allows an auditor to trace the evolution of a transaction. The chronological evolution of a transaction originates in its underlying activity (e.g., an inventory movement, or a sale to a customer), and 38 • AuditTrends® a satisfactory audit trail is in place if the audit evidence of the transaction can be viewed in its entirety through to the general ledger. The verification of audit trails is important in both substantive and compliance testing. Walkthrough tests (a form of compliance testing) specifically focus on the adequacy of audit trails.
Audit trail Resolves the validity of an accounting entry by a step-by-step record by which accounting data can be traced to their source.
audit universe The total potential scope of work within an auditor’s remit. Audit planning involves the allocation of resources to individual auditable units within an audit universe, normally on the basis of a combination of the following: (i) materiality, (ii) risk assessment, (iii) a cyclical or rotational factor to ensure periodic coverage of every auditable unit, and (iv) requests from auditees. The audit universe of a multinational corporation, for example, may include the operational and financial activities of the individual overseas branches: An internal audit function may determine the frequency of audit assignments at individual branches from a balanced assessment of the four factors listed above.
Audit Vision A U.S. information technology auditing newsletter. Published monthly by Audit Serve Inc., and distributed by e-mail, Audit Vision offers news and guidance on computer security and related areas. Web link: www.auditserve.com/forms/newsletter.
auditability The feasibility of undertaking auditing procedures. Auditability is the first of the postulates of auditing elaborated by Robert Khun Mautz and Hussein A. Sharaf: It is, in effect, the prerequisite to auditing. If all the records of a transaction-intensive organization were irrecoverably lost in a fire, for example, the organization would in all likelihood be unauditable. Alternative procedures may be undertaken by the auditor in such circumstances (including the reconstruction of transactions by memory, or the confirmation of transactions by third parties), but it is highly unlikely that alternative procedures would lead to an unqualified opinion in the context of complete destruction of records. In a less extreme scenario, questions of auditability can arise from (i) inadequate cooperation from auditees and (ii) inadequate systems of internal control.
auditable unit An organization, operation, individual, or other discrete entity that can be subjected to an audit. During audit planning, an auditor determines an audit universe of auditable units, and dedicates appropriate levels of auditing resources to each unit. For example, the auditor of a multinational corporation may define individual overseas branches as auditable units. Within each overseas branch, the auditor may proceed to define a series of further auditable units along the lines of the purchasing and revenue cycles and other operational activities.
auditee An individual or organization subject to an audit. Contrast auditor.
auditing The process or action of undertaking an audit. Although the gerund auditing places greater emphasis on action than the simple noun audit, the two terms are largely interchangeable.
Auditing Practices Board (APB) The external auditing standards-setter in the United Kingdom. A subsidiary board of the Accountancy Foundation, the APB issues Statements of Auditing Standards and interpretative bulletins, which together comprise British Generally Accepted Auditing Standards. The APB in its current form was established in 2002, when it took over the responsibilities of a preceding organization of the same name. Web link: www.accountancyfoundation.com/auditing practices board/ index.cfm.
Auditing Roundtable A U.S. organization for environmental and health and safety auditing. Founded in 1972 and headquartered in Scottsdale, AZ, the Roundtable’s activities include publications and the issuing of Standards for the Performance of Environmental Audits. With the Institute of Internal Auditors, the Roundtable founded the Board of Environmental, Health & Safety Auditor Certifications in 1997. Web site: www.auditear.org.
auditing standard 1. Formal rules and guidance for external auditing. In the United States the Auditing Standards Board issues Statements on Auditing Standards, while the International Auditing and Assurance Standards Board of the International Federation of Accountants issues International Standards on Auditing. Formal auditing standards of this nature are the main component (in addition to legislation and custom) of Generally Accepted Auditing Standards. 2. The Standards for the Professional Practice of Internal Auditing of the Institute of Internal Auditors.
Auditing Standards Board (ASB) The external auditing standards-setter in the United States. A technical committee of the American Institute of Certified Public Accountants (AICPA), the ASB’s standards take the form of Statements on Auditing Standards (SAS). (It also issues Statements on Standards for Attestation Engagements, and Statements on Quality Control Standards.) The SAS are issued after public consultation and are binding on AICPA members who conduct external audits. In addition to promulgating standards in this way, the ASB also issues comments on and interpretations of SAS. See also Generally Accepted Auditing Standards. Web link: www.aicpa.org/members/div/auditstd/index.htm.
Auditing: A Journal of Practice and Theory A U.S. scholarly auditing journal. Established in 1981, it is published quarterly in print and online forc01. 32 • Auditing Practices Board mats by the American Accounting Association. The journal is scholarly in tone and focuses mainly on external auditing. Web link: http://accounting.rutgers.edu/raw/aaa/audit/pubs.htm.
Auditing: A Journal of Practice and Theory focus. For example, in one year the audit team may focus on the revenue cycle, while in the following year it may skew its tests toward the purchasing cycle. An internal audit function’s overall agenda may envision coverage of the audit universe within a recurring cycle of periodic audits, with different areas of focus in different time periods.
AuditNet® A Web-based auditing resource center. Established by Jim Kaplan, the AuditNet Web site describes itself as a “communications network for auditors.
auditor An individual or organization that performs an audit. Contrast auditee.
auditor independence See independence.
Auditor’s certificate See: Accountant’s opinion.
Auditor’s report A section of an annual report that includes the auditor’s opinion about the veracity of the financial statements.
auditor’s luck A semi-ironic term that refers to the inclusion in an auditor’s sample of an awkward or discomforting item. For example, an auditor may select a judgmental sample of twenty sales invoices taken from an accounts receivable ledger and discover a sale that exceeds a customer’s credit limit without appropriate internal authorization. The auditee may claim that the auditor has stumbled by chance across a rare exception, and dismiss the finding as the auditor’s allegedly uncanny ability to hit on unrepresentative items that cause auditee discomfiture.
Auditor’s Report, The A U.S. auditing newsletter. Published quarterly by the American Accounting Association, the newsletter focuses on academic and professional developments in auditing. Web link: http://accounting.rutgers.edu/raw/aaa/audit/auditorsreport.htm.
AuditTrends® AU.S. internal auditing consulting organization. Established in 1992 by James Roth, AuditTrends undertakes consulting services and seminars in internal auditing and corporate governance. Web site: www.audittrends.com.
Auditwire AU.S. auditing newsletter. Published bimonthly by the Institute of Internal Auditors (IIA), Auditwire alternates with the months of publication of the IIA magazine Internal Auditor. It is available online. The newsletter’s Web page states that it offers “perspectives on current and emerging issues and delivers news about the IIA and the people, events, and issues that shape the [internal auditing] profession.” Web link: www.theiia.org/ecm/newsletters.cfm?doc id=757.
Aunt Millie An unsophisticated investor.
Australian Stock Exchange (ASX) Australia’s major securities market, formed when the six state stock exchanges (Adelaide, Brisbane, Hobart, Melbourne, Perth, and Sydney stock exchanges) were merged in 1987.
Autarky Absence of a cross-border trade in models of international trade.
Autex Video communication network through which brokerage houses alert institutional investors of their desire to transact block business (a purchase or sale) in a given security. Indications transmit small, medium, and large sizes only, with occasional limits mentioned. Supers are messages with specific size and price included. Both “indications” and “supers” can be only seen by customers (institutional subscribers to Autex). Trade recaps, advertised block trades entered by the dealer/subscribers, are also displayed, but can be seen by both institutions and dealers. See: Expunge, size.
Authentication In the context of bonds, refers to the validation of a bond certificate.
Authority bond A bond issued by a government agency or a corporation created to manage a revenue- producing public enterprise. The difference between an authority bond and a municipal bond is that margin protections may be incorporated in the authority bond contract as well as in the legislation that enables the authority.
authorization The giving of approval or permission. Authorization is central to many of the internal controls found in modern organizations, from the making of disbursements to the hiring of employees. Authorization can be effected through written signatures or password-controlled access to transactions in a computerized information system. Authorization rights derive from the status of an individual in an organization, and are normally restrained by accountability for the exercise of the rights. avoidable cost • 39.
Authorized shares The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. This figure is usually listed in the capital accounts section of the balance sheet. Also known as “authorized stocks” or “authorized capital stock”. Usage: This number can be changed only by a vote of all the shareholders. Management will typically keep the number of authorized shares higher than those actually issued. This allows the company to sell more shares if it needs to raise additional funds..
Autocorrelation The correlation of a variable with itself over successive time intervals. Sometimes called serial correlation.
Automated bond system (ABS) The computerized system that records bids and offers for inactively tradedbonds until they are cancelled or executed on the NYSE.
Automated Clearing House (ACH) A collection of 32 regional electronic interbank networks used to process transactions electronically with a guaranteed one-day bank collection float.
Automated Customer Account Transfer (ACAT) For transfers of securities from a non-equity trading account to your equity trading account with your broker.
Automated Export System Electronic filing of Shippers Export Declaration (SEDs) with US Customs prior to departure.
Automated Order System (AOS) Investment bank computerized order entry system that sends single order entries to DOT (Odd-Lot) or to investment banks floor brokers on the exchange. See: Round lot, GTC orders.
Automated Pit Trading (APT) Introduced in 1989, APT is the LIFFE screen-based trading system that replicates the open outcry method of trading on screen. APT is used to extend the trading day for the major futures contracts as well as to provide a daytime trading environment for non-floor trading products.
Automated teller machine (ATM) Computer-controlled terminal located on the premises of financial institutions or elsewhere, though which customers may make deposits, withdrawals or other transactions as they would through a bank teller. Other terms sometimes used to describe such terminals are customer- bank communications terminal (CBCT) and remote service unit (RSU). Groups of banks sometimes share ATMs. Sometimes called Automated Banking Machines.
Automatic Data Processing (ADP) A private company that acts as an intermediary to perform proxy services for several banks and brokers. Distributes proxy material to beneficial owners, tabulates the returned proxies, and provides the Corporation or its tabulator compiled reports of the tabulation results. ADP also distributes quarterlyreports and other corporate information to the beneficial owners.
Automatic exercise A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.
Automatic extension An automatic extension of time granted to a taxpayer to file a tax return.
Automatic funds transfer A transfer of funds from one account or investment vehicle to another using electronic or telecommunications technology.
Automatic investment program A program in which an investor can invest or withdraw funds automatically. A mutual fund, for example, automatically withdraws a pre determined specified amount from the investor’s bank account on a regular basis.
Automatic reinvestment See: Constant dollar plan.
Automatic stay The restricting of liabilityholders from collection efforts related to collateral seizure. Automatically imposed when a firm files for bankruptcy under Chapter 11.
Automatic transfer service (ATS) account A depositor’s saving account from which funds may be transferred automatically to the same depositor’s checking account to cover a check written or to maintain a minimum balance.
Automatic withdrawal A mutual fund that gives shareholders the right to receive a fixed payment from dividends on a quarterly or monthly basis.
Autoquote Autoquote indicative prices are generated for many of the financialoptions contractstraded at LIFFE using standard mathematical models as derived by Black and Scholes and Cox, Ross, Rubinstein. Autoquote calculates prices for all series by processing variables captured in real-time from other systems and trading members each time the underlying price changes. Autoquotes indicate where a series may trade, given the current level of the underlyinginstrument.
Autoregressive Using past data or variable of interest to predict future values of the same variable.
Autoregressive Conditional Heteroskedasticity (ARCH) A nonlinear stochastic process, where the variance is time-varying, and a function of the past variance. ARCH processes have frequency distributions which have high peaks at the mean and fat-tails, much like fractal distributions. The ARCH model was invented by Robert Engle. The Generalized ARCH (GARCH) model is the most widely used and was pioneered by Tim Bollerslev. See: Fractal Distributions.
Auto-Regressive (AR) Process A stationary stochastic process where the current value of the time series is related to the past p values, where p is any integer, is called an AR(p) process. When the current value is related to the previous two values, it is an AR(2) process. An AR(1) process has an infinite memory.
Availability The period in which the project financing is available for drawdown.
Availability float Checks deposited by a company that have not yet been cleared.
Available cash flow Total cash sources less total cash uses before payment of debt service.
Available on the way in In context of general equities, stock is available to new customer as trade initiated by another customer is about to be consummated (on the exchangefloor). Usually said to an inquiring salesperson. See: Open.
Aval Term meaning inseparable from the financialinstrument. This gives a guarantee and is abstracted from the performance of the underlying trade contract: Article 31 of the 1930 Geneva Convention of the Bills Of Exchange states that the aval can be written on the bill itself or on an allonge. US Banks are prohibited from avalizing drafts.
Avalizor An institution or person who gives the aval.
Average An arithmetic mean return of selected stocks intended to represent the behavior of the market or some component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the current prices of the 30 DJIA stocks, and divides the results by a predetermined number, the divisor.
average A single number calculated to represent a set of numbers. The term average is popularly used as a synonym for mean, but it also covers the median and the mode. See also weighted average.
Average accounting return The average project earnings after taxes and depreciation divided by the averagebook value of the investment during its life.
Average age of accounts receivable The weighted-average age of all the firm’s outstanding invoices.
Average collection period, or days’ receivables The ratio of accounts receivables to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales 365).
Average cost In the context of investing, refers to the averagecost of shares or stock bought at different prices over time.
Average cost of capital A firm’s required payout to bondholders and stockholders expressed as a percentage of capitalcontributed to the firm. Average cost of capital is computed by dividing the total required cost of capital by the total amount of contributed capital.
Average daily balance A method for calculating interest in which the balance owed each day by a customer is divided by the number of days. See also: Adjusted balance method and previous balance method.
Average discount rate Purchaserstender their competitive bids on a discount rate basis. The weighted, or adjusted mean of all bids accepted in Treasury bill auctions.
Average down A strategy used by investors to reduce the average cost of shares, in which the investorpurchases more shares with a fixed amount of capital as the price of the shares decreases. The investor receives more shares per dollar and decreases the average price per share.
Average equity A customer’s average daily balance in a trading account at a brokerage firm.
Average life Also referred to as the weighted-average life (WAL). The average number of years that each dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal paydowns.
Average maturity The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average maturity.
Average rate of return (ARR) The ratio of the average cash inflow to the amount invested.
Average tax rate Taxes as a fraction of income; total taxes divided by total taxable income.
Average up A strategy used by investors to lower the overall cost of shares by buying as many shares with a given amount of capital in an increasing market. Buying $1000 worth of shares at $30, $35, $40, and $45, for instance, will make the average cost of the sharesx $36.65, lower than the average price of $37.50.
Average (across-day) measures An estimation of price that uses the average or representative price of a large number of trades.
Averaging See: Constant dollar plan.
avoidable cost An item of expenditure incurred at the discretion of the management of an organization. In contrast to a sunk cost, an avoidable cost can be incurred or avoided on the basis of a management decision. For example, potential rental fees for warehousing space can be avoided if management decides not to occupy the warehouse, or the raw material costs of a manufacturing process can be avoided if management decides not to produce the item in question. Avoidable costs can be variable or fixed in nature. See also unavoidable cost and controllable cost.
Avoided cost In context of project financing, the capital and expense that would have to be spent if the project did not proceed.
Away A trade, quote, or market that does not originate with the dealer in question, e.g., “the bid is 98-10 away from me.”
Away from the market In context of general equities, out of line with the inside market at this time, such as when a bid on a limit order is lower or the offer price is higher than the current market price for the security; held by the specialist for later execution unless FOK. Antithesis of in-line.
Away from us Used in context of general equities, to characterize role of a competing broker/dealer. Trading away from us signifies that stock is bought and/or sold with institutions using other tradingfirms.
Away from you Used for listed equity securities. See: Outside of you.
Axe to grind Used in context of general equities. Involvement in a security, whether through a position, order, or inquiry.
A-D Advance-Decline, or measurement of the number of issuestrading above their previous closing prices less the number trading below their previous closing prices over a particular period. As a technical measure of marketbreadth, the steepness of the AD line indicates whether a strong bull or bear market is under way.
