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Board Independence is Less Effective at Deterring Accounting Fraud in Family Controlled than in Publicly Held Corporations

An Annotated Bibliography by Todd Benschneider

Prencipe, Annalisa. Bar-Yosef, Sasson. “Corporate Governance and Earnings Management in

Family-Controlled Companies.” Journal of Accounting, Auditing and Finance. April 2011,

Vol. 26 Issue 2, p199-227. 29p. Database: Business Source Alumni Edition.

Annalisa Prencipe, PhD. and senior lecturer at SDA Bocconi School of Management with her team of researchers conducted a study of 249 firms to compare the quality (long-term sustainability) of profits in family controlled firms to earnings of publicly held companies. The study investigated the impact of “earnings management strategies” a term that The Journal of Accountancy defines as “the discretionary distortion of revenue, expense and depreciation schedules to optimize short term goals such as executive bonuses, budget targets or manipulation of stock prices.”  The results of the study were intended to provide accounting firms with new tools for identifying ratios and patterns that detect shareholder fraud in family controlled firms.

In publicly held firms strong incentives such as performance bonuses, performance reviews and salary bonuses lure executives to portray company financials in the most positive light, while concealing negative information from financial reports. However, over reporting earnings provides inaccurate feedback to the product development, finance and marketing departments who rely on accurate reporting to steer future products and operations strategy. Extended periods of inaccurate market feedback can undermine the long term economic health of the company. Stockholders can reduce mismanagement by electing an independent board of directors who hire, evaluate, supervise and fire top level executives to ensure that strategic decisions represent the shareholders’ best interest.

Prencipe explains that “A typical board structure is composed of outside directors and top company officers. Outside directors are appointed by the company’s shareholders and are assumed to be acting in the shareholders’ interests. However, the inclusion of top management among board members may give rise to a conflict of interest as management may attempt to transfer wealth from stockholders by taking advantage of information asymmetry. The results show that the increase in shareholder wealth is significantly higher when the board is dominated by independent directors.”

Recent trends in corporate governance now encourage firms’ directors to enforce accurate financial reporting. Board oversight can identify executives who exploit short range strategies that inflate profits to capitalize on performance bonuses. By the time the earnings management schemes unravel, the executives involved have often retired or moved on to other companies, which limits the legal recourse available to the stakeholders. Public demand in response to recently publicized investor fraud cases have prompted legislators to issue regulations that hold board members accountable to shareholders for fraudulent reporting of the executives they oversee. Regulatory changes in corporate governance have been eliminating the participation of company executives from the board of directors to reduce their influence over the boards’ objectivity, especially by eliminating CEO’s from also serving as the Chairman of the Board.

However, family controlled companies face different incentives to publish inaccurate financials, and further compounding the distribution of power, the CEO is often times also the largest stockholder of the company, entitling them to serve as the Chairman of the Board.  Prencipe wrote “Current literature suggests that, although founding family ownership seems to be associated, on average, with higher earnings quality, the extent of earnings management remains an open issue for family controlled firms. Since most families with controlling interest in their company possess a long term vision for growth and therefore make decisions that favor long range goals rather than boosting quarterly profits.”

Prencipe believes that while experts agree that there is less incentive for family controlled firms to over report earnings, that instead those companies manage earnings to secure the family’s controlling interests, minimizing the distribution of wealth to minority shareholders. She hypothesized that recent corporate governance restructuring would be less effective in family controlled companies whose self-interest lies in underreporting earnings, especially present in where the family also served in salaried executive positions by increasing family members bonuses or siphoning private benefits at the expense of other shareholders such as supplier kickbacks, travel expenses and other concealable business write offs.

The study was expected to validate previous research that had shown a lower incidence of earnings management under a board of directors with independent decision making authority, especially those boards lacking a CEO chair holder.  A board possessing low levels of independence has many of the company executives voting on board decisions, with the CEO also serving as the chairman of the board. In cases of a highly independent board the CEO does not hold a seat and possesses only subordinate levels of authority in regulating corporate accounting. However this study would specifically compare results from widely held public corporations against those from private firms and measure the estimated earnings management strategies present in the financial reports. Levels of earnings management in the companies would be calculated from a fraudulent accounting indicator: abnormal working capital accruals (AWCA).

Prencipe and Bar-Yosef conducted a study of Italian corporations by applying AWAC audit calculations to a sample of 249 Italian corporations consisting of four publicly traded corporate governance structures:

1-      Family Controlled with CEO on the Board of Directors

2-      Family Controlled with no executives on the Board of Directors

3-      Publicly Held with CEO on the Board of Directors

4-      Publicly Held with no executives on the Board of Directors

The intent of their study was to see if a correlation could be found that suggested that any of these four governance structures yielded a higher quality long range financial growth. The results validated several previous studies that found higher quality earnings generated by publicly held corporations with a highly independent board of directors. The results also supported Prencipe’s hypothesis that family controlled firms outperformed publicly held firms in earnings quality; however there was a less pronounced advantage to private firms with a highly independent board when compared to public firms with an identical governance structure.

Prencipe’s closed her article with:

“Our conclusions may lead regulators and academics to reevaluate the effectiveness of some corporate governance models when applied to family controlled companies. In particular, our results suggest that regulators should pay special attention to the selection of board members. For the benefit of all shareholders, it is important to guarantee substantial independence of the board. Our results are also useful to users of financial statements, suggesting that a company’s ownership structure and its corporate governance characteristics should be taken into account when accounting numbers are used.”

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Managers Rationalize Ethical Dilemmas in Accounting Fraud

An Annotated Bibliography by Todd Benschneider

Johnson, Eric. Fleischman, Gary et al. Managers’ Ethical Evaluation of Earnings Management                         

              And Its Consequences. Contemporary Accounting Research. Fall 2012, Vol. 29 Issue 3,                                         p 910-927. 18p. Database: Business Source Premier.

A 2012 study performed by the Universities of Wyoming and North Dakota questioned 264 experienced managers with a hypothetical ethics scenario. The researchers wanted to discover whether “The ends of positive consequences justify the means of earnings management?” in current managers. To test the idea, managers were given a hypothetical scenario of measuring the scale of severity that upper managers would reprimand lower level managers who were found to be managing earnings reports to increase  salary bonuses. Fleischman wrote “Our findings suggest that the current generation of managers have a tendency to behave as if the end justifies the means, which raises the issue of rationalization of unethical conduct.”

Earnings management is defined by the Journal of Accountancy as “the discretionary distortion of revenue, expense and depreciation schedules to optimize short term goals such as executive performance bonuses, budget objectives or the manipulation of stock prices.”   Earnings management typically involves optimizing of income and expense schedules to achieve short term benefits resulting in salary bonuses and positive evaluations, often resulting in negative consequences for the firm. Biasing earnings reports to achieve short range goals can disrupt market feedback, product development, production, and customer relations in the supply chain.

The study was broken into four separate hypothetical scenarios which found that the managers surveyed agreed that the practice was unethical; however, the positive or negative impact on the firm’s profits was factored into how severely they would reprimand the subordinate manager. The study found that managers overall viewed unethical management practices less negatively if the behavior resulted in a positive short term benefit to the firm. The study suggests that the foundation is detected for the ethical dilemma of “incrementalism” where an acceptance of minor unethical practices gradually lead to large scale corruption and loss of investor confidence.

The researchers surveyed 264 participants who were currently employed in business management positions while enrolled in working adult MBA programs at a variety of universities. The hypothetical situation each manager assessed involved one of the four following basic situations which resulted in either positive or negative repercussions for the firm.

The initial hypothetical situation below presents the subordinate as the originator of the unethical behavior:

“Terry Patton, an automobile dealer manager that you supervise, is anxious to maximize his incentive compensation that is based on budgeted net income for the dealership. Terry receives a higher bonus if he achieves 120 percent of this target, and a lower bonus if he achieves only 80 percent of this target. The sliding scale between these two performance extremes is not linear and encourages achievement of net income in excess of the budget (100 percent). Terry calculates that if he accelerates or delays revenues and expenses to increase the variability of his dealership’s net income over time he will, on average, receive higher bonus income than if he does not manage revenues and expenses.”

The study then presents one of the following two consequences to Terry’s strategy:

  1. Positive Outcome – “Terry tells his friends at dealerships for another company about his compensation strategy and is able to convince these very able managers to join Terry’s company because the compensation is so much more attractive. This causes Terry’s company as a whole to become better managed and 18% more profitable this year.”
  2. Negative Outcome – “Terry tells his friends at other dealerships within the same company of his plan and they also engage in the managing of revenues and expenses, which cause the company as a whole to experience an 18 percent decline in profitability for the year, which is discovered could be solely attributed to Terry’s strategy.”

The alternated basic scenario involves the subordinate Terry being the whistleblower of the bonus manipulation plan described above of other dealer managers: “Terry Patton, an automobile dealer manager that you supervise, has overheard other dealer managers at other locations within Terry’s company discuss their incentive compensation maximizing strategy.” Following this basic story line the participant is presented then offers one of the two following outcomes:

  1. Terry brought up the practice at a dealer managers meeting and discouraged this manipulation. He obtained support from some managers but criticism from others. Over the next twelve months the company as a whole was 18 percent more profitable because those managers that stopped manipulating their dealer net income based on Terry’s recommendation.
  2. Terry brought up this practice at a dealer managers’ meeting and discouraged this manipulation. He obtained support from some managers but criticism from others. Some talented managers were so upset by Terry’s comments that they left the company, which suppressed overall company profitability by 18 percent this year.

The study found that either case, being the supervisor of the conspirator or of the whistleblower that the managers surveyed would have reprimanded the hypothetical subordinate “Terry” more harshly in situations which resulted in losses to the annual profits than in identical dilemmas resulting in improved annual profits. These findings support their hypothesis that in terms of ethics, the management participants surveyed would lean toward “the end justifies the means” attitude to management in ethical dilemmas.

Researcher Eric Johnson concluded: “Our findings suggested that, overall, the ethical nature of an act had the greatest influence on manager judgment of the act and the intention to intervene, however positive organizational consequences significantly reduced the reprimand. This finding answers the question: the end did justify the means. In addition to advancing literature on the ethics of earnings management, these results also provides empirical support for understanding how managers actually respond to such ethical dilemmas, rather than stating what they should do.”

Enron Collapse: A Case Study in Audit Failure

August 29th, 2015

News broke in October of 2001 that energy conglomerate Enron was declared insolvent; the story that followed revealed the largest case of accounting fraud in history. As a result, Enron declared bankruptcy and one of the nation’s largest accounting firms Arthur Anderson was forced out of business. Analysts were shocked to discover how long Enron had been able to manipulate its reported earnings without discovery by auditors or the board of directors (Catanach. 2012).

Today it is still uncertain whether auditors from Arthur Anderson’s Houston office were compensated to overlook the numerous accounting discrepancies or instead, simply unqualified to decipher the unique accounting procedures developed by the Enron management. The catastrophic loss to shareholders and employees pensions serves as a warning to auditors of the devastation that inadequate accounting procedures can cause (Mclean. 2001).

As a result of the intentional manipulation of reported profits, sixteen Enron executives were convicted of defrauding investors. The primary defendant, company founder and financial advisor to President Busch: Kenneth Lay was sentenced to 45 years for his crimes, but died of heart failure before serving his sentence. CFO Andrew Faustow cooperated with SEC investigators and was sentenced to 10 years without parole for insider trading, tax evasion and defrauding investors. CEO Jeffrey Skilling was sentenced to 24 years. Accounting firm Arthur Edwards and several key employees were convicted of obstructing justice by shredding thousands of pounds of documents and deleting thousands of emails as the scandal made the news. The Arthur Anderson employee convictions were later overturned by US Supreme Court (Mclean. 2001).

The combined losses of over $150 billion dollars to shareholders, creditors and employee pension funds negatively impacted the US economy in a sum equal to that of every American man, woman and child losing $533 for 2002. Public outcry over corporate irresponsibility resulted in the drafting of the Sarbanes-Oxley Act of 2002 which was created to address every loophole that Enron used to elude detection. Today SOA regulations dictate many of the federal accounting reporting standards and policies. Despite SOA guidelines, many privately held companies and several major publicly held companies continue to fail after earnings management schemes unravel (Jain. 2013).

The catalyst to Enron’s aggresive cycle of earnings management tactics was ignited by the deregulation of the electric power industry in the years prior to the scandal. With newfound freedom from government oversight, Enron management was able to sell hedge contracts on energy futures and report hedge values as actual sales; this practice greatly overstated annual revenue and gave the illusion of record breaking growth and profits. Enron management gradually created a highly competitive corporate culture that rewarded high performing employees for generating short term solutions that would make the company look good in quarterly reports and continue to attract investors and drive stock prices. Many employees even at lower and middle management received large percentages of their salary as stock options for hitting bonus levels or at least creating the illusion of achieving performance goals (Watkins. 2002).

The sheer complexity of accounting the true values of energy futures hedging using market to market costing and uncovering the management earnings schemes that were created by the 20,000 employee army who were all being encouraged to boost their bonuses by finding creative ways to manipulate Enron’s stock prices (Helman. 2013). The corporate culture snowballed out of controlled as management began to actively recruiting new hires who showed promise of financial creativity and also held flexible attitudes towards ethics, with this strategy the managers of Enron were able to create an ingenious army of professional corporate swindlers, and provided them a rich environment to capitalize on those talents. These and other factors created an accounting system so elaborate and deceptive that investigators had difficulty uncovering the flow of cash even after the scandal unraveled (Watkins. 2003).

Enron for several of their final years poached the best and the brightest performers from competing firms by offering salaries at twice the market rate being offered by competitors. Recruiting top talent combined with a policy of automatically culling the lowest 15% performers from the workforce every year generated a culture where every employee carefully avoided  bearing bad news and their mistakes or losses were swept under the rug to protect jobs (Watkins. 2003).

Not only were the salaries aggressive but perks and extravagant expense accounts made available jobs at Enron highly sought after. This ultra-competitive culture pushed all employees to find creative and innovative ways to inflate their own contributions to the company’s bottom line, at least for short term gains with little regard for long term repercussions (Jain. 2013).

A recurring theme to Enron’s development was the massive expansion into industries and locations that Enron was poorly equipped to compete in. The corporate background in supplying natural gas to the western US could not have prepared them for the projects they would undertake such as building a $900 million power plant in India that failed to ever produce revenue after disagreements with the government of India. Another failed “get rich quick scheme” was the Wessex Water Co in England which Enron paid $3 billion for and then offered its shares to the public in an IPO which lost nearly $100 million per month until its collapse in August 2000 (Watkins. 2003).

Possibly the nail in the Enron coffin was their overconfidence in their ability to provide the distribution of utilities to the public. In 20000 Enron invested billions in fiber optic technology to provide cable television and internet to over half the households in the US. The fiber optic division managed to lose over $10 million per month (Catanach. 2012)

Enron initially built a track record of performance while under the guidance of CEO from 1990-1996 Rich Kinder, a business attorney, who in comparison was credited for his conservative management style. Under Kinder’s leadership Enron earned much of the credibility that would later be used to attract investment capital and industry credibility. The talents of Kinder are later substantiated as the driving talent, as he later went on to build multibillion dollar energy conglomerate Kinder-Morgan (Mclean. 2001).

The rise and fall of Enron ends with the losses in billions of dollars to defrauded investors. These losses resulted from a decade of greed driven earnings management schemes that enabled Enron employees to participate in a Ponzi like deception of stockholder funds. A corporate culture is created from the top down and exaggerated by recruiting and hiring policies. One of the defining points of Enron’s downward spiral was hiring the most intelligent candidates who also exhibited a moral flexibility toward earnings management policies and held a Robin Hood disdain for constrictive industry regulations. While it is important that we hone our auditing policies to detect earnings management schemes such as those at Enron, we cannot overlook that a recurring theme is the human resources failure to screen out candidates who would overlook long term sustainability for personal gain for their share in the corporate greed (Watkins. 2003).

Work Cited

Catanach Jr., Anthony H., and J. Edward Ketz. “ENRON Ten Years Later: Lessons To       Remember. (Cover Story).” CPA Journal 82.5 (2012): 16-23. Business Source Premier.

Helman, Christopher. “10 Reasons Why Houston No Longer Cares About Enron Or Whether          Jeff Skilling Gets Out Of Jail Early.” Forbes.Com (2013): 1. Business Source Premier.          Web. 10 Jan. 2014 Web. 10 Jan. 2014.

Jain, Pravin. “Confessions Of An Enron Executive: We Lacked Finesse.” Emergence:           Complexity & Organization 15.2 (2013): 104-109. Business Source Premier. Web. 10 Jan.           2014.

Mclean, Bethany, et al. “Why Enron Went Bust. (Cover Story).” Fortune 144.13 (2001): 58-68.           Business Source Premier. Web. 10 Jan. 2014

Watkins, Thayer. “The Rise and Fall of Enron” 2003.            Web. http://www.sjsu.edu/faculty/watkins/enron.htm

Continued Consumer Resistance to Fuel Efficency Technologies

12/09/2012 EPA policies that affect the economy become front page news in an election year and the hot topic for 2012 is the Corporate Average Fuel Economy (CAFE) revisions, which automakers to improve average automobile fuel economy from 29 mpg to 54.5 mpg over the next 13 years. Agreements to these revised fuel efficiency standards were concessions made by automakers during the industry bailouts of 2009. In the backlash of that federal bailout, critics have been quick to fault American manufacturers for their lack of long term planning. However, in defense of management strategy, the automakers have for decades, simply been doing what profitable businesses do best, responding to consumer demand (Vlasic).

The press often suggests that domestic auto sales recovery will depend on the fuel economy of the products that manufacturers can provide. These critics assume that consumers make purchase decisions using primarily math and logic, those of us in the auto industry experience first hand purchase motives that are much more closely akin to the process of purchasing fashions or artwork. To most Americans, their car is a part of their self-image, not just a tool that converts dollars into miles traveled. Journalists such as News-Herald’s John Lasko write articles that with opening lines such as, “With gas prices hovering near $4 a gallon, many are opting to trade in their gas-guzzlers for more fuel-efficient vehicles.” With news headlines like those, it is easy for the public to conclude that the US automakers lack of sales was due to its heavy reliance on gas guzzling models. However, those assumptions are based on popular ideas that the domestic manufacturers previously lacked the capability to produce fuel efficient vehicles. In their defense, the simple reality remains, the automakers must make their first priority to produce those vehicles that sell well in the domestic market.

The critics overlook the 3 million Chevrolet Chevettes that were produced between 1976 and 1987 or its domestic counterparts, the Plymouth Horizon and the Ford Fiesta that provided fuel efficiency equal to most economy cars on the market today. For example, the Chevrolet Chevette was for nearly a decade, the American flagship economy car, selling millions by providing a real world fuel economy of 25 city/ 30 hwy, or with a popular diesel engine option reaching 33 city/41 hwy. The Chevette was sold with a base price, that inflation adjusts to about $11,000 in today’s dollars and consistently surpassed the fuel economy ratings of it’s main Japanese competitor, the Toyota Corolla by nearly 2 mpg for nearly a decade.

Compare those cost and fuel efficiency ratings to today’s most economical products available in the US, the Korean made 2013 Hyundai Accent with an MSRP of $10,665 that is rated at 29 city/39 hwy. The comparison of these cars in the context of the 25 years of technology that evolved between them should dispel assumptions that Asian economy cars have enjoyed decades of superiority in fuel economy (fueleconomy.gov). However, in the American car market, every one of those fuel sipping economy cars was discontinued in the late 1980’s when sales dried up as the pendulum of automobile fashion swung toward a return of larger and more powerful transportation, with the introduction Sport Utility vehicles and the return of V8 powered high performance sedans.

By 1990, it became increasingly uncool to be seen in fuel efficient cars, American auto fashion began to enter the age of the 1993 Jeep Grand Cherokee, offering a taller ride height for a better visibility in traffic and providing the owner with a sense of safety and rugged capability. The Grand Cherokee became the benchmark to measure style popularity, marketed with an image of recreational outdoor travel and adventure rather than previous trend for  economical commuter transport. These mid-sized all terrain Sport Utilities grew especially popular with female buyers in northern states, at the same time four door 4×4 pickups became increasingly popular with young male buyers seeking that “Eddie Bauer” outdoorsy image.

Critics often ignore the strategic decisions that allocated research and development funding away from fuel economy and directed budgets to safety, performance and durability to meet the consumer demand curves. Over the past 15 years the average vehicle age alone has grown by a third to 10.8 years old with advancements in vehicle durability (USA Today).  Additional progress that was made during that period to improve braking distances and implement crash avoidance technology reduced accident frequency and cut the percentage of crash fatalities in half.  In an effort to appeal to consumer demands for more powerful accelerator pedals, 0-60 acceleration times have improved by over 40%. And to counter the reliability critics of the domestic cars from the 1980’s, the inflation adjusted annual maintenance costs have dropped by more than 80% (NADA.COM).

Today even after the industry collapse, American manufacturers once again dominate automobile industry technology development, General Motors again was ranked the 2011 No. 1 innovator in automotive patents by US patent board (Tuttle). However, consumer demand trends in automobiles are similar to those in fashion, with opposing trends recurring in 10 year cycles, such as style trends toward skinny jeans from bell bottoms and short carefully styled hair to today’s bushy headed natural hairstyles. Sociologists attribute 10 year style cycles to be dependent on the needs for generational self-image, as each generation makes fashion and identity statements to differentiate them from the previous generation.

Business Times writer Brad Tuttle suggests that the fuel economy trend that began in 08 will continue to gain momentum:

“A new True Car post traces the average miles-per-gallon rise among new cars sold

in the US… all of the top seven automakers posted dramatic year over year

increases in average miles per gallon. In 2011 the average new Ford got just 17.3

mpg compared with 22 mpg in February of 2012 … the rise comes primarily as a

result of Ford doubling sales of small cars such as the Fusion and Focus”

However, despite increases in economy cars sales, auto sales as a whole have risen, the demand is also increasing on 5 year old full size SUV’s. According to industry writer Nick Bunkley,

“Retail prices for five-year-old full size S.U.V.’s are 23 percent higher than a year ago

according to Edmunds.com, an automotive information Web Site. That is more than

double the average price increase of 11 percent for all five-year-old vehicles.”

One thing is constant in the automobile industry, vehicle selection is an emotional decision more than it is an economic one. Customer buying motives first and foremost are influenced by how the vehicle makes them feel, a vehicle becomes one with the driver, it can allow them to feel bigger, more secure or more powerful.  I recently encountered a perfect case that really defined the influence of self-identity on vehicle selection.

Carolyn, a 60 year old widow and retired guidance counselor arrived at our Buick-GMC showroom in a well maintained, three year-old, luxury four wheel drive truck. Carolyn had gotten a letter from our used car department that high demand for trade-ins like her truck had currently driven trade-in values up thousands over the previous year. The letter encouraged her to consider upgrading soon, to take advantage of current trade in values for used 4×4’s.

The timing of the letter was perfect for Carolyn, since she had recently moved to Florida from the Midwest and no longer had the need for wintertime four wheel drive; to further complicate matter the garage of her new condo also couldn’t accommodate the truck. She explained when she arrived, that she really wanted to reduce her fuel budget and downsize into one the new hybrid Buick Regal sedans she had been reading about in the newspapers, rated for twice the fuel economy of her truck.

Over the following week Carolyn test drove over a dozen of fuel efficient sedans from ours and different dealerships including the Hybrid Regal that she initially planned to purchase. Despite our best efforts to persuade her to choose our last remaining hybrid, she instead opted to buy the high performance Regal T Type, performance sedan, that ironically provides a only a slight fuel economy advantage of 15% over the truck she was trading in and was priced thousands higher than the $28,000 hybrid version.

Carol admitted that when driving the cars rated highly for fuel efficiency she felt as if she had sacrificed the power that she was accustomed to and those low powered cars made her feel old and slow behind the wheel, she insisted that she “wasn’t ready to feel like an old lady toodling down the right lane, holding up traffic”. Carol’s time behind the wheel of the Regal Turbo made her feel young and put a smile on her face every time she pushed down on the accelerator pedal. For the sake of “feeling young” she was perfectly content to pay an extra $90 in monthly car payment for the high performance engine and luxury options and also disregard the $65 month in fuel savings that the hybrid version offered.

Think of the vehicle choices by comparing it to an airplane selection; imagine choosing between airplanes, where you could select a 2 seat Cessna that might make you feel like buzzing mosquito, or for another $150 a month you could pilot the F-16 fighter jet or a Boeing 747 to work, ….to you which of those options excites you?. The difference it capability seems huge and the difference in increased fuel costs may only be an additional $100 a month. The thrill of becoming something larger and more powerful and the status that comes with that ownership has an attraction beyond what can be measured in simple terms of transportation costs per mile. American buyers have consistently demonstrated that they are willing to sacrifice a larger part of their income to enjoy vehicles that provide them with excitement.

Current sedan trends are being influenced by the fuel efficient designs from Asian manufacturers that were designed to handle the high taxes on Japanese gas and the shortage of open roads on the islands of Japan. Understanding the American tastes requires us to understand the differences in our driving habits, many countries do not have the smooth open roads that American can enjoy, foreign drivers are often limted in their ability to appreciate American tastes for size and horsepower. However in Australia, which has road systems similar to the US, they have a huge market for large SUV’s, trucks and big engined cars. During the 1990’s many Japanese automakers began to design vehicles to cater to the American market, large gas guzzlers like the Nissan Armada, Toyota Sequoia and Honda Ridgeline ensured import survival during the SUV years, and most notably those Japanese trucks and SUV’s suffer from slightly lower fuel economy ratings than the American SUV competitors.

It has been easy for the press to fault American automakers for their lack of vision in developing economy vehicles, and to blame management for not remaining competitive in fuel efficiency technology. However, despite almost a total lack of advertising dollars for large engine SUV’s, compounded by the handicaps of stale aged out designs and a decrease of discounts offered on the large SUVs, the demand for large SUV’s is climbing back to nearly 2008 levels despite continued fuel cost nearing $4.

Over the past 30 years, American consumers have voted with their wallets, which indicated that fuel economy has been considerably less important than size, safety, reliability and performance. The challenges that lie ahead are not building smaller, less powerful cars as much as directing energy saving technology development at the powerful SUV’s, light trucks and spirited sedans that American consumers demand.

Because for many Americans the automobile is more than simple transportation, it is as much an entertainment and fashion decision as a financial decision, and many of those Americans have proven for decades that they are perfectly willing to pay a premium to enjoy a few more smiles-per-gallon.

Work Cited

Bunkley, Nick. “As Car Owners Downsize, the Market Is Strong for Their Used S.U.V.’s.” New

                        York Times. 07 2012: n. page. Web. 7 Nov. 2012.

“Side By Side Economy Comparison.” fueleconomy.gov. US Environmental Protection Agency,

07 2012. Web. 7 Nov 2012.

Lasko, John. “Gas Prices Have Car Makers, Sellers, Buyers Looking at Fuel Efficiency.” The News

                       Herald. 30 2012: n. page. Web. 7 Nov. 2012.

. “Guidelines.” nada.com. National Automobile Dealers Association, 07 2012. Web. 7 Nov 2012.

Tuttle, Brad. “Even with $4 Gas, Few Drivers Choose Electric Cars – Or Even Hybrids.” Business

                          Time. 12 2012: n. page. Web. 7 Nov. 2012.

Vlasic, Bill. “U.S. Sets Higher Fuel Efficiency Standards.” New York Times. 28 2012: n. page. Web.

7 Nov. 2012.

“Our Cars are Getting Older, too: Average Age now 10.8 years.” USA Today. 01 2012: n. page.

Web. 7 Nov. 2012..