The purpose of this study was to try to identify the impact of ambiguity and risk on the auditor's judgment about inherent risk and control risk when planning the audit. A second purpose was to determine how ambiguity tolerance/intolerance affects judgment.
Auditors form judgments by integrating the evidence they gather with information stored in memory (knowledge). As they acquire experience, auditors have the opportunity to learn how different patterns of evidence are associated with particular audit problems. Research in experimental psychology has demonstrated that individuals with task-specific experience can match the cues they encounter with patterns they have learned, and form judgments without consciously analyzing the individual cues. Accounting researchers have suggested that auditors develop judgment templates through task-specific experience, and that these knowledge structures automatically provide decisions in familiar situations. I examined whether auditor knowledge leads to reliance on judgment templates. To test this thesis, I synthesized a theoretical framework and developed research hypotheses that predict relationships between task-specific experience (my surrogate for knowledge) and (1) measures of cognitive effort, (2) accuracy of residual memory traces, and (3) performance with respect to identifying potential problems. To test these predictions, I provided senior auditors with comprehensive case materials for a hypothetical client and asked them to use analytical procedures to identify potential audit problems. Subjects acquired information and documented their findings on personal computers using software that I developed to record their activities.
This dissertation presents empirical evidence intended to help answer two research questions. The first question asks whether executive compensation systems appear to exploit the bias in accounting-based performance measures in order to reduce the volatility in executive compensation and to allocate incentives more effectively across the range of activities performed by the executive. The second question asks whether compensation systems systematically differ between firms that use alternative accounting methods and whether any such systematic difference helps explain accounting choice. Parameters estimated in fixed-effects endogenous switching regression models were used to test the risk-shielding and incentive-allocation hypotheses. The models were estimated across a dataset consisting of 1151 executive-year observations of annual compensation paid to 222 top-level executives in 40 oil and gas firms. The dataset was partitioned by accounting method and separate models estimated for the full cost and successful efforts partitions. The tests provided modest support for the risk-shielding and incentive-allocation hypotheses, revealing that accounting measurement bias is used to focus incentives for effort in the exploration activity and to reduce executives' exposure to production risk. The design also allowed an estimate of the proportional change in compensation that was realized from the accounting choice actually made.
This study extends a research stream calling for further research regarding pricing and accounting feedback. Marketing executives rely heavily on accounting information for pricing decisions, yet criticize accounting feedback usefulness. To address this criticism, this research integrates the cognitive psychology and accounting literature addressing feedback effectiveness with pricing research in the marketing discipline. The research extends the scope of previous accounting feedback studies by using a control group and comparing two proxies of subject task knowledge; years of pricing experience and a measure of the cognitive structure of pricing knowledge. In addition, this research manipulates task complexity by using two different accounting systems. These systems vary in the number of cost pools used in allocating overhead, resulting in differentially projected cost and profit information. A total of 60 subjects participated in a computer laboratory experiment. These subjects were non-accountants with varying amounts of pricing knowledge. Subjects were randomly assigned to six experimental groups which varied by feedback type (no accounting feedback, outcome feedback only, or a combination of outcome and task properties feedback) and task complexity (high or low number of overhead cost pools). The subjects attempted to (1) maximize profits for a product during 15 rounds of pricing decisions, and (2) accurately estimate their profit for each round. The experimental results indicate no difference in performance between the three feedback types examined. However, increases in both subjects' pricing knowledge and the number of cost pools do influence feedback effectiveness. This study suggests that the amount of the users' task knowledge may influence the effectiveness of current accounting reports. In addition, increasing the number of cost pools in accounting systems may be beneficial for all users.
This study examined whether three reserve-based quantity replacement measures and three reserve-based value replacement measures have incremental information content beyond that of historical earnings and its cash and accrual components. This study also examined whether the cash and accrual components of earnings have incremental information content beyond that of earnings.
The primary objective of this dissertation is to determine the factors that have shaped the corporate financial reporting practices in Bahrain. Prior researchers have offered two explanations, environmental factors and cultural importation, for the emergence of financial reporting practices in developing countries. The environmental explanation suggests that a nation's financial reporting practices will be shaped by its socioeconomic structure. The cultural importation explanation states that the desire for international legitimacy creates incentives for developing nation to adopt Western financial reporting practices. Bahrain provided an excellent environment in which to examine the two explanations since its public and closed corporations have similar economic characteristics. Only public corporations are legally required to publish financial reports. I posited that public corporations would try to gain legitimacy for their published reports by adopting Western standards, while closed corporations would not have a similar incentive. I used an interpretive framework to analyze the Bahrain socioeconomic environment and to examine the general financial reporting practices of Bahraini corporations. I found that closed corporations provided data responsive to the Bahraini environment. Public corporations, however, adopted International Accounting Standards. My analysis supported prior researchers7 findings that colonialism, the need for international legitimacy, and international audit firms were important factors in gaining acceptance for Western accounting practices. The adoption of Western financial reporting practices may be dysfunctional to a developing nation like Bahrain if these practices do not provide relevant information about corporate performance. Therefore, Bahrain, as well as other developing countries, needs to proceed cautiously before adopting Western corporate reporting practices.
The purpose of this research was to examine the United States population of plans with over 100 participants to determine the extent of the reaction away from defined benefit plans resulting from the 1986 and 1987 legislation.
Many corporate managers elect to adopt a new Statement of Financial Accounting Standard (SFAS) early instead of waiting until the mandatory adoption date. This study tests for evidence that managers use early adoption as an earnings management tool in a manner consistent with one or more positive accounting theories.
This research examines the assertions made by Johnson and Kaplan (1987) that cost accounting lost relevance after 1925 due to the dominance of financial accounting, to an academic preoccupation with financial accounting, to the disappearance of engineers and to a managerial emphasis on financial measures of net income and earnings per share. Additionally, the research looks at environmental effects on cost accounting, both economic and governmental.
This study uses concurrent verbal protocol analysis to examine the decision processes of lenders as they evaluate the financial information of a loan applicant. Of specific interest is the lenders' use of Statement of Financial Accounting Standards Board No. 95 (FAS 95), Statement of Cash Flows, in that decision process.
The study addresses whether differently ordered accounts receivable workprograms and task experience relate to differences in judgments, confidence levels, and recall ability. The study also assesses how treated and untreated inexperienced and experienced auditors store and recall accounts receivable workprogram steps in memory in a laboratory environment. Additionally, the question whether different levels of experienced auditors can effectively be manipulated is also addressed.
This historical study examines the evolution of the accounting system of the Quincy Mining Company between 1846 and 1900. The external financial reporting practices and internal accounting procedures of the firm are defined and interpreted in the context of three time periods that portray the formation, growth and maturation of the firm. Each period reflects unique economic and social conditions that are associated with changes in the firm's accounting system. A cross temporal analysis of these changes highlights three factors: the relationship between the accounting system and the labor force, the emergence of accounting as a control mechanism and the diminishing informational content of the firm's annual reports. Primary sources are used to document the perspectives of the Quincy management and to assess the motivations for accounting processes such as internal control, auditing procedures, responsibility centers and other managerial practices. This study addresses the inherent nature of accounting information and its relationship to the economic and social environment of an individual firm in the nineteenth century.
The purpose of this study was to identify company characteristics associated with the presence of disclosures regarding internal control in the annual report. Gibbins, Richardson and Waterhouse  have developed a framework from which to examine financial disclosure,. These authors define two dimensions of a company's disclosure position; opportunism and ritualism. I examined the association between variables representing the dimensions identified by these authors and a company's decision regarding disclosure of a management report on internal control. I compared specific characteristics of companies disclosing this information to those of companies not disclosing. The dependent variable represented the presence or absence of disclosure. I used logit analysis to test the significance of the chosen characteristics relative to the decision to include or exclude a management report on internal control in the annual report. My results were consistent with the existence of ritualism with respect to this issue. Reporting on internal controls was associated with membership in the Financial Executives Institute, auditor choice, certain industry designations and prior inclusion of such a report. FEI membership was closely related to initial reporting decisions as well'. I found evidence of opportunism as well. The likelihood of reporting on internal controls was related to company size (and presumably control strength), and growth rates. I also found an association between reporting and the issuance of publicly traded securities in the succeeding year and more moderate levels of debt relative to an industry average. In addition, I found that initial reporting decisions were associated with external events relating to potential legislation of the reporting issue. This research provides insight into the corporate response to reporting on internal controls.
George O. May's (1952) prescient statement that "if accounting had not already become, it was well on its way to becoming a political phenomenon" provides the motivation for this study. Changing socioeconomic relationships in the post-World War II period make it an ideal period to examine the politicalization of accounting. Keynesian economic policies justified active government intervention in the economy to manage demand and ensure full employment. No longer could it be assumed that competitive market forces would ensure that corporations produced goods and services at a socially optimal level or that income would be distributed equitably. Claims that accounting profit provides a measure of managerial efficiency are based on these premises. This dissertation examines the political dynamics of one particular accounting measurement debate--the debate over the determination of business income. Policies, such as wage/price controls, the excess profits tax, and the undistributed profits tax, brought the accounting income determination debate to center stage. The perseverance of the historic cost allocation model in the face of significant economic changes presents a fascinating glimpse of the important role accounting played in justifying continued reliance on the private property rights paradigm. I use retrodiction (reasoning from present to past) to examine why the historic cost allocation model has been so enduring. In my examination, I use personal correspondence, transcripts of Congressional hearings, published financial statements, and relevant journal articles. My analysis indicates that, while accountants empathized with managers who claimed that inflation distorted reported earnings and recognized that a serious measurement scale issue existed, they also recognized that abandonment of historic cost would not be politically feasible. If accountants had adopted a strongly partisan position that favored management with respect to bargaining with labor, this could have undermined the profession's claim to neutrality and opened the standard-setting process to closer political scrutiny. ...
This study explores how the Egyptian socioeconomic factors impacted the implementation of International Accounting Standards (IASs) in Egypt. Prior research concluded that developing nations have special needs when it comes to accounting and financial reporting and recommended nation-specific analysis. The author adapts Gray's (1988) model, which connects Hofstede's cultural dimensions with accounting practice, to fit the Egyptian environment.
The author examined whether contextual variables impact internal auditors' self-assessed likelihood of whistleblowing. The author synthesized a theoretical framework and developed research hypotheses that predict relationships between the self-assessed likelihood of whistleblowing and (1) magnitude of the consequences (2) channels of communication and (3) type of wrongdoing. To test these hypotheses, the author provided internal auditors (n=123) with a scenario and asked them to self-assess the likelihood of reporting evidence of a malfacation to their internal audit director even though their audit manager told them to ignore the wrongdoing.
A research study is undertaken to determine if economic incentives exist for noncompliance with regulatory standards, and if accounting related disclosure of regulatory enforcement actions is a determinant of environmental performance.
The purpose of this study was to determine the effects of interactions with IRS employees on tax practitioners' attitudes toward the IRS. The mission of the IRS is to inspire the highest degree of public confidence as it collects the proper amount of tax revenues at the least cost to the public. The IRS believes it must project a favorable image to tax practitioners in order to foster a high level of support for its mission. Prior surveys of tax practitioners found that practitioners have generally unfavorable attitudes toward the IRS and its employees. This study examined whether the unfavorable attitudes result from interactions with IRS employees, and provides empirical evidence of the effects of interactions with IRS employees on tax practitioners' attitudes toward the IRS.
Auditors use substantive analytical procedures to make assertions about the adequacy and appropriateness of client balances. The analytical procedure process consists of auditors creating independent account expectations and corroborating unusual fluctuations through obtaining and evaluating additional audit evidence. Prior analytical procedure research has found that knowledge of clients' unaudited account balances biases auditors' expectations towards the current year figures. However, this research has failed to examine the impact of biased expectations on the subsequent stages of analytical procedures. This dissertation assesses the full impact of biased account expectations on auditors' use of analytical procedures. I experimentally test the hypotheses of my dissertation through administering an experiment to senior level auditors. After inducing an account expectation bias that favors the client account balance in half the participants, I examine the auditors' cognitive investigation into an unusual account fluctuation. The results indicate that a biased account expectation negatively affects auditors' judgment quality. In particular, a biased expectation leads auditors to favor hypotheses and additional information that supports the proposition that the client's balance is reasonably stated. Alternatively, auditors with unbiased account expectations are more willing to consider all hypotheses and are able to identify the most pertinent additional information to the decision task. As a result of the different decision strategies employed, auditors who form unbiased account expectations are significantly more likely than auditors with biased account expectations to identify the correct relationship among the underlying data and the proposed hypotheses during a substantive analytical procedure.
This research examines how experience and missing information affect judgments of tax return preparers. Tax return preparers may often be faced with the problem of incomplete information, and their responses to this problem may be conditioned by whether or not they recognize information is missing. Based on the Holland et al.'s cognitive theory of induction as applied to tax judgment by Marchant et al., it was hypothesized that experienced tax preparers would correctly classify more items as to their relevance to a specific tax issue than novice tax preparers. Additionally, it was hypothesized that the strength of recommendations of tax preparers who had no relevant information missing would be greater than the strength of recommendations of tax preparers who had relevant information missing and were prompted that information was missing. Lastly, it was hypothesized that prompting that relevant information was missing would have a greater effect on the strength of recommendations of tax return preparers with lesser specific experience than it would on the strength of recommendations of tax return preparers with greater specific experience. The results suggest that experienced tax preparers do recognize the relevance of information to a greater degree than novice tax preparers. There was no significant difference, however, in the strengths of recommendation of tax preparers who had no missing information and those who were prompted that information was missing. There was a significant difference in the strengths of recommendations of tax preparers with lesser specific experience who had been prompted that relevant information was missing and those who had not been prompted that relevant information was missing. Among tax preparers with greater specific experience, however, there was no significant difference between the two groups. These results suggest that tax preparers with greater specific experience recognized that relevant information was missing without being prompted, while tax ...
Knowledge workers are an important resource for the typical modern business firm, yet financial reporting ignores such resources. Some researchers contend that the accounting profession has stressed reliability in order to make the accounting appear objective. Others concur, noting that accounting is an insecure profession and adopts strict rules when faced with uncertainty. Accountants have promulgated a strict rule to expense human resource costs, although many know that such resources have future benefits. Some researchers suggest that any discipline must modify its language in order to initiate change toward providing useful social ameliorations. If accounting theorists extend this idea to the accounting lexicon.s description of investments in human resources, investors and other accounting user groups might gain greater insight into how a firm fosters and nourishes human capital. I tested three hypotheses related to this issue by administering an experiment designed to assess financial analysts. perceptions about alternative financial statement treatments of human resources in an investment recommendation task. I predicted that (1) analysts' perceptions of the reliability (relevance) of the information they received would decrease (increase) as the treatment of human resources increasingly violated GAAP (became more current-oriented), (2) analysts exposed to alternative accounting treatments would report a lower likelihood of recommending that their clients invest in the company in the task, and (3) financial analysts who ranked reliability (relevance) as a more important information quality would be less (more) likely to recommend that their clients buy the stock represented in the case because the treatment of human resources on the financial statements violated GAAP (was more current-oriented) as compared to analysts who ranked reliability (relevance) as being lower (higher) in importance. Analysts receiving financial statements with accounting treatments of human resource costs that violated GAAP judged such information as less reliable and were also less likely to recommend ...
Tax evasion is a serious issue that influences governmental revenues, IRS enforcement strategies, and tax policy decisions. While audits are the most effective method of enforcing compliance, they are expensive to conduct and the IRS is only able to audit a fraction of the returns filed each year. This suggests that audits alone are not sufficient to curb the billions of dollars of tax evaded by taxpayers each year and that a better understanding of factors influencing compliance decisions is needed to enable policymakers to craft tax policies that maximize voluntary compliance. Prior research tends to model compliance as economic, environmental, or personal decisions; however, this study models it as a multifaceted decision where these three perspective individually and interactively influence compliance. It is the first to decompose perceived detection risk into two dimensions (selection risk and enforcement risk) and investigates how these two dimensions of risk, decision domains (refund or tax due positions), and three personal factors (mental accounting, narcissism, and proactivity) influence taxpayers’ compliance decisions. I conducted a 2x2 fully crossed experiment involving 331 self-employed taxpayers. These taxpayers have opportunities to evade that employed taxpayers do not. For example, they can earn cash income that is not reported to the IRS by third parties. For self-employed taxpayers (especially those wanting to evade), perceived selection and enforcement risks may be distinctly different depending on a taxpayer’s situation, what they believe they can control, and what risk they are willing to accept. For example, selection risk may be perceived as the greatest risk for those with unreported items on their return, while enforcement risk may be more prominent for those perceiving certain levels of selection risk. Thus, I believe self-employed taxpayers are the most appropriate population to sample from and are likely have reasonable variation in the three personal factors ...
Many external parties such as investors, creditors, and regulatory agencies, use a company’s financial statements in their decision-making. In doing so, they rely on audit opinions on whether financial statements are fairly stated. However, evidence suggests that there are factors in the audit environment that influence auditor judgments. For example, nondiagnostic client information dilutes auditor judgments when compared to judgments based on diagnostic information alone, especially for less experienced auditors (Hackenbrack 1992; Hoffman and Patton 1997; Glover 1994; Shelton 1999). High time pressure conditions mitigate this effect by refocusing auditor attention toward relevant client information, therefore reducing the impact of nondiagnostic information (Glover 1994, 1997). This research study examines other common audit environment factors to determine if they too influence audit judgment results. An online questionnaire of 149 auditors, CPAs and other accounting professionals indicate that the inclusion of nondiagnostic client information results in a significant change in auditor judgments. The direction of this change follows a theorized pattern; risk assessments that were initially high are reduced, while those that were initially low are increased. Significance was not consistently found for a workload and PCAOB effect on auditor judgment. However, a comparison of the absolute value of dilution effect means across conditions reveals some trending for the proposed unwanted effect of high workload, and the beneficial effect of PCAOB guidance. These results have important implications for auditing research and practice. It extends previous archival research on workload effects and uses a unique questionnaire design to reexamine workload pressures in a behavioral setting. The results of hypothesis testing on workload pressure and PCAOB guidance, although lacking consistent statistical significance; exhibit trends that agree with proposed theoretical relationships. Tests on the effects of nondiagnostic information show strong statistical support for previous studies in the area of psychology and audit. This study’s greatest ...
The federal income tax system in the United States depends upon a high degree of voluntary compliance. The IRS estimates that the voluntary compliance level is declining and that this tax compliance gap cost the government an estimated $90.5 billion in 1981. Between 1979 and 1982, Congress made several changes in the tax laws designed to improve tax compliance. Extensive data was collected by the IRS for 1979 and 1982 through the random sample audits of approximately 50,000 taxpayers on the Taxpayer Compliance Measurement Program (TCMP), which is conducted every three years. During the period 1979 through 1982, Congress lowered the marginal tax rates, added some fairly severe penalties, for both taxpayers and paid return preparers, and increased information reporting requirements for certain types of income. In this research, it was hypothesized that voluntary compliance should increase in response to lower marginal rates, a higher risk of detection due to additional reporting requirements, and increased penalties. Multiple regression analysis was employed to test these hypotheses, using 1979 and 1982 TCMP data. Because of the requirements for taxpayer confidentiality, it was necessary for the IRS to run the data and provide the aggregate data results for the research. The results provided insight into the effectiveness of tax compliance legislation. While the overall voluntary compliance level (VCL) increased from 1979 to 1982 by 1.53 per cent, the VCL increase for taxpayers in high marginal rates was much smaller (.42 percent) than the overall increase. This is very inconsistent with the notion that high marginal rates are driving noncompliance, and suggests that marginal rates may not be strong determinants of compliance. Probably other factors, such as opportunity for evasion, may be more important. There was little change from 1979 to 1982 of the compliance of returns done by paid return preparers. Because of ...
The Financial Accounting Standards Board is a private sector rule making body. Congressional inquiries have questioned whether the setting of accountin standards should remain in the private sector. Congressional critics have charged that the FASB has been captured by special interests and recommended that a governmental agency assume responsibility for standard setting. Specifically, critics charge that large corporations capture the Big Eight accounting firms who, in turn, have captured the FASB. Previous capture studies have concluded that the standard setting process is pluralistic and that the FASB has not been captured. The studies have focused on the influence of the Big Eight to determine if the FASB has been captured. They assume if standards do not reflect the expressed preferences of the Big Eight, then Congressional criticisms are invalid. The studies also assume a unidirectional influence between participants in the process and have ignored the intensity of preferences of the respondents.The purpose of this study is to provide a theoretical framework to specify selection of standards that would be expected to be subject to capture. This framework also recognizes the duo-directional nature of influence. The allegations of capture were tested using the standards selected in accordance with the theoretical framework. The following hypotheses were tested. HO_1 There is no positive statistically significant relationship between clients' preferences and an accounting firm's support for an outcome. HO_2 There is no positive statistically significant relationship between the preferences of large corporations and standards enacted by the FASB. HO_3 There is no positive statistically significant relationship between the preferences of the Big Eight firms and the standards enacted by the FASB. These hypotheses were tested for each Big Eight accounting firms and for each standard. A logist procedure was employed. The results of the tests, with three exceptions, indicate that any relationships that occurred ...
The purpose of this study is to determine whether oil and gas producing companies smooth their ending reserve quantities. Smoothing is defined as a reduction in variance in the trend of ending reserve quantities over time compared to the trend of ending reserve quantities less the hypothesized smoothing variable over time. This study focuses on two variables that are most susceptible to manipulation—revisions of previous estimates and additions. This study also examines whether revisions are positively or negatively biased and the variability of the revisions. The sample consists of 70 companies chosen from oil & Gas Reserve Disclosures: 1980-1984 Survey of 400 Public Companies by Arthur Andersen and Company. For each company, ending reserve quantities for the years 1978-1984 were regressed over time, and the standard deviation of the estimate (SDE) was calculated. Then the ending reserve quantities less the hypothesized smoothing variable were regressed over time, and the SDE was calculated. A linear model and a semi-logarithmic model were used. A smoothing ratio (SR) was determined by dividing the SDE of reserves less the hypothesized smoothing variable by the SDE of ending reserve quantities. An SR greater than one indicates smoothing, and an SR less than one indicates that smoothing did not occur. The mean percentage revision and a t-test were used to test for positive or negative bias in the revisions. The mean absolute percentage revision was used to assess the relative variability of revisions. The number of companies classified as smoothers of oil reserves was statistically significant for the semi-logarithmic model but not for the linear model. Under both models the number of companies classified as smoothers of gas reserves was statistically significant. Few companies had mean percentage revisions that were significantly different from zero. The majority of companies had mean absolute revisions of under ten percent.
This dissertation is a descriptive, exploratory examination of professional commitment, organizational commitment, and conflict between those commitments in the internal audit profession. That conflict has been suggested in prior studies as the source of dysfunctional outcomes such as increased role stress, high turnover, decreased job satisfaction, and the exercise of improper judgment leading to audit failures. The descriptive aspect of this study deals with the development of a more comprehensive structural model of the factors and relationships involved in commitment and conflict than has been developed by previous research dealing with accountants. The exploratory aspect deals with the testing and refinement of the developed model utilizing the internal audit profession as the field of examination. The model developed in this study is derived from the synthesis of factors suggested by role theory, the concept of side bets, the cosmopolitan-local construct, and the concept of commitment as a process. This research utilizes a questionnaire administered to 205 practicing internal auditors in order to test 30 hypothesized relationships. Path analysis is used to determine the significant direct relationships between variables with a process of theory trimming being conducted in order to produce more parsimonious structural models. Indirect relationships between significant variables are identified and their redundant or suppressive nature determined. Explanations of these suppressive or redundant relationships are provided based on the theoretical considerations identified above. Such a determination and explanation of the redundant and suppressive indirect relationships involved in the commitment-conflict relationship has not been accomplished in earlier studies of the subject. Although the procedures used here do not support causal conclusions, the findings of this study indirectly provide evidence that conflict between the two commitments in the internal audit area is not to be considered inherent. The findings also suggest a possible undesirable relationship between organizational formalization and professional commitment.
This study used protocol analysis to identify key variables in the venture capital investment decision-making process. The study used a fictional business plan which was based on six actual business plans. This fictional business plan was presented to ten venture capitalists who were asked to review it to decide whether to interview the investee. The protocols obtained from these subjects were analyzed to determine patterns within the subjects' review. The sections of the business plan which were commonly reviewed first were the deal structure, the executive summary, and the management section. The management section was used by the greatest number of subjects. The market section was used the greatest number of times. The data were also organized by type of operators used in each subject's protocols. Information Search/Retrieval operators were most common, followed by Task Structuring/Set Goal operators. When classified into the four major categories of Task Structuring/Set Goal, Information Acquisition, Analytical/ Inferential, and Choice operators, Analytical/Inferential operators were used most frequently. Choice operators were least used. The phrases were analyzed by the relevant section in the business plan. The market received the greatest number of references, followed by references to the product and to management. However, when references to the income statement and balance sheet were combined as phrases relevant to the financial statements, the financial statements were referred to more frequently than the product or the people. The subjects appeared to use an unidentified choice program within which certain models could be identified as subroutines. The subjects used an elimination-by-aspects model to screen the business plan. If the business plan met the criteria within the elimination-by-aspects model of the subject, the subject used an additive/nonlinear model for the remainder of the review. The results of this study indicate that financial statements provide information important in the venture capital ...
Subordination of judgment is a fundamental threat to auditor objectivity. Subordination of judgment occurs when auditors agree with their superiors either in spite of or without forming their own independent judgments. Many audit procedures rely on independent, critical thinking at every level of the audit team; however, a number of studies suggest that auditors tend to agree with superiors even when a superior's views clearly run contrary to generally accepted accounting principles. While there is general agreement among scholars that subordination of judgment is "bad," very little attention has been given to moral biases that might influence an auditor's tendency to subordination of judgment, or to potential remedies that could mitigate an auditor's tendency to subordinate judgment. Moral Foundations Theory suggests that individuals tend to make intuitive, normative evaluations of situations based upon a set of personal moral biases or preferences called "moral foundations." Two specific moral foundations could influence subordination of judgment in divergent ways. The moral foundation of loyalty-respect may make agreement with a superior's views seem more acceptable than would disagreement. Meanwhile, the moral foundation of fairness may make an auditor more sensitive to the observance of rules, resulting in less subordination of judgment when a superior's views run contrary to professional rules. Social Identity Theory suggests that in-group favoritism may exacerbate subordination of judgment in general; however, strengthening an auditor's professional identity salience (PIS) could strengthen an auditor's objectivity. PIS is the temporary, heightened awareness of an auditor's identity as a professional and their role as guardian of professional rules. As a result, PIS may interact with an auditor's innate sense of fairness, resulting in less subordination of judgment than when professional identity is less salient. Results supported the hypothesis that auditors tend to subordinate their judgment to that of a superior, but not that PIS ...
The purpose of this dissertation is to explore the influences of industry dynamic factors (e.g., peer selections) on a client’s subsequent decision to select the type of auditor (e.g., Big N versus non-Big N), following auditor turnover. More specifically, drawing on social norms and social learning theories, I develop testable implications and investigate whether and how industry dynamics have an incremental power in explaining auditor choice beyond traditional firm-specific variables documented in prior research. Using a large sample from years 1988 – 2012, I find that clients are more likely to imitate their industry peers’ prior selections to select the type of their succeeding auditors, consistent with the implications of social learning theory. I also find that clients in industries with stronger industry norms, as measured by a greater proportion of clients audited by Big N auditors in an industry, are more likely to select Big N auditors as their succeeding auditors, consistent with the implications of social norms theory. To my best knowledge, this is the first study to explore the impact of social dynamics measured at the industry level on auditor selection and provide large-sample evidence on the relations between industry dynamics and auditor selection at the firm level. Findings of this study provide insights into the dynamic process of auditor selection in which companies do not make auditor-selection decisions in isolation of one another as often posited in existing literature, contribute to the research on the determinants of auditor choice by incorporating industry dynamics into an agent-principal model, and provide a more comprehensive view of the phenomenon of auditor selection.
This study uses both basic and self-selection regression models to test three hypotheses about the effect of SFAS 87 disclosures on information asymmetry during 1985- 1987. Both types of models test the hypotheses after controlling for changes in the inventory holding and order processing costs of the spread, while the self-selection models also control for potential self-selection bias.
In this study, I investigate the effect of auditor-provided tax services (ATS) on firms’ levels of book-tax differences and investors’ mispricing of book-tax differences. The joint provision of audit and tax services has been a controversial issue among regulators and academic researchers. Evidence on whether ATS improve or impair the overall accounting quality is inconclusive as a result of the specific testing circumstances involved in different studies. Book-tax differences capture managers’ earnings management and/or tax avoidance intended to maximize reported financial income and to minimize tax expense. Therefore, my first research question investigates whether ATS improve or impair audit quality by examining the relation between ATS and firms’ levels of book-tax differences. My results show that ATS are negatively related to book-tax differences, suggesting that ATS improve the overall audit quality and reduce aggressive financial and/or tax reporting. My second research question examines whether the improved earnings quality for firms acquiring ATS leads to reduced mispricing of book-tax differences among investors. Recent studies document that despite the rich information about firms’ future earnings contained in book-tax differences, investors process such information inefficiently, leading to systematic pricing errors among firms with large book-tax differences. My empirical evidence indicates that ATS mitigate such mispricing, with pricing errors being lower among firms acquiring ATS compared with firms without ATS. Collectively, these results support the notion that ATS improve audit quality through knowledge spillover. Moreover, the improved earnings quality among firms acquiring ATS in turn helps reduce investors’ mispricing of book-tax differences.
Client inquiry is a fundamental procedure for gathering audit evidence. Since inquiries are not audio- or video-recorded in practice, auditor memory is vital to the accuracy of evidence gathered in this manner. Due to the potential for error during memory encoding and retrieval, the effect of memory on judgment, and the cognitive complexity of conducting a face-to-face inquiry, examining factors affecting auditor memory of client inquiries is important. In this dissertation, I examine two factors likely to affect auditor memory of a client inquiry. First, encoding style is a low-level cognitive function representing how much stimuli an individual perceives before applying prior knowledge (schemata) to assist with encoding to long-term memory, affecting information noticed and remembered. Differences in auditors’ encoding style may explain variance in memory accuracy of evidence gathered from a client inquiry. Second, audit professionals often make hand-written or typed notes during client inquiries, and subsequently review the notes, which may affect memory. To address these issues, I first gather interview evidence from six professional auditors to determine how practicing auditors plan, prepare for, conduct, and document evidence from client inquiries. I then develop and execute a video-based experiment with 33 senior auditor participants, 23 masters-level accounting students, and 47 undergraduate-level accounting students to investigate whether encoding style and note taking affect auditor memory accuracy of, and audit judgments resulting from, a client inquiry. I find multiple significant results. First, I find that encoding style affects memory accuracy such that auditors quickly utilizing prior knowledge during an inquiry results in greater memory accuracy than auditors slowly utilizing prior knowledge. This finding suggests that quickly utilizing prior knowledge helps auditors to manage the cognitive complexity of a client inquiry. Second, I find that participants who take notes during an inquiry, and subsequently review his or her notes taken, have ...
The purpose of this dissertation is to investigate the effect of U.S. firms’ geographic location, whether urban or rural, on their corporate disclosure and governance practices. An “urban” firm is one that is headquartered in a large metropolitan area; whereas, a “rural” firm is one that is headquartered some distance from any metropolitan area. Specifically, the study examines whether there are different stock market reactions to urban and rural firms around key event dates relative to the enactment of the Sarbanes-Oxley Act (SOX) on July 30, 2002. Also, the readability and linguistic style in the Management Discussion and Analysis (MD&A) section of public company’s annual reports (Form 10-K) to the Securities and Exchange Commission (SEC) are investigated to determine whether urban and rural firms communicate information differently to investors.
In 1990, the accounting profession and the British government worked together to establish a new regulatory framework for financial reporting in the United Kingdom (UK), the Financial Reporting Council (FRC) and its two subsidiaries, the Accounting Standards Board (ASB) and the Financial Reporting Review Panel (FRRP). The FRRP enforces companies' compliance with the ASB's accounting standards and the accounting provisions of the UK Companies Act. Only one study, Brandt et al. (1997), has examined the activities and effectiveness of the FRRP. This dissertation attempts to extend Brandt et. al (1997) and add to understanding of the origins and regulatory actions of the FRRP.
This study contributes to the debate on accounting pedagogy in the basic financial accounting course by examining the pedagogical tool of fluency training as a way to improve student performance. Fluency training has been shown to improve performance of students in other academic disciplines.
Organizations invest in team-based systems in order to generate innovative practices that will give them a competitive edge. High-performing teams require training and other support systems to gain the skills they need as well as to create and maintain an environment conducive to their success. The challenge for managers is to make resource allocation decisions among investment alternatives to maximize team effectiveness and still ensure a financial return for company investors. This study has three objectives. The first objective is to investigate whether there is a positive relationship among organizational environment, team potency (the team's collective belief it will succeed) and team performance. Results indicate that the presence of four organizational support systems influences team potency and performance. These support systems are the Design and Measurement, Rewards, Training and Communications Systems. In addition, results indicate that team potency is a mediating variable between the Design and Measurement and Communications Systems and team performance. These results suggest that companies are able to influence team performance by investing in environmental support systems. The second objective is to examine whether team members and managers view the organizational environment differently. Results indicate that managers view the Training and Communications Systems as more important, while teams perceive the Design and Measurement System and the Rewards System to be more important to their success. Since the systems that team managers view as important may influence their investment decisions, these differences may suggest a resource alignment issue. Third, a measure of team effectiveness based on financial measures is introduced. Published literature emphasizes attitudinal, behavioral and operational measures of performance. A financial measure offers a method of evaluating performance that is similar to methods used in capital budgeting and may be consistently applied across different types of teams with different purposes. The data collection process was performed by ...
This research examines whether firms managed earnings in the year they adopted SFAS 109, Accounting for Income Taxes (or its predecessor SFAS 96), by combining the choice to adopt SFAS 109 with other accounting choices in an interdependent rather than independent manner. Prior literature generally analyzes only one specific accounting choice, assuming that the decision is independent of other accounting procedure choices. However, it is unlikely that managers act in this manner. When attempting to achieve certain income goals, managers have numerous accounting tools available to them including the choice of accounting procedures and the exercise of judgment as to accrual amounts. This study investigates five choices consisting of: (1) the adoption of SFAS 109/96; (2) the adoption of SFAS 106; (3) the reporting of a restructuring of operations and/or a write-down of assets; (4) the reporting of asset sales; and (5) the choice of discretionary accruals. The study adopts both a portfolio and joint decision approach. The portfolio approach combines the earnings effects of the five choices into a single dependent variable and tests income smoothing, big bath, and debt hypotheses. The joint decision approach utilizes simultaneous equation methodology to investigate the interdependence of the five choices and the independent variables. The portfolio approach findings provide evidence that firms used the combined effect of the five accounting choices to smooth income in the year they adopted FAS 109/96. The results also provide support for the debt hypothesis but do not support the big bath hypothesis. The joint decision approach findings provide evidence that firms jointly determined at least two of the five accounting choices. The strong support for the income smoothing hypothesis under the portfolio approach combined with the joint significance of the individual accounting choices in the simultaneous equations suggests that firms use a multitude of accounting choices ...
Previous research has shown that accountants may be inadequate moral reasoners. Concern over this trend caused the Treadway Commission (1987) and the Accounting Education Change Commission (1990) to call for greater integration of ethics into the student's training. Ponemon and Glazer (1990) found a difference in cognitive moral development (CMD) between accounting students at a public university and a private university with a liberal arts emphasis. This study expands Ponemon and Glazer's research by examining two liberal arts universities, one a private, secular institution and one a Catholic institution. The primary research question asks if Catholic university accounting students manifest greater CMD growth than secular university accounting students. Additionally, this study examines and compares the priority that accounting students from the different institutions place on ethical values versus economic values. It was expected that Catholic university accounting students would manifest both greater CMD growth and a greater concern for ethical values over economic values when compared with non-Catholic university accounting students. The study utilized a two-phase approach. In the first phase, an organizational study of two institutions was made to determine how each strives to integrate moral development into their accounting students' education. In the second phase, lower-division and senior accounting students were given three ethical and values related tasks to complete which propose to measure differences in ethical and economic values.
This research investigates the information content of the translation information resulting from exchange rate fluctuations. Two hypotheses are examined. The dollar movement hypotheses investigate whether there is a positive relationship between security valuation and the translation information and whether the market assigns different weights to translation gains and losses in both the depreciating and appreciating exchange rate environments. The geographic concentration hypothesis tests whether the market's response to the translation information is geographically sensitive. Prior research on SFAS No. 8 and SFAS No. 52 has concentrated on the price and trading volume responses to the deliberations and issuance of these two accounting statements. Soo and Soo (1994) examine the long-term effect of the disclosure requirement under SFAS No. 52 on MNEs' security prices from 1981 to 1987. However, they fail to address two important issues pertinent to the MNE research--the effects of exchange rate changes and the geographic concentration. The dollar movement hypotheses provide strong evidence that under both the appreciating and depreciating exchange rate environments, a positive relationship exists between security returns and the translation information when MNEs disclose translation losses in stockholders' equity. The findings also provide evidence for a positive or at least non-negative relationship between security returns and the translation information when MNEs disclose translation gains. The findings provide evidence that the positive relationship is greater in appreciating than in depreciating exchange rate environment for losses, but no evidence of such a difference exists for gains. The evidence also indicates that the market reacts more to the translation information when translation losses are reported than when translation gains are reported in both exchange rate environments. The examination of the impact of the geographic concentration of MNEs' foreign operations provides limited evidence to support the geographic concentration hypothesis. One possible explanation for the weak findings is that ...
This study resolves divergent prior findings relating book-tax differences to future earnings, determines whether prior literature has missed relationships between different types of book-tax differences and pre-tax and/or after-tax income, and investigates prior earnings as a factor contributing to the observed relationships. As past research has found that some firms have large book-tax differences over several years, this study separates these firms with large stable book-tax differences from others with large book-tax differences (non-stable) when investigating the link between large book-tax differences and future earnings. Finally, this study investigates whether the relationship between book-tax differences and future earnings reflects information about prior earnings and finds that prior earnings growth explains much of the lower persistence found for firms with large book-tax differences.
The focus of the study is on financial reporting for non-U.S. firms registered with the Securities Exchange Commission (SEC) but using International Accounting Standards (IAS). This study addresses two issues, (1) whether the comparability of financial reporting among firms using IAS in credit and equity financing jurisdictions increases over time and (2) the associated capital market implications. The motivation for the study is the SEC's ongoing assessment of IAS for possible use by non-U.S. registrants for listing and capital raising in the U.S. Previous research on variations in financial reporting practices has revealed distinctly different types of financial reporting depending on country of origin. Moreover, some research suggests that such differences in financial reporting tend to persist in spite of harmonization efforts of accounting standards. This study suggests that there may be a systematic difference between credit and equity firms' financial reporting that is manifested by the fact that credit firms' adjustments to U.S. GAAP are greater than the adjustments made by equity firms. This systematic difference has had the following capital market consequences for credit firms, (1) a decreasing strength of association between accounting earnings and share prices post-1994, (2) an increased bid-ask spread post-1994, and (3) a decreased trading volume post-1994. This may be an indication that on the average firms reporting under IAS fail to meet an important part of the SEC's second assessment criterion with respect to high quality and full disclosure, namely comparability. In addition, it seems that the revisions made by International Accounting Standards Board (IASB) have not resulted in more congruent financial reporting among firms reporting under IAS over time.
This study examines the impact of Statements of Financial Accounting Standards No. 141 and No. 142 (hereafter SFAS 141, 142) on the characteristics of financial analysts' earnings forecasts after mergers. Specifically, I predict lower forecast errors for firms that experienced mergers after the enactment of SFAS 141, 142 than for firms that went through business combinations before those accounting changes. Study results present strong evidence that earnings forecast errors for companies involved in merging and acquisition activity decreased after the adoption of SFAS 141, 142. Test results also suggest that lower earnings forecast errors are attributable to factors specific to merging companies such as SFAS 141, 142 but not common to merging and non-merging companies. In addition, evidence implies that information in corporate annual reports of merging companies plays the critical role in this decrease of earnings forecast error. Summarily, I report that SFAS 141, 142 were effective in achieving greater transparency of financial reporting after mergers. In my complementary analysis, I also document the structure of corporate analysts' coverage in "leaders/followers" terms and conduct tests for differences in this structure: (1) across post-SFAS 141,142/pre-SFAS 141, 142 environments, and (2) between merging and non-merging firms. Although I do not identify any significant differences in coverage structure across environments, my findings suggest that lead analysts are not as accurate as followers when predicting earnings for firms actively involved in mergers. I also detect a significant interaction between the SFAS-environment code and leader/follower classification, which indicates greater improvement of lead analyst forecast accuracy in the post-SFAS 141, 142 environment relative to their followers. This interesting discovery demands future investigation and confirms the importance of financial reporting transparency for the accounting treatment of business combinations.
The Internet provides many sources of financial information that investors can use to help with investment decisions and in interpreting companies' accounting information. One source of information is Internet stock message boards such as those at Yahoo! Finance. This source allows for anonymous postings and information exchange. Despite the possibility of the information being incorrect many individuals visit these message boards. The purpose of this study is to investigate Internet stock message boards and address the primary question: From an individual investor perspective, do message boards, which contain accounting information, influence investment decisions? The question is addressed using psychology rumor literature and attitude theories. Message board postings are a type of rumor, since not all the information is verified and is usually intended to persuade a belief or influence a decision. Further, the messages may influence an investor by causing a change in attitude about the investment. Using an experiment, message board influence on an investment decision and attitude was tested. The results indicated that individuals that received negative message board postings did have a significantly higher change in investment amount as compared to a control group that did not receive any message postings. The positive message board group and the control group were not significantly different in their amount of investment change. The results of the study also show that message board postings influenced attitude, those that received negative (positive) postings had a negative (positive) attitude about the investment. It was further found that those with a negative (positive) attitude decreased (increased) their investment. Finally, contrary to expectations, investment experience did not lead to an individual being less influenced by message board postings. This study contributes to the accounting literature by investigating an additional source of Internet financial reporting that may or may not contain correct information. The SEC ...
Prior literature suggests two competing theories regarding the role of venture capitalists (VCs) in their portfolio companies. The VC monitoring hypothesis argues that VCs effectively resolve the managerial agency problem through close monitoring and restraining managers' earnings management behavior. The VC moral hazard hypothesis argues that VCs aggravate the private benefits agency problem by exerting influence over managers to artificially inflate exit stock price through earnings management. Using a sample of IPO firms between 1987 and 2002, after controlling for the magnitude of accruals manipulation (AM), I compare the magnitude of real activities manipulation (RM) between venture-backed and non-venture-backed companies. I find that relative to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. The finding supports the VC monitoring hypothesis that VCs restrain managers' RM behavior. Furthermore, I document that venture-backed companies exhibit a significant difference from non-venture-backed companies only in the first post-IPO fiscal year. The difference between the two groups in either the IPO year or the second post-IPO fiscal year is not significant, or at best, is weak. This finding is consistent with the argument that VCs tighten their control during the lockup expiration period when insiders such as managers or founders have strong incentives to inflate earnings. By the end of the second post-IPO fiscal year when VCs exit the portfolio companies, their impact on portfolio companies' RM decreases dramatically which makes the difference between the two groups less significant. In addition, using a sample of venture-backed IPOs from 1987 to 2002, I find that companies backed by high-reputation VCs show significantly less RM than those backed by low-reputation VCs in the first post-IPO fiscal year. The results are robust to alternative VC reputation proxies. This finding is consistent ...
In recent years, the accounting profession has faced increased scrutiny because of scandals involving management fraud (e.g., Enron, WorldCom). In response, Statement on Auditing Standards (SAS) #99 has expanded auditors' responsibility for detecting fraud, requiring auditors to gather significantly more information in their assessment of fraud. In addition, the Public Company Accounting Oversight Board (PCAOB) will focus on fraud detection through their inspections of registered accounting firms. In light of the increased emphasis on auditors' responsibility for detecting fraud, public accounting firms face the challenge of improving their fraud detection process, including their assessment of management fraud risk. Decision aids are one way for auditors to improve their assessment of management fraud risk. In fact, several studies from the decision aid literature suggest that aids are useful tools for a variety of tasks, including fraud risk assessment. At the same time, another stream of the decision aid reliance literature, which looks at people's willingness to rely on decision aids, suggests that individuals tend to be reluctant to accept the output given by an aid. Thus, the primary focus of this paper is on uncovering factors that would encourage one to voluntarily use and rely upon a decision aid. Toward that end, 132 senior-level auditors participated in an experiment that examined how several factors (confidence, perceived usefulness, client size, and conformity pressure) affect decision aid usage and reliance. The results show that perceived usefulness and decision aid reliance are significantly related. Further, the results suggest that perceived usefulness affects reliance more than variables examined in prior studies (e.g., confidence). Finally, the results suggest that decision aid usage mediates the relationship between perceived usefulness and reliance. The results of the current study have important implications for research in both the information systems and decision aid reliance areas. First, the study shows that ...
This study investigates the use of discretion by oil and gas companies in reporting financial performance and oil and gas reserve estimates during times of high political scrutiny resulting from increases in energy prices. Hypotheses tested in prior literature state that companies facing the risk of increasing taxes or new regulations reduce reported earnings to reduce this risk. This study uses a measure of high profitability (rank order of return on assets relative to industry peers) to identify oil and gas companies more likely to manage earnings during the period from 2002 to 2008. Two measures of discretionary accruals (total and current discretionary accruals), and a measure of discretionary depreciation, depletion, and amortization (DDA) were used as indicators of discretion exercised in reporting earnings. Data on oil and gas reserve disclosures was also hand-collected from Forms 10-K to investigate whether managers use reserve estimate revisions to reduce reported earnings through increasing the annual depletion expense. Results suggest that both oil and gas refining and producing firms use negative discretionary accruals to reduce reported earnings. Results also indicate that profitability is an important determinant of the use of negative discretionary accruals by these companies regardless of the time period examined. There is also evidence that oil and gas producing firms opportunistically revise their oil and gas reserve estimates to increase depreciation, depletion, and amortization expense during periods of high oil prices.
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