Reviews the book "Guide for a Review of a Financial Forecast."

This research was designed to evaluate the potential independence problem posed by CPAs who accept employment with ex-client firms. First, CPA firm data concerning how frequently auditors actually leave public accounting to accept employment with client firms is reported. Next, the reactions of selected users of accounting data and CPAs to a hypothetical case are studied. The case is designed to permit the impact of two variables on perceived independence to be evaluated: (1) the time lapse between auditing and working for a client firm; and (2) the rank of the ex-auditor. The results revealed that the perceived severity of the independence problem was different for the two groups, and that the time and rank variables significantly influenced the responses of both the users and the CPAs.

Discussion regarding whether to require management to make earnings forecasts public has been based, in part, on the existing evidence concerning published management earnings forecasts. This article evaluates certain attributes of forecast firms in an effort to determine whether currently produced forecasts are representative of what might be produced by all firms if forecasts were mandatory. The results of the various tests all suggest that previous research findings may not provide a sound basis for a policy decision on forecasting.

Comments on the research efforts concerning income smoothing practices, as reported by Carl R. Beidleman. Assumptions considered in the defense of income smoothing; Market model referred to in the defense of income smoothing; Discretionary items examined in the study.

Auditing, Financial forecasts

Forecasting models, Management forecasts, ARIMA models, Analyst forecasts

This paper reports the results of the experimental stage of a three-stage project which explores many aspects of auditors' involvement in their clients' financial forecasts. The experimental instruments include forecasting factors which were considered important by auditors and which closely paralleled two quite distinguishable corporate settings. Analysis of auditor judgments of the reasonableness of forecasts based on these corporate settings provides evidence which is consistent with the following general conclusions: 1. Models representing individual reasonableness judgments concerning the two cases were relatively well specified 2. The track records of management in forecasting accuracy for net income and sales were the most significant factors in the individual judgment models; and 3. Based on the judgment models employed in the analysis of the experiment, subjects' judgments appeared to be affected by differences in the background information in the two corporate cases.

[This study examines the effect of the uncertainty in analysts' earnings forecasts on the relation between unexpected returns and unexpected earnings. Numerous theorists have considered the effect of uncertainty on firm value, with particular interest in the uncertainty in a firm's future cash flows that underpin firm value. Since accrual accounting earnings represent a theoretical proxy for future cash flows, the effect of earnings uncertainty on firm value is also of considerable interest. However, observed uncertainty in accounting earnings may be attributable to noise (garbling) in the earnings signal or to the fundamental uncertainty of expected future cash flows, or both. Moreover, theory suggests these different forms of uncertainty may have differing effects on firm value. To date, there is little empirical evidence concerning the effect of uncertainty in earnings on firm value. We investigate the effect of ex ante earnings uncertainty by using the familiar linear relation between unexpected stock returns (UR) and unexpected earnings (UE), with 3,167 firm-year observations collected over the six-year period 1979-84. The variance in analysts' earnings forecasts just prior to a firm's annual earnings announcement is employed as our firm-specific proxy for ex ante uncertainty. Our results indicate a systematic relation between ex ante uncertainty and the information content of earnings. A given unit of earnings news has a greater effect on unexpected stock price change as the amount of pre-earnings-announcement uncertainty decreases. Firms with relatively high ex ante uncertainty exhibit little or no systematic price change at the time earnings are announced. Sensitivity tests reveal our results to be robust over numerous alternative specifications of the variables and models employed. Sensitivity tests also suggest that our results are not driven by either firm size or the amount of information available about the firm. In addition, we develop and report results of a model that controls for the effects of uncertainty. This results imply that the dispersion (disagreement) in analysts'earnings forecasts is more likely to be a proxy for noise in the financial reporting system than a proxy for fundamental uncertainty in a firm's future cash flows.]

We examine capital structure changes to investigate the impact of SFAS No. 13 on lessees. While this accounting standard essentially rearranged capital lease disclosures (from footnotes to the balance sheet), mandated capitalization substantially altered key accounting ratios. Our results document a systematic substitution from capital leases to operating leases and nonleases sources of financing. In addition, lessees appear to reduce book leverage by increasing equity and reducing conventional debt. The magnitudes of these responses are cross-sectionally related to preadoption levels of footnoted capital leases.