Post-Cognitive structure, Information systems, Complexity, Decision making

Abstract The article presents comments of the author on a paper by W. McGhee, M. Shields and J. Birnberg, titled "The Effects of Personality on a Subject's Information Processing," published in the July 1998 issue of the journal "The Accounting Review." According to the author, McGhee, Sheilds and Birnberg are to be commended for their description of current research findings in the area of determinants of human decision-making. In the highly complex and relatively unexplored area of human information processing, accountants can certainly benefit from such literature reviews. Unfortunately, their theoretical discussion and experimental design do not reflect that literature review. It is questionable whether the research questions and associated empirical tests could have enlightened accountants regarding the information processing of financial accounting cues. Moreover, there is sufficient evidence to suggest that conclusions drawn by McGhee, Sheilds and Birnberg do not necessarily follow from results of their empirical tests.

Abstract Investigates the role of perceptual differentiation (PD) in the effects of monetary incentives on effort and decision performance. Correlations between the effectiveness of monetary incentive and cognitive skill of the decision maker; Extension of research on the role of PD in decisions made in accounting contexts.

[Much accounting research is based on the premise that monetary rewards are used to direct and control individual actions. The assumption is that such rewards motivate individuals to exert additional effort and achieve higher levels of performance. Several studies have recently shown that the effects of monetary incentives on judgment and effort are contingent on a number of factors. In this study the contingent factors used are the cognitive characteristics of the decision maker. The cognitive characteristic under examination is perceptual differentiation (PD), an individual's ability to perceptually abstract from a complex setting certain familiar concepts or relationships. The experimental tasks involve applying three decision rules frequently used in accounting settings: conjunction probability, sample size, and sunk cost. In the development of the hypotheses, PD is posited to relate positively to decision performance, and monetary incentives are expected to induce all subjects to exert additional effort, but to increase the performance levels of only those who possess the requisite cognitive skill. Seventy full-time undergraduate students at a major U.S. university voluntarily participated in the experiment. All subjects received a one dollar participation fee, and one half of them (incentive condition) were given an opportunity to win an additional six dollars. The subjects first completed the Group Embedded Figures Test, which provided scores used to classify them as high and low PDs. The subjects then responded to a series of questions to test their understanding of the conjunction probability, sample size, and sunk cost decision rules as well as their ability to apply these rules in three different accounting settings: an estimate of past due accounts receivable, an evaluation of internal control, and a fixed asset replacement. The results indicated that high PDs performed better than low PDs only in the decision context where conjunction probability was applied. No differences in performance were observed between high and low PDs in the contexts requiring the application of sample size and sunk cost. Error rates in the sample size and sunk cost contexts exceeded those of conjunction probability, and high PDs showed a greater understanding than did low PDs of the sunk cost decision rule. The subgroup of subjects offered a monetary incentive spent significantly more time on the tasks than subjects not offered the incentive. In the low PDs, monetary incentives were not associated with higher levels of performance across all three decision contexts. In the high PDs, monetary incentives were associated with higher levels of performance in the contexts that required applications of the conjunction probability and sample size decision rules. The contributions of the study include (1) demonstrating that the effectiveness of a monetary incentive may depend on the cognitive skill of the decision maker, and (2) extending the research on the role of PD in decisions made in accounting contexts.]

Abstract ABSTRACT: This study examines the leader/subordinate relationship between in-charge auditors and their staff assistants. Path-goal theory is used as a framework to analyze the effect of in-charge leader behavior on staff assistant satisfaction and motivation. The hypothesis is that the effects of leader behavior (i.e., consideration and initiating structure) are contingent upon the assistant's perception of task complexity, This hypothesis is supported by survey research using auditors working for four Big Eight accounting firms. Limitations and areas for future research are also discussed.

[Litigation risk is a significant and increasing concern for U.S. public accounting firms. Ernst & Young's recent 400 million settlement with the FDIC is an indication of the magnitude of the problem facing the Profession. A recent survey conducted by the AICPA shows that malpractice insurance premiums for CPA firms other than "Big 6" have increased 300 percent since 1985, while deductibles have increased almost six times. Forty percent of those firms surveyed are "going bare" due to the high cost of liability insurance. extasciicircum\1\ In addition, partners from Laventhol & Horwath, previously the seventh largest accounting firm in the U.S., cited litigation claims against their firm in their decision to declare bankruptcy, and Palmrose (1988) notes that litigation against an audit firm can impair its reputation by providing a negative signal about the quality of the firm's audit services. In an effort to combat the increasingly litigious business environment, the "Big 6" recently issued a Statement of Position which has been distributed to audit clients, accounting faculty, state and federal legislatures, and members of selected government organizations. extasciicircum\2\$ In such an environment, it is important that auditors be able to effectively screen potential clients and accurately assess litigation risks. Indeed, many accounting firms already appear to be more carefully screening new clients and rejecting some who, prior to the litigation explosion, would have been accepted. The purpose of this study is to examine this screening process, and to determine whether auditor judgments of litigation risk and their recommendations for the preliminary audit plan and client fees are influenced by certain client characteristics that have been empirically related to audit litigation in the accounting literature. Specifically, we hypothesize that client financial condition, asset structure (proportion of receivables and inventory to total assets), sales growth, market value of equity, and variability in stock price returns relate to auditor judgments of litigation risk, to their recommendations for the amount of evidence required to reduce the risk of a material misstatement to an acceptable level, and to client fees. The hypotheses are tested in a field experiment where 243 audit partners and managers of four "Big 6" firms from offices throughout the U.S. were each asked to review a single case describing a prospective audit client, and then (1) assess certain elements of litigation risk associated with the engagement, (2) evaluate the financial condition of the client, and make recommendations for (3) the required amount of audit evidence and (4) client fees. Asset structure, sales growth, firm market value, and stock return variability were each assigned two levels (high/median) in the between-subjects experimental design, giving rise to 16 versions of the case which were distributed randomly across the subject sample. The results indicate that the client's overall financial condition is the primary consideration in the auditor's assessment of litigation risk and recommendations for the audit plan and fees. Poorer financial condition was associated with higher levels of litigation risk, more audit evidence, and higher audit fees. The results for asset structure (receivables and inventory as a percentage of total assets) were generally consistent with the hypotheses and with the results for financial condition, though much weaker. Client market value and sales growth were generally unrelated to litigation risk, and the variability of the client's stock price was either ignored or viewed as relating negatively to litigation risk. Additional tests suggest that audit fees reflect both the amount of audit evidence collected and an additional premium to cover litigation risks. That is, auditor assessments of a client's overall litigation risk explained a significant amount of the variance in audit fees over and above the amount explained by audit evidence, suggesting that auditors may be charging clients to insure against future litigation losses. The evidence does suggest, however, that the portion of the audit fee constituting the insurance premium is unrelated to the client characteristics examined in this study. Identifying the client characteristics that relate to the insurance premium may be an important area for future research. In the next section, prior research is reviewed and its relationship to the design of the reported study is explained, followed by descriptions of the theoretical model and related hypotheses. The data collection and analysis procedures are then described, and the paper closes with a discussion of the results and implications.]