Knowledge that Transforms

ABSTRACT We study how auditors prioritize tasks and how variations in task order influence auditors' performance. Drawing on conservation of resources theory, we develop and test our hypotheses through three experiments involving over 350 professional auditors. The first two experiments assess the impact of task order on performance. Across two settings, we manipulate task order and find that prioritizing an easier task generally results in lower performance compared with prioritizing a difficult task. In the third experiment, auditors are given autonomy over task ordering. We observe a tendency to prioritize easier tasks, particularly under heightened time pressure. We do not find any evidence that psychological ownership weakens the effect of time pressure on easy task prioritization.

ABSTRACT The rise of independent oversight of the accounting profession has attracted considerable research attention. Much of this research has studied how professional accounting bodies and the Big 4 firms have shaped the mandate and capabilities of independent oversight bodies. Less is known about how independent oversight has affected the workings of professional accounting bodies, particularly their capacity to simultaneously govern and represent their members. This paper advances our understanding of this dynamic through a longitudinal, interpretive case study of how the Dutch professional accounting body, the NBA (the Royal Netherlands Institute of Chartered Accountants), adapted and developed its regulatory intermediary role during a lengthy period of intense oversight by the Dutch regulator, the AFM (the Authority for the Financial Markets), and shifting levels of Big 4 firm discord. Drawing on extensive archival materials and insights gained from in‐depth interviews with key participants, the study advances existing theorizations of the work of regulatory intermediaries by highlighting both their functional variability and fragility. In responding to recurring crises and critique, the NBA's intermediary role shifted from facilitation to curation and ultimately to orchestrating the Big 4 firms' regulatory response. Such shifts were neither smooth nor predictable—characterized by a sense of “role limbo” as the NBA battled to bolster its identity and authority when sidelined by the AFM or dictated to or impeded by the Big 4 firms. In examining such shifting intermediation and contesting levels of influence, the NBA's governance and representation functions emerge as more symbiotic than oppositional, with the NBA using its fulfillment of one as a means of strengthening its execution of the other. Overall, the paper's analysis uncovers the functional fragility of the NBA, which questions whether repeated calls for professional accounting bodies to rediscover their public interest mandate have adequately appreciated the complex, contested nature of the regulatory environment in which they operate.

ABSTRACT A concentrated debt structure can facilitate creditor coordination, which reduces the financial distress cost in a liquidity default but also increases the risk of a strategic default. Debt concentration affects the sensitivity of leverage to tax through these two forces. We show that firms with a more concentrated debt structure are more responsive to state corporate income tax rate increases in increasing financial leverage, suggesting that when the tax rate increases, debt concentration's role in reducing the financial distress cost matters more. The impact of debt concentration on leverage is more pronounced when firms are subject to a high default risk, have low asset redeployability, or have a low liquidation value. Additional debt covenants can facilitate low debt concentration firms to increase leverage after tax rate increases. Our findings suggest that debt concentration is an important factor influencing the tax sensitivity of financial leverage.

ABSTRACT We use theory from identity economics, which synthesizes research characterizing how personal identity shapes decisions in domains such as education and career selection, to predict that the process by which people sort into accounting careers produces a population of accountants with a distinctive set of values. Specifically, we hypothesize that two kinds of personal values, called conservation values and self‐enhancement values, are overrepresented among accountants because they are associated with the decision to work as an accountant. Using data from 38 countries in the European Social Survey, we find support for both hypotheses. Given this evidence that accountants' values prioritize stability over change and concern for self over concern for others, we further hypothesize that, motivated by these values, accountants will be relatively skeptical about contemporary targets of social reforms, including those pursued by prominent accounting organizations. We test this prediction using attitudes about climate change and tolerance for minorities and find support for it. Based on our findings, we derive recommendations for an effective design of social reforms in the accounting profession. Our findings are relevant for accounting elites tasked with leading the profession into a dynamic future and contribute to the new and growing literature on accounting's human capital.

Over the past decade, the audit profession has significantly increased its use of non‐equity partners for private (non‐listed) company audits. Such partners lead audit engagements and sign audit reports but do not share in the partnership's profits. Non‐equity partner positions were introduced in response to increasing workloads and to retain talented individuals unsuited to or uninterested in equity partnership, either temporarily or permanently. Using data from Big 4 private company audits during the period 2008–2017, our analyses show that equity incentives affect auditors' reporting behavior and their clients' financial reporting quality. Non‐equity partners are less likely to issue going‐concern opinions to their financially distressed clients, their reporting is less accurate (i.e., more Type II errors), their reporting is less conservative, and their clients' financial reporting is of lower quality (i.e., more frequent reporting of small earnings increases and more tax restatements). We also find that equity incentives mitigate some of the negative effects of fee‐based compensation on auditors' reporting behavior. Moreover, our findings suggest that incentives arising from ownership, rather than partners' innate differences or client differences, drive these associations.

Accounting Standards Update (ASU) 2016‐01 requires that unrealized gains and losses on equity investments (equity‐URGL) previously recognized in other comprehensive income now be included in net income. Using a sample of public insurers, we examine how this accounting standard change influences managerial investment decisions, with a particular focus on the moderating effects of compensation contracting and financial reporting practices. We find that prior to ASU 2016‐01, equity‐URGL was positively associated with CEO compensation, but this association dissipates in the post‐adoption period, when equity‐URGL is more frequently excluded from CEO performance metrics. Despite purported concerns about increased earnings volatility due to the new reporting requirements, highly affected insurers do not significantly reduce the size or risk of their equity investment portfolios following ASU 2016‐01, particularly when compensation metrics exclude equity‐URGL. We also find that equity‐URGL is more frequently excluded from non‐GAAP earnings post‐adoption, suggesting that managers adjust financial reporting practices as a response to the change. Moreover, highly affected insurers maintain the size and risk of their equity portfolios when equity‐URGL is excluded from non‐GAAP earnings. These findings suggest that managerial responses to ASU 2016‐01 are influenced by a balance between incentive structures and the costs associated with adjusting investment strategies.

In this study, we leverage judgment decomposition and information acquisition theories to develop and test an intervention to improve group auditors' identification of and response to component‐level qualitative risk. Improving group auditors' response to qualitative risk is important because (1) group audits are prevalent today and require multiple qualitative risk assessments, (2) auditors have historically overlooked qualitative risks, and (3) prior interventions have failed to improve auditors' response to qualitative risk. In an experiment with 88 audit partners and managers, we find that a hybrid risk assessment approach that combines elements of judgment decomposition and notetaking improves auditors' group audit planning decisions. Specifically, auditors utilizing our hybrid approach are better able to identify and respond to component‐level qualitative risks than auditors who use a holistic approach. Importantly, the improvement in qualitative risk response does not come at the expense of auditors' response to quantitative risk.

Product market advertising, while containing little new information, triggers spikes in investor attention. Using weekly advertising data, we find that sell‐side analysts issue optimistic earnings forecasts in response to heavier advertising in the prior week. This effect is not driven by confounding earnings or product news. It is more pronounced for experienced analysts and analysts affiliated with brokerages that rely solely on trading revenues. The optimistic forecast bias intensifies the impact of advertising on investor trades of the underlying stock during the following week, especially on retail buying. Overall, analysts appear to issue optimistic forecasts to exploit retail investor attention spikes induced by advertising.

Beginning May 1, 2020, with the strong support of our team of Editors, CAR implemented a reviewer recognition program.The purpose of the program is to annually recognize reviewers, nominated by the Editors, who regularly perform exceptionally high-quality and timely reviews.CAR has a long-standing tradition of providing thoughtful and constructive reviews

Prior research has established that tax liability increases lead to decreased compliance. However, tax liability changes do not happen in a vacuum. Notably, prior research has also identified a withholding phenomenon: individuals in a tax due position are less compliant than those in a refund position. Additionally, tax law changes are often enacted in politically polarized environments. We examine how three factors—tax liability changes, withholding position, and group affiliation—combine to influence individuals' tax compliance decisions. Our experimental results show that a tax increase is universally experienced as a loss, even when coupled with a tax refund and enacted by an ingroup, leading to decreased compliance. However, a tax decrease coupled with a tax due position is viewed neutrally and leads to less compliance than a tax decrease coupled with a tax refund. Further, group affiliation influences compliance in some situations. Individuals in a tax due position are less compliant when an outgroup, versus an ingroup, is responsible for the tax change. This study contributes to the mental accounting literature by examining how individuals react to mixed gain/loss situations when the gains and losses are of different types. We also integrate the previous separate research streams on the withholding phenomenon and tax liability changes. Practically, our results contribute to tax policy by showing how individuals react when tax law changes are enacted. Importantly, even when a tax change results in a decrease in tax liability, tax compliance may be affected by individuals' withholding position and group affiliation.