Knowledge that Transforms

[The economic theory of regulation suggests that occupational licensing laws are enacted and administered to advance the interests of licensed practitioners. For example, grading standards on licensing examinations could be altered to protect incumbent practitioners from new competitors. This possibility is investigated with time series data of Uniform CPA Examination results for California and Illinois. The results indicate that when the exam was graded by the individual states, exam failure rates increased with downturns in economic activity (as measured by unemployment rates). However, the evidence shows no statistical relation between failure rates and economic activity in the years after each of the states adopted the AICPA's Advisory Grading Service.]

[This note extends previous research on accounting method choice in the petroleum industry by examining the association between selected attributes of "successful efforts" firms and the decision to change to "full cost" accounting. Firms that changed to full cost are found to exhibit higher levels of financial risk (leverage) and exploration activity (capital expenditures) when compared to firms that retained successful efforts, and these differences are shown to predate full cost adoption by several years. Tests also indicate that the change to full cost is associated with concurrent increases in debt financing and exploration investment.]

[Developments of accounting concepts and procedures in governmental, religious, and eleemosynary organizations have received scant attention in the literature. This study examines an extensive store of primary documents that chronicle the early development of the United Society for the Propagation of the Gospel in eighteenth century England. It concludes that the immediate impetus for auditing in the Society came from business practices rather than from government and that rudimentary managerial accounting procedures emerged in the Society as a result of internal needs for planning and control in much the same way they were emerging in businesses of the period.]

[This study examines empirically three aspects of auditor materiality judgments: (1) their association with publicly available financial information, (2) whether materiality judgment consensus differs across Big Eight audit firms, and (3) whether judgment consensus is correlated with audit firm structure. The results suggest that nine publicly available financial measures explain a significant portion of the variability in auditor materiality judgments, thereby raising a question about potential information in auditors' interest-capitalization consistency exceptions. Although publicly available financial information was found to be significantly associated with materiality judgments in each Big Eight firm, the judgment consensus of consistency opinion decisions varied among individual Big Eight firms. Not only were there significant differences in judgment consensus among firms but also a significant positive association was found between audit judgment consensus and the degree of audit structure, thereby providing empirical evidence that audit structure may influence audit judgment.]

[The perceived limitations of historical cost net income for assessing the relative performance of oil and gas firms led the SEC and FASB to issue a series of pronouncements requiring disclosure of current value reserve-based information to supplement the information contained in the primary financial statements. This study examines whether historical cost earnings of oil and gas companies possess information in the sense of explaining cross-sectional differences in firm security returns. Additionally, we examine whether various Reserve Recognition Accounting-based measures possess incremental information relative to historical cost earnings measurements. The results indicate that for the sample period 1979-1981, historical cost earnings as well as reserve-based measures constructed from RRA data contain information relevant to valuing oil and gas firms. However, these results deteriorate for the sample period 1982-1984 where reserve-based measures are constructed from SFAS No. 69 data. The weaker relations in the latter period are consistent with the findings of Miller and Upton [1985b] and Magliolo [1986] and are attributed to the relative stability of oil prices during this time frame which results in a lower "signal-to-noise" ratio for the various reserve-based measurements.]

[This paper analyzes the adjustment processes of financial ratios in the presence of costly adjustment and information uncertainty. The paper proposes a generalized partial adjustment-adaptive expectations model to characterize dynamic financial ratio adjustment processes. The proposed model incorporates the persistence of changes in industry averages into the process of financial ratio adjustment. The Gauss-Newton nonlinear regression method is used to estimate the structural parameters of the generalized model. Results show that adjustment to target ratios is not instantaneous. Results also show that there are differences in the patterns of ratio adjustment for firms in different industries with different sizes.]

[In response to the greater challenges and competitive pressures facing the public accounting profession in recent years, many CPA firms have hired significant numbers of MBAs. Yet there has been little empirical evidence of the comparative performance in public accounting of MBAs vis-a-vis undergraduates with an accounting major (BAs). This issue has important implications as to the appropriate educational training for those entering the profession and for CPA firm recruiting strategies. This study traced the performance of 54 MBA and 56 BA entry level accountants over a nine year horizon. Performance was measured by advancement, turnover, and salary increases. MBAs advanced more rapidly in the firm than BAs but did not demonstrate significant differences in turnover or salary increases. MBAs from top rated schools, however, reached the manager level faster and experienced lower turnover rates than other MBAs and BAs.]

[This paper provides empirical evidence on a truth-inducing pay scheme widely discussed and analyzed in the incentive contracting literature. An experiment was conducted in which subjects acted as subordinates who performed a production task. Budgets were participatively set under either a truth-inducing or slack-inducing pay scheme and either the presence or absence of a superior-subordinate information asymmetry about subordinate performance capability. Slack was defined as expected performance minus the participatively set budget. The results showed that, when the information asymmetry was absent, slack did not differ significantly between the pay schemes. However, when the information asymmetry was present, slack was significantly lower under the truth-inducing scheme. Similarly, the pay scheme and information asymmetry variables interacted to affect performance.]

[For years the SEC had required companies that experienced increases in their equity in subsidiaries due to a subsidiary stock issuance to enter that increase (or "gain") in Paid-In Capital. In 1983, the SEC changed its views on this issue in Staff Accounting Bulletin No. 51 [SEC, 1983]. Following the conclusions of an AICPA Issues Paper on the subject, the Commission decided to offer companies the option of reporting such gains from subsidiary stock issuances either in capital or in income in consolidated financial statements. This treatment was later extended to stock issuances of nonconsolidated equity investees, and companies began reporting these gains in income. This paper critically examines the view taken in the Issues Paper and reflected in SAB 51, that gains on subsidiary stock issuances are similar in substance to gains realized when the parent sells part of its investment in the subsidiary. It also reports on the treatment of these transactions in practice-and the window-dressing potential-by companies reporting them. We conclude that while a subsidiary stock issuance is similar in many respects to a parent's sale of its subsidiary's stock, there are important differences. Moreover, the proper accounting may depend on the theory of consolidation adopted. Public reporting of these transactions is often inadequate, particularly with respect to tax effects (an unsettled area in which standard-setting may be needed) and footnote disclosure.]

[This study was designed to provide empirical evidence on the effects of audit structure on audit judgments. Specifically, the study examined differences between structured and unstructured audit methods in terms of judgment consensus and auditors' use of coordination and control mechanisms, under different degrees of task uncertainty. A field experiment was conducted involving 113 audit seniors from four firms: two from each end of an audit structure scale. Contrary to expectations, auditors from structured firms did not exhibit uniformly greater consensus in their judgments. However, relative to unstructured firms' auditors, the auditors from structured firms exhibited a greater propensity to increase their use of certain control and coordination mechanisms (especially consultation with peers and audit managers) as the level of task uncertainty increased.]