Knowledge that Transforms

This study examines the relation between performance covenants in private debt contracting and conservative accounting under adverse selection. We find that under severe adverse selection (i.e., high information asymmetry), accounting conservatism and performance covenants act as complements to signal that the borrower is unlikely to appropriate wealth from the lender. No such relation obtains in a low information asymmetry regime. We further show that in the high information asymmetry regime, borrowers with high levels of conservatism and tight performance covenants generally enjoy lower interest rate spreads than borrowers with low levels of conservatism and loose performance covenants. Consistent with our signaling theory, in the high information asymmetry regime, borrowers with high levels of conservatism and tight performance covenants are less likely to make abnormal payouts to shareholders. Our empirical results are robust to alternative measures of conservatism and covenant restrictiveness.

This research studies whether severance agreements may reduce fraudulent earnings management, and whether severance pay mitigates executives’ career concerns. In a sample of large U.S. firms, those with higher severance pay are less likely to be subject to accounting and auditing enforcement releases ( AAER s) by the U.S. Securities and Exchange Commission ( SEC ). Among S&P 500 firms in the post‐ SOX period with premanaged earnings below analyst forecasts, firms with higher severance pay are less likely to meet/beat the analyst forecast using abnormal accruals. Overall, these results suggest that fear of losing a lucrative severance package, and/or the insurance offered by such a package curbs earnings management.

Recent research suggests that adopting imprecise accounting standards elevates audit firm litigation exposure and could undermine auditor objectivity if audit firms respond by herding to industry norms. This paper reports the results of two experiments that demonstrate how audit firms can effectively mitigate the elevated litigation exposure without herding to industry norms by staffing engagements with recognized technical experts, using judgment frameworks and automated decision aids, and providing persuasive evidence of adherence to auditing standards. We find that judgment frameworks are particularly well‐suited for defending judgments under imprecise standards, and represent a cost‐effective alternative to using technical experts. However, our results also indicate that judgment frameworks may provide a safe harbor for relatively low‐quality judgments when those frameworks are used under precise standards. We discuss implications for audit firms, courts, and regulators that currently conduct or evaluate audits within and across jurisdictions where the precision of accounting standards varies considerably.

Discretionary bonus adjustments allow managers to restore the alignment of employee effort and compensation when bonus amounts are based on noisy objective performance measures. The implications of discretionary adjustments for employees' future efforts and fairness perceptions present important trade‐offs for managers to consider. Adjustments may be used to motivate different types of effort in future periods, but may also create perceptions of unfairness among employees who are not affected by negative events. This study examines the joint influence of the likelihood of future negative uncontrollable events and compensation interdependence (i.e., the extent to which one employee's compensation influences others' compensation) on managers' willingness to make adjustments for the effect of a negative uncontrollable event on a single employee. In our experiment, we manipulate the likelihood of future uncontrollable events and whether bonuses are determined individually or are drawn from a shared bonus pool. Results show that managers are less willing to adjust when the likelihood of future events is high to avoid setting a precedent, thereby motivating employees to adapt to changing conditions. We also find that managers are less willing to adjust, regardless of event likelihood, when compensation interdependence is high, to avoid demotivating unaffected employees. Finally, we find that participants' general attitudes toward compensation significantly influence their adjustment decisions beyond the effects of our independent variables. Our results highlight the unique nature of discretionary adjustments, help explain findings from previous research, and demonstrate important considerations managers must make when using the flexibility provided to them in pay‐for‐performance contracts.

Responding to calls to instate the visual in accounting history research, this study utilizes photographic images to reveal the role of accounting in the attempt to preserve an ideal (ruralism) and an institution (the family farm) in the United States . These elemental features of the American way of life were threatened during the interwar depression, resulting in governmental programs to secure their restoration. The analysis of official imagery reveals how the accounting prescriptions attending state intervention in agriculture were deemed conducive to the fortification of the economic, social and political foundations of agrarian living. Documentary photographs propagated the notion that accounting facilitated companionate marriage and the inclusive family. They also suggested that accounting was a focus for encouraging the communitarian endeavor, democratic participation and receptivity to state interventionism considered necessary to preserve the rural mode of living.

The above article has been retracted at the request of authors Robert Libby and Hun‐Tong Tan, in agreement with the Editor‐in‐Chief, Patricia C. O'Brien, the copyright holder, the Canadian Academic Accounting Association (CAAA), and Wiley Periodicals, Inc. Bentley University conducted an investigation confirming that Dr. J. E. Hunton, while a faculty member at Bentley University and without the knowledge of his co‐authors, engaged in research misconduct, specifically data fabrication. Dr. Hunton provided the data used in the above study, and did not respond to a request for comment. Based on Bentley's initial report and further investigation into details specific to this paper, we conclude that the validity of the data cannot be confirmed. To correct the academic literature and maintain standards of academic integrity, we therefore retract the paper. The article was published online in Contemporary Accounting Research on 13 May 2010, in Wiley Online ( wileyonlinelibrary.com ). Reference Tan , H.‐T. , R. Libby , and J. E. Hunton . 2010 . . Contemporary Accounting Research 27 (): 187 – 208 . doi: 10.1111/j.1911‐3846.2010.01006.x

We investigate how auditors learn the technical aspects of their professional role while performing client engagements, and how that learning process has been shaped by changes in societal, economic, and regulatory forces. Prior studies explicitly recognize that auditors need social skills and demeanor consistent with professional norms as well as requisite knowledge, but those studies generally focus on the processes through which new auditors are molded toward consistency with social norms. In contrast, we focus on forces affecting the transfer of technical knowledge from supervisor (guide) to subordinate (learner) in the everyday work setting. Our evidence derives from semi‐structured interviews with 30 relatively new and more experienced audit partners at one Big 4 firm, thus spanning multiple “generations” of experience. Results confirm that auditors primarily acquire technical knowledge on the job, through the interactions among individual engagement team members. However, partners express concern about changes in the practice environment that may limit effectiveness of on‐the‐job learning, including characteristics of personnel, the approach to formal training at induction, supervisors' reluctance to provide candid feedback, regulatory and economic pressures, and the increased distraction, and reduced interpersonal contact associated with the use of information technology. At the end of the day, our findings raise implications for practice regarding the difficulty of developing effective learning conditions for auditors in the face of these challenges.

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