Abstract This paper examines the change in the average level of moral development over a 7.5‐year period of promotion, attrition, and survival in five Big 6 firms. The study improves upon previous cross‐sectional studies that found decreases in the average level of moral development at the senior manager and partner levels, which has been referred to as the “inverted‐U” phenomenon. Problems with these studies that limit the generalizability of their findings include their cross‐sectional nature and samples that usually come from one or two firms. Over a 7.5‐year period, we found that the participating Big 6 firms retained auditors with higher average levels of moral development (measured using the defining issues test), while those with lower average levels left the firms. The average level of moral development for new partners was at least as high as the group from which they came. This research suggests that the concern about Big 6 firms retaining a higher proportion of auditors with lower moral development may be an artifact of research design.

Abstract. This study extends prior research on the average level of moral development in public accounting by examining five large accounting firms and three staff levels. The research is important because it highlights the need to include auditors from several firms in research designs, provides evidence of differences in moral development among public accounting firms, and profiles the professions' average level of moral development for three levels. The data are from 494 managers and seniors (204 females and 290 males) from five Big Six firms. Using the Defining Issues Test (Rest 1979a) to measure moral development, several results were noted. First, the results indicate a difference in the average level of moral development among firms, suggesting that use of subjects from only one firm inhibits the generalizability of findings regarding moral development. Second, female managers are at a significantly higher average level of moral development than male managers. In fact, the average scores for male managers fell between those expected for senior high school and college students. The data suggest that a greater percentage of high‐moral‐development males and low‐moral‐development females are leaving public accounting than their respective opposites. These results indicate that the profession has retained, through advancement, males who are potentially less sensitive to the ethical implications of various issues. The analysis also indicates that Kohlberg's (1969) theory of moral development is not biased towards the thought processes of males because female auditors did not score lower on the Defining Issues Test.

Abstract. This study investigates variations in covenants across different classes of preferred stock and describes the role of accounting numbers in such covenants. The findings indicate that covenants in contracts that protect the priority of the claims of preferred stockholders are more prevalent in very debt‐like preferred stock issues when there are greater anticipated conflicts over claim priority with common stockholders. When the preferred stock issues take on common equity‐like interests, there is less opportunity for common stockholders to gain from diluting the priority of the claims of the preferred stockholders. Consequently, the contracts are not configured to the same extent of restrictions on wealth transfers. Audited accounting numbers are utilized extensively in these covenants, and the contracts adjust these numbers to limit management's discretion in their choice of accounting policies for relaxing the covenants. Résumé. Les auteurs analysent les différences observées dans les clauses restrictives associées à diverses catégories d'actions privilégiées et décrivent le rôle des données comptables chiffrées dans ces clauses. Les conclusions de l'étude révèlent que les clauses restrictives des contrats qui assurent la priorité des créances des actionnaires privilégiés sont plus répandues dans les émissions d'actions privilégiées s'apparentant très étroitement à des titres d'emprunt lorsque les conflits prévus avec les actionnaires ordinaires en ce qui a trait à la priorité des créances sont plus importants. Lorsque les actions privilégiées émises s'apparentent davantage à des actions ordinaires, les actionnaires ordinaires sont moins susceptibles de tirer profit d'une dilution de la priorité des créances des actionnaires privilégiés. Par conséquent, les contrats ne sont pas structurés de façon à contenir des restrictions de même portée sur les transferts de richesse. Les données comptables vérifiées sont abondamment utilisées dans ce genre de clauses restrictives, et les contrats prévoient l'ajustement des données chiffrées de façon à limiter la discrétion dont jouit la direction dans le choix des conventions comptables susceptibles d'assouplir le caractère restrictif des clauses.

Abstract This paper investigates brand name, industry specialization, and leadership audit pricing in the wake of the mergers that created the Big 6 and the Big 5 accounting firms. For samples of Australian listed public companies in each of the postmerger years 1990, 1992, 1994, and 1998, we estimate national audit fee premiums for the Big 6/5 auditors and the industry specialists and leaders. We find limited support for the ability of the Big 6/5 to obtain fee premiums over non‐Big 6/5 for those industries not having specialist auditors. Nonspecialist Big 6/5 auditors are able to obtain fee premiums over nonspecialist non‐Big 6/5 auditors for those industries having specialist auditors. However, this result only holds among the smaller half of our sample. We do not find strong support for the presence of industry specialist premiums in the postmerger years, especially after 1990, using various definitions of industry specialist. We find, at best, limited support for the presence of industry leadership premiums. The evidence suggests that after the Big 8/6 audit firm mergers, some caution is required in generalizing the Craswell, Francis, and Taylor 1995 finding of national market industry specialist premiums. More generally, the study raises questions about the tenuous link between the concept of specialization and national market‐share statistics.

Abstract This paper extends the application of the bootstrap method in accounting research to a simultaneous equations model of the demand and supply of audit services with mixed qualitative and continuous dependent variables. A moderately sized sample of 118 quality control reviews (Copley, Doucet, and Gaver 1994) is used to demonstrate the bootstrap method and compare results to estimates of standard errors obtained from Amemiya's 1978 asymptotic generalized least squares (GLS) procedure. We find that the GLS t ‐statistics are inflated by as much as 55 percent and the corresponding p ‐values are likewise overstated when compared to the bootstrap results. The problem is more acute with the qualitative dependent variable for audit quality, which is often the key variable of interest.

Abstract. Previous work on hypothesis generation demonstrates that auditors tend to generate frequently occurring financial statement errors as their initial hypotheses to explain unexpected fluctuations. However, such work does not examine how the initially generated hypothesis affects subsequent performance at identifying an actual error. We hypothesized that the initially generated hypothesis would interfere with an auditor's ability to subsequently switch to a different hypothesis. Thus, if the initial hypothesis were incorrect, auditors would find it difficult to switch hypotheses in order to identify an actual error. Moreover, initially generating a frequent error would exacerbate this difficulty. Auditor‐subjects were asked to generate an initial error hypothesis after seeing a pattern of fluctuations in which sales and accounts receivable were overstated. After they generated their initial hypothesis, half of the subjects were provided with additional information that was consistent with a very frequent error (sales cutoff) and the other half were provided with information consistent with an infrequent error (sales recorded twice). As expected, we found that initially generating the very frequent error (i.e., sales cutoff) versus some other less frequent error affected auditors' subsequent performance at identifying actual errors. Specifically, auditors who generated the very frequent error as their initial hypothesis performed best when it was the actual error, but performed worst when the infrequent error was the actual error. In contrast, auditors who generated a less frequent error as their initial hypothesis performed moderately well (i.e., between best and worst) both when the actual error was frequent and when it was infrequent. The implications of these results for audit efficiency and effectiveness are discussed.

Résumé. Les travaux antérieurs qui ont porté sur la formulation d'hypothèses démontrent que les vérificateurs ont tendance, dans la formulation de leurs hypothèses initiales, à attribuer les fluctuations imprévues aux erreurs qui se produisent fréquemment dans les états financiers. L'on ne s'interroge cependant pas, dans ces travaux, sur la nature de l'incidence des hypothèses initiales sur la performance subséquente dans le diagnostic de l'erreur véritable. Les auteurs avancent que l'hypothèse formulée au départ et la capacité des vérificateurs de passer par la suite à une hypothèse différente interfèrent. Si, par exemple, l'hypothèse initiale était inexacte, il serait difficile pour les vérificateurs de changer d'hypothèse dans le diagnostic de l'erreur véritable. Plus encore, le fait d'invoquer initialement une erreur fréquente exacerberait cette difficulté. L'on a demandé aux vérificateurs‐sujets de produire une hypothèse initiale relative à l'erreur après avoir pris connaissance d'un modèle de fluctuations dans lequel les ventes et les comptes clients étaient surévalués. Une fois formulée leur hypothèse initiale, la moitié des sujets recevaient de l'information supplémentaire révélant l'existence d'une erreur très fréquente (dans la démarcation des ventes) et l'autre moitié recevaient de l'information révélant l'existence d'une erreur peu fréquente (celle de la double comptabilisation d'une même vente). Conformément à leurs prévisions, les auteurs constatent que le fait, pour les vérificateurs, d'invoquer initialement l'erreur très fréquente (soit la démarcation des ventes) par rapport à une autre erreur moins fréquente avait par la suite une incidence sur leur performance dans le diagnostic des erreurs véritables. Plus précisément, les vérificateurs qui invoquaient l'erreur très fréquente dans leur hypothèse initiale obtenaient les meilleurs résultats lorsque cette erreur était l'erreur véritable, mais ils obtenaient les résultats les moins bons lorsque l'erreur peu fréquente se trouvait être l'erreur véritable. Les vérificateurs qui invoquaient une erreur moins fréquente dans leur hypothèse initiale affichaient, pour leur part, une performance relativement bonne (c'est‐à‐dire se situant entre la performance la meilleure et la performance la moins bonne), aussi bien lorsque l'erreur véritable était fréquente que lorsqu'elle était peu fréquente. Les auteurs analysent les conséquences de ces résultats sur l'efficience et l'efficacité de la vérification.