Knowledge that Transforms

Income smoothing, Chemical industry, Accounting measures, Systematic normalization criterion

An important function of managerial accounting is the provision of information for controlling activities. In this regard, the data generated by the accounting process should facilitate: (1) evaluations of the degree of conformance between actual states of affairs and goals, (2) the selection of managerial actions that will contribute to the conformance of actualities and goals, and (3) evaluations of the need for exploratory efforts directed towards developing additional alternative actions, modifying managerial goals, or both. Several proposals have appeared which are designed to enhance the degree to which the accounting process facilitates managerial control. Most of these proposals focus upon two actions that may be initiated in order to a particular process, i.e., investigate or do not investigate. Also, most of these proposals only consider a probability distribution defined on the current state of the system (and, usually, conditional upon a set of observations or experimental outcomes).' Optimal action is defined by some of the proposed approaches by comparing a measurable characteristic of the process to be controlled with a stipulated managerial goal or a stipulated standard. Simple control chart schemes and schemes that embrace the use of information-theory measures are examples of such ap-

Paul Frishkoff, An Empirical Investigation of the Concept of Materiality in Accounting, Journal of Accounting Research, Vol. 8, Empirical Research in Accounting: Selected Studies 1970 (1970), pp. 116-129

Accounting errors, Accounting allocation, Uncertainty

It is a great pleasure to meet with a group such as this, devoted to-or at least interested in-the study of what is actually going on in the real world, with the object of drawing useful conclusions from the facts. In my opinion, as a useful way of spending one's time this compares favorably with the popular pastime of arm-chair pontification with total reliance on a sort of mystic inner guidance developed during a lifetime of defending the indefensible from assaults of change. Simulated cases studied in the classroom and business games on the computer are certainly good fun and, up to a point, are perhaps instructive. But I welcome the evidence of a growing concern with studying the actual facts, rather than even the most ingenious simulations thereof. In such areas as financial communication, we cannot (and I am sure will never be able to) match the controlled conditions which the chemist or physicist can often create in his lab for experimentation. This may be illustrated, in a simple-minded sort of way, by contrasting the control of heat in a lab experiment with the control of inflation in the economy. Presumably by controlling the flow of fuel, temperatures can be raised in a lab experiment absolutely predictably. However, while inflation is certainly closely related to money supply, the effect on prices of a given increase in money supply is nothing like so predictable. The price rise depends on many noneconomic factors-for in dealing with people, all sorts of political considerations inevitably enter the picture-and I sometimes wonder whether our difficulties in controlling inflation do not stem from the fact that we tend to think of inflation as an economic rather than as a political problem. Certainly in Canada, during World War II, we virtually halted inflation by appointing a Prices Czar who announced it was not to take place. A special case of course, but one which dramatically illustrates the principle. But if we cannot hope to match the controlled observations of the

That hereafter, whenever practicable and reasonable, and where the aggregate amount of notes and accounts receivable represents a significant portion of the current assets or of the total assets of a concern, confirmation of notes and accounts receivable by direct communication with the debtors shall be regarded as generally accepted auditing procedure in the examination of the accounts of a concern whose financial statements are accompanied by an independent certified public accountant's report, and that the method, extent, and time of confirming receivables or a part thereof, be determined by the independent certified public accountant as in other phases of procedure requiring the exercise of his judgmentl

A major purpose of the Estes study was to determine, by using questionnaires, the expected usefulness of current cost information for various classes of assets, both current and long term.2 Two assumptions were made in conducting the study: (1) current costs were objectively measurable, and (2) the current cost information would be of a supplementary nature only. The sample was selected from three organizations: the Institute of Chartered Financial Analysts, the National Association of Bank Loan Officers and Credit Men (Robert Morris Associates), and the Financial Executives Institute. These groups were chosen because Estes believed they closely paralleled two major financial statement user groups: (1) investors, both current and potential, and (2) lenders. Questionnaires were sent to 300 members from each group. A total of 338 or 37.8% responded. The results of the study were that 81 percent of the item responses

Amortization, Advertising expenses, Financial Statements, Goodwill