Knowledge that Transforms

The article focuses on the practice of cost allocation by the managers and their decisions related to performance measurements. According to the author a major survey indicated that 40 percent of 594 companies calculated income for internal decision and control purposes consistent with the way it is calculated for external reporting. Practically all cost accounting textbooks recommend that a manager's evaluation should be confined to those aspects of performance that he can directly influence in the time period under consideration, this concept is called responsibility accounting. Here the author attempts to provide several possible explanations for why managers are evaluated on the basis of costs over which they exercise no direct control. His focus is on the controllability of costs and responsibility accounting rather than the issue of fixed versus variable costs. He examines rationales for basing the revenue department agent's compensation on those non-controllable service costs which are uncertain at the time of the contract.

Transfer pricing, Agency theory, Uncertainty, Moral hazard

Auditing, Decision making, Frequency judgements, Internal control evaluations

Maureen McNichols, G. Peter Wilson, Evidence of Earnings Management from the Provision for Bad Debts, Journal of Accounting Research, Vol. 26, Studies on Management's Ability and Incentives to Affect the Timing and Magnitude of Accounting Accruals (1988), pp. 1-31

Equity-for-debt swaps, Earnings expectations, Information effect

Ricks [1982] found that stock returns near the earnings disclosure dates of 1974 LIFO adopters were negative and significantly lower than returns near the earnings disclosure dates of firms not using LIFO. Given that firms adopting LIFO in 1974 were voluntarily switching to an accounting method providing often significant tax savings, it is not obvious why investors would have reacted negatively. Nor is it likely that investors were unaware of many of the firms' LIFO adoption decisions. This study presents evidence suggesting that the negative excess returns observed by Ricks [1982] were associated with, and possibly due to, analysts' systematic overestimates of earnings of firms adopting LIFO in 1974. We are aware of no previous study documenting systematic errors in analysts' earnings forecasts conditional on a voluntary accounting method change.

This paper empirically investigates the relation between investor wealth and the value of annual and quarterly earnings announcements as implied by (1) the behavior of mean stock trade transaction sizes at announcement dates, and (2) transaction size-stratified trading activity in postannouncement time periods. Announcement-period mean transaction sizes are found to exceed expected mean transactions sizes estimated from trading activity occurring in nonannouncement periods. This result is attributed to a greater relative trading response to earnings announcements by wealthier investors, consistent with Ohlson's [1975] proposition that information value increases with investor wealth in a security market setting. Further evidence of a positive relation between value and wealth is found when postearnings announcement stock transactions are stratified by share size into three strata, where the first stratum (small stratum) is transactions of 100 and 200 shares, the second stratum (large stratum) is transactions of 300 to 900 shares, and the third stratum (institutional

Auditing, Auditor change, Auditor change disclosure, Delayed hiring

Earnings announcements, Stock options, Option open interest