Dennis Murray, The Effect of Certain Research Design Choices on the Assessment of the Market's Reaction to LIFO Changes: A Methodological Study, Journal of Accounting Research, Vol. 21, No. 1 (Spring, 1983), pp. 128-140
Theories from the economics, management control, and organizational behavior literatures predict that when it is difficult to align incentives by contracting on output, aligning preferences via employee selection may provide a useful alternative. This study investigates this idea empirically using personnel and lending data from a financial services organization that implemented a highly decentralized business model. I exploit variation in this organization in whether or not employees are selected via channels that are likely to sort on the alignment of their preferences with organizational objectives. I find that employees selected through such channels are more likely to use decision‐making authority in the granting and structuring of consumer loans than those who are not. Conditional on using decision‐making authority, their decisions are also less risky ex post. These findings demonstrate employee selection as an important, but understudied, element of organizational control systems.
In this paper, I examine the sensitivity of promotion and demotion decisions for lower‐level managers to financial and nonfinancial measures of their performance and investigate the extent to which the behavior of lower‐level managers reflects promotion‐based incentives. Additionally, I test for learning versus effort‐allocation effects of promotion‐based incentives. I find that promotion and demotion decisions for store managers of a major U.S.‐based fast‐food retailer (QSR) are sensitive to nonfinancial performance measures of service quality and employee retention after controlling for financial performance. The likelihood of demotion in this organization is also sensitive to nonfinancial performance on the dimension of service quality, while the probability of exit is primarily sensitive to financial performance measures rather than nonfinancial performance measures. I also find evidence that the behavior of lower‐level managers is consistent with the incentives created by the weighting of nonfinancial performance measures in promotion decisions. Managers in locations where there is a higher ex ante probability of promotion and a higher potential reward upon promotion demonstrate significantly higher levels and rates of performance improvement in service quality. Finally, consistent with promotion‐based incentives inducing both effort‐allocation and learning effects, I find that performance‐improvement rates for service quality: (1) are higher in prepromotion periods in markets where promotions occur, (2) decrease immediately after the occurrence of a promotion in the same market area, and (3) remain higher than in markets where promotions do not occur. These findings provide some of the first empirical evidence on an alternative to the explicit weighting of nonfinancial metrics in compensation contracts as a mechanism for generating improvements in nonfinancial dimensions of performance.
The purpose of this paper is to examine an auditor's decision to investigate for fraud, when a manager with exogenous incentives to misreport chooses the quality of internal controls. I extend the strategic auditing literature by allowing the manager both a choice with respect to fraud and a second choice that affects the error rate in the audit population. Consistent with the practitioner literature, I assume managers can commit fraud by overriding internal controls, and that audits conducted in accordance with Generally Accepted Auditing Standards (GAAS) do not always distinguish between errors and fraud. The study is motivated by the increasing importance of internal controls in auditors' fraud risk assessments. In 1997, the Auditing Standards Board issued Statement on Auditing Standards (SAS) No. 82: Consideration of Fraud in a Financial Statement Audit. This standard requires auditors to assess the risk of fraud on every audit and encourages auditors to consider both the internal control system and management's attitude toward controls, when making this assessment.1
Our purpose is to investigate the use of geographical segment disclosures. Specifically, we examine whether equity valuations of U.S. multinationals are affected by geographical segment disclosures mandated by Statement of Financial Accounting Standards No. 14: Financial Reporting for Segments of a Business Enterprise (henceforth SFAS 14). Our results suggest that, when unexpected segmental earnings are large, geographical segment disclosures are used. For the most part, however, we find little evidence that these disclosures affect equity values. This research is motivated by the allegation that geographical segment disclosures are essentially useless. SFAS 14 (paragraph 34) allows considerable discretion in defining reportable segments and firms employ coarse definitions, possibly because of an innate fear of disclosure (Wechsler and Wandycz [1990]) or desire to finesse dumping and international transfer-pricing questions (Balakrishnan, Harris, and Sen [1990]). It is not difficult to find anecdotal evidence of coarse segmental definitions. Caterpillar Industries had reported three geographical segments: U.S., Europe, and Other. In June 1990, the company told analysts that Brazilian operations had entered a deep slump. The stock market reaction to this announcement was minimal. A few days later, however, the company informed analysts that this slump would cause second-quarter profits to be less than half the amount reported for the
Prior research on justification has typically focused on the differences in judgments between auditors required, or not required, to justify their decisions. However, justification memos can be prepared using different approaches. In this study we examine the impact of using three justification memos: supporting, balanced, and component. Using a comprehensive control environment case based on an actual client that experienced fraud, we find that the justification memo used can affect the judgments of auditors preparing the memos as well as the judgments of auditors who review their work. Specifically, the results indicate that auditors using an unrestricted component memo, who were required to write memos for components of their task by providing important positive and negative evidence, thought that the firm's control environment was more likely to prevent fraud as compared with the supporting and balanced memo groups. Additional analyses suggest that the reason for this result is that an unrestricted component memo focuses auditors’ attention on a larger percentage of positive control environment characteristics when a firm's underlying evidence set is mostly positive. This may be problematic because firms can have more positive than negative control environment characteristics, even when fraud is present.