This paper discusses an approach to Introducing empirical accounting research design to Ph.D. Students. The approach includes a framework for evaluating accounting experiments as well as studies based on passive observation of subjects or data. Alternative methods of isolating the effect of the "independent" variable of interest from effects of prior-to-the-study-period variables and contemporaneous variables are discussed along with the advantages and limitations of each method. Also discussed is the relationship between type I and type II error risks, sample size, and research design. The importance of research design, including theory development and means for mitigating the effects of extraneous variables, is emphasized as perhaps the only practical way to achieve research objectives in empirical research 'in accounting.
Analytical review can be a relatively inexpensive means for reducing detailed substantive testing in auditing. This article presents a formulation and comparison of four statistical and two naive procedures for conducting analytical review which rely on substantially different information sets. Specifically, ordinary least squares regression predictions and three sets of integreted-autoregressive-moving-averege-(ARIMA) based predictions are compared with martingale and submartingale predictions for a set of monthly accounting series. The data for the empirical work are 15 years of operating revenues of a sample of six railroads in the southwestern United States. All methods exhibit a slight prediction bias but the ARIMA-based univariate transfer function, which requires the largest information set and the greatest computation effort, yields the smallest mean absolute error as well as the smallest prediction bias. Regression predictions are second in predictive power. ARIMA predictions of revenues and ARIMA predictions of the independent variable as input for regression predictions of revenues (which can be used when an independent variable is not economically available or available only at a lag) are found to reduce substantially mean absolute yearly bias and mean absolute errors vis-a-vis the naive procedures. Considering the results, ARIMA bases seem to be potentially useful but not as generally applicable alternative(s) to the more traditional time series regression. Other characteristics of ARIMA predictions are briefly explored.
This article describe the uses of the time-shared interactive computer in the real-time environment as a teaching aid in the auditing of Electronic Data Processing systems. The approach described here has been used in undergraduate auditing classes at the University of Iowa. Students work with files of data and programs prepared by the instructor and stored within the computer system. The student's focus is on the audit problem to be solved, the input of data and the use of the computer to yield a solution. As in practice, no programming knowledge is required. The time-shared computer allows the user to communicate with the computer as if he were the only user of the system.
Presents a reply to comments made by Holzmann and Gressis on a study about diversification at the company level. Selection of investment projects; Information on a measure of ex ante diversification success which alleged to have ex ante relevance for the capital budgeting decisions of management; Conclusions.
This article focuses on portfolio theory and company returns. Two topics of recent interest in the literature of accounting and finance are portfolio theory and the reporting of segment financial data by large, multisegment corporations. In the paper an integration of the two areas will be explored by examining the relationship between the covariability of segment earnings of a sample of multisegment firms and the covariability of the returns of these shares with the market. The purposes are to present an ex post accounting measure of diversification and apply the measure to existing accounting data and relate this accounting measure of diversification and risk to the market determined risk measure in order to provide some empirical evidence as to the market evaluation of diversification at the company level. As early as 1952, researcher Harry Markowitz suggested a portfolio context in which the expected risk of an investment is considered in an investment decision as well as the expected return from the investment. An "efficient" portfolio is one for which the expected risk is minimum for a given expected return.
This study reports the results of an experiment in which audit seniors made judgments in analytical review and compliance testing settings. In both settings, results consistent with the hypothesized use of the anchoring and adjustment heuristic were observed. With respect to analytical review, the study alerts auditors to the potential importance of forming expectations concerning a client's audited values without considering the recorded (book) values. With respect to compliance testing, a judgment procedure that mitigates the potentially dangerous consequences of anchoring when judgmental Inferences from sample information must be made is presented. Results of the compliance study were used by the Sampling Standards Task Force of the AICPA in developing Statement on Auditing Standards No. 39, entitled, "Audit Sampling."
This paper reviews auditing research on the process by which auditors form their opinions on financial statements. A structure for this research is provided to organize the review and to provide insights into areas where research is needed. This structure is obtained by cross-classifying steps in theory development and steps in the opinion formulating process. While several important lines of research have begun, the primary conclusion is that a great deal of potentially important research has not been performed.
This paper reports two experiments in which Big 5 audit managers estimate reported (audited) earnings conditional on analysts' consensus forecast, auditing standards, and auditor discovery of a quantitatively immaterial earnings overstatement. We find that auditors judge overstatement correction less likely if it would cause a missed forecast, even for objectively measured misstatements. This behavior is consistent with SEC Chairman Levitt's concerns about opportunistic corrections to manage earnings to forecasts. Also, SAS No. 89's mandated representations and communications do not increase corrections that would cause a missed forecast, indicating that the Auditing Standards Board has limited ability to reduce opportunistic corrections through such regulations.