This commentary considers experimental and archival auditing research published over the past 50 years and suggests directions for future research. Starting with Ashton (1974a) and Simunic (1980), I discuss major research themes occurring in these literatures. I use Brunswik’s lens model as a metaphor that highlights methodological complementarities and opportunities for convergence to address important issues. Possible topics to consider further in future research include the determinants of audit quality, the structure of audit firms and audit regulation, the effect of emerging technologies like AI, teaching and supporting future auditors, potential enhancements of the audit report, and expansion of the services that auditors provide to society.

This study tests the competitive equilibrium predictions of a multi-period model of audit pricing and independence in two sets of laboratory markets: a control set consisting of human subjects in the role of auditors contracting with robot clients, and a treatment set in which both auditors and clients are human subjects. The results in all the control-set markets and some of the treatment markets support the predictions of "lowball" pricing and that heterogeneous beliefs among auditors regarding the treatment of a client-reporting issue is a necessary condition for independence impairment. By contrast, several treatment-set markets exhibit cooperative behavior between auditors and clients to achieve jointly beneficial outcomes. This behavior deviates from the price-independence relationship predicted in the competitive equilibrium, exhibiting instead a price-independence relationship that is characterized by an absence of lowballing and frequent independence impairment, even when auditors have homogeneous beliefs.

Considerable evidence exists that governmental accounting numbers are related empirically to bond risk and return measures. However, prior research does not preclude the possibility that accounting numbers merely reflect unobserved factors such as economic and political attributes impounded in bond measures. This study considers whether governmental annual financial reports convey new information directly to the bond market. Changes in bond prices during the period around the release date of governmental annual reports were examined to assess market responses to the reports. No significant evidence was obtained to suggest that municipal bond investors use the information in the annual report at the time of its release to adjust bond prices. In contrast, new bond issues and bond rating announcements were associated with significant market reactions. Thus, these results indicate that, while issuer-specific accounting information may be used by bond investors in conjunction with decisions involving new issues and rating evaluations, investors do not appear to impound the information directly into secondary market prices at the time the information is released.

This study examines whether the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union significantly improves information comparability in 17 European countries. We employ three proxies—the similarity of accounting functions that translate economic events into accounting data, the degree of information transfer, and the similarity of the information content of earnings and of the book value of equity—to measure information comparability. Our results suggest that mandatory IFRS adoption improves cross-country information comparability by making similar things look more alike without making different things look less different. Our results also suggest that both accounting convergence and higher quality information under IFRS are the likely drivers of the comparability improvement. In addition, we find some evidence that cross-country comparability improvement is affected by firms' institutional environment. Data Availability: Data are available from commercial providers (Worldscope, DataStream, and I/B/E/S).

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn Email Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation OTHMAR W. WINKLER, THOMAS R. DYCKMAN; Interpreting Economic and Social Data: A Foundation of Descriptive Statistics. The Accounting Review 1 September 2010; 85 (5): 1820–1822. https://doi.org/10.2308/accr.2010.85.5.1820 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search

This paper reports the results of experiments designed to examine whether investor selection of auditors enhances auditor independence. The experimental design enables us to explore the effect on independence of different institutional rules as to who hires and fires auditors and to directly measure independence violations. The results suggest that transferring the power to hire and fire the auditor from managers to investors significantly decreases the proportion of independence violations. Additional analysis suggests that a reduction in independence violations increases the overall economic surplus generated in the markets examined.

We use experimental markets to examine stock-based compensation's impact on the objectivity of participants serving as audit committee members.We compare audit committee member reporting objectivity under three regimes: no stock-based compensation, stock-based compensation linked to current shareholders, and stock-based compensation linked to future shareholders. Our experiments show that student participants serving as audit committee members prefer biased reporting when compensated with stock-based compensation. Audit committee members compensated with current stock-based compensation prefer aggressive reporting, and audit committee members compensated with future stock-based compensation prefer overly conservative reporting. We find that audit committee members who do not receive stock-based compensation are the most objective. Our study suggests that stock-based compensation impacts audit committee member preferences for biased reporting, suggesting the need for additional research in this area.

Two essentially opposite accounting policy decisions were the FASB proposal to eliminate full cost (FC) accounting and the SEC proposal 13 months later to allow FC accounting while reserve recognition accounting was developed. The SEC's reversal of the FASB decision provides an opportunity to develop additional evidence concerning the market consequences of accounting policy decisions. The authors test whether the SEC proposal had a significant effect on the valuation of FC firms and whether its pricing effect was opposite to that observed at the time of the FASB proposal. A generalized least-squares procedure that takes account of contemporaneous correlation in abnormal return data is employed. The procedure and tests are completely general and appropriate for investigating the market effects of a variety of accounting policy decisions in which cross-sectional correlation of the data is a problem. Evidence is presented that the FC firms had significantly higher returns in the SEC period than the successful efforts firms. Furthermore, within the FC sample, a negative relationship is found between the abnormal returns of individual firms at the times of the FASB and SEC proposals.

Companies, including public accounting firms, are integrating systems with advanced algorithms into decision-making processes to assist with developing and evaluating complex estimates. However, individuals may hesitate to rely on algorithmic output, particularly under conditions of uncertainty. We conduct two experiments examining whether and how a system’s ability to adapt—an emerging feature of machine learning—interacts with uncertainty to influence accounting professionals’ reliance on algorithmic advice. In Experiment 1, we find that auditors are more willing to rely on advice from learning algorithms than static algorithms when estimation uncertainty is relatively high. Experiment 2 replicates this result in a general accounting context where preparers develop their own estimates. Our findings demonstrate that accounting professionals’ reliance on algorithms is contextually dependent, and highlights algorithm adaptability as an important technological feature that can promote advice utilization, particularly when adaptability is likely important to the judgment context (e.g., when estimation uncertainty is high).

This paper examines the relationship between the incidence of litigation events with potentially large damage awards and managers' accounting choices. We argue that the size of damage awards is a function of reported net income and net worth, and that this relationship provides management an incentive to manipulate accounting numbers. Our results indicate that managers of oil firms facing potentially large damage awards choose income decreasing non-working capital accruals relative to managers of other oil firms. Further, the results indicate that the management of these firms makes accounting choices that result in lower non-working capital accruals during the litigation period than in other years. These negative non-working capital accruals appear to result from the under-estimation of new reserves.