Knowledge that Transforms

[A principal-agent relation is analyzed where the agent chooses an unobservable effort level and an observable level of utilization of a resource supplied by the principal. When the agent has private information about the usefulness of the principal's resource, it is shown that the optimal compensation function must include the resource level as an argument. That is, some form of "cost allocation" appears to be part of the optimal solution to the principal's problem. Further analysis shows that standard cost allocation techniques (where the agent is allocated more costs if he or she uses more of the resource) may not be efficient in motivating the agent's choices. In some circumstances, it may be optimal to pay the agent more if he or she used more of the principal's resource.]

[This Small Sample Study describes and illustrates two types of discrepancies that can occur between the change in certain balance sheet amounts as derived from comparative balance sheets and the change that is reported in the funds statement. Four possible causes for such discrepancies are discussed and disclosure policies that would help to overcome some possibly serious reporting deficiencies are suggested.]

[This study compares litigation activities of independent auditors to assess litigation as a means for making quality distinctions among auditors. The study provides a frame-work suggesting auditors with relatively low (high) litigation activity represent higher (lower) quality suppliers. The empirical analysis examines a sample of legal cases (n = 472) and resolutions for these cases (if available, n = 183). The cases involve audit-related litigation against both Big Eight and large non-Big Eight firms during 1960-1985. The results indicate that non-Big Eight firms as a group have higher litigation activity than Big Eight firms. This result is consistent with existing research supporting the Big Eight as quality-differentiated auditors. Comparisons among Big Eight firms reveal some significant differences. However, identification of particular Big Eight firms as low (high) litigation activity auditors appears sensitive to the type of analysis.]

[Inequity in capital markets, defined here as inequality of opportunity or the existence of systematic and significant information asymmetries across investors, leads to adverse private and social consequences: high transaction costs, thin markets, lower liquidity of securities, and in general, decreased gains from trade. Such adverse consequences of inequity can be mitigated by a public policy mandating the disclosure of financial information in order to reduce information asymmetries. The equity-orientation of disclosure regulation advanced here differs markedly from the traditional, moralistic concepts of equity in accounting, which are generally phrased in terms of maintaining fairness, eliminating fraud, and protecting the uninformed investors against exploitation by insiders. In contrast to such vague, anachronistic, and unattractive notions, the equity concept advanced here is state of the art and operational, being linked directly to recent theoretical developments in economics and finance. As such it provides an economically sound justification for disclosure regulation, and furthermore, it offers accounting policymakers an operational "public interest" criterion for disclosure choices and opens up to researchers a rich agenda for evaluating regulation consequences.]

[This paper discusses the problem of equity accounting for reciprocal stockholdings. Alternative accounting treatments are presented. Illustrations of some of these alternatives are discussed which are drawn from actual practice in New Zealand. The treatments are classified and evaluated according to two broad underlying theories of equity accounting.]

[This study examines the joint effect of perquisite disclosure regulations and enforcement policies on changes in cash salary and bonus compensation paid to chief executive officers. It is hypothesized that the combined effect of an SEC perquisite disclosure requirement and the IRS policy of taxing perquisites as income causes a shift from perquisites to monetary compensation. A regression model is used to assess the changes in real compensation. The findings support the hypothesis that a change in the chief executive officers' compensation occurred as a result of the disclosure requirement and tax policies.]

[The research reported here investigates the effects of information choice and information use on the quality of municipal financial analysts' predictions concerning changes in the general obligation bond ratings of cities. Analysts were given a menu from which they chose information; a statistical model of bond rating changes was constructed using the same information. Analysts predicted bond rating changes using either their self-selected information or information selected by the statistical model. Although previous research concluded that information choice was the main factor in humans' sub-optimal prediction achievement, the results in this study show that humans performed about as well as statistical models in a validation sample. Previous research was reinterpreted in light of the current results.]

[This study examines the contention that a change in the method of financial reporting for privately-funded research and development (Statement of Financial Accounting Standards No. 2 and Securities and Exchange Commission Accounting Series Release No. 178) may have affected the ability of small high-technology firms to secure federal agency contract awards for R&D. Even though cash flows were not changed, many of these firms had significantly negative changes in the accounting levels and ratios used by federal agency analysts in evaluating financial capability of contract bidders as part of a preaward survey. ANOVA and ANCOVA models on a set of 101 research-intensive firms, with under $100 million of sales in 1975 and analyzed over the time period 1970-1979, did not detect an effect on the dollar amounts of the awards. Also, a matched-pair comparative study did not demonstrate any significant differences between expensing (unaffected) and deferring (affected) firms. Based upon these results, it is concluded that there is no evidence that the R&D rule reduced the amount of R&D awards by federal agencies to small research-intensive companies.]

[Previous studies examining internal accounting control judgments have found an inconclusive association between auditor consensus and auditor experience. The present study suggests that an association between judgment consensus and situational experience may be confounded because of the tenure of an auditor with the same audit staff group and/or superior. The adaptive behavior in an organizational relation suggests that judgment consensus among subordinates should increase (i.e., become more congruent) as the subordinate has greater interaction with the audit staff group and/or superior. As support for these expectations, an experiment was conducted using auditors of a state auditor's office. The results indicate that consensus among staff auditors increased as the length of time that staff auditors had been associated with the same audit manager increased, but did not increase based on the length of time that the auditors had been with the state auditor's office.]

[Popper's falsificationism is apparently being adopted as an ideal by accounting researchers. For example, Christenson [1983] has criticized Watts and Zimmerman's [1978, 1979] theories for not conforming to Popper's approach. This paper argues that Popper's falsificationism should not be viewed as an attainable ideal by accounting researchers, and that standard of rigor and research and experimental design are sufficient to support Christenson's criticisms without recourse to Popper's methodology.]