Knowledge that Transforms

ABSTRACT: This paper describes and illustrates an approach to teaching variance analysis which the authors have found to be very effective with their students. The approach is based on the dual ideas of profit impact as a unifying theme and a multi-level analysis in which complexity is added sequentially, one layer at a time. The analysis stops when additional complexity is not outweighed by additional "actionable" insights.

Internal audits derive their utility from the information which they provide about the effectiveness of the firm's system of internal control and from the effects they may have on the behavior of that system, both before and after the audit has been performed. This study concentrates on the informational aspects of internal audits, with particular attention being given to audit timing. A sequential decision process is defined wherein the objective is to minimize expected total discounted costs. The decision process can be characterized as an infinite-state, time-varying Markov decision process, and, accordingly, the decision model can be called a Markov decision model. Solutions to this model are obtainable by dynamic programming.

ABSTRACT: A participant observation methodology is employed in this paper to investigate the management strategy of a large public accounting firm. The author directly observed partners and managers of an audit practice office going about their daily tasks over a 3-month period. A descriptive model of the management strategy was developed from the observed matrix of daily interactions. The results indicate that there are three components to the management strategy: Doing, Representing and Being. Doing is defined as those activities which the firm undertakes to maintain and improve its relationship with its clients. Representing is defined as those activities which the firm undertakes to maintain and improve its relationships with outside parties other than clients. Being is defined as the image of the firm. The three components work together to manage the environment in which the public accounting firm operates.

ABSTRACT: The objectives of this paper are: (1) to correct several oversights and conceptual deficiencies in Yoshihide Toba's paper, "A General Theory of Evidence as the Conceptual Foundation in Auditing Theory" [1975] and (2) to extend some of Toba's results. The paper's principal argument is that a number of general assertions relate directly to the auditor's opinion and, for each such assertion, three states are possible--the proposition (1) may be established by evidence, (2) may be refuted by evidence or (3) may be indeterminate. This notion forms the basis for a normative definition of necessary and sufficient conditions for each of the auditor's options regarding an opinion on client financial statements. This reasoning then is extended to define the state of each general proposition in terms of the states of more basic underlying elementary propositions. Finally, the paper concludes with a general framework of the audit process consistent with the foregoing analysis.

ABSTRACT: This paper presents some tentative experimental results bearing on the joint problems of materiality and disclosure. This research is within the spirit of a recent but substantial research tradition referred to as "clinical judgment." The experimental task requires disclosure/aggregation judgments based on materiality considerations. Generally, our results indicate that our experimental subjects exhibit substantial individual differences in deciding on appropriate levels of disclosure. Subject to the usual and important caveats about internal and external validity in experimental settings, this study is another indication that the problem of materiality can be studied with some rigor, and tentative empirical conclusions can be offered.

This study presents a comprehensive approach to cost-volume-profit analysis under uncertainty. It combines the probability characteristics of the environmental variables with the risk preferences of decision makers. The approach is based on recently suggested economic models of the firm's optimal output decision under uncertainty, which were modified here within the mean-standard deviation framework to provide for a cost-volume-utility analysis allowing management to: (1) determine optimal output, (2) consider the desirability of alternative plans involving changes in fixed and variable costs, expected price and uncertainty of price and technology changes and (3) determine the economic consequences of fixed cost variances.

ABSTRACT: The ledger of Jachomo Badoer is the only commercial document written entirely in Constantinople that has survived, in its entirety, the Turkish conquest of that city. It is a precious source of data relevant to the intense economic activities and Byzantine commerce of that era. It furnishes us with varied information on wares exchanged, their prices and marketing practices, the monetary currencies circulating in the Levant, their purchasing power and the rates of exchange, which were continuously fluctuating. It also vividly portrays the stage of development of the art of bookkeeping, which was in a fluid state. Badoer, himself, was an experimenter and innovator of new ideas in bookkeeping. The first evidence of a compound entry that has so far surfaced is found in his ledger.

ABSTRACT: The problem of joint cost allocation is examined with particular emphasis on the possibility that some allocation schemes may result in divisional decisions which are suboptimal at the corporate level. Such decisions may arise whenever the marginal cost function for the allocated cost is decreasing, and the joint cost allocation scheme results in a charge to a division (or group of divisions) which exceeds the charge which that division (or group of divisions) could incur by acting independently. The theory of the core is used to establish criteria that any cost allocation scheme should meet if it is to avoid encouraging these suboptimal decisions. Four cost allocation schemes are studied and evaluated using the core criteria. It is shown that three of these schemes, including the activity level allocation scheme, satisfy the core criteria; however, a fourth scheme, which was recently proposed, is satisfactory in only certain cases.

The time-series behavior of the quarterly earnings, sales and expense series of 69 firms over the 1946-74 period is examined. A Box-Jenkins time-series methodology is adopted. Based on inspection of the cross-sectional autocorrelation function, it is concluded that each series has (a) an adjacent quarter-to-quarter component and (b) a seasonal component. One-step-ahead forecasting results reveal that these two components can be successfully modelled at the individual firm level. The use of various quarterly forecasting models in security price analysis is also examined. The results are consistent with the market adjusting for seasonality in quarterly earnings in interpreting each quarter's earnings change.

Responds to comments on a paper which employed the Decision Style theory to examine decision speed, information purchase and information use. Strategies of scientific investigation; Revision of the Decision Style model.