Knowledge that Transforms

Reviews the book "The Audit Expectations Gap in the United Kingdom," by Christopher Humphrey, Peter Moizer and Stuart Turley.

Reviews the book `Business Ethics: A European Casebook,' by John Donaldson.

Reviews the book `Questions and Information Systems,' by Lauer et al.

Reviews the book "The Hidden Dimensions of Annual Reports: Sixty Years of Social Conflict at General Motors," by Marilyn Kleinberg Neimark.

Reviews the book "Company Financial Reporting: A Historical and Comparative Study of the Dutch Regulatory Process," by Stephen A. Zeff, Franz Van Der Wel and Kees Camfferman.

Audit planning is a crucial task in the audit process. While making planning decisions, auditors have a large amount of information available to them and their existing knowledge structures influence how this information is used to form a problem representation. This problem representation has a significant effect on all subsequent decision making. The purpose of this study is to investigate the nature and evolution of auditors' planning problem representations by an examination of free recalls. In the cognitive psychology literature, it has been reported that, as decision makers accumulate more experience, their knowledge structures change to embody more total knowledge, more knowledge of relationships, and more abstract knowledge. In the context of an audit planning task, I predicted that problem representations formed by more experienced auditors would reflect these characteristics. To test the hypotheses, an experimental study was conducted with 211 practicing auditors. Subjects were from 16 offices of the then Big Eight public accounting firms, with experience levels ranging from one month to 30 years. Using experimental materials that consisted of approximately 20 pages of background information on a hypothetical audit client, subjects completed a planning task, followed by a background questionnaire, and a surprise recall task. The free recalls provide indirect evidence on the nature of the problem representations formed during the planning task. The results suggest that the problem representations of managers and partners may be different from those of seniors or juniors. The manager/partner recalls included a smaller percentage of simple case facts and a higher number and percentage of abstractions from the basic facts. These results have potential implications for audit practice. To the extent that the managers and partners form "better" problem representations and are actively involved in the process, more effective and efficient audit planning might be possible. However, more research needs to be conducted to determine the specific effect of the exhibited differences on planning decisions.

Comments on the valuation of executive stock options (ESO) and the fair value proposal of the Financial Accounting and Standards Board. Stability of the added parameter; Compatibility of lambda and the numerical method with accounting policy; Analysis of the ESO estimation.

Firms are redesigning operations to reduce slack and waste and improve performance (Hoerr 1989; Safizadeh 1991; Walton 1987) and this often involves reorganizing production workers into workgroups to foster cooperation and group participation in setting standards (Hayes et al. 1988; Schonberger 1986). In addition to employing incentive schemes linked to meeting standards, many firms are using bonuses tied to relative performance among groups to develop a spirit of intergroup competition. Over the past two years, we made several visits to three Fortune 500 manufacturing firms involved in such changes. The site visits suggested several hypotheses that merited further investigation. Thus, we designed a laboratory experiment to study more systematically what we had observed in the field. This study extends previous research on determinants of slack and performance (e.g.. Chow 1983; Chow et al. 1988; Waller and Chow 1985; Young 1985) by: (1) incorporating our observations and the literature on intragroup cooperation and competitive feedback to develop hypotheses, (2) studying workgroups rather than individuals, and (3) using a multiperiod rather than single-period setting. Results of the experiment show that the type of competitive feedback received by groups affected both their output and slack. Interestingly, when individuals were allowed to cooperate rather than work In isolation, performance actually declined. This latter result was unexpected and was likely the consequence of the particular experimental task.

The primary purpose of this study was to investigate how auditors' belief revisions and evidence search are influenced by the frame of the hypothesis being tested and by confirmation bias and professional skepticism (conservative bias). This study is distinguished from prior research in three main ways. First, the effects of confirmation bias and professional skepticism on the complementary audit functions of evidence evaluation and evidence search are examined jointly in the same experiment. Second, unlike many studies which have examined belief revisions of auditors solely under an error frame (Ashton and Ashton 1988, 1990; Tubbs et al. 1990), this study examines the judgments and behavior of auditors operating with both environmental (nonerror) and error-framed hypotheses. Third, the full effects of confirmation bias and professional skepticism were enhanced by having the subjects establish their own hypothesis frame and likelihood assessments, rather than respond to preset conditions. Confirmation bias implies that auditors may seek to confirm their hypotheses and so may favor information that confirms rather than refutes their initial assessments. This approach could lead to premature closure on a belief or hypothesis. Professional skepticism implies that auditors focus more on error-related evidence. An approach that is too conservative may lead to the performance of unnecessary audit procedures and thereby reduce audit efficiency. Environmental conditions refer to economic changes, changes in the industry and geographic area in which the company operates, or changes in company policies regarding investment, marketing, and financing strategies. Error conditions refer to intentional or unintentional misstatements in the financial statements. A field experiment was conducted in which auditors reviewed preliminary audit information and then indicated whether they favored an environmental or an error-framed hypothesis as the most likely explanation of an observed fluctuation in financial statement ratios. A likelihood assessment was assigned to the favored hypothesis frame, and the auditors were then asked to seek information to test their initial hypothesis from a list of audit questions. After evaluating the audit cues, the auditors updated their hypothesis beliefs and continued their evidence search. The results of this study indicate that auditors reacted differently to audit evidence, depending upon the frame of the hypothesis they favored and their belief extremity. Specifically, auditors who favored the error frame reacted more strongly to both confirming and disconfirming evidence than did those who favored the environmental frame. Furthermore, in conformance with the findings of Ashton and Ashton (1988, 1990) and contrary to Bamber et al. (1991), the auditors were more responsive to disconfirming evidence than to confirming evidence when belief revision was measured with an absolute scale. However, when the relative change in belief revision was measured with a proportional scale, the magnitude of response with confirming evidence was not significantly different from that with disconfirming evidence. The auditors' continued evidence search was conditioned by a conservative bias irrespective of the hypothesis frame favored or belief extremity; that is, their search strategy emphasized the uncovering of potential material errors (Smith and Kida 1991). Because the conservative bias was stronger for auditors who favored the error frame, confirmation bias may partially account for this effect by enhancing the emphasis on error. Conversely, confirmation bias may have somewhat weakened the effect of conservative bias for those auditors who favored the environmental frame.

This article examines the association between lessees' market returns and their changes in the tightness of the debt covenant constraints resulting from compliance with SFAS No. 13 (1976). This paper differs from previous research in that it uses covenant-based measures. Similar to Hughes and Ricks (1984) and Schipper and Thompson (1983), it examines cross-sectional stock return dependencies that exist when industry effects cannot be randomized over time. The paper begins by identifying a sample of lessees who retroactively capitalized leases as a result of SFAS No. 13. Actual debt contracts of same pie firms are then analyzed to identify accounting-based restrictions, the default value of each restriction, and the definition of the accounting variables used in the covenant. Next, the percentage increase in the tightness of covenant restrictions arising from adopting SFAS No. 13 is calculated. Finally, cross-sectional tests of the relationship between changes in covenant tightness and changes in security prices that accompanied the events leading to SFAS No. 13 are performed. The analyses reveal several results. First, retroactive capitalization of off-balance sheet leases would have caused significant increases in the tightness of the debt covenant restrictions. Second, affected lessees experienced negative market returns contemporaneously with the disclosure of two of the events that led to the promulgation of SFAS No. 13. However, the magnitude of the reduction in market returns is correlated with the impact of SFAS No. 13 on the tightness of debt covenant restrictions. Finally, there appear to be important differences in the structure of debt covenants. Private debt covenants have tighter financial restrictions, while public debt covenants have more nonaccounting-based provisions such as sinking fund, security, and seniority of the debt.