Knowledge that Transforms

This paper presents a statistical sampling approach based on the multinomial distribution for obtaining a bound for either total population understatement or overstatement errors or both. The approach is nonparametric in nature and, unlike most currently used techniques, it has known characteristics so that the auditor is assured of the specified confidence level regardless of the nature of the population and the nature of the error pattern. Results are presented which show the multinomial bound to give tighter bounds than the Stringer bound in all instances stud]ed. The behavior of the multinomial bound is stud[ed with respect to the effects of sample size and error patterns.

This article contains an experiment designed to assess the importance of two personality variables, tolerance for ambiguity and decision style, on a subject's information processing. Subjects who were classified as heterogeneous on personality variables made homogeneous decisions. Further, subjects who were classified as having homogeneous linear decision models had heterogeneous personality classifications. Thus, in this experiment as in several other experiments (which are cited in this paper), personality variables do not appear to be useful in describing, understanding, or predicting human information processing. Psychological literature was reviewed which reinforces the finding of this and other papers--that personality alone does not account for much of the variance in a decision maker's behavior. The literature reviewed indicated that to account for large portions of the variance in behavior, human information processing models might need to take into account not only the processor, but also (particularly) the task and the processor-task interaction.

The relative accuracy of management and financial analyst earnings per share forecasts has important implications both for accountants who prepare management forecasts and for users of earnings forecasts. This article reports on a study of the relative accuracy of the two sets of competing information. The subject of study was a sample of actual management and analyst forecasts. The management and analyst forecasts were first compared to each other. Then both groups of forecasts were compared to a third set of forecasts developed by extrapolating from the trend of previous earnings changes over time. This provided an indication of the overall quality of the two sets of forecasts. Results showed that differences in accuracy between the management and financial analyst forecasts were not statistically significant. The study also showed that both management forecasts and analyst forecasts prepared subsequent to the release of these management forecasts are superior to those developed using the simple extrapolative models tested here. Analyst forecasts reported prior to the announcement of management forecasts were not significantly more accurate than those of the simple naive model.

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.

Recent literature in accounting, finance, and economics often assumes that information can be processed efficiently. Among the outputs of the processing activity are the presumably appropriate assessments of the underlying probability distributions for all important variables, and a good deal of the recent research assumes that observable realizations of the variables are drawn from these distributions. This paper provides evidence concerning the ability of selected individuals, namely security analysts, to provide estimates of earnings per share after presumably processing the available information. Several aspects of the quality of analyst forecasts are examined. The study indicated, as expected, that analysts' forecasts become more accurate as the reporting date is approached. Furthermore, the predictions of changes in earnings per share data contain no significant systematic bias. However, the authors do not find sufficient support for the expected decline in forecast variability among analysts as the reporting date is approached.

This paper adjusts rankings of leading accounting departments presented by Bazley and Nikolai in the July, 1975 THE ACCOUNTING REVIEW. Adjusted rankings reflect (a) differences in perceived quality of journals and (b) differences in sizes of accounting faculties. The conclusion is that, while differences in perceived journal quality have little effect on Bazley and Nikolai's rankings, adjustment for faculty size does.

Arthur L. Thomas has argued that financial cost allocations in general and depreciation allocations in particular are arbitrary and incorrigible whenever the firm's revenues are generated by interacting assets. The game-theoretic Shapley technique is applied to the net-revenue-contributions approach to depreciation allocations. The resulting allocations, it is maintained, are non-arbitrary and corrigible if statement users and the accounting profession are willing to accept a constitution of three "reasonable" allocation axioms.

The objective of this study is to provide some empirical evidence relevant to the social performance disclosure question. To provide this evidence, the investigation concentrated on ascertaining the validity of a widely stated view of some investors that a moderate to strong association exists between the investment value of a company's common shares and its social performance. This was achieved by testing for associations between a number of economic and financial indicators of investment value (profitability, size, total and systematic risk, price/earning ratio) and corporate performance on one key social issue (pollution control) in a sample of companies drawn from a pollution prone industry. Some statistically significant associations were found to exist although there was a reduction in the level of these associations over time. While generalization of these results will require further research, the findings reported are consistent with stated investors' perceptions.

The primary goals of this paper were (a) to test the information content of stock dividend announcements and (b) to produce evidence about the validity of the AICPA conclusion that small stock dividends almost always produce significant amounts of extra value on the ex date and that large stock dividends fail to generate such ex date value. In regard to the first objective, the authors' findings imply that the market, in the aggregate, uses stock dividend information in setting equilibrium security prices, that much of the market's reaction to such information occurs no later than the declaration date, and that such information tends to produce positive unexpected returns. With respect to the second goal, the results imply that the market is not conditioned to react positively to stock dividends of any size on the ex date and, consequently, that the AICPA conclusion is valid (invalid) with respect to large (small) stock dividends.

This article explores conventional questions of why and how budgets should be employed for motivation purposes in an economic setting. The authors focus on the types of employment contracts that are associated with equilibrium allocations in the labor market. Market incompleteness is a necessary condition for use of budgets in the employment contract. Beyond this, issues of controllability, management by exception, and tightness of standards are observed to depend on the contracting environment faced by the individual agents.