Knowledge that Transforms

[This article discusses the accounting implications of a new type of financial security introduced on the European bond market. The security, known as a deferred-payment note, allows the investor to acquire a note by paying a portion of the issue price at the time of issuance. The remaining amount is required to be paid in a second installment due some months later. Alternative accounting treatments are presented. These treatments are evaluated in light of the FASB's conceptual framework pronouncements. The paper concludes that the FASB's current position fails to provide appropriate guidelines which the profession can use to resolve this new financial reporting issue.]

[This paper reports the error characteristics of five accounting categories using a new data set consisting of errors discovered during the audits of 20 companies throughout five years. The shape and variability of error amount distributions are described as well as the magnitude, direction, and types of errors making up these distributions. Four error rates are defined and their distributions presented and analyzed. Finally, three environmental factors (accounting category, industry, and firm-specific characteristics) are investigated for their impact on errors and error rates. In addition, the effect of firm size on error rates is tested.]

[This note explains a modified shortcut approach for computing earnings per share when convertible securities are present. In many cases, it can decrease the number of calculations involved when compared to a widely used shortcut procedure.]

[Previous research has questioned the use of COMPUSTAT capital expenditures data to layer fixed assets for the purpose of estimating constant dollar depreciation. This note compares the layering technique with the more popular alternative, the average age method. Estimated amounts were compared with actual data reported under FASB #33. The results indicate that the layering method provides estimates that exhibit less error, bias, and variance.]

[This paper investigates the issue of whether financial reports appear to convey, at least in an implicit fashion, information on risk. The paper extends previous analyses by using the risk perceptions of a representative group of financial analysts as surrogates for ex ante risk. Our findings indicate that the seven accounting measures of risk used in the study "explain" approximately 79 percent of the variation in the average risk perceptions of the financial analysts surveyed. Tests were also performed which support the use of the analysts' risk perception measure as a proxy for a stock's "true" market risk.]

[Experiments involving variations on two analytical review task situations were used to assess practicing auditors' judgments. The first experiment required auditors to generate expected values and noninvestigation intervals given variations in the amount of audited information available and the presence or absence of unaudited information. Consistent with prior research, the auditors' judgments were biased in the direction of the unaudited information. However, this bias was moderated when additional audited information was available. The second experiment required auditors to extrapolate intuitively an expected value for an account, given six different deterministic time-series patterns. The auditors' extrapolations were more accurate for those time-series patterns that are more likely to be encountered in practice. That is, extrapolations were slightly more accurate for increasing trends than decreasing trends, and were more accurate for linear and logarithmic patterns than exponential patterns. Implications for research and practice are discussed.]

[This paper addresses a wide gap in the literature of accounting: the absence of a descriptive theory of accounting measurement. It begins with a review of accounting practices aimed at finding what accounting attempts to measure. It goes on to examine specific measurement practices to ascertain what measurement methods are used and the qualities characterizing those methods. Finally, the paper seeks a central idea that explains the bulk of accounting measurement practices. The method employed is empirical and inductive. The results range from the obvious to the surprising. Accounting measurements focus on aspects of wealth. Eight general measurement methods are used to varying extents. The qualities most frequently associated with those methods and the resulting measurements are stability of the income statement line item involved, conservatism, and flexibility and control of income measurement by management. The common thread that holds GAAP measurement practices together is the notion of market simulation; in the absence of observable current market prices for setting-specific assets and liabilities, accounting simulates such prices by selecting and blending pertinent observed market prices and other evidence in accordance with accepted principles of market economics.]

[Auditors are charged with the responsibility of evaluating internal control systems. Recent advances in decision support systems indicate that the speed, accuracy, and memory capacity of computers may be used to aid auditors in this task. To test this proposition, a computer-assisted method of designing, analyzing, and evaluating internal control systems, called The Internal Control Model or TICOM, was designed and implemented. The technical manual and the TICOM software are available from the authors. This paper presents the results and conclusions of that project. TICOM is a computer-based analytic tool that aids the auditor first to model the internal control system and then to query the model in order to aid the auditor in evaluating the internal control system. TICOM is based on concepts in artificial intelligence such as knowledge representation and graph simplification. It serves (1) to describe office information systems while emphasizing internal accounting controls and (2) as an aid in control evaluation. It was found that the advantages of TICOM over traditional evaluation methods are that (1) the evaluation can be more rigorous and exhaustive, (2) the documentation of the system can be more thorough because of automated completeness and consistency tests, and (3) the modeler may probe and test controls by using the query-processing portion of TICOM.]