Knowledge that Transforms

[Based on a careful examination of the traditional approach to teaching behavioral aspects of performance evaluation, this paper concludes that there are some serious instructional gaps in teaching the topic. The paper argues that new pedagogical approaches based on student-generated experiences are effective in teaching behavioral aspects of accounting. Two experiential exercises developed by the author are also presented and discussed in the paper. Finally, the paper recommends development and wider adoption of experiential exercises in teaching behavioral aspects of accounting.]

[This paper takes a Bayesian approach to incorporate auditors' prior information in constructing error bounds for the proportion of dollar amount overstated (equivalently, the total amount overstated) in an accounting population. The multinomial distribution model within the dollar-unit sampling framework suggested by Fienberg, Neter, and Leitch [1977] is used, and the prior distribution belongs to the class of Dirichlet distributions. The properties of the resulting Bayesian bounds are discussed. Some comparisons of tightness of bounds are made with the multinomial and the modified multinomial bounds [Leitch, et al., 1982]. Simulation results suggest that some of the Bayesian bounds have good repeated sampling properties. In particular, in repeated sampling, a Bayesian bound gives a significance level close to the nominal level for many typical accounting populations. Another advantage of the suggested approach is computational efficiency which is independent of the sample size and the number of errors found in the sample.]

[The audit risk model was used to generate hypotheses concerning the effect that internal control evaluation exerts on audit planning decisions. Specifically, directional predictions concerning the contingent nature of the effects of the susceptibility of accounting processes to error, the strength of the internal control design, and the strength of the related compliance tests were developed. These hypotheses were then compared to the behavior exhibited by a group of experienced auditors who completed a highly realistic series of case studies. The auditors' decisions were consistent with the predictions developed from the audit risk model. In addition, the paper introduces a modification of the standard policy-capturing method that allows the use of complex realistic case materials in a powerful, internally valid experimental design which decreases problems with experimental demand. It also provides initial evidence on experts' perceptions of the effectiveness of different approaches to compliance testing and further evidence on auditor consensus in a more structured audit environment.]

[This paper analyzes the payment of monetary compensation (salary) and nontaxable benefits and develops an expansion path for the optimal combination of salary and benefits. The results explain why 1) the employer has an incentive to pay nontaxable benefits instead of salary, 2) benefits such as health insurance are given to lowly as well as highly paid employees while perquisites become a more favored form of compensation as employees' incomes increase, 3) an employee at or near the minimum wage for his or her occupation may receive increases in compensation in the form of increased nontaxable benefits, 4) a broad class of middle management employees are all paid the maximum legal benefits for their job classification, and 5) the employer may authorize the payment of possibly nondeductible benefits to highly compensated executives.]

[Budget-based compensation arrangements often are used in decentralized organizations to motivate manager decision-makers toward achieving organizational objectives. The use of budgets for this purpose can influence managers' decisions to make discretionary expenditures that yield future benefits. This study analyzes how budget-based compensation influences these decisions. The primary insight is that, if a lump-sum bonus is paid for meeting budgets, then managers prefer more discretionary expenditures when budgets are set at levels relatively difficult to achieve than when budgets are at levels easily attained.]

[This paper analyzes the manner in which financial analysts forecasts of annual earnings are formed. A sample of over 6,000 earnings forecasts made over a period of 11 years is examined. The results from the time-series tests show that analysts' forecasts of annual earnings are rational in the sense that they fully utilize the information contained in the past history of earnings and their own forecasts. The findings also suggest that the adaptive expectations model adequately describes the process of the formation of earnings forecasts. The adaptation coefficient, however, is not constant across companies and over time. The results imply that the use of mean forecasts and cross-sectional (rather than time-series) tests in previous studies has reduced the tests' power and efficiency, but still led to valid conclusions.]

[The primary purpose of the study is to provide evidence on the characteristics of firms which did and did not disclose management's annual earnings forecasts in the Wall Street Journal. The study finds that earnings variability is greater for non-disclosing firms while firm size is larger for disclosing firms. Systematic market risk was not significantly different between the two groups of firms. To the extent that earnings variability and firm size influence forecast accuracy and information content, the results reported in this study suggest that the accuracy and information content of voluntarily disclosed forecasts may not be representative of the accuracy and information content of the forecasts of currently non-disclosing firms if forecasts for these firms become required.]

[This paper reports the results of an experiment to test four models of the principal's information evaluation behavior in a private, pre-decision, principal-agency setting. The four models tested were an expected utility model, a prospect theory model, a linear model and a multiplicative model. In response to recent criticism that tests of positive theories in accounting lack sufficient power to discriminate among competing theories, the tests of the models were designed to disconfirm the models' predictions without assuming initial conditions. The model which best resisted the attempts to falsify it was the multiplicative model. The results demonstrate the generalizability of theories of information evaluation behavior from an information evaluator-decision maker setting to a principal-agency setting and show that the descriptive validity of principal-agency theory can be enhanced by incorporating models of individual behavior other than those based on expected utility theory. The study also provides a rigorous test of prospect theory and offers guidance for the future development of this theory.]

[This article discusses several issues underlying a dispute between Aetna and the SEC about accounting for the tax benefits of loss carryforwards. We discuss current accounting requirements for these benefits, Aetna's accounting for its tax benefits, and the reaction of security markets to its dispute with the SEC. We believe that accounting for these tax benefits should be changed to reflect changes in the tax laws, current definitions of assets, and criteria for accounting recognition.]

[Little is known about the speed and accuracy of aggregate taxpayer response to an income tax law change. Using a multiple time series model, it was found that individuals and corporations quickly and relatively accurately adjust their income tax prepayments in response to a tax increase.]