Knowledge that Transforms

[Models that characterize Pareto-efficient sharing of joint venture profits or constrained Pareto-efficient sharing of income in principal-agent contracting problems have ignored tax considerations. We extend the theory by showing that the effect of taxes on optimal contracting (both in the face of and in the absence of moral hazard problems) is related to the effect of changes in risk attitudes towards lotteries over pre-tax income. For example, optimal contracts will reflect the tax-induced demand for insurance of a risk-neutral individual who faces a progressive income tax schedule; that is, the risk-neutral individual will not bear all the risk, and in the face of moral hazard on the act selection of a risk-neutral agent, demand for monitoring will be created where none existed in the absence of the progressive tax. We also show that Pareto-optimal risk-sharing contracts do not generally result in expected tax minimization, even when taxes are modeled as a deadweight loss to the system.]

[Decisions about a subordinate's behavior are among the most important control problems facing audit managers and partners. Green and Mitchell [1979] apply attribution theory to examine supervisors' decisions made following a subordinate's behavior. Green and Mitchell argue that an individual's causal attributions regarding a subordinate's behavior serve as mediators between the behavior of the subordinate and the action responses of the evaluator. This paper reports the results of a study that examines the attribution judgments and responses made by auditors following an incidence of an audit senior's poor performance. Employee work history and client history each significantly affect the attribution judgments made by auditors. Also, the attribution judgments were associated significantly with the recommended responses of auditors. Additional analyses showed that the association was higher for internal attributions and responses than for external attributions and responses.]

[This article describes hybrid convertible debentures and how these debentures are currently accounted for, and it proposes an alternative approach for accounting for these debentures. Hybrid convertible debentures are similar to typical convertible debentures in form, but they differ in substance and should be given different accounting treatment.]

[This paper provides a description of recent authorship in The Accounting Review (TAR) in terms of authors' schools of affiliation and degree. The analysis is confined to American universities. Comparisons with similar studies in economics and finance, with previous studies of accounting journals, and with the Journal of Accounting Research (JAR) result in the following conclusions: 1) concentration of authorship in TAR is greater for degree school than school of affiliation, which is consistent with the experience in other disciplines; 2) the concentration by certain degree schools is persistent over time; and 3) certain degree schools have been dominant in both TAR and JAR through time. The general conclusion is that there is some evidence suggesting an institutional element that influences the accounting research published in TAR. Additional research projects are suggested which might answer why this institutional element is present and whether it contributes to the perceived decline in the epistemic quality of TAR.]

[This paper presents evidence to support the proposal that the force model of expectancy theory [Vroom, 1964] provides a useful conceptual framework for understanding a student's motivation to strive for academic success. Previous research examining this issue has employed the methodologically-flawed across-persons approach. Using the within-persons decision modeling approach [Stahl and Harrell, 1981], the study results indicate: (1) force model predictions of student motivation are very accurate (R = 0.85); (2) increases in the value of expectancy result in declining marginal increases in a student's motivation; and (3) a student's motivation to strive for academic success is positively correlated with the student's actual behavior (academic performance). The results have implications for the grading and other policies of accounting educators who seek to establish a learning environment which fosters high student motivation.]

[This paper presents a reliability model of a control system with control components in series. The results show that output reliability may increase or decrease as new control components are added to the series, depending on the characteristic reliability parameters of the control components. The results are compared with Bodnar's [1975] results that led him to the paradoxical conclusion that fewer control components are better than more in a serial system. It is observed that no such paradox exists when the controls are modeled properly.]

[A simplified audit setting is used to illustrate the crucial nature of strategic interactions in audit planning and in assessing audit risk. Unlike single-person decision-theoretic models which essentially represent games against nature, the model developed here allows a prospective audit to influence the behavior of the auditee. We reformulate the problem in a game-theoretic framework with rational players which (1) encompasses strategic factors for both the auditor and auditee, (2) is consistent with behavioral hypotheses regarding the effect of an audit, and (3) is consistent with certain audit phenomena such as randomized strategies. An illustration is provided which demonstrates several points. First, both the auditor and the auditee may frequently use a randomized strategy. Second, the auditor's strategy depends on the interaction between the accounting control system and the auditee's actions. In addition, the use of traditional single-person decision theory may frequently cause errors in estimating audit risk because it fails to consider audit influences on the auditee. Settings in which decision theory may serve as an adequate model simplification are also considered.]

[The empirical relationship between consensus and accuracy is examined in two prediction tasks of interest to accountants-a managerial accounting task and an auditing task. The relationship between these two attributes is particularly important in auditing contexts in which consensus is sometimes accepted as a practical goal. The results of this study indicate a consistent, highly positive relationship between consensus and accuracy. The mean Pearson (Spearman) correlation between the two attributes was.84 (.82) across (1) the two tasks, which featured both continuous and dichotomous outcomes and which were performed by different sets of experts, (2) both individual and pairwise measures of subjects' consensus and accuracy, and (3) both correlational and absolute measures of performance in the managerial accounting task.]

[The measurement of divisional performance is still a subject of some debate. Most accounting researchers appear to favor measures which either include an interest charge on capital employed or relate divisional income to its capital asset base, but some dissenters exist. Various measures are used in practice. The use of particular accounting methods is hypothesized to be influenced by organizational characteristics, such as the extent to which decision making authority has been delegated to divisional managers. An empirical study of associations between 12 variables reflecting accounting methods and the nature of divisional autonomy was undertaken from questionnaire surveys of large companies in the United States (U.S.) and the United Kingdom (U.K.), and the relationship between accounting methods and the nature of divisional autonomy in the two countries is examined. Many similarities were observed in the accounting methods used by the responding companies in the U.S. and the U.K. to evaluate divisional performance, analyze divisional capital expenditure proposals, and control authorized divisional capital expenditures. The major difference between the countries was the use of post-completion audits by more than twice as many U.S. companies (84.2 percent) as U.K. companies (36.3 percent). In both countries, the expected associations between accounting methods and divisional autonomy were not found. Further research is needed to explore the dynamics of accounting systems in divisionalized companies, such as longitudinal studies of individual companies.]