Abstract Examines participative budgeting in the context of the psychology of risk. Theoretical background on risk preferences; Empirical evidence of domain-specific risk preferences; Study design; Dispositional risk attitude measurement; Preference ratings of risk-averse versus risk-taking groups; Limitations of the study.

Abstract Reviews the book `1991 Tax Penalties: The Complete Guide to Penalties Under the Internal Revenue Code,' by Pauline White and Consuelo M. Ohanesian.

[This study examines participative budgeting in the context of the psychology of risk. As Young (1985) and Waller (1988) report, there is some preliminary evidence that risk-averse workers create more budgetary slack than risk-neutral ones. They show that "truth inducing incentive schemes" (e.g., Soviet incentive schemes; see Weitzman 1976) reduce budgetary slack for risk-neutral subjects but not for risk-averse subjects. If this is true, it means that resource allocations within organizations are mediated by perceptions of risk. Young (1985) and Waller (1988) define risk preference as a dispositional variable, which presumes that it is a stable personal trait, a latent variable, traditionally inferred from observed behavior of risk propensity in such settings like lotteries. This study tests whether risk preferences are domain-specific; that is, latent risk preferences translate into differing manifest risk preferences according to the context. Domain-specific risk preference can be understood as a manifest psychological variable that may well be the result of the combination of latent risk propensity and the situation. Kahneman and Tversky's prospect theory (1979) suggests that manifest risk preferences depend upon whether the subject frames his or her task in the context of gain or loss prospects, where gains and losses are defined in relation to a neutral reference point. If risk preferences are domain-specific, then past studies' suggestion that incentive schemes should be designed in consideration of dispositional, or latent, risk preferences needs to be reexamined (Waller 1988; Kaplan 1982). The question before this study is: If subordinates are influenced by prior period performance in setting current period budgets for themselves, will that influence take the form predicted by prospect theory and thus lead to riskier preferences (tight budgets) when the subordinates perceive themselves in a losing situation? This is an important question considering Young's (1985) alluding to the possibility that inducing subordinates to less risk-averse behavior may be a way to favor tight budgetary standards and reduce slack. This prediction is consistent with prospect theory's implication that losers who are slow to adjust their reference point act in a more risk-seeking manner. Thus, the induction of losing prospects might be a way to minimize budgetary slack. An additional concern in this study is to jointly test domain-specific risk preferences and dispositions toward risk as influences over budgetary decisions. Whereas prospect theory explains risk preferences as domain-specific contingencies, other theories construe risk preferences as dispositional. It is likely that both domain-specific and dispositional factors influence budgetary decisions. This study deploys a conventional lottery procedure to elicit and test dispositions toward risk. An experiment simulating the public accountants' budgeting of billable hours was designed to test the hypothesis that subject preference for tight or safe budget behavior depends on the performance of coworkers and domain-specific risk preferences. The hypotheses were tested in an experiment employing 81 students. The results generally support the view that subordinates' risk preferences are influenced by a situation-dependent variable. The reversal of risk preferences around a neutral reference point is statistically significant for both dispositionally risk-averse and dispositionally risk-seeking subjects. The dispositional variable also contributes to the explanation of variations in subjects' manifest risk preferences. Thus the propensity to induce budgetary slack seems to be a joint function of situations and dispositions.]

Abstract Identifies and evaluates potential determinants of the switch from cost-allocation actuarial method to a benefit-allocation actuarial cost method. Effects of the switch; Causes of the decrease in pension expense and funding; Reasons for the switch in actuarial cost methods.

[The choice of the appropriate actuarial cost method was an important issue considered at the different stages of the process that led to the promulgation of the SFAS No. 87, "Employers' Accounting for Pensions." Actuarial cost methods have been used by firms for accruing periodic pension expenses and determining the funding of defined-benefit pension plans. These methods have been classified by actuaries into cost-allocation methods and benefit-allocation methods. This study identifies and evaluates some possible determinants of the switch from a cost-allocation actuarial cost method to a benefit-allocation actuarial cost method. The primary effects of this switch are a decrease in pension expense and in the amount funded to the pension plan. The decreases in pension expense and funding arise because benefit-allocation methods have lower pension liabilities than do cost-allocation methods. This study hypothesizes that the primary reasons for the switch in actuarial cost methods are: a reduction in contracting costs, a decline in the taxpaying status and the earnings performance, and a preference for internal over external sources of funds for financing investment outlays. In addition, the study examines whether an actuarial alignment of pension assets to the reported present value of the accumulated plan benefits motivates the switch in actuarial cost methods and controls for the effect of differing interest rates in the computation of the accumulated plan benefits. The hypotheses are tested by comparing switch firms to industry-matched nonswitch firms and using proxy measures to operationalize the theoretical concepts. The comparisons are performed in the year prior to the switch, the year of the switch, and the year following the switch by relying on multivariate logit models. The primary advantage of logit models is the presence of consistent coefficient estimates whenever choice-based sampling is involved. Univariate matched-pairs t-tests and Wilcoxon sign-rank tests are also performed in the year of the switch. The empirical findings suggest that financial statement considerations and reduction in pension funding appear to be the primary reasons associated with the switch in actuarial cost methods. The reduction in pension funding is first accomplished by the use of higher interest rates, which decrease pension liabilities, and then by the switch into a benefit-allocation method, which provides an additional decrease in the pension liabilities. The last step is used if firms have limited freedom to make further increases in interest rates as unreasonably high interest rates are not permissible under ERISA. Empirical evidence based on multivariate logit models reveals a lower current assets to current liabilities ratio, a slower rate of investing into new projects, and a higher long-term debt to total tangible assets ratio for switch firms in comparison to their nonswitch counterparts for the year of the switch. To the extent that these relationships reflect a higher probability of technical default for switch firms, the findings are consistent with both the pension funding literature (Francis and Reiter 1987) and the accounting method choice literature (Holthausen and Leftwich 1983). In addition, this study points out the importance of an interactive effect between working capital ratio and rate of undertaking new investments in that increasing levels of working capital are needed to sustain higher rates of new investments.]

Abstract ABSTRACT: Critics allege that audit committees often fail to mitigate management pressure on auditors when disputes arise during an audit. The objective of this study is to investigate factors that may affect the likelihood that audit committees will support auditors, rather than management, in audit disputes. A repeated measures experiment was conducted using 179 audit committee members as subjects. Analysis of variance results show that backgrounds of audit committee members may be predictive of their willingness to support auditors involved in disputes with client management. Also, two contextual variables seem important--whether the relevant professional standards are objective and the relative financial condition of the audited firm.

[Critics allege that audit committees often fail to mitigate management pressure on auditors when disputes arise during an audit. The objective of this study is to investigate factors that may affect the likelihood that audit committees will support auditors, rather than management, in audit disputes. A repeated measures experiment was conducted using 179 audit committee members as subjects. Analysis of variance results show that backgrounds of audit committee members may be predictive of their willingness to support auditors involved in disputes with client management. Also, two contextual variables seem important-whether the relevant professional standards are objective and the relative financial condition of the audited firm.]

Abstract ABSTRACT: Since various accounting costs are used in product pricing decisions, this paper' Identifies conditions under which a particular product cost is appropriate for use in product pricing. The approach used is to compare 'the output price selected Using three accounting costs commonly used in pricing with the output price selected by a utility-maximizing decision maker conducting a complete analysis. This comparison indicates conditions under which each accounting cost leads to prices closest to those obtained after a complete analysis and is used to develop testable hypotheses about costing method use.

Abstract ABSTRACT: According to the principle of user primacy, the interests of users of financial reports take priority over the interests of preparers of financial reports. When applied to the activities of a standard setter for corporate financial reporting, user primacy is a constitutional claim, stating a general principle for the resolution of conflicts. It is controversial, because it is incompatible with views that standard setting is a collective choice process, where the interests (preferences) of all parties are to count equally. An analysis of the logical foundations of the principle is provided, based on recent work in ethics and social and political philosophy. User primacy is a distributional principle governing the relationship between users and managers. A theoretical framework for the rational choice of a distributional principle governing the disclosure of information in the securities market is provided. The conditions under which a securities market--which includes in its basic structure a standard setter to implement the user primacy principle--would be chosen by rational, disinterested securities market agents are analyzed. A standard setter would be established to enforce user primacy, thereby redressing an imbalance between investors (users) and managers. By acting in accordance with this principle, the standard setter aids all securities market agents in exploiting the potential trading gains provided by such a market. At the same time, investors are protected from possible losses arising from the basic relationship between them and managers of widely held corporations. The analysis is applied to two versions of the user primacy principle prominent in the professional standard-setting literature. Although the analysis is not intended to advocate user primacy, a clear and complete statement of the principle is proposed as a guide to...