Knowledge that Transforms

Abstract Many accounting studies examine dichotomous choices (e.g., qualify/do not qualify an audit opinion or capitalize/do not capitalize a cost). These studies often involve small overall sample sizes, disparate response group sizes, and predictor variables that are skewed and collinear. These factors can cause distributional problems in test statistics for logit (or probit) regression models, which can lead to incorrect inferences. However, few empirical benchmarks exist for assessing the effect of these factors. The current paper determines how response group size and the number, distribution, and correlation of predictor variables affect empirical error rates and the minimum required sample size for using logit. Comparisons are made with the error rates obtained from an ordinary least squares (OLS) linear probability model, an alternative that has been suggested for small sample studies. Because accounting researchers choosing between logit and OLS may be concerned with more than the calibration of the models' test statistics, comparisons of the sensitivity of logit and OLS parameter estimates to the range of data sampled for the predictor variables and of the models' classificatory ability also are made. Both simulated and real accounting data are used. The results of Monte Carlo simulations show that logit test statistics are biased when the sample size is small However, much of the bias is attributable to the skewness of the predictor variables, a problem that is characteristic of accounting research and that also affects OLS test statistics. In such settings, OLS may result in test statistics that are minimally better calibrated. The parameter estimates of the model, however, will be more sensitive to the sampling frame. Furthermore experimentation with data on auditors' Statement No. 87 consistency judgments indicates that 01$ also may result in higher Type I error rates when it is used for prediction or classification These results are interpreted as indicating that, even for sample sizes as small as 50, log it rather than OLS still may be the preferable model for accounting choice studies.

Abstract Examines a principal-agent model in which the principal can influence the extent to which the agent has superior private information on which the latter can base his action choice. Relevance of information furnished by management accounting systems in the assessment of employees; Conditions for the improvement of the agent's private pre-decision information system.

Abstract This article considers audit sampling and the auditor's risks of incorrect conclusions in deciding whether an accounting population contains a material error amount. The proposed new sample evaluation procedure takes into account the correction of all errors observed in the sample and calculates a modified upper bound on the total error amount remaining in the unsampled population. This procedure is known as rectification. It is shown that rectification significantly reduces the risk of incorrect rejection when sample sizes of 150 and 300 are used. Since the size of the error amount observed in the sample is crucial to the extent of risk reduction, the first stage of this study investigated the magnitude of rectification for three dollar-unit sample selection methods commonly used in practice-systematic, random, and cell selection. Theoretical results for the expected error amount contained in systematic samples were obtained for 32 different study populations for three sample sizes (65, 150, and 300). Simulation was used to estimate the expected error amounts with random and cell selection for the same 32 study populations and three sample sizes. The results show that the average error amount subject to rectification with cell selection is very close to that with systematic selection for alt three sample sizes. Random selection produced smaller expected error amounts than did systematic selection, especially for the larger sample sizes. In the second part of the study, the risks of incorrect rejection with and without rectification were compared. Factors considered in this comparison were sample size (65, 150, or 300) and sampling method (systematic, random, or cell). Use of rectification led to noticeable reductions in the risk of incorrect rejection for sample sizes other than 65. For a given application, auditors will need to determine whether the cost of the additional sampling is balanced by the savings from the reductions in the risk of incorrect rejection with rectification.

Abstract The article applies the Financial Accounting Standards Board (FASB)'s proposal to a random sample of firms that granted stock options in order to assess the impact of the related compensation expense on operating income in the United States. Under existing generally accepted accounting principles, no compensation expense is recorded for executive stock options (ESOs) if the exercise price on the date of grant is equal to the market price of the stock. Similarly, only negligible compensation expense tends to be recorded if the exercise price on the date of grant is less than the market price of the stock. The inadequacy of this method has led the FASB to consider a proposal to measure compensation related to grants of ESOs at their fair values, with a lower bound constraint. It would seem natural to use the continuous-dividend version of the B-S model for firms that pay cash dividends and the no-dividend version for firms that do not pay dividends. The latest FASB proposal requires that stock option compensation be measured as of the vesting date, as opposed to the date of grant.

Abstract Presents an obituary for William Joseph Vatter, a distinguished member of the American Institute of the American Institute of Certified Public Accountants. Childhood; Career beginnings; Contribution to the accounting profession; Published works on managerial accounting; Personal character.

Abstract Reviews the book `A Cross-Industry Analysis of Financial Rations: Comparability and Corporate Performance,' by J. Edward KEtz, Rajib K. Doogar and David E. Jensen.

Abstract This research examines and interprets the security market response around annual report release dates. Annual reports contain data beyond that reported in preliminary earnings announcements. While prior research has concentrated on the price response to annual report releases and the issue of information content with mixed results, this paper extends earlier work by employing both price and trading measures. The trading measures, which include number of transactions, size-stratified transactions, and mean transaction size, enable the analysis to address not only information content issues, but also social welfare issues in the sense of Lev and Ohlson (1982) and to coarsely identify what type of investor responds to the annual report by trading. inferences as to the relative usefulness of annual reports to different investor groups are also made based on these trading measures. A number of studies address, often indirectly, annual report informativeness by examining the price response accompanying the report's release. Of these, studies by Wilson (1987) and Lobo and Song (1989) suggest a price response to the earlier of the annual report or 10-K. However, other studies, including Foster et al. (1986), Mynatt (1988), and Bernard and Stober (1989), fail to detect such a price response. The informativeness of annual reports from a price-based perspective remains an open question and from a trading-based perspective it is an unaddressed question. In this study, price response to the annual report is measured using both absolute value and squared unexpected returns. A market model approach is used to estimate unexpected returns. A simulation analysis is included to substantiate the ability of these two metrics to detect a price response. Unexpected volume and unexpected number of transactions, both in general and for size-stratified trading, are estimated via market model regressions. Unexpected mean transaction sizes are estimated from a temporal drift regression. No evidence of a price response and little evidence of a volume of shares response at annual report dates is found. Number of transactions, however, increases significantly around annual reports, peaking four to five trading days after the annual report release date. This trading response suggests that investors find annual reports informative. The simultaneous absence of an economically significant price response is interpreted as indicating that annual reports provide social welfare value in the sense proposed by Lev and Ohlson (1982). Most notably, the analysis of trading response stratified by transaction size suggests that the trading response occurs mostly within the smallest size strata (i.e., 100 and 200 share transactions, transactions of less than $30,000 in value). Consistent with this, mean transaction sizes during the annual report period are less than expected. This is contrary to mean trans- action size behavior at earnings announcement dates (Cready 1988) and suggests that annual reports are of greater value to less wealthy individual investors relative to wealtheir individual and institutional investors. Such a finding is consistent with Hakansson (1977) in that it suggests that "small" investors rely on the public information system (i.e., the annual report) while "large" investors rely more on predisclosure information in making investment decisions.

Abstract Reviews the book "Accounting Software and the Microcomputer: A Practical Guide to Evaluation and Implementation," by Irwin Winsten.

Abstract Demonstrates that consumers respond differently to a market event depending on the information reported about the event. Principle of dual entitlement; Factors which affect consumers' response to prices; Combined effect of a change in the sellers' tax rate and tax base; Advantages of a tax setting for testing the theory; Calculation of profits.

Abstract Reviews the book "Competing Against Time: How Time-Based Competition Is Reshaping Global Markets," by George Stalk and Thomas M. Hout.