Knowledge that Transforms

Examines the effects of familiarity with the preparer and task complexity on reviewers' effectiveness at detecting `classification' and/or `conclusion' errors in the audit review process. Overview of the review process; Deterioration in decision-making effectiveness; Between-familiarity comparisons; Within-familiarity comparisons.

Identifies widespread noncompliance with Securities and Exchange Commission (SEC) regulations requiring prompt disclosure of auditor changes. Institutional setting; Effect of changes in regulatory regimes; Competency factors; Disclosure costs and incentives.

Under hospital accounting guidelines, contractual adjustments are an allowable deduction from revenue that reflect the difference between gross charges and reimbursement amounts. This study explores the use of contractual adjustments to shift costs among payors and increase revenues within a regulatory environment that attempted to limit cost shifting and set revenue constraints. Throughout the regulatory period, we find that hospitals overestimated budgeted contractual adjustments in a systematic manner which allowed cost shifting among payors and increased revenues. In addition, budgeted patient volumes and variable costs were manipulated in an attempt to relax the revenue constraint. After deregulation, we find that volume and cost biasing behavior decreased while overestimation of contractual adjustments increased. Further, we examine the interaction of this regulation with cost-containment regulation at the federal level.

Studies the information asymmetry perspective of corporate accounting choice. Effects of information asymmetry to transaction costs and liquidity for trading shares; Disclosure opportunity to decrease information asymmetry; Information asymmetry in the choice of functional currency by multinational firms.

Examines the effectiveness of two types of decision aids designed to alleviate the effects of one type of task-knowledge mismatch on auditors' judgments. Organization of audit planning tasks; Content and organization of auditors' knowledge; Specific processing problems caused by mismatch between task organization and knowledge organization.

This paper provides evidence on the time-series properties and predictive ability of cash-flow data. It employs a sample of firms on which the accuracy of one-step-ahead cash-flow predictions is assessed during the 1989--1991 holdout period. We develop a new multivariate, time-series prediction model that employs past values of earnings, short-term accruals and cash-flows as independent variables in a time-series regression. Our predictive results indicate that this mode! clearly outperforms firm-specific and common-structure ARIMA models as well as a multivariate, cross-sectional regression model popularized in the literature. These findings are robust across alternative cash-flow metrics (e.g., levels, per-share, and deflated by total assets) and are consistent with the viewpoint espoused by the FASB that cash-flow prediction is enhanced by consideration of earnings and accrual accounting data.

Presents a stylized model of the effect of information on security prices when there is uncertainty regarding the precision of information. Uncertain precision; Rational expectation models; Earnings-returns relation; Nonlinearity.

Examines the prediction that the inclusion of larger proportions of outside members on the board of directors significantly reduces the likelihood of financial statement fraud. Fraud firm selection; Differences in outside directors; Grey and independent directors; Consideration of audit committees; Other board characteristics.

This study investigates the association between going concern opinions and the market's reaction to bankruptcy filings. The results of prior studies indicate that going concern opinions are useful in predicting bankruptcy and provide some explanatory power in predicting bankruptcy resolution. As such, going concern opinions may reduce the surprise associated with bankruptcy. Our results are consistent with this assertion. Firms receiving going concern opinions experience less negative excess returns in the period surrounding bankruptcy filings than those receiving unqualified opinions. These results hold after controlling for the probability of bankruptcy, the market's reaction to news announcements occurring prior to bankruptcy, and changes in stock price prior to the issuance of the auditor's report. Overall, our results are consistent with going concern opinions having information value.

Evaluates the association between the market value of banks' common equity and fair value estimates disclosed under Statement of Financial Accounting Standards No.107. Fair value accounting; Financial instruments; Financial statement disclosures; Commercial banking.