Knowledge that Transforms

This article comments on the article "Cost of Information and Security Prices: Market Association Tests for Accounting Policy Decisions," by Robert G. May and Gary L. Sundem, published in the January 1973 issue of the journal "The Accounting Review." May and Sundem presented an analysis of the information set underlying a set of market-clearing security prices. The authors conclude that choosing between accounting alternatives on the basis of benefits and costs to society is a complicated procedure and that alternative accounting procedures may lead to alternative sets of market-clearing prices, so that the market association of an unreported accounting alternative may not reflect its actual information content. It is found that the conditions under which market association measures are valid are not as restricted as those found by May and Sundem. It was found that the conditions under which market association measures are valid are not as restricted as those found by May and Sundem. In cases where an unreported accounting alternative provides more timely information than the currently reported alternative, market associations are valid if they are measured over an appropriate time period.

This article presents information on expectations and achievements in income theory. A major confusion concerning the relationship between ex ante present value and ex post concepts of income and asset valuation underlies much of the recent literature in income theory and asset valuation. Many claims have been made in favor of the present value concepts and measurements as providing the ideal accounting system which are not valid, and many criticisms of historical accounting which are based on the supposed merits of present value accounting are not sound. The case for the use of current value or replacement cost accounting is thought by many to rest on the merits of present value accounting whereas it really rests upon other grounds. The case for the dominant position of ex ante present value income rests on the needs of investors for information about future income prospects of a firm. Investors in business enterprises, i.e., owners, are interested in the prospects of future income from investments, and it is differences in these future prospects which determine the allocation of their investment funds.

Presents information on a study which applied probabilistic models to management planning and control in accounting. Mathematical expression of nonprobabilistic approach to management planning and control; Problem with the traditional nonprobabilistic approach and probabilistic approach.

The article presents the text of a report issued by the American Accounting Association executive committees from 1971 to 1973, which deals the implications of professional supply and demand factors on doctoral programs in accounting. The meanings of the terms "doctoral program" and "accounting" have changed greatly over the past several decades, and the meaning of each term is expected to continue changing during the period of time for which demand and supply projections were prepared. Persons now enrolled in doctoral programs who plan to enter the job market in 1976 or later, and persons now seeking admission to accounting doctoral programs, should be advised that it is highly probable that in the 1976-1985 period the supply of new doctorates interested in positions on accounting faculties of degree-granting colleges or universities will exceed the demand by such institutions. Two-year colleges, public accounting firms, governmental agencies, and industry appear to have absorbed approximately 10 percent of the numbers of new accounting doctorates each year in the last twenty-five years.

Reviews the book "The Theory of Financial Decisions," by Charles W. Haley and Lawrence D. Schall.

The article reports that decision making under uncertainty is receiving increasing emphasis in business and economic academic programs. The concept of expected value, for example, is emphasized in many statistics, economics, and operations research courses. Unfortunately, the techniques of maximizing and minimizing expected values are generally taught without appropriate attention being given to the formulation of the subjective probabilities. Without such experience, individuals may be hesitant or lack proficiency in specifying personal probability distributions. Several types of classroom exercises have been devised to emphasize the elicitation of personal probabilities. The formation of personal, subjective probabilities can also be emphasized in course examinations through the use of a technique one calls Probabilistically Answered Examinations (PAE). In PAE, students are encourage to quantify their beliefs honestly concerning the correctness of alternative answers. For example, multiple choice and true-false PAE questions require that students place probabilities in the form of percentages on each answer. This article also explains scoring rules for PAE, presents an acceptable PAE grading technique, and reports the results of adopting PAE in an undergraduate auditing class.

This article presents a reply from the authors to the criticism of their article underlying a set of market-clearing security prices by Robert P. Magee, published in a recent issue of the journal "The Accounting Review." In their earlier work, the authors showed that there is a potential bias against non-extant accounting alternatives built into association tests based on extant security prices. Magee shows that under certain conditions the bias may be sufficiently reduced such that a nonextant alternative which actually contains more information will indeed be judged so on the basis of its association with market prices. He concludes that the conditions that they specified under which association tests will be valid for nonextant alternatives are too restrictive. There is no nontrivial accounting disclosure change that will not potentially cause a redistribution of wealth; consequently, there is no change for which social welfare impacts can be accurately surrogated by results of market association tests for differential information content. The authors concluded that market association tests may provide data that policy makers can use to revise their prior beliefs about the relative desirability of alternative accounting disclosure requirements.

This article presents a study on the implications to accounting of efficient markets and the capital asset pricing model in the U.S. If a proposed accounting procedure is theoretically superior to what is done in practice and if price observations indicate that the market is using it, then this can be used to support the contention that the superior practice should be used. With less than strong-form efficient markets and with the likelihood of a significant percentage of the market being fooled by faulty accounting practices, there is still a place for intrinsic value analysis.

Reviews the book "Financial Statement Analysis: Theory, Application and Interpretation," by Leopold A. Bernstein.

The article presents the text of the 1972-73 report of the American Accounting Association Committee on the relationship of behavioral science and accounting. Behavioral accountants typically have been trained traditionally as either accountants or behavioral scientists. Some accountants have used behavioral methods to test hypotheses; some behavioral scientists have used accounting situations and contexts to test general behavioral hypotheses. In the past, behavioral accounting research has been conducted by accountants with occasional and often casual inputs from behavioral scientists. Basically, the accountants have interesting problems which are likely to be amenable to behavioral techniques, whereas the behavioral scientists have the requisite skill in those techniques. Perhaps the greatest deficiency in behavioral accounting research is the lack of formal models. By formal models, here, we simply mean systematic attempts to formulate sets of principles, postulates, and hypotheses about relationships among variables which can then be tested empirically. Essentially, it includes any attempt to formalize a priori the relationships between selected independent and dependent variables.