Knowledge that Transforms

Several new methods of evaluatIng dollar-unit samples have been proposed recently for use in auditing. This paper presents results of a simulation study that compared four of these new methods. Additional simulations on alternative forms of two of these are also presented. Evidence on the reliability and relative size of the upper error bounds for each method is provided for 2,160 different combinations of sample sizes, confidence levels, and types of accounting populations. The results provide a comprehensive analysis of the capabilities of these methods. All four methods have strengths and weaknesses. The Multinomial Dirichlet bound is quite reliable but very conservative and (as formulated) not able to utilize understatement errors. The two versions of the Cox and Snell bound that were tested (with different priors) varied considerably in their reliability over a range of confidence levels. While not without an occasional reliability problem, test results for the Moment Method bound and one of the two Bayesian-Normal bounds were largely favorable.

Many researchers describe themselves as Bayesians in that they revise their prior beliefs based on observed empirical evidence. However, most studies are designed and reported as classical hypothesis tests, and research design issues are typically considered as determinants of abstract properties of statistical tests. Thus, although the primary function of empirical research is to influence beliefs, research design Issues are seldom considered in their fundamental role as determinants of beliefs. In this paper, a Bayesian perspective is used to analyze the role of basic properties of hypothesis tests in the revision of beliefs. Two main points are emphasized. First, hypothesis tests with low power are not only undesirable ex ante (because of the low probability of observing significant results) but also ex post (because little probability revision should be induced even when significant results am observed). Second, irrespective of the usual issues of statistical and methodological validity, the effective level of tests in published research is likely to exceed the stated level, thus reducing the amount of probability revision justified by reported results. In combination, these conclusions are especially troublesome. If tests reported in the accounting literature are characterized by both low power and high effective levels, the results of published tests properly have little or no impact on the beliefs of a Bayesian. The Bayesian framework is useful in understanding and analyzing the tradeoffs which are an inherent part of empirical research. The analysis here Identifies a Bayesian motivation for the common recommendations that researchers should attempt to maximize power in the design and execution of empirical tests and attempt to maintain the effective level of tests at their stated levels. Further, the analysis demonstrates the importance of explicit...

This paper reassesses the Information content of annual earnings announcements using errors in analyst forecasts published within one week of those announcements as the proxy for unexpected earnings. In addition to the use of analyst forecasts near to the announcement date, features which distinguish this study from earlier work include: a more precise dating of earnings announcements; a comparison of analyst forecast errors and changes in fourth-quarter earnings as proxies for unexpected earnings; tests of unusual variability in excess returns at the time of earnings announcements with the influence of forecast errors removed; a separation of early and late disclosers within an industry; and an examination of the properties of forecast range as an ex ante measure of earnings predictability. We conclude that: provided that analyst forecast errors measure unexpected earnings, annual earnings announcements have information content even when compared to market expectations very near to those announcements; analyst forecast errors do not dominate fourth-quarter changes as a proxy for unexpected earnings; other information released concurrently with earnings announcements appears to have significant pricing implications; there is greater information content in earnings announcements of early disclosers than of late disclosers; and forecast ranges may provide a reasonable measure of the error in analyst forecasts, and hence of earnings predictability.

Presents findings from a survey of accounting research submitted to 'The Accounting Review' journal. Summary analysis of submissions; Authors and universities behind the accounting research; Topics and subtopics; Research methods employed in the accounting studies.

In 1981, Congress enacted a "safe harbor" lease law that permitted firms to sell unneeded tax depreciation deductions and tax credits to other firms. During the effective life of the law, the Financial Accounting Standards Board (FASB) did not establish reporting or disclosure requirements for firms entering the safe harbor transactions. Because of this, many policies were followed. This paper examines the impact of this lack of reporting and disclosure guidance on the comparability and Interpretability of financial statements across firms involved in leasing. This study provides examples of problems the FASB might need to address when analyzing changes under the new tax bill.

Reviews the book 'Federal Taxation of Partners and Partnerships,' by G. Fred Streuling, James H. Boyd and Kenneth H. Heller.

Reviews the book 'Accounting Principles,' 2nd ed., by Jack L. Smith, Robert M. Keith and William L. Stephens.

This paper examines the effects of outcome information on managerial decision evaluations. Specifically, based on cognitive considerations, hypotheses are developed about a base-line effect of outcome information and attenuation of that effect by: (1) the evaluator's prior involvement with the evaluatee's decision process, and (2) the extent to which reported outcomes imply evaluatee responsibility for anticipating such outcomes. The hypotheses are confirmed by the results of an experiment set within the context of capital budgeting. Implications of these results are discussed in terms of information system design and the process of generalizing psychological research into accounting contexts.

Reviews the book 'Modern Auditing,' 3rd ed., by Walter G. Kell, William C. Boynton and Richard E. Ziegler.

Reviews the book 'Dictionary of Banking and Financial Services,' 2nd ed., by Jerry M. Rosenberg.