Knowledge that Transforms

This paper describes the construction of an expert system for making planning-stage materiality judgments. The purpose of the study was to investigate how various types of qualitative and qualitative information influence those judgments. A rule-based expert system was built as a vehicle for this descriptive research because its use of If-Then rules to represent domain knowledge makes both the role played by various pieces of information and the reason for using that information explicit. The system's judgment model breaks down the materiality judgment process into two separate decisions: (1) a choice of the appropriate base. Examination of the rules used by the system indicates that information about (a) the nature of the client, (b) future plans of the client, and (c) perceptions of the needs of financial statement users influences the choice of a materiality base. Information about the intended use of the financial statements and the nature of the audit engagement affects the selection of the percentage rate.

Reviews the book "The Growth Of Arthur Andersen & Co. 1928-1973. An Oral History by Leonard Spacek," edited by Paul Briggs.

Reviews the book 'The Learning Curve: A Management Accounting Tool,' by Ahmed Belkaoui.

Reviews the book 'International Accounting and Reporting Issues: 1984 Review.'

The article presents a list of names of books received by the editor but not published in the April 1987 issue of the journal "The Accounting Review." The names of books include "Corporate Financial Reporting in a Competitive Economy," by Herman W. Bevis, "Management Controls: New Directions in Basic Research," edited by Charles P. Bonini, Robert K. Jaedicke, and Harvey M. Wagner, "Corporate Financial Reporting and Analysis in the Early 1900s," edited by Richard P. Brief, "Estimating the Economic Rate of Return From Accounting Data," edited by Richard P. Brief, "Ethical Standards of the Accounting Profession," edited by John L. Carey and William O. Doherty, "Issues in Finance," edited by Michael Firth and Simon M. Keane, "Controlling and Auditing Small Computer Systems," by S.J. Gaston, "The British Accounting Association Research Register 1986," edited by R.H. Gray, "Research in Accounting Measurement," edited by Robert K. Jaedicke, Yuji Ijiri and Oswald Nielsen, "Taxation of Securities, Commodities, and Options," by Andrea S. Kramer, and "The Accounting Profession and the Middle Market," edited by Belverd E. Needles Jr.

The sequential treatment adopted in many multiple signal studies is consistent with a simultaneous treatment and with other apparently diverse sequential approaches. More importantly, the conventional residual security return research design, which is also a sequential approach, can lead to downward-biased estimates of the incremental explanatory power of the accounting variables introduced at the second stage. This finding is striking in that it implies that the most pervasive use of a sequential approach is likely to lead to biased results.

A class of agency problems is analyzed in which a principal, responsible for production decisions, delegates responsibility for gathering information germane to such decisions to an agent. At issue is the value of sample outcomes and other signals in improving the efficiency of contracts offered by the principal in resolving the moral hazard that arises from the unobservability of the agent's effort. It is Shown that sample outcomes are useful in providing appropriate incentives, as well as in conditioning production decisions. Ex post observability of either the state of nature or the payoff from production is also shown to be valuable for incentive purposes in all but highly specialized and less interesting situations. Among the classes of agents to which these findings might apply are market researchers, political pollsters, census takers, geological surveyors, research scientists, quality inspectors, traffic monitors, talent scouts, and corporate auditors.

Reviews the book 'Accounting Principles,' 2nd ed., by Lanny M. Solomon, Richard J. Vargo and Larry M. Walther.

Reviews the book 'Laboratory Market Research,' edited by Shane Moriarity.

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.