Knowledge that Transforms

[This study examines accountants' objectivity when serving as a litigation specialist and expert witness on legal cases. Its purpose is to determine whether professional objectivity, in generating a fair and unbiased accounting estimate, will be influenced by the possible conflicts of interest inherent in the litigation support role. Employing litigation specialists and auditors from two firms, and the Defining Issues Test as a psychometric for practitioners' ethical reasoning, this research examines client advocacy on a damage valuation experiment manipulating the client's legal position. Results show that domain-specific experience coupled with ethical reasoning reduces the extent of bias or "side taking" in litigation support judgment.]

[The purpose of this study is to determine the prevalence, magnitude and timing of retiree health care benefit reductions and to identify determinants of the benefit-reduction decisions. Three explanations for these benefit reductions are examined: (1) increased contracting cost caused by the financial reporting consequences of SFAS No. 106, (2) financial weakness independent of SFAS No. 106 and (3) firm-specific increases in retiree health care costs. Strong support for the increased contracting cost hypothesis is found after controlling for industry, financial weakness and firm-specific changes in retiree health care costs. However, the results also indicate that firms cutting benefits are financially weaker and have higher retiree health care costs at the time benefits are reduced. Therefore, SFAS No. 106 cannot be viewed as the sole cause of the health care benefit reductions.]

[This paper documents a positive association between firms' tendencies to access capital markets and to disclose earnings forecasts, suggesting that firms attempt to mitigate potential consequences of differential information through disclosure. Our evidence also indicates that firms financing externally are not significantly more likely to forecast in the period shortly before an offering than at other times. Therefore, while firms that issue more capital tend to issue more forecasts, forces such as legal liability deter them from more frequent forecasting around the time of an actual offering. The paper also documents that management forecasts are not systematically greater than analysts' existing expectations, or than subsequently realized earnings. The data thus suggest that to the extent firms benefit from issuing favorable earnings forecasts when offering securities, competing forces such as potential legal liability and reputation costs deter them from issuing optimistic forecasts.]

[This paper evaluates alternative accrual-based models for detecting earnings management. The evaluation compares the specification and power of commonly used test statistics across the measures of discretionary accruals generated by the models and provides the following major insights. First, all of the models appear well specified when applied to a random sample of firm-years. Second, the models all generate tests of low power for earnings management of economically plausible magnitudes (e.g., one to five percent of total assets). Third, all models reject the null hypothesis of no earnings management at rates exceeding the specified test-levels when applied to samples of firms with extreme financial performance. This result highlights the importance of controlling for financial performance when investigating earnings management stimuli that are correlated with financial performance. Finally, a modified version of the model developed by Jones (1991) exhibits the most power in detecting earnings management.]

[This paper considers how time pressure and knowledge separately and jointly affect tax researchers' ability to locate relevant authority. Tax professionals and graduate tax students participated in a computer interactive experiment in which subjects selected relevant key words relating to a partnership tax issue. The results indicate that declarative and procedural knowledge enhance tax researchers' ability to select relevant key words in a time-restricted task. The most significant finding is that subjects with procedural knowledge responded more positively to time pressure than did subjects without such knowledge, thereby demonstrating an interaction between time pressure and knowledge.]

[We demonstrate that when cost differences among CPA firms serve as a source of economic rents to the incumbent auditor, the switching costs previously cited as the source of the auditors' rents may actually reduce the auditors' economic rents to the benefit of the client. This result has implications for how switching costs affect the way audit engagements are structured and how clients invest in their relationships with auditors. While the resulting behavior may appear to be inefficient or of a suspicious nature, it is a natural consequence of imperfect competition. This behavior includes (i) clients under-investing in their accounting systems, (ii) clients accepting their current auditor's management advisory services (MAS) bid, even though a rival CPA firm has submitted a lower bid for identical MAS, and (iii) inefficient same sourcing for MAS and audit services when CPA firms treat their audit and non-audit divisions as separate profit centers.]

[Prior research acknowledges that an earnings announcement may generate heavy trading but minimal price changes, and vice versa. Surprisingly, there is little empirical evidence regarding the extent of such occurrences. This study investigates the frequency with which earnings announcements generate differential price and volume reactions, and then assesses whether these differential reactions are associated with announcement-specific characteristics. Although there is a positive relation between the magnitudes of price and volume reactions (on average), nearly a quarter of the announcements generate price and volume reactions of very different relative magnitudes. Additional empirical evidence is consistent with the notion that trading volume is likely to be high relative to price reaction when an earnings announcement generates differential belief revisions among investors, but a small average aggregate market belief revision.]