Knowledge that Transforms

The article reviews the book "In Search of Identity: An Inquiry Into Identity Issues of Accounting," by John W. Buckley.

The attempt to prescribe accuracy criteria for the publication of sales and net-income forecasts not only raises the issue of feasibility but would not supply investors with the essential data relevant to the investment decision. In the rationale of investor models, the fact that forecasts of sales or net income should not err by more than 10% does not greatly advance the decision process unless reinforced by probabilistic estimates of deviations more or less than 10%. Probabilistic budgets for multi-product firms aggregate product line budgets, and as such the distribution of revenue and expense depends upon the covariance relationships within and among the product line estimates. As illustrated, with this in- formation and the major assumptions underlying each product forecast, the investor may manipulate product mixes which conform to his prognostications about the economy and the industry and calculate the net-income effects. In this context, the historical accuracy of company forecasting has marginal value since the investor commands the appropriate information to act upon his own insights and assumptions. Historical accuracy-the dispersion of actual and forecasted sales in prior years- is significant to the analyst only as bench- mark data against which to argue his special projections regarding the future behavior of sales. Thus, if in recent years total or product line sales had never fallen short of the management forecast by more than 6%, the investor might well ponder his rationale for a higher downside variation. Such comprehensive disclosure would also tend to reduce the potential for management manipulation of forecast information, although in particular circumstances short term competitive disadvantages might accrue. Financial reporting has primarily emphasized the verification of past events. The transition to a system which will allow for the prediction of future outcomes merits an extensive research effort into the format and content of budget disclosures. This paper has attempted to highlight some areas of investigation with particular reference to the design of investor oriented budgets (forecasts of sales and net-income). At best, it represents a threshold discussion of an area with far reaching implications for financial reporting.

Reviews the book "Basic Auditing Principles," 4th ed., by Arthur W. Holmes and Wayne S. Overmeyer.

This article presents information on a conceptual framework for linking some seemingly diverse approaches to human resource accounting. Human resource accounting has two components, human asset accounting and human capital accounting. Human asset accounting is concerned with determining the value of the human resources employed in an organization to the organization. Human capital accounting is concerned with determining the value of the human resources employed in an organization to the employees of that organization. The total value of the human resources employed in an organization is equal to the value of the organization's human assets and its employee's human capital. Under the proprietary and entity theories of the firm, accountants are primarily interested in determining the value of human assets to an organization. However, they must recognize that changes in human capital values affect human asset values. If the enterprise theory of the firm were adopted, accountants would also be directly interested in determining the total value of the human resources employed in an organization and the value of the employee's interest in these resources.

First, the evidence indicates that investors who used only price-level restated or both price-level restated and conventional financial statements did not make forecasts different from those made by investors who used only conventional in- formation. With the exception of period 4, the isolated differences which did appear between the forecasts of the groups were attributed to chance. With respect to period 4, the evidence did reveal forecasting differences among the groups. Two possible explanations for this occurrence were considered. The information content explanation suggests that differences in forecasts occurred only in period 4 because this was the only period in which investors made a sufficiently thorough comparative analysis of the combined statements. However, analysis to the extent possible within the research design could not validate this explanation. An alternative explanation, called the shock effect explanation, attributes the period 4 differences to the shock of the initial decision experience and holds that the forecast differences had nothing to do with any differences between the conventional and price-level restated statements. This explanation does seem to be in accord with most of the evidence. Second, the evidence indicates that neither the users of the restated statements nor the users of the combined statements made decisions different from those made by the users of the conventional statements.

The article argues that behavioral implications should be considered in the formulation of tax law and policy in the United States. The income tax policy of the United States has many objectives including raising revenue, encouraging economic growth, stabilizing the economy, redistributing income and wealth and encouraging certain industries. Although taxation does influence human behavior, most tax laws are enacted without adequate consideration of their behavioral effects. A person on welfare cannot better himself by working unless he can get off welfare altogether. Proponents of the negative income tax, both conservatives and liberals, indicate that under a negative income tax system the individual's payments would not be reduced dollar-for-dollar as earnings rise. The households were drawn from a stratified sample of eligible households and were assigned to either an experimental or control group. An increase in income has had little impact on family stability. The power of incentives and disincentives is enormous. They may be used to safeguard or to exploit, to subsidize one interest or to destroy another, to simplify administration or to confuse it. Taxation does influence human behavior, but the important thing is to learn which provisions influence behavior in what way-- and whether the resulting behavior is that which is desired.

The article reviews the book "Perspectives on Electronic Data Processing: A Book of Readings," edited by James D. J. Holmes.

Reviews the book "Auditing Looks Ahead: Proceedings of the 1972 Touche Ross/University of Kansas Symposium on Auditing Problems," edited by Howard F. Stettler.

The article presents a report of the Committee on Internal Measurement and Reporting of the American Accounting Association as of October 1973, which focused on the data gathering stage for the testing of hypotheses in the area of internal measurement and reporting. This report has focused separately on each area in order to highlight these differences. However, it is the opinion of the majority of the Committee members that the most interesting and fruitful research may result when hypotheses combining the technical and behavioral areas are investigated. Hopefully, the discussion in this report has alerted the researcher to at least two important points, which should be considered prior to undertaking research that involves both areas. Additional research in each of the areas may be necessary to create a sufficient knowledge base for formulating meaningful hypotheses, which combine technical and behavioral factors.

The article discusses efficient market empirical research literature in relation to accounting information. The studies discussed in the article questioned the frictionless nature of the hypothesis as usually expressed. The authors believe that efficient-markets research in relation to financial accounting is the most important thrust made by accounting researchers in the past decade. By its very nature, empirical research is time consuming and messy. Furthermore, conclusions are always subject to reservations.