This paper reports analyses of data obtained using a field-based questionnaire in which 253 auditors from one Big 5 firm recalled and described 515 specific experiences they had with clients who they believe were attempting to manage earnings. This approach enables us to analyze separately managers' decisions about how to attempt earnings management and auditors' decisions about whether to prevent earnings management by requiring adjustment of the financial statements. Our results indicate that managers are more likely to attempt earnings management, and auditors are less likely to adjust earnings management attempts, which are structured (not structured) with respect to precise (imprecise) standards. We also find that managers are more likely to make attempts that increase current-year income, but auditors are more likely to require that those attempts be adjusted, that managers are more likely to make attempts that decrease current-year income with unstructured transactions and/or when standards are imprecise, and that auditors are more likely to require adjustment of attempts that they identify as material or that are attempted by small clients.

We investigate how unique features of charities affect the manner in which they compensate their executives. We find that changes in compensation are significantly positively associated with changes in spending on programs that advance organization objectives, whether changes in program spending are attributable to changes in revenue raised or to changes in the relative costs of administering the charity. The results suggest that accounting performance measures can play a role in nonprofit organizations whose objectives are typically subjective and nonfinancial, and thus, whose progress toward objectives is difficult to quantify.

Questionnaire responses reported by Luft and Libby (1997) reveal that transfer price negotiators expect fairness-based price concessions that moderate the influence of an outside market price when the outside market price strongly favors one of the parties. We examine whether these expectations of fairness extend to the actual prices that result from real-cash negotiations. Findings indicate that expectations of fairness-based price concessions do not survive actual negotiations when participants negotiate over a computer network with no communication other than bids, asks, and acceptances. Conversely, both expectations and actual negotiated outcomes reflect fairness-based price concessions when participants negotiate in a face-to-face setting with unrestricted communication. Together, these results imply that the extent to which questionnaire-based judgments of social behavior generalize to actual behavior depends on the whether the competitive environment suppresses or reinforces the social presence necessary to sustain phenomena such as preferences for fairness.

This study compares samples of publicly and privately held bank holding companies to examine whether the high frequency of small earnings increases relative to small earnings decreases reported by public firms is attributable to earnings management. We expect public banks' shareholders to be more likely than private banks' shareholders to rely on simple earnings-based heuristics in evaluating firm performance, so we expect public banks to have more incentives to report steadily increasing earnings. Consistent with this expectation, we find that relative to private banks, public banks: (1) report fewer small earnings declines, (2) are more likely to use the loan loss provision and security gain realizations to eliminate small earnings decreases, and (3) report longer strings of consecutive earnings increases. These results suggest that the asymmetric pattern of more small earnings increases than decreases, first documented by Burgstahler and Dichev (1997), is attributable to earnings management and is not simply a reflection of the underlying distribution of earnings changes.

We use the Ohlson (1995, 1999) and Feltham and Ohlson (1999) valuation models to investigate the market's perception of the economic effect of employee stock options (ESOs) on firm value for a sample of 85 profitable computer software companies. Our results suggest that the market appears to value these firms' ESO expense not as an expense but as an intangible asset (even after controlling for the endogeneity bias arising from the mechanical relation between ESOs and the underlying stock prices). However, we also find a conflict between: (1) the positive manner in which investors appear to value ESO expense, and (2) the negative relation between current ESO expense and future abnormal earnings. This conflict not only could be an artifact of the restrictiveness of the abnormal earnings forecasting equation we estimate, but it also calls into question whether investors assess correctly the effect of ESOs on profitable software firm value.