Auditing, Auditor judgment, Accountability, Recency

Examines the `curse of knowledge' in audit judgment and the extent to which it is mitigated by accountability, experience and counterexplanation. Occurrence of curse of knowledge when individual are unable to disregard information already processed; Audit implications; Debiasing information.

Disclosures, Contingent liabilities, SFAS No. 52, Environmental liability

Auditing, Technical knowledge, Audit planning, Performance evaluation

This study examines analyst forecast errors within the context of stock recommendations. We predict positive forecast error (i.e., optimism) for buy recommendations and negative forecast error (i.e., pessimism) for sell recommendations. We offer two explanations for this prediction: (1) the unconscious tendency to process information in a manner that supports one’s goal, which we refer to as the “objectivity illusion” hypothesis, and (2) the economic incentive to boost trade, which we refer to as the “trade boosting” hypothesis. The pattern of analyst forecast bias we predict (i.e., optimism for buys and pessimism for sells) is opposite in direction to that predicted by the management relations hypothesis—a commonly cited hypothesis for analyst forecast bias. We find broker‐analyst earnings forecast errors are significantly optimistic for buy recommendations and significantly pessimistic for sell recommendations, consistent with the objectivity illusion and trade boosting hypotheses. Our study indicates that the pattern of results reported in prior research (i.e., increasingly optimistic earnings forecasts as the stock recommendation becomes less favorable) is likely driven by a correlated omitted variable, actual earnings. Results of an analysis to distinguish between trade boosting and objectivity illusion appear more consistent with the objectivity illusion.

Auditing, Performance evaluation, Decision justifiability, Auditor expertise

XBRL (eXtensible Business Reporting Language) is an emerging technology that facilitates directed searches and simultaneous presentation of related financial statement and footnote information. We investigate whether using an XBRL-enhanced search engine helps nonprofessional financial statement users acquire and integrate related financial information when making an investment decision. We conduct our investigation in the context of recognition versus disclosure of stock option compensation. Our results reveal that many users do not access the technology, but those who do use it are better able to acquire and integrate information. Specifically, we find that when stock option accounting varies between firms, the use of an XBRL-enhanced search engine increases the likelihood that individuals acquire information about stock option compensation disclosed in the footnotes. We also find that XBRL helps individuals integrate the implications of this information, resulting in different investment decisions between individuals who use and do not use the search engine. Our results suggest that search-facilitating technologies, such as XBRL, aid financial statement users by improving the transparency of firms' financial statement information and managers' choices for reporting that information. Our results also reveal that wide publicity about the benefits of using search-facilitating technology may be needed to induce financial statement users to access the technology.

Previous research demonstrates that auditors' directional goals influence their reporting decisions. For example, when auditors have goals of accepting client-preferred accounting methods, they tend to exploit ambiguity in reporting standards to justify those methods, even when they are aggressive (Hackenbrack and Nelson 1996). We report an experimental investigation of the likely effectiveness of regulation designed to curb this tendency. Specifically, regulators suggest that having auditors identify benchmarks or assess the quality of various methods will “raise the bar” for method acceptability, thereby reducing auditor acceptance of aggressive reporting methods. However, this reasoning ignores the fact that ambiguity typically surrounds quality assessment. Following motivated reasoning theory, we argue that, in order to meet the increased standard for acceptability, auditors with high commitment to directional goals will exploit the ambiguity surrounding the quality of various methods when making quality assessments, with the result that the client-preferred method will be deemed best, or at least of high enough relative quality to be used. This theory suggests that auditor acceptance will increase with goal commitment, and that the increase will be most dramatic when quality assessment is performed. Results of our experiment support our hypotheses that performing a quality assessment amplifies the effects of auditors' directional goals on their acceptance of client-preferred methods and on their ratings of the quality of that method. Moreover, auditors making quality assessments are more likely to identify the client's method as the most appropriate method when they are more committed to their directional goals. An implication of our theory and results is that regulation (such as SAS No. 90) that requires auditors to make quality assessments may decrease auditors' objectivity when auditors have directional goals to accept client methods.

We investigate a key assumption underlying much of the experimental research in financial accounting that graduate business students are a good proxy for nonprofessional investors. To conduct our investigation, we categorize recent experimental studies in financial accounting, based on the relative level of integrative complexity inherent in each study's task. We then conduct experiments using two tasks, one that is relatively low in integrative complexity and one that is relatively high in integrative complexity, and compare the responses of two groups of M.B.A. students and nonprofessional investors. Our results suggest that using M.B.A. students as a proxy for nonprofessional investors is a valid methodological choice, provided researchers give careful consideration to aligning a task's integrative complexity with the appropriate level of M.B.A. student. M.B.A. students who have completed their core M.B.A. courses and are enrolled in or have completed a financial statement analysis course are a good proxy for nonprofessional investors in tasks that are relatively low in integrative complexity. Though less definitive, the majority of our tests also suggest that these students are a good proxy for nonprofessional investors in tasks that are relatively high in integrative complexity. However, care must be taken when using students in the first-year core financial accounting course. In tasks that are relatively low in integrative complexity, these students perform similarly to nonprofessional investors except when they are asked to make an investment decision. In tasks that are relatively high in integrative complexity, these students acquire information similarly to nonprofessional investors, but they do not appear to integrate the information in a similar manner.