Analytical review, Diagnosis model, Audit planning, Auditing

Audit Report, Perception, Auditors, Bankers

Robert Libby, The Impact of Uncertainty Reporting on the Loan Decision, Journal of Accounting Research, Vol. 17, Studies on Auditing-Selections from the "Research Opportunities in Auditing" Program (1979), pp. 35-57

Financial ratios, Prediction achievement criterion, Bankruptcy, Decision making

William Kinney, Robert Libby, Research on Credible Financial Reporting 1961-99: The Contributions of Professor Nicholas Dopuch, Journal of Accounting Research, Vol. 37, Studies on Credible Financial Reporting (1999), pp. 1-15

The article presents the author's opinions on an article by Karl E. Weick, published in the April 1, 1983 issue of the periodical "Accounting Review," which argued that stress is an important accompaniment of corporate accounting practices. That article by Weick was titled: "Stress in Accounting Systems." According to Weick, accountants and auditors work under tremendous stress. The first important feature of the stress concept is that its consequences are specified in terms of observable performance metrics. In the short term, the consequences of stress relate primarily to cognitive performance. There is also a sequence of physiological and psychological consequences, which in the long term can produce serious health problems. An important feature of the stress concept is that, as Weick has aptly demonstrated, accounting is closely involved with many of the antecedents of stress. Given the well-defined antecedents and consequences of stress, it is possible to specify explicit remedies which may be implemented if the benefits of the remedies outweigh their costs.

The article presents response of the author on comments made by scholars Gerald L. Salamon, Wilfred C. Uecker and Richard Simmons and James Jimbalvo on his article "Prediction Achievement and Simulated Decision Makers As an Extension of the Predictive Ability Criterion," published in the July 1975 issue of the periodical "The Accounting Review." In their comment, Salamon, Uecker and Simmons question the generality of the usefulness of the prediction achievement criterion as developed in my earlier paper. Their analysis is organized around the Report of the Committee on Accounting Valuation Bases (CAVB) . This reply will present my view of the place of the prediction achievement criterion in generalized and particularized accounting situations and compare it to that of Salamon, Uecker and Simmons and clear up some minor misunderstandings by Salamon, Uecker and Simmons of my earlier work and the position taken by CAVB. In Jiambalvo's comment, he also takes issue with the usefulness of the prediction achievement index in relation to predictive ability measures, in addition, he questions the use of the correlational measures of performance presented in my discussion of the Lens Model and suggests that estimated prediction achievement provides biased estimates of usefulness.

This article deals with the expansion of the predictive ability criterion to consider the effects of information on decision-maker's (DM) behavior. The analysis involves two parts. In the first part, an information relevance criterion that simultaneously considers both the information and the DM's interpretation and use of it is developed. Under this relevance standard called prediction achievement, information alternatives are evaluated based upon the accuracy of the predictions made by the DM. Efficient implementation of this relevance measure requires that the effects of different information alternatives on the DM's behavior be predicted based upon descriptive mathematical models. The second part of this research consists of a field experiment designed to test three necessary conditions for the use of one particular model in the prediction of two-group classification decisions. E. Brunswik's Lens Model brings the relationship between predictive ability and information utilization into bold relief.