Knowledge that Transforms

Auditing, Sampling plan, Representative sampling, Preventive Sampling

Teaching accounting, Work load, Effectiveness, Smallest Space Analysis

Accounting Measurement, Performance measurement, Decision making

William C. Pyle, Nabil Elias, Summary of Discussion by William C. Pyle of "The Effects of Human Asset Statements on the Investment Decision" and a Reply, Journal of Accounting Research, Vol. 10, Empirical Research in Accounting: Selected Studies 1972 (1972), pp. 234-240

Again the distinction is drawn, but is it really so clear? Consider, for example, the standard cost system in a manufacturing firm. This system supplies information which is useful for some decision-making purposes. But, underlying each standard input cost is an implied decision about the kind and amount of resource to be used and the nature of the market in which it is to be purchased. Behind each input/output relationship is an implied decision regarding the technical conditions under which the process should operate and the rate at which employees should work. In order to obtain solutions to one set of problems-those for which the output of a

To most accountants, a management information and control system based on accounting and other quantitative data is an article of faith. This paper is not designed to discredit that faith. Rather its purpose is to outline some of the competitive conditions under which sophisticated management controls are more extensively utilized and those under which they are less extensively utilized. One result of this study could be a more discriminating application of management controls. Generally speaking, competition is likely to accentuate the use of controls. The greater the competition, the greater the need to control costs, and to evaluate whether production, marketing, finance, etc. are operating according to expectations. This paper empirically confirms this argument. But it goes beyond this to try and show that different types of competition -in this paper, price, marketing or distributive, and product competition -may have very different impacts on the use of controls in manufacturing organizations. It is not easy to measure how extensively a particular control is used in a firm. Two firms may both claim to use internal audits or activity budgeting. But one may be using it occasionally, or with respect to only a small part of its operations, while the other may have a full-fledged system of internal audit and activity or flexible budgeting. Thus, a dichotomous, yes-no measure is not very useful. Nor is a management control a physical thing that can be measured cardinally. We are therefore forced to use ordinal measures, such as rating scales, particularly in preliminary stages of research.

In this paper I describe a study of the predictive ability of price-level adjusted and unadjusted historical earnings numbers for a sample of firms in the electric utility industry during the period 1935-1940. The criterion used to assess predictability was an ex post valuation. The ex post valuation was computed by discounting actual net cash flows plus a terminal market value back to base periods which ranged from 1938 to 1941. Ex ante valuations based on adjusted and unadjusted accounting data available at the base periods are compared to the ex post valuations to evaluate the predictive ability of these earnings streams. The test is intended to provide empirical evidence about both the accuracy of predictions based on earnings data in general and the relative predictive abilities of price-level-adjusted and unadjusted earnings numbers. The valuation models used in the empirical test are based on homogeneous risk class models defined by Modigliani and Miller.' The derivation of these models are described in the next section.

M&A, Tender offer, Conservative accounting, Target characteristics

Quarterly earnings, Interim reporting, Price reaction, Volume changes

James Ohlson, Analysis of the Usefulness of Accounting Data for the Portfolio Decision: A Decision-Theory Approach, Journal of Accounting Research, Vol. 10, Empirical Research in Accounting: Selected Studies 1972 (1972), pp. 45-84