Knowledge that Transforms

[There has been a proliferation of dollar-unit sampling bounds over the past few years; however, in many cases there has been little guidance provided on the relative performances of these bounds under representative audit conditions. This is particularly true of the Bayesian bounds which are analyzed here. One purpose of this study, therefore, is to provide further validation of Bayesian models by assessing their robustness when using diffuse priors on the "typical tainting patterns" of Leitch, et al. [1982]. A second purpose of the study is to compare Bayesian bounds with non-Bayesian bounds. The study found that even with diffuse priors, some Bayesian models show potential for improving on the performance of non-Bayesian dollar-unit sampling techniques.]

[The most widely-held securities in America (and also the world) during the 1920s were the stocks and bonds of Kreuger & Toll, Inc., a Swedish match conglomerate. The company was founded and headed by Ivar Kreuger. The reason Kreuger's securities were so popular was that they were sold in small denominations and paid high dividends. Dividends of over 20 percent annually were paid on both stocks and bonds. Unfortunately, these dividends were paid mostly out of capital, not profits. Kreuger was essentially operating a giant pyramid scheme, which was hidden from the investing public by Kreuger's insistence that financial statements not be audited. He preached a philosophy that secrecy was paramount to corporate success. The bankruptcy of the company in 1932 was the largest on record and resulted in numerous changes in financial reporting. Articles in magazines and newspapers kept Americans aware of the extent of the fraud scheme at the same time Congress was considering the passage of a federal securities law. Thus, the timing of the bankruptcy and the corresponding media coverage made it politically expedient to pass laws that would make it difficult for similar schemes to be successful in the future. Such laws were indeed passed, and the Congressional committee reports specifically refer to Kreuger. The hypothesis of this paper is that the Ivar Kreuger fraud contributed significantly to the passage of the securities acts.]

[This paper reports the results of an empirical study designed to assess the relationship of budgetary participation to motivation and performance among middle-level managers in three manufacturing firms. Expectancy theory provides the theoretical framework for specifying and estimating motivation. It is hypothesized that motivation mediates the effect of participation on performance. Participation and performance are found to be significantly positively related; however, the path between them through motivation explains very little of this, principally because participation's relationship with motivation is insignificant. The correlations between participation and the elements in the expectancy model show a positive relationship with the expectancies, counteracted by a negative relationship with the intrinsic valences. An interpretation of participation's potential effects on budgetary slack is offered as a possible explanation of this unexpected finding.]

[This study investigates the accounting decisions made by managers of 64 New York and American Stock Exchange firms who proposed to purchase all publicly-held common stock and "go private" during 1973-1982. These management buyouts engender potentially severe conflicts of interest for insider-managers, who both have a fiduciary duty to negotiate fair value for the publicly-held shares and are themselves the purchasers of those shares. Although managers virtually always engage an independent investment banker to evaluate the offer terms, the typical management buyout nonetheless generates litigation by public stockholders who claim their compensation is inadequate. Because the courts and investment bankers employ earnings-based valuation methods to assess fair value, managers have incentives to understate reported income in attempts to reduce the buyout compensation. However, a variety of tests that employ the recently developed accrual methodology reveal no indication that managers of sample firms systematically understated earnings in periods before a management buyout of public stockholders.]

[Authoritarianism has been the most widely studied personality variable in management accounting research. One important line of research has been the role of authoritarianism as a moderating variable in studies which examine the effectiveness of budgetary participation. Results from these studies have been equivocal. In this paper it is argued that the lack of consensus in this research may be a consequence of examining the personality of only one member of the group involved in the participative process, usually the subordinate. It is claimed that improved understanding of the influence of authoritarianism on subordinate attitudes to the job and budgets can be expected if both subordinate and superior authoritarianism are considered together. The results indicate that budgetary participation is important in its own right and the homogeneous authoritarian dyads are positively associated with subordinate outcomes. Moreover, participation is more strongly associated with subordinate job satisfaction and budgetary attitudes in the homogeneous than in the heterogeneous dyad.]

[Revenues of hospitals in the state of Washington are constrained by an upper bound that is a function of budgeted costs, budgeted volume, and actual volume. Basically, allowable revenue is the hospital's total budgeted cost, with an adjustment for the difference between actual and budgeted volume. A hospital can increase its allowable revenue by biasing the budget data reported to the Washington State Hospital Commission. For example, when a hospital budgets for an increase in volume, it is to the hospital's advantage to overstate the impact of the increase in volume on the hospital's total budgeted cost. Conversely, when a hospital budgets for a decrease in volume, the constraint on revenues can be relaxed by understating the impact of the decrease in volume on the hospital's total budgeted cost. Empirical evidence is consistent with hospitals biasing, in certain predictable ways, budget data reported to the regulatory commission.]

[This study examines the relative accuracy of analyst earnings forecasts prepared both before (prior forecasts) and after (posterior forecasts) voluntary management earnings forecasts. The motivation for the study stems directly from recent studies which document statistically significant stock price reactions associated with management forecasts. The results of these studies suggest that management conveys new (or inside) information about earnings through its forecasts. Based on these results, one would expect that management forecasts would be more accurate than prior analyst forecasts while management and posterior analyst forecasts would be equally accurate. This paper reports results fully consistent with both of these predictions. These results, however, are conditional upon caveats about the estimation dates for analyst forecasts used to classify them as prior or posterior. Several previous studies have also investigated similar issues but have produced conflicting results. The tests reported here are based on larger samples than those found in previous studies. This suggests that any accuracy differences between management and analysts are of such magnitude that they can be detected only in relatively large samples.]

[The auditing profession, in its use of existing statistical estimators and statistical procedures, has been assuming implicitly that the effect of nonsampling error on these estimators and procedures is negligible. This study investigates the potential effect of one type of nonsampling error, errors of measurement on the part of the auditor, on the behavior of alternative estimators and statistical sampling procedures in a Monte Carlo simulation study. The results indicate that the potential existence of independently occurring measurement error can significantly affect the auditor's statistical results and that the actual warranted level of confidence obtained by a statistical procedure may often be far below the desired level of confidence.]

[The impact of personality variables on participative management systems has been a subject of considerable current interest to researchers. The effect of locus of control on the relationship between participation and performance of subordinates in a participative budgeting environment was recently examined by Brownell. This study examines the participative relationship between superiors and subordinates. The findings of a laboratory experiment indicate that locus of control also may influence the behavior of superiors involved in the participative budgeting process in accepting the inputs of their subordinates. The results of this experiment support the hypothesis that internal managers are willing to allow subordinates greater participation than are external managers.]

[This article reviews and evaluates the financial reporting of the federal income taxes of General Dynamics Corporation. Such a review illustrates the material discrepancies that can result between book income and tax return income using generally accepted accounting principles. It also raises doubts as to (1) the relevance of the current disclosure of "effective tax rates" in the income tax note to the financial statements, and (2) whether General Dynamics has fully reported its tax status in its annual reports. We believe that the FASB should require a more complete articulation of a corporation's tax status in its annual reports.]