Knowledge that Transforms

Auditing, Internal control system, Judgment variance, Experience

International accounting, Accounting differences, Earnings, National characteristics

Inventory valuation, Price-level adjusted accounting, Inflation, General price level adjusted accounting

Voluntary Disclosure, Earnings forecasts, Selective dissemination, Informational content

Bertrand N. Horwitz, Richard Kolodny, The Economic Effects of Involuntary Uniformity in the Financial Reporting of R&D Expenditures, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 38-74

In recent years, there has been an increased emphasis on the forecasting of accounting earnings using the Box-Jenkins method of forecasting via autoregressive integrated moving average (ARIMA) models.' Generally, however, these models are univariate by definition and do not provide for the statistical modeling of events which occur outside of the earnings series. The purpose of this study is to explore the impact of this limitation by employing a more general approach which incorporates market and industry index data into the forecast model. One reason for exploring this more general approach is that Financial analysts have long recognized that economy-wide and industry-wide factors affect the financial numbers of individual firms. Index models enable quantification of the effects of these factors. Such quantification can be important when assessing financial trends in a firm and forecasting financial variables (Foster [1978, p. 155]; see also Brown and Ball [1967] for further motivation for index models). This objective can be achieved through the use of the single-input transfer-function method developed by Box and Jenkins [1970]. The transfer function provides a more generalized form of the ARIMA model by incorporating an additional predictor variable, in addition to past earnings, in the form of a market or industry price index. Section 1 contains a brief discussion of the transfer function and

Forecasting, Box Jenkins method, Earnings forecasts, EPS

Cornelius J. Casey, Jr., The Usefulness of Accounting Ratios for Subjects' Predictions of Corporate Failure: Replication and Extensions, Journal of Accounting Research, Vol. 18, No. 2 (Autumn, 1980), pp. 603-613

Accounting standards, Uniformity, Auditing

Budgeting, Participation process, Employee satisfaction, Performance evaluation