Using a sample of UK firms for the period 1996‐98, we provide empirical evidence on the relation between nonaudit services (NAS) purchase and three proxies for earnings management: (1) the likelihood that client firm accounting practices during the sample period were publicly criticized or subject to regulatory investigation; (2) the likelihood that client firms were required to restate prior financial statements or adjust current year results upon adoption of Financial Reporting Standard (FRS) No. 12, which was intended to curb opportunistic use of provisions; and (3) the mean absolute value of client discretionary working capital accruals over the sample period. The level of NAS purchase is measured, alternatively, as (1) the ratio of nonaudit to total auditor fees, (2) the natural log of NAS fees, and (3) the decile rank of a particular client's NAS fees given all NAS fees received by the audit firm practice office. With one exception, we find that all three measures of earnings management are positively and significantly associated with the three measures of NAS purchase.

This paper provides evidence that keiretsu group member firms are subject to lower effective tax rates than independent firms in Japan. As an explanation, we develop a hypothesis that keiretsu firms strategically shift financially reported income among affiliates in order to reduce overall effective tax rates. Empirical evidence supports this income-shifting hypothesis since the positive relation between pre-tax return on firm value and marginal tax rate status is significantly mitigated by keiretsu membership. Contrasting conjecture, keiretsu income-shifting activities intensify when Japanese firms face economic recession. The evidence also suggests that benefactors of shifted income are compensated via increased dividends.

Reviewers use expectations about the client and preparer to help form perceptions of the probability of preparer error and relative accountability to the client and financial statement users (Gibbins and Trotman 2002; Rich et al. 1997b). Experimental findings suggest these perceptions interact to affect reviewers' agreement with the preparers' work and decisions about the amount of preparer follow-up work required. Further, the nature of reviewer cognition, as measured by the relative proportion of critical and supportive reviewer elaboration explains a significant portion of the effect of these perceptions on reviewer judgment and decisions. Elaboration is a stage of reviewers' judgment and decision-making processes in which the reviewer assesses the strengths and weaknesses of the preparer's work (Petty and Cacioppo 1986; Rich et al. 1997b; Lerner and Tetlock 1999). Although the extent of reviewer elaboration is also affected by expectations about the client and the preparer, extent of elaboration does not explain a significant portion of the effect on reviewer judgment. These findings increase our understanding of how and why expectations of the client and preparer interact to affect reviewer judgments and decisions.

I selectively survey the use of expectations in accounting research. While expectations are central to modeling work and essential in empirical documentation, we tend to rely on largely exogenous expectations, as opposed to closing the analysis with aggressive identification of information sources and an explicit equilibrium argument.

While some field studies have suggested that management control systems can be used simultaneously to make organizations more efficient and more flexible, the contingency literature has found it difficult to address this issue in the absence of a clear and comprehensive typology for analyzing more processual uses of management control systems. This paper distinguishes between enabling and coercive (Adler and Borys 1996) uses of management control systems. Coercive use refers to the stereotypical top‐down control approach that emphasizes centralization and preplanning. In contrast, enabling use seeks to put employees in a position to deal directly with the inevitable contingencies in their work. The design principles that underlie the enabling use of management control systems are repair, internal transparency, global transparency, and flexibility. Through a detailed analysis of a single‐case field study carried out over a two‐year period, we illustrate how management pursued the objectives of efficiency and flexibility by using management control systems in enabling ways. We suggest that the four design principles of enabling use can facilitate field studies of management control systems, but that they can also be used to define an enabling typology for contingency researchers to analyze the ways in which organizations simultaneously pursue efficiency and flexibility through their management control systems.

General Nature of the Editorial Process

We contribute to the debate over the reform of the Basel Accord by developing risk-based capital requirements for mortgage loans held in portfolio by financial intermediaries. Our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions. Results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification. Hence, rules that offer little risk differentiation, including the current Basel I regime and “standardized” approach proposed in Basel II result in significant divergence between regulatory and economic capital. These results highlight the incentive problems inherent in simplified methods of capital regulation.

This paper analyzes the role health status plays in household portfolio decisions using data from the Health and Retirement Study. The results indicate that health is a significant predictor of both the probability of owning different types of financial assets and the share of financial wealth held in each asset category. Households in poor health are less likely to hold risky financial assets, other things (including the level of total wealth) being the same. Poor health is associated with a smaller share of financial wealth held in risky assets and a larger share in safe assets. We find no evidence that the relationship between health status and portfolio allocation is driven by “third variables” that simultaneously affect health and financial decisions. Further, the relationship between health status and portfolio choice does not appear to operate through the effect of poor health on individuals’ attitudes toward risk, their planning horizons, or their health insurance status.