Abstract This paper reports an experiment demonstrating that MBA students overrely on old earnings performance when predicting future earnings performance in a laboratory setting. In the experiment, MBA students relied too heavily on old annual ROE information to predict future annual ROE. The experiment shows how a common cognitive error (overreliance on unreliable information) interacts with the structure of the earnings time series to create particular patterns of prediction errors. The results also suggest directions for research on two well‐known anomalies, long‐run overreactions (De Bondt and Thaler 1985, 1987) and post‐earnings‐announcement drift (Bernard and Thomas 1990).

Investigates whether replacing a standard that employs a vague, verbal disclosure threshold with a standard that employs a more stringent numerical threshold mitigates the aggressiveness of reporting decisions in accounting. Performance in a tax setting; Effect of incentives on the interpretation of vague standards.

Abstract Presents the results of an experiment which focuses on the mismatch between auditors' tendency to structure their knowledge of financial statement errors with audit objective. Audit tasks' requirement of auditors' assessment of objectives; Effects of knowledge structures' mismatch with task structures.

Two alternative approaches are used in audit practice to provide quantitative materiality assessments about proposed audit adjustments. The cumulative approach compares to net income the total amount of misstatement existing at the end of the current period, while the current-period approach compares to net income the amount of misstatement added in the current period. Depending on the relation between total misstatement and current-period misstatement, either the cumulative approach or the current-period approach can calculate higher quantitative materiality. This paper reports an experiment that varies materiality approach between auditors by providing auditors with either the current-period or cumulative formats used by their firm to summarize proposed audit adjustments. Results indicate that, across a variety of experimental contexts (varying misstatement size, subjectivity, precision, and income effect, and varying whether auditors document effects on their client's quality of earnings), auditors are more likely to require their client to book the misstatement under the approach that makes the misstatement appear more material. These results suggest that standard setters mandate that auditors require adjustment whenever a misstatement is material under either approach.

ABSTRACT Auditors work in hierarchical teams in which effective upward communication is critical to audit quality. In these teams, subordinates choose both the content, as well as the style, of their communications. We report survey and experimental evidence of the importance of communication style in the context of audit team culture. Our first two studies provide evidence that audit staff perceive assertive upward communication as risky and prefer to communicate passively, especially in less autonomous team cultures. Our third study provides evidence that audit seniors consider more follow-up procedures and rate staff higher when staff communicate assertively, especially in more autonomous team cultures. Combined, these studies indicate a disconnect between audit seniors, who reward and follow up more on assertive communication, and their staff, who prefer passive communication. Our results suggest the potential for audit quality improvements by better alignment of supervisor-subordinate communication-style preferences, especially in more autonomous team cultures. Data Availability: Contact the authors.

ABSTRACT This paper reports five studies examining audit team members' willingness to raise audit issues. The first study is a survey of interacting audit teams that provides evidence that team members are more willing to speak up when they view their leader as team-oriented (i.e., emphasizing team success as opposed to the leader's own personal advancement). Experiments 1–3 provide converging evidence that audit seniors are more willing to speak up to a team-oriented leader and about issues that are aligned with that leader's concerns. Experiment 4 provides evidence that the effect of team-oriented leadership on willingness to speak up is mediated by team members' commitment to the team leader and, to a lesser extent, by their identification with their team, but not by concerns about the immediate or eventual repercussions of speaking up. Together, these studies provide evidence that auditors' willingness to raise audit issues is affected by what the auditor has to say and how they think their message will be received, potentially affecting audit effectiveness and audit efficiency. Data Availability: Contact the authors.