Earnings smoothing, Changes in accounting methods, Earnings management

In this article the author remarks on the comments made by researcher Mary Bejan on his article on financial statements. He says that Bejan's comment on his article stems from two fundamental misinterpretations of it. First, she believes that the author limited his concern to the welfare of financial statement users, who she implies are a subset of the set of all individuals in society; in fact, the author's analysis considers all members of society to be users of financial statements. Second, she fails to understand the author's decomposition of the effect of a newly imposed accounting principle on the expected utility of an individual. He says that Bejan next proceeds to use a partial equilibrium analysis to explain what she calls the action and price effects of information. Public information disclosure will perturb an existing state of equilibrium and cause movement toward a new equilibrium. One way to analyze this movement is to assume that it proceeds in stages. Each stage is called a partial equilibrium because it represents an equilibrium only if certain assumptions are made about the absence of one or more effects.

ABSTRACT: Several authors have examined the issue of choice among financial reporting standards and principles using the framework of rational choice theory. Their results have been almost uniformly pessimistic in terms of the possibilities for favorable resolution of the issue. Upon further analysis, these results are revealed to be an artifact of the way in which the issue is initially formulated. Several possible methods of reformulating this issue within the rational choice framework are proposed and explored in this paper. The results here support a much more optimistic conclusion and suggest numerous avenues of further research which could provide considerable insight to the conditions under which optimal accounting principles are possible.

Presents a reply to Ishikawa' s commentary which proposed that the reliability model could be improved by the use of feedforward concepts and that maintainability may be applied to the study of internal control systems. Explanation of control concepts; How reliability model encompasses the feedforward concept; Dispute against Ishikawa's contention that the engineering concept of maintainability is adaptable to application in the study of internal control systems.

Presents information on a study which described how mathematical models may be useful to controllers and auditors in designing and evaluating internal control systems. Internal control procedures; Application of the model in auditing; Problems in the implementation of the models; Conclusions.

In a recent issue of "The Accounting Review," accountant, Joel S. Demski described an extension of variance analysis. This article presents an analysis of some of the assumptions underlying Demski's proposed system and briefly discusses its limitations. This article will provide those interested in conducting additional research in this area with useful insights relative to the most fruitful avenues for such research to take. Demski's article represents a worthwhile and provocative contribution to the managerial accounting literature. The possibility of deriving a control system which would encourage managers to depart from their original production plan when such departure is to the firm's advantage is a highly interesting and potentially important development. Some of the feasibility problems indicated might prove to be insignificant in the presence of computer technology's rapidly expanding capacity to handle data. Thus the author concur with Demski that additional research in this area is justified, and he is hopeful that the discussion will stimulate and provide useful points of departure for such research.

Provides additional evidence on factors influencing inventory accounting choice in the United States. Comparison of firms using first in, first out (FIFO) and last in, first out (LIFO) inventory accounting methods; Study design and specification of variables; Effect of potential tax savings on inventory accounting policy choice.

[This study provides additional evidence on factors influencing inventory accounting policy choice. Following Lee and Hsieh (1985), Dopuch and Pincus (1988), and Lindahl (1989), we compare long-time FIFO users with long-time LIFO users to test variables that might be expected to influence inventory method choice. This study incorporates a tax savings variable in evaluating the LIFO/FIFO choice. We also survey financial executives to corroborate the results of secondary data analyses and to seek new insights about inventory method choice. The findings suggest that: (1) anticipated tax savings is the primary reason firms use LIFO and (2) other firms do not use LIFO because of numerous factors without a single dominant reason. Most of these factors diminish the potential tax savings from LIFO. They include LIFO layer liquidations, LIFO bookkeeping costs, declining production costs, and contradictory tax and financial reporting rules on accounting for inventory obsolescence. However, other factors include effects on debt covenants, concern about the complexity of LIFO, and the requirements of FIFO for government contracts. Two unexpected findings emerged. First, the multivariate model is quite accurate in predicting FIFO firms, but predicts less then half of those using LIFO. Second, the correspondence between the responses to the FIFO survey and the cross-sectional data is not as strong as might be expected, which suggests that determinants of inventory choice continue to be elusive.]

Comments on a study by Martin L. Gosman on the investigation of companies which have made changes in their accounting policies. Problems with the study; Insights on the data presented in the study; Suggestions for the improvement of the methodology.

Barry E. Cushing, D. Gerald Searfoss, Reed H. Randall, Materiality Allocation in Audit Planning: A Feasibility Study, Journal of Accounting Research, Vol. 17, Studies on Auditing-Selections from the "Research Opportunities in Auditing" Program (1979), pp. 172-216