D. Paul Newman, [Discussion of The SEC's Influence on Accounting Standards: The Power of the Veto]: A Reply, Journal of Accounting Research, Vol. 19, Studies on Standardization of Accounting Practices: An Assessment of Alternative Institutional Arrangements (1981), pp. 170-173
The article presents the author's response to comments on his paper "Coalition Formation in the APB and FASB: Some Evidence on the Size Principle," by accounting expert James A. Anderson. These comments given by Anderson are partitioned into two major areas and the article provide a few general arguments in defense of the size principle and the particular investigation. In particular, topics including assumptions of the model and methodological issues on observation of coalitions, specifying payoffs and operationalizing tendency seem to capture the major points. The article also provides some remarks regarding the simplistic nature of the size principle versus more developed models of coalition formation based on policy dimensions. Anderson raises a number of points regarding the conditions required to test the predictions of the size principle and the information and threat effects. Some concerns are over the surrogates utilized in the tests. These comments focus on the inability to observe a winning coalition, the nature of a "tendency" toward minimum winning coalitions and the payoffs to participants in the standard-setting process.
ABSTRACT: The objective of this study is to investigate the applicability of the size principle, which predicts a tendency to minimum winning coalitions, to political processes in accounting standard formulation. Actual winning coalitions in the APB and FASB are found to be significantly larger than minimum winning, leading to a consideration of the assumptions underlying the size principle. Two alternative hypotheses, the "information effect" and the "threat effect," are examined. Evidence regarding these hypotheses is inconclusive due to the inability to define unambiguously an observed winning coalition for the APB.
ABSTRACT: A simplified audit setting is used to illustrate the crucial nature of strategic interactions in audit planning and in assessing audit risk. Unlike single-person decisiontheoretic models which essentially represent games against nature, the model developed here allows a prospective audit to influence the behavior of the auditee. We reformulate the problem in a game-theoretic framework with rational players which (1) encompasses strategic factors for both the auditor and auditee, (2) is consistent with behavioral hypotheses regarding the effect of an audit, and (3) is consistent with certain audit phenomena such as randomized strategies. An illustration is provided which demonstrates several points. First, both the auditor and the auditee may frequently use a randomized strategy. Second, the auditor's strategy depends on the interaction between the accounting control system and the auditee's actions. In addition, the use of traditional single-person decision theory may frequently cause errors in estimating audit risk because it fails to consider audit influences on the auditee. Settings in which decision theory may serve as an adequate model simplification are also considered.
[A simplified audit setting is used to illustrate the crucial nature of strategic interactions in audit planning and in assessing audit risk. Unlike single-person decision-theoretic models which essentially represent games against nature, the model developed here allows a prospective audit to influence the behavior of the auditee. We reformulate the problem in a game-theoretic framework with rational players which (1) encompasses strategic factors for both the auditor and auditee, (2) is consistent with behavioral hypotheses regarding the effect of an audit, and (3) is consistent with certain audit phenomena such as randomized strategies. An illustration is provided which demonstrates several points. First, both the auditor and the auditee may frequently use a randomized strategy. Second, the auditor's strategy depends on the interaction between the accounting control system and the auditee's actions. In addition, the use of traditional single-person decision theory may frequently cause errors in estimating audit risk because it fails to consider audit influences on the auditee. Settings in which decision theory may serve as an adequate model simplification are also considered.]