Analytical review, Diagnosis model, Audit planning, Auditing

Audit Report, Perception, Auditors, Bankers

Robert Libby, The Impact of Uncertainty Reporting on the Loan Decision, Journal of Accounting Research, Vol. 17, Studies on Auditing-Selections from the "Research Opportunities in Auditing" Program (1979), pp. 35-57

Financial ratios, Prediction achievement criterion, Bankruptcy, Decision making

[This paper examines experienced managers' judgments about the effects of market price and accounting profit information on negotiated transfer prices. Conventional economic arguments predict that market price should determine negotiated transfer prices by determining reservation prices for parties with outside options. We found, however, that experienced managers expected the influence of market price to be limited by divisional managers' concern about how their profits compare with each other. While market price did affect managers' reservation-price and transfer-price estimates, its influence was significantly less when market price resulted in a more unequal ("unfair") distribution of profits between divisions. Profit comparisons also affected the judgments that determine the efficiency of the bargaining process. We found that as market price diverged from a price that offered equal profits to both divisions, both variance and bias in managers' price estimates increased, indicating that it would be harder to reach agreement on a transfer price.]

[The ability of Einhorn's [1972] "expert measurement and mechanical combination" to eliminate bias and increase consensus in control reliance decisions was examined. This method uses the human to measure cue values and then combines these component judgments with a mathematical model to form global control reliance decisions. Its aim is to eliminate error induced when the human aggregates information into a global judgment. Two groups of senior auditors evaluated a series of cases by either making global control reliance decisions or making component judgments of the strength of the individual controls and compliance tests. Component judgments of the latter group were combined mechanically into an overall judgment. The mechanically combined component judgments were, on average, more like those provided by a group of firm experts and were more consensual than the global judgments. These results are compared to those of prior studies which examined similar aids.]

William Kinney, Robert Libby, Research on Credible Financial Reporting 1961-99: The Contributions of Professor Nicholas Dopuch, Journal of Accounting Research, Vol. 37, Studies on Credible Financial Reporting (1999), pp. 1-15

The article presents the author's opinions on an article by Karl E. Weick, published in the April 1, 1983 issue of the periodical "Accounting Review," which argued that stress is an important accompaniment of corporate accounting practices. That article by Weick was titled: "Stress in Accounting Systems." According to Weick, accountants and auditors work under tremendous stress. The first important feature of the stress concept is that its consequences are specified in terms of observable performance metrics. In the short term, the consequences of stress relate primarily to cognitive performance. There is also a sequence of physiological and psychological consequences, which in the long term can produce serious health problems. An important feature of the stress concept is that, as Weick has aptly demonstrated, accounting is closely involved with many of the antecedents of stress. Given the well-defined antecedents and consequences of stress, it is possible to specify explicit remedies which may be implemented if the benefits of the remedies outweigh their costs.

The article presents response of the author on comments made by scholars Gerald L. Salamon, Wilfred C. Uecker and Richard Simmons and James Jimbalvo on his article "Prediction Achievement and Simulated Decision Makers As an Extension of the Predictive Ability Criterion," published in the July 1975 issue of the periodical "The Accounting Review." In their comment, Salamon, Uecker and Simmons question the generality of the usefulness of the prediction achievement criterion as developed in my earlier paper. Their analysis is organized around the Report of the Committee on Accounting Valuation Bases (CAVB) . This reply will present my view of the place of the prediction achievement criterion in generalized and particularized accounting situations and compare it to that of Salamon, Uecker and Simmons and clear up some minor misunderstandings by Salamon, Uecker and Simmons of my earlier work and the position taken by CAVB. In Jiambalvo's comment, he also takes issue with the usefulness of the prediction achievement index in relation to predictive ability measures, in addition, he questions the use of the correlational measures of performance presented in my discussion of the Lens Model and suggests that estimated prediction achievement provides biased estimates of usefulness.