This study examines the impact of Statements of Financial Accounting Standards No. 141 and No. 142 (hereafter SFAS 141, 142) on the characteristics of financial analysts' earnings forecasts after mergers. Specifically, I predict lower forecast errors for firms that experienced mergers after the enactment of SFAS 141, 142 than for firms that went through business combinations before those accounting changes. Study results present strong evidence that earnings forecast errors for companies involved in merging and acquisition activity decreased after the adoption of SFAS 141, 142. Test results also suggest that lower earnings forecast errors are attributable to factors specific to merging companies such as SFAS 141, 142 but not common to merging and non-merging companies. In addition, evidence implies that information in corporate annual reports of merging companies plays the critical role in this decrease of earnings forecast error. Summarily, I report that SFAS 141, 142 were effective in achieving greater transparency of financial reporting after mergers. In my complementary analysis, I also document the structure of corporate analysts' coverage in "leaders/followers" terms and conduct tests for differences in this structure: (1) across post-SFAS 141,142/pre-SFAS 141, 142 environments, and (2) between merging and non-merging firms. Although I do not identify …

In recent years, the accounting profession has faced increased scrutiny because of scandals involving management fraud (e.g., Enron, WorldCom). In response, Statement on Auditing Standards (SAS) #99 has expanded auditors' responsibility for detecting fraud, requiring auditors to gather significantly more information in their assessment of fraud. In addition, the Public Company Accounting Oversight Board (PCAOB) will focus on fraud detection through their inspections of registered accounting firms. In light of the increased emphasis on auditors' responsibility for detecting fraud, public accounting firms face the challenge of improving their fraud detection process, including their assessment of management fraud risk. Decision aids are one way for auditors to improve their assessment of management fraud risk. In fact, several studies from the decision aid literature suggest that aids are useful tools for a variety of tasks, including fraud risk assessment. At the same time, another stream of the decision aid reliance literature, which looks at people's willingness to rely on decision aids, suggests that individuals tend to be reluctant to accept the output given by an aid. Thus, the primary focus of this paper is on uncovering factors that would encourage one to voluntarily use and rely upon a decision aid. Toward that …

The problem with which this study is concerned is that of the income concepts used by bank loan officers in dealing with financial information, as compared to the income concepts used by the accounting profession. A series of twenty different financial situations were designed which required the loan officer to make a decision as to an income concept before he could compute the answer to the questions in income, profit, gain, and change in wealth which were asked for in each situation. The loan officers' answers to each situation were then compared with the accountants' answers, using generally accepted accounting principles. In addition, comparisons were made between the income concepts used by the different classes of loan officers and sixteen environmental factors to determine what influence, if any, these factors might have on the answer given by the bank loan officers. The two purposes of the study were to show that bank loan officers do not calculate net income by the same methods as accountants, and to determine if there are environmental factors which would influence the method the loan officer used to compute his answers.

The problem of this investigation is that of determining how double entry bookkeeping originated and evolved during the thirteenth, fourteenth and fifteenth century in mediaeval Italy and its influence on capital formation. The methodology of this study included the use of both primary and secondary sources of information. Great reliance was placed upon a direct examination of original documents found mainly in the State Archives of Genoa, Florence, Milan and Venice. Because this is basically a historical research, particular emphasis was given to the study and criticism of economic, political and religious conditions that most likely had a considerable influence on the creation and evolution of bookkeeping techniques and methods.

The Internet provides many sources of financial information that investors can use to help with investment decisions and in interpreting companies' accounting information. One source of information is Internet stock message boards such as those at Yahoo! Finance. This source allows for anonymous postings and information exchange. Despite the possibility of the information being incorrect many individuals visit these message boards. The purpose of this study is to investigate Internet stock message boards and address the primary question: From an individual investor perspective, do message boards, which contain accounting information, influence investment decisions? The question is addressed using psychology rumor literature and attitude theories. Message board postings are a type of rumor, since not all the information is verified and is usually intended to persuade a belief or influence a decision. Further, the messages may influence an investor by causing a change in attitude about the investment. Using an experiment, message board influence on an investment decision and attitude was tested. The results indicated that individuals that received negative message board postings did have a significantly higher change in investment amount as compared to a control group that did not receive any message postings. The positive message board group and …

In the early 1990s, Robert Kaplan and David Norton introduced and developed a new performance measurement and management system called the balanced scorecard (BSC). Most studies have found that evaluators tend to ignore or are not willing to use nonfinancial measures. This study attempts to examine whether the explicit linkage between the evaluator's BSC and the subordinate's BSC makes the evaluators use nonfinancial measures in performance evaluation. This study used an experimental design where subjects were asked to evaluate two managers' performance under explicit linkage versus nonexplicit linkage conditions. The difference between performance evaluation scores of the two managers under the two linkage conditions captures the influence of explicit linkage between BSCs on performance evaluation. I used regression analyses to test my hypothesis. The results of the regression analyses support my hypothesis. This study attempts to explore one possible reason for evaluators' not using nonfinancial measures much in performance evaluation. It is the first one that studies the influence of the linkage between the BSCs on performance evaluation.

Management control systems perform a vital role in facilitating the accomplishment of organizational objectives. To effectively align the objectives of employees with those of the organization, firms balance multiple control mechanisms to encourage organizationally desired behaviors and discourage undesired behaviors. The purpose of my dissertation was two-fold. First, I assessed how changes in monitoring frequency influenced employee behaviors and the overall function of the management control system. Second, I investigated the effects of stretch goals on behavior to determine whether stretch goals can lead to harmful behaviors and whether continuous monitoring can mitigate these behaviors. Results suggest that individuals exert more effort when assigned a stretch or difficult goal compared to an easy goal. My study also finds that stretch goals can be harmful because of their effect on risk taking, goal commitment, and job insecurity. Finally, results indicate that accountability mediates the monitoring frequency-risk taking relationship such that continuous monitoring increases accountability and accountability decreases risk taking. However, the ability of monitoring frequency to decrease risk taking may depend on numerous factors. Results from this study allow practitioners to understand the potential benefits and drawbacks of implementing continuous monitoring systems and the combined effects of using these systems in …

This study examines whether the probability of a firm receiving a going concern modified report or a standard audit report with note disclosure of a going concern uncertainty has increased after the issuance of SAS No. 59. This study also examines whether the probability of a firm having no reference to a going concern uncertainty in its audit report or the financial statement notes has decreased after the issuance of SAS No. 59. The findings provide support for the hypotheses that a firm has a higher probability of receiving a standard audit report with note disclosure of a going concern ('J uncertainty and a lower probability of receiving no reference to a going concern uncertainty in the audit report or the financial statement notes after the issuance of SAS No. 59. However, this study finds no support for the hypothesis that a firm has a higher probability of receiving a going concern modified report after the issuance of SAS No. 59. The findings of this study suggest that the Auditing Standards Board, the government, and the accounting profession should consider the impact of SAS No. 59 on the presence of note disclosure when assessing the success or failure of SAS …

The present auditing environment involves increasing audit costs and potential legal liability. Increasing audit costs mandate methods to make the audit more efficient, while the credibility of audited financial statements depends on audit effectiveness. Internal accounting control evaluation impacts both the efficiency and effectiveness of the audit process since this judgment establishes a basis for determining the timing, nature and amount of auditing procedures to be performed. Results of previous research, however, have indicated that variance does exist in auditors' evaluations of internal controls. While individual differences have been given as an explanation of the variance, no research has successfully isolated which individual differences relate to differences in judgment. This study examined the possibility that cognitive style, defined as the mode of processing which individuals use in their perceptual activities, was an individual difference which could explain some of the variance in internal control judgments. The Myers-Briggs Type Indicator (MBTI) was used to measure the cognitive style of auditors. A second instrument, an audit judgment case, was prepared by the researcher to elicit (1) an auditor's estimate of the reliability of internal controls in a computerized payroll application, and (2) his assessment of the perceived relevance of case information to …

The overall purpose of this study was to evaluate the current status of the Sherman Act's application to the professions, with emphasis on the accounting profession. This was further stated as two purposes. 1. The primary purpose was to interpret the historical development and current status of the most important defenses used in the courts by the professions and professionals against alleged violations of the Sherman Act. 2. The second purpose was to evaluate the relative importance of variables, including the defenses used, that have affected the outcomes of court cases involving alleged violations of the Sherman Act.

In Statement No. 33, "Financial Reporting and Changing Prices," the FASB requires that some large companies disclose their historical cost/constant dollar and current cost information in the published financial statements. One of the purposes of these disclosures is to help users of the financial statements in assessing future cash flows. This study was directed toward the examination of the effects of the different levels of disclosures on cash flow projections.

The purpose of this dissertation is to investigate the effect of U.S. firms’ geographic location, whether urban or rural, on their corporate disclosure and governance practices. An “urban” firm is one that is headquartered in a large metropolitan area; whereas, a “rural” firm is one that is headquartered some distance from any metropolitan area. Specifically, the study examines whether there are different stock market reactions to urban and rural firms around key event dates relative to the enactment of the Sarbanes-Oxley Act (SOX) on July 30, 2002. Also, the readability and linguistic style in the Management Discussion and Analysis (MD&A) section of public company’s annual reports (Form 10-K) to the Securities and Exchange Commission (SEC) are investigated to determine whether urban and rural firms communicate information differently to investors.

Client inquiry is a fundamental procedure for gathering audit evidence. Since inquiries are not audio- or video-recorded in practice, auditor memory is vital to the accuracy of evidence gathered in this manner. Due to the potential for error during memory encoding and retrieval, the effect of memory on judgment, and the cognitive complexity of conducting a face-to-face inquiry, examining factors affecting auditor memory of client inquiries is important. In this dissertation, I examine two factors likely to affect auditor memory of a client inquiry. First, encoding style is a low-level cognitive function representing how much stimuli an individual perceives before applying prior knowledge (schemata) to assist with encoding to long-term memory, affecting information noticed and remembered. Differences in auditors’ encoding style may explain variance in memory accuracy of evidence gathered from a client inquiry. Second, audit professionals often make hand-written or typed notes during client inquiries, and subsequently review the notes, which may affect memory. To address these issues, I first gather interview evidence from six professional auditors to determine how practicing auditors plan, prepare for, conduct, and document evidence from client inquiries. I then develop and execute a video-based experiment with 33 senior auditor participants, 23 masters-level accounting students, …

In this study, I investigate the effect of auditor-provided tax services (ATS) on firms’ levels of book-tax differences and investors’ mispricing of book-tax differences. The joint provision of audit and tax services has been a controversial issue among regulators and academic researchers. Evidence on whether ATS improve or impair the overall accounting quality is inconclusive as a result of the specific testing circumstances involved in different studies. Book-tax differences capture managers’ earnings management and/or tax avoidance intended to maximize reported financial income and to minimize tax expense. Therefore, my first research question investigates whether ATS improve or impair audit quality by examining the relation between ATS and firms’ levels of book-tax differences. My results show that ATS are negatively related to book-tax differences, suggesting that ATS improve the overall audit quality and reduce aggressive financial and/or tax reporting. My second research question examines whether the improved earnings quality for firms acquiring ATS leads to reduced mispricing of book-tax differences among investors. Recent studies document that despite the rich information about firms’ future earnings contained in book-tax differences, investors process such information inefficiently, leading to systematic pricing errors among firms with large book-tax differences. My empirical evidence indicates that ATS mitigate …

Auditors use substantive analytical procedures to make assertions about the adequacy and appropriateness of client balances. The analytical procedure process consists of auditors creating independent account expectations and corroborating unusual fluctuations through obtaining and evaluating additional audit evidence. Prior analytical procedure research has found that knowledge of clients' unaudited account balances biases auditors' expectations towards the current year figures. However, this research has failed to examine the impact of biased expectations on the subsequent stages of analytical procedures. This dissertation assesses the full impact of biased account expectations on auditors' use of analytical procedures. I experimentally test the hypotheses of my dissertation through administering an experiment to senior level auditors. After inducing an account expectation bias that favors the client account balance in half the participants, I examine the auditors' cognitive investigation into an unusual account fluctuation. The results indicate that a biased account expectation negatively affects auditors' judgment quality. In particular, a biased expectation leads auditors to favor hypotheses and additional information that supports the proposition that the client's balance is reasonably stated. Alternatively, auditors with unbiased account expectations are more willing to consider all hypotheses and are able to identify the most pertinent additional information to the decision …

Prior literature suggests two competing theories regarding the role of venture capitalists (VCs) in their portfolio companies. The VC monitoring hypothesis argues that VCs effectively resolve the managerial agency problem through close monitoring and restraining managers' earnings management behavior. The VC moral hazard hypothesis argues that VCs aggravate the private benefits agency problem by exerting influence over managers to artificially inflate exit stock price through earnings management. Using a sample of IPO firms between 1987 and 2002, after controlling for the magnitude of accruals manipulation (AM), I compare the magnitude of real activities manipulation (RM) between venture-backed and non-venture-backed companies. I find that relative to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. The finding supports the VC monitoring hypothesis that VCs restrain managers' RM behavior. Furthermore, I document that venture-backed companies exhibit a significant difference from non-venture-backed companies only in the first post-IPO fiscal year. The difference between the two groups in either the IPO year or the second post-IPO fiscal year is not significant, or at best, is weak. This finding is consistent with the argument that VCs tighten their control …

Auditors regularly make judgments regarding whether a client’s chosen accounting policy is appropriate and in accordance with generally accepted accounting Principles (GAAP). However, to form this judgment, auditors must either possess adequate topic-specific knowledge or must gain such knowledge through information search. This search is subject to numerous biases, including a bias toward confirmation of a client’s preference. It is important to further our understanding of bias in auditors’ information search to identify its causes and effects. Furthering our understanding is necessary to provide a basis for recommending and evaluating a potential debiaser, such as accountability. the Public Company Accounting Oversight Board (PCAOB) annually inspects the audit files of selected engagements, which introduces a new form of accountability within the auditing profession. This new form of accountability has come at great cost, however, there is little empirical evidence regarding its effects on auditors’ processes. As such, it is important to understand whether the presence of accountability from the PCAOB is effective in modifying auditors’ search behaviors to diminish confirmation bias. Using an online experiment, I manipulate client preference (unknown vs. known) and PCAOB accountability pressure (low vs. high) and measure search type (information –focus or decision-focus), search depth (shallow or …

This study resolves divergent prior findings relating book-tax differences to future earnings, determines whether prior literature has missed relationships between different types of book-tax differences and pre-tax and/or after-tax income, and investigates prior earnings as a factor contributing to the observed relationships. As past research has found that some firms have large book-tax differences over several years, this study separates these firms with large stable book-tax differences from others with large book-tax differences (non-stable) when investigating the link between large book-tax differences and future earnings. Finally, this study investigates whether the relationship between book-tax differences and future earnings reflects information about prior earnings and finds that prior earnings growth explains much of the lower persistence found for firms with large book-tax differences.

Professional skepticism is a critical component of audit practice and current auditing standards direct auditors to remain skeptical throughout the duration of each audit engagement. Despite the importance and prevalence of an emphasis on professional skepticism throughout auditing standards, evidence indicates that auditors often fail to exercise an appropriate degree of professional skepticism. Prior accounting research suggests that auditors’ professionally skeptical behavior is affected by individual personality traits as well as situational (state) influences, whereby both factors contribute to auditor professional skepticism. Yet, prior research has primarily focused on trait skepticism; and little research to date has investigated the concept of state skepticism. The purpose if this research study is to experimentally investigate the impact of time pressure and trait skepticism on state skepticism, and to test a potential debiasing procedure on the impact of time pressure on state skepticism. In addition, this study examines the influence of both skepticism types on skeptical behavior.This research offers several contributions to accounting literature and practice. First, I contribute to the existing debate regarding the influences of professional skepticism by providing evidence that professional skepticism may be categorized as a temporary state, induced by situational aspects, in addition to being classified as an …

It is the purpose of this study to examine the underlying nature of the relative risk associated with an audit engagement.

The purpose of this dissertation is to explore the influences of industry dynamic factors (e.g., peer selections) on a client’s subsequent decision to select the type of auditor (e.g., Big N versus non-Big N), following auditor turnover. More specifically, drawing on social norms and social learning theories, I develop testable implications and investigate whether and how industry dynamics have an incremental power in explaining auditor choice beyond traditional firm-specific variables documented in prior research. Using a large sample from years 1988 – 2012, I find that clients are more likely to imitate their industry peers’ prior selections to select the type of their succeeding auditors, consistent with the implications of social learning theory. I also find that clients in industries with stronger industry norms, as measured by a greater proportion of clients audited by Big N auditors in an industry, are more likely to select Big N auditors as their succeeding auditors, consistent with the implications of social norms theory. To my best knowledge, this is the first study to explore the impact of social dynamics measured at the industry level on auditor selection and provide large-sample evidence on the relations between industry dynamics and auditor selection at the firm …

This study had two basic objectives. The first was to determine the stock market reactions to the pension policy deliberations. The second was to further our understanding of the significance of the FASB's due process. The author selected 13 critical events that preceded passage of SFAS No. 87 and designed a quasi experiment to examine the stock market reaction around the above events. Two portfolios were constructed to test the hypotheses. The first portfolio consisted of firms in the experimental group (firms sponsoring a defined benefit pension plan) and the second portfolio consisted of firms in the control group (firms sponsoring a defined contribution pension plan). The two portfolios were matched on the basis of SIC code, debt to equity ratio and assets.

The primary purpose of this dissertation is to develop the arguments for reporting directly on a company's cash flows in its published financial statements. Specifically, the Free Cash Flow (FCF) model of economist Joel Stern is analyzed and critiqued as a basis for a revised reporting scheme.

This research was undertaken to test the effects of conservatism on the decisions made by auditors. The evaluation of the research results provided by the two psychological tests indicated that, when measured on the construct of resistance to change, auditors as a group are essentially heterogeneous and slightly conservative. However, the auditors' test scores on the construct of aversion to risk reflected a homogeneous group who were distinctly conservative. Based on these results, this research seems to indicate that the firm effect is more important in auditors' decision making than personal characteristics except, perhaps, in the area of compliance testing decisions. If this is indeed the case, it could be said that the different audit philosophies held by the public accounting firms and instilled in their auditors may be the prime cause of the substantial differences that have been continuously found in auditor judgments.