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ABSTRACT: This study examines whether client importance affects jurors’ evaluations of auditors. Specifically, we examine whether client importance is significantly related to juror evaluations of responsibility and blame as well as auditor liability and damage awards. The results indicate that when an auditor is involved in litigation associated with an audit client that is financially more important to the auditor, participants evaluated the auditor as less objective, more blameworthy, and more deserving of punishment. Client importance is also found to significantly affect jurors’ liability assessments. Further analysis indicates the effects of client importance on liability assessments can be attributed to independence perceptions. Despite these differences, results indicate only a marginally significant influence of client importance on punitive damage awards and no influence on compensatory damage awards.

The Effect of Obedience Pressure and Perceived Responsibility on Management Accountants’ Creation of Budgetary Slack

Stan Davis

Wake Forest University

Todd DeZoort

The University of Alabama

Lori S. Kopp

University of Lethbridge

ABSTRACT: This study evaluates management accountants’ susceptibility to inappropriate obedience pressure to create budget slack in violation of corporate policy. We also evaluate links between pressure effects and perceived responsibility, decision justifications, and underlying ethical dimensions. The results of an experiment with 77 management accountants reveal that despite pervasive perceptions of ethical conflict, almost half of the participants violated explicit policy and created budgetary slack when faced with obedience pressure from an immediate superior. The results also indicate that participants who added slack to their initial budget recommendation found themselves less responsible for their budget decision than did participants who refused to add slack. In addition, a majority of the participants indicated that the creation of budgetary slack was unfair, unjust, and/or contrary to their duties.

Stock Recommendations as a Source of Bias in

Earnings Forecasts

Michael Eames

Santa Clara University

Steven M. Glover

Brigham Young University

Jane Jollineau Kennedy

University of Washington

Abstract: Recent scandals and controversies have focused substantial attention on the behavior of financial analysts. Responses such as the Sarbanes Oxley Act, new regulations at securities exchanges, and massive legal settlements are consistent with the perception that analysts’ research and stock recommendations exhibit significant self-serving bias. While anecdotal and legal evidence support the allegations that some analysts have intentionally mislead the investing public, recent archival research suggests unintentional cognitive processes also contribute to systematic bias in analysts’ forecasts (Eames et al. 2002). However, studies based on stock-market data cannot distinguish between unintentional cognitive processes and intentional bias stemming from economic incentives (e.g., trade boosting). In a laboratory experiment we eliminate economic incentives and find that cognitive processes unintentionally lead to earnings forecast bias. Our results suggest that recent regulations and policy changes by Congress, the Securities and Exchange Commission, exchange markets, and brokerage firms will not totally eliminate bias in analysts’ earnings forecasts.

Key Words: Analyst earnings forecast, framing, motivated reasoning, forecast bias.

Data: Contact the authors.

Audit Review: The Impact of

Discussion Timing and Familiarity

Michael Favere-Marchesi

Simon Fraser University

Abstract: I investigate how the trend in audit practice of including face-to-face discussions between the preparer and the reviewer affects audit team performance. Specifically, I focus on the timing of reviewer/preparer discussion and explore whether performance of the audit team in a task involving a review by interview process is affected by the timing of the discussion. The discussion timing compares senior/manager teams when review discussions are held either concurrently with or following the manager’s review of the senior’s work. Additionally, I explore how reviewers’ familiarity with preparers may also affect the audit team performance. Familiarity is examined by comparing senior/manager teams where the managers had either positive prior involvement or no prior involvement with the reviewed seniors.

The audit team performance in generating hypotheses in a preliminary analytical review case was measured to assess any differences due to those attributes. Consistent with expectations, I find that post-review discussion and familiarity with the preparers are both, independently, important sources of audit team performance gains in a review process that includes face-to-face discussions.

Keywords: Audit review, audit teams, discussion timing, familiarity.

The Effects of Experience on Complex Problem Representation and Judgment in Auditing: An Experimental Investigation

Constance M. Lehmann

University of Houston Clear Lake

Carolyn Strand Norman

Virginia Commonwealth University

Abstract: The purpose of this study is to investigate problem representation and judgment by auditing professionals within the context of a going-concern task. Our results suggest more experienced auditors have more concise problem representations than do novices. In addition, our results show that some types of concepts listed in the problem representation are associated with judgment, regardless of experience level.

This study makes several contributions. First, understanding differences in problem representation at different levels of experience (novice, intermediate, and experienced) gives insight into the process of how representations change as experience changes/develops. Understanding the development of “becoming qualified” to make judgments regarding the going-concern evaluation assists in (1) the development of teaching approaches for analyzing a company’s financial condition, and (2) professional development for less-experienced professionals. Further, our measure of problem representation, similar to that in Christ’s (1993) study, provides a task-sensitive measure of problem representation for accounting research. This should have important implications for understanding expertise development in complex problem-solving tasks that auditors and accountants face.

Key words: expertise, problem representation, going-concern, expert-novice paradigm

An Information Economic Perspective on Experimental Research in Accounting

Laureen A. Maines, Gerald L. Salamon and Geoffrey B. Sprinkle

Indiana University

Abstract: In this paper, we examine the role experimental research plays in developing accounting knowledge. We use as a framework for this examination an information economic perspective, positing that the general goal of accounting research is legitimate, consequential belief revision. We then evaluate how the characteristics of experimental research provide advantages and disadvantages in creating legitimate, consequential belief revision within the context of accounting issues. Throughout the paper, we provide guidance on how to design and implement experiments with the greatest potential to influence thought.

The Impact of Task Information Feedback on Ethical Reasoning

Abstract: This study investigates whether task information feedback (TIF) promotes 84 auditors’ and accounting students’ use of higher ethical reasoning, thereby increasing their tendency to consider the public interest in the resolution of ethical dilemmas. TIF is a type of feedback in which subjects are provided with guidance about the cognitive decision-making process they should use. In our experiment, subjects used higher ethical reasoning to resolve audit dilemmas after receiving TIF than they did before receiving TIF. Accordingly, our findings suggest that TIF is effective in promoting higher ethical reasoning and thus increasing the tendency of practicing and aspiring auditors to consider the public interest when resolving ethical dilemmas.

Abstract: This paper tabulates the field-based research in accounting that was published in the period 1981-2004 and discusses the use of this method and its contributions. It shows that the number of field research publications has grown significantly over this period but that use of the method is primarily confined to management accounting topics. The paper describes the major impacts that field research has had on the management accounting field, particularly in identifying leading edge practices and enhancing their scholarly exploration, thereby contributing to our understanding of the phenomena we research and linking our research with practice. We also suggest that similar contributions might be made if researchers in other fields employed field research methods more.

Abstract: One important purpose of audit review is to provide feedback and on-the-job training (Libby and Luft 1993), but we know very little about the effectiveness of review as a feedback mechanism. Firms have recently been moving to including discussion of performance and audit findings as part of the review procedure (Rich et al. 1997). The purpose of this field survey is to explore whether the addition of such discussion to the review feedback process enhances preparers’ subsequent performance. By examining survey responses from both reviewers and preparers from actual audit engagements, we find that incorporating discussion of performance with written review notes does enhance preparers’ motivation to improve performance. However, experience moderates the effect of discussion on performance improvement as perceived by the reviewer. While discussion resulted in better performance for less experienced auditors, it appears to actually diminish performance improvement for more experienced preparers.

Key words: Audit, review, discussion, experience, feedback, motivation, performance,

Abstract: Turnover of experienced and well-trained professionals continues to be a problem for accounting firms. Much of the turnover is among individuals who are trying to satisfy demands of both work and family. This study examines the sources of work-family conflict and their association with job outcomes in the accounting profession. One source of work-family conflict, work interfering with the family (WIF), is found to significantly relate to job satisfaction and turnover intentions. Females are much more likely than males to experience turnover intentions when their work interferes with their family.

Another source, family interfering with work (FIW), is not significantly related to either job satisfaction or to turnover intentions when flexible work arrangements are offered, but is related to turnover intentions when flexible work arrangements are not offered. As currently offered, flexible work arrangements seem to be effective at reducing turnover related to FIW.

Key Words: work-family conflict; flexible work arrangements; job satisfaction; turnover

Data Availability: The survey data for this study is available from the authors.

Abstract: This study examines two methodological issues in judgment and decision making studies in accounting – compensation level and context – using an income reporting task. Previous research has not examined the joint effect of compensation level and context. Further, findings in previous research about these two variables may not extend to specific contexts such as an income reporting context. Specifically, the study examines the effect of different levels of compensation (including zero and very high values) on participants’ income reporting behavior in the laboratory. It also examines whether the use of tax-specific instructions results in differences in income reporting behavior compared to the use of context-free instructions. The study predicts that compensation level should not affect reporting income levels when the treatment is tax-specific due to the influence of social norms. The study also makes predictions based on expected utility theory in the context-fee treatment. An experimental study was carried out in India using college students that manipulated two types of context (tax-specific and context-free) and six levels of compensation, including no compensation, grouped into three levels -- Low, Medium, and High. The results show that compensation levels did not affect participants’ income reporting behavior in the tax-specific treatment but in the context-free treatment, participants’ income reporting behavior was negatively affected by the introduction of adequate compensation.

Key Words: Experimental economics, compensation, social norms, income reporting behavior.

Abstract: We examine the relationship between quality-based manufacturing strategy and the use of different types of performance measures, as well as their separate and joint effects on performance. A key part of our investigation is the distinction between financial and both objective and subjective nonfinancial measures. Our results support the view that performance measurement diversity benefits performance as we find that, regardless of strategy, firms with more extensive performance measurement systems – especially those that include objective and subjective nonfinancial measures – have higher performance. But our findings also partly support the view that the strategy-measurement “fit” affects performance. We find that firms that emphasize quality in manufacturing use more of both objective and subjective nonfinancial measures. However, there is only a positive effect on performance from pairing a quality-based manufacturing strategy with extensive use of subjective measures, but not with objective nonfinancial measures.