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to the Table of Contents"Structure and Agency in an Institutionalized Setting: The Application and Social Transformation of Control in the Big Six," by M. Dirsmith, J. Heian and M. Covaleski, Accounting, Organizations and Society [Vol. 22, Number 1, 1997]: 1-27.
This study draws upon select portions of institutional theory, the sociology of the professions, and structuration theory to analyze the exercise, resistance and transformation of control in Big Six accounting firms. Its focus is on understanding the interplay between structural and social facets of these firms as shaped by the relative power of their administrative and practitioner agents. The authors examined these issues by a means of an interpretive field study which found that the firms have implemented the formal, structural practice of management by objectives (MBO) as one element in an array of rationalizing strategies in the expectation that MBO would provide an integrated approach to effecting management control. The authors also found that mentoring has become an important social force shaping, and in turn being shaped by, the exercise of formal control. They conclude that the structural and social processes of MBO and mentoring, while serving primarily the administrative and practitioner components of the firms, have become inter-penetrated or mutually constitutive in actual practice, each serving a spectrum of interests, functions and purposes. Their results further suggest that, as ongoing processes, MBO and mentoring are infused with power and self-interest, and that they serve as instances of the constraints, media and outcomes of structural and social change within the Big Six firms.
"An Analysis of Multinational 'Audit Failures'," by H. Hermanson, D. Hermanson and J. Carcello, The International Journal of Accounting [Vol. 31, Number 3, 1996]: 281-291.
This paper analyzes how the shift toward multinational corporations has exposed the auditor to many risks not found on domestic audits, including foreign currency issues, international political risks, international economic risks, greater information asymmetry and greater complexity. The authors argue that as the client base of large accounting firms becomes more multinational, it is important to understand whether multinational risk factors are associated with "audit failures." They identified only eight multinational audit failures (multinational client bankruptcy shortly after an unmodified audit opinion) from the period 1988-1992. An examination of these eight failures provided very little evidence that multinational risk factors played any role in the failures.
"Outcome Information and the 'Expectation Gap': The Case of Loss Contingencies," by W. Kinney, Jr. and M. Nelson, Journal of Accounting Research [Vol. 34, Number 2, 1996]: 281-299.
This paper reports the results of an experiment designed to assess two components of a possible "expectation gap." The gap exists between auditors' ex ante judgments about appropriate audit report reference to a loss contingency and the ex post judgments of non-auditors who have knowledge that the same contingency has been unfavorably resolved. The experiment addresses whether (1) auditors and non-auditors differ in their assessments of appropriate audit report references ex ante, (2) non-auditors are influenced by outcome information, and (3) these effects combine such that auditors' ex ante judgments differ from non-auditors' ex post judgments made after an uncertainty has been resolved unfavorably. The authors find that auditors' assessments of the need for audit report reference to the contingency were significantly greater than those of non-auditors when no outcome information was available. However, non-auditors' judgments of the need for audit report reference were significantly affected by information that an unfavorable outcome had occurred.
"Ethical Development, Professional Commitment and Rule Observance Attitudes: A Study of Auditors in Taiwan," by C. Jeffrey, N. Weatherholt and S. Lo, The International Journal of Accounting [Vol. 31, Number 3, 1996]: 365-379.
The authors examine the professional commitment, ethical development, and attitudes towards following rules for auditors in Taiwan. Taiwanese accountants exhibit relatively high professional commitment, and commitment increases with rank. Accountants with high professional commitment perceive rule observance as more important than do those with low commitment. Accountants who perceived rule observance as important were primarily reasoning at conventional levels of moral development, while accountants who perceived rule observance as less important were reasoning at post-conventional levels. Rule observance attitudes may mitigate continued ethical development. The authors found that higher professional commitment was associated with a higher level of moral reasoning. However, the mean ethical development of accountants was consistent with the post-conventional level of ethical development for both high and low professional commitment conditions.
"The Role of Economic Trade-Offs in the Audit Opinion Decision: An Empirical Analysis," by J. Krishnan and J. Krishnan, Journal of Accounting, Auditing and Finance [Vol. 11, Number 4, 1996]: 565-586.
This study examines the decision that audit firms must make regarding qualified opinions. On the one hand, the audit firm faces the risk of losing the client if it issues a qualification, and on the other, failing to qualify exposes the auditor to lawsuits and reputation loss. The authors model the auditor's qualification decision as a two-stage model. They estimate a bivariate model that breaks down the probability of qualifying into two components: (1) the probability that the client deserves a qualified opinion based on the audit and (2) the probability that the auditor reports a qualified opinion, given the auditor considers that the client deserves such an opinion. The authors hypothesize that the second-stage decision to qualify or not is influenced by factors such as (a) the auditor's risk of litigation, (b) the type of auditor (Big Six or not), (c) the extent of outsider ownership, (d) the ratio of public debt to total debt, (e) the relative importance of the client in the auditor's portfolio, and (f) the future growth rate of the client. The results indicate that factors a, c, e and f are important in the audit opinion decision.
"Motivating Factors in Lawsuits Against Independent Auditors: Experimental Evidence on the Importance of Causality," by C. Cloyd, J. Frederickson and J. Hill, Journal of Accounting and Public Policy [Vol. 15, Number 3, 1996]: 185-218.
This study examines the importance of proximate cause in plaintiff attorneys' preliminary assessments and recommendations regarding the initiation litigation against auditors. Advanced law students, acting as surrogates for entry-level law associates, made recommendations regarding a case in which a bank had suffered a loan loss and was considering filing suit against the debtor's auditor for alleged failure to disclose the debtor's going concern problem. Two factors were manipulated: (1) the degree of the bank's reliance on the independent auditor's work, and (2) the presence or absence of non-causal misstatements in the financial statements. Factor (1) affects proximate cause whereas factor (2) does not. The results were generally consistent with proximate cause being less important in the initiation of lawsuits than principles of tort law suggest it should be. Despite recognition by most subjects in the low-reliance condition that the suit lacked sufficient merit to be actionable under the principles of tort law, most recommended filing suit. Further, most of these subjects did so with the express intent of pursuing a settlement only. Moreover, subjects in the low-reliance condition whose cases contained non-causal misstatements, assessed both higher settlement likelihoods and values than subjects in the same condition whose cases did not contain such misstatements.
"Auditor Market Share, Product Differentiation and Audit Fees," by D. S. Lee, Accounting and Business Research [Vol. 26, Number 4, 1996]: 315-324.
This study examines the effects of auditor market share and product differentiation on audit fees in order to determine whether the price premium charged by the Big Six is due to product differentiation or partly due to monopoly pricing. In the present study, the Hong Kong audit market provides a unique setting in which a non-Big Six local auditor has a market share comparable to those of the third and fourth largest Big Six firms. The author argues that this makes it feasible to control for the effects of market share via matching. Also, the wide disparity among the Big Six firms' market shares in Hong Kong makes it feasible to test for the effects of market power on audit fees. The results show that the Big Six firms charge higher audit fees than non-Big Six firms in the small auditee, but not the big auditee, market. Furthermore, despite the Big Six firms' widely different market shares, there was no price differentiation among them. Yet there was a Big Six premium over the large local firm with a similar market share to those of two of the Big Six. The author concludes that the results suggest that the Big Six price premium is a result of product differentiation rather than monopoly pricing.
"Post-Socialist Transition and the Development of an Accountancy Profession in the Czech Republic," by W. Seal, P. Sucher and I. Zelenka, Critical Perspectives on Accounting [Vol. 7, Number 4, 1996]: 485-508.
This paper analyzes the collective mobility project of accountants and auditors in the Czech Republic as they have attempted to possess new areas of economic activity brought about through the post-1989 transition of Czech society. The transition is characterized by a changing balance between the guiding principles of state, market and community within which Czech accountants and auditors are visualized as pursuing the twin and related strategies of constituting a professional market and identifying themselves with the regulatory power of the state. The analysis of the relationships between the professions and the state and market orders is supplemented with an appreciation of the special role played by human agency and transnational institutions and enterprises in a society undergoing rapid change. Changes in the Commercial Code, accounting and taxation laws plus the emergence of equity markets have created fresh tasks in the social construction of trust in the nascent capitalist order. A chamber of auditors has been created by statute but its future is being questioned by powerful libertarian politicians in the Czech government. It is argued that the ambivalent policy of the Czech government has made it easier for the multinational accounting firms with reputation built up over decades in mature capitalist societies to invade the potential domain of Czech auditing and accounting professionals.
"Neural Networks and Empirical Research in Accounting," by D. Trigueiros and R. Taffler, Accounting and Business Research [Vol. 26, Number 4, 1996]: 347-355.
The authors provide an overview of the potential role of neural network (connectionist) methodology in empirical accounting research. The study highlights how the accounting task domain differs substantially from those for which neural network techniques were originally developed. A non-technical summary of neural network methodology is given, along with guidelines to help accounting researchers interested in applying these new tools to recognize the potential dangers and strengths underlying their use. The paper suggests research areas in accounting where neural network approaches could make a potential contribution. Explicit recommendations for prospective authors are also made.
"A Comparison of Japanese and U.S. Auditor Decision-Making Behavior," by J. Yamamura, A. Frakes, D. Sanders and S. Ahn, The International Journal of Accounting [Vol. 31, Number 3, 1996]: 347-363.
This paper extended research in auditing by examining audit decision making in an international context. Audit decisions made by Japanese and U.S. auditors were compared in areas expected to be affected by cultural differences. Hofstede's measures of national characteristics, specifically, rank consciousness and group orientation, were used to predict the effects of cultural differences. In an audit setting, these differences were expected to result in differences in acceptance of senior management judgment. Results of hypothesis testing provided evidence of the existence of national differences. The differences, however, appeared to be due to environmental factors rather than the theorized effect of cultural differences.
"Planned Audit Quality," by R. Elitzur and H. Falk, Journal of Accounting and Public Policy [Vol. 15, Number 3, 1996]: 247-269.
This study was motivated by suggestions to impose mandatory rotation of independent auditors and the passing of a bill by the U.S. Congress which reduces the auditor's civil liability for audit failure. The authors offer a multiperiod model for the planning of optimal audit quality by external auditors, and examine five propositions concerning the relations between audit quality and (1) the auditor's relative efficiency, (2) audit fees, and (3) the expected loss due to audit failure. The major results suggest that: (1) efficient independent auditors will plan a higher level of audit quality than less efficient independent auditors, (2) higher audit fees will result in an increase in the planned audit quality level for all expected engagement periods except the final one, and that (3) irrespective of the penalty regime, the level of planned audit quality will diminish over time. It is possible to motivate the auditor to plan a higher audit quality level for the last engagement period by increasing the penalty for audit failure in that period. Such a strategy will result, however, in reduced planned audit quality levels in all periods prior to the final one. The authors state that while their analysis increases their understanding about the above relations, it is not sufficient to conclude whether the newly-enacted tort reform is socially desirable.
"Market Reactions to Differentially Available Information in the Laboratory," by R. Bloomfield and R. Libby, Journal of Accounting Research [Vol. 34, Number 2, 1996]: 183-207.
This paper examines whether differential availability of information affects prices in laboratory markets. Specifically, the authors test whether market prices increase when unfavorable information is made less widely available. Their results have regulatory implications to the extent that where information is presented alters its distribution among investors. The authors presume that non-earnings information is available to fewer investors than earnings information and test only whether differential information availability affects market prices. An examination of investors' pre-trading estimates of value indicates that investors react equally strongly to both the widely available and less available signals at the individual level. The authors state that this suggests that the effects of information availability on closing prices are driven by the failure of the market to aggregate information held by differentially informed investors, not by investors' individual bias in interpreting the information they personally hold. The authors also find that the availability effect increased when less information was widely available, and the increase in this effect appears to be driven entirely by individual bias.
"User Involvement in the Standard-Setting Process: A Research Note on the Congruence of Accountant and User Perceptions of Decision Usefulness," by N. Harding and J. McKinnon, Accounting, Organizations and Society [Vol. 22, Number 1, 1997]: 55-67.
This is an exploratory study which examines whether accountants and users of financial statements hold congruent or incongruent views on the decision usefulness of accounting information. This issue is important to the question of whether users require direct involvement in the standard-setting process, or whether their views may be adequately represented in the process by other participants such as accountants. The authors draw on the sociology of professions literature under which professionals, such as accountants, are assumed to seek to maintain the judgment domain and indeterminacy of their professional task. They hypothesize that, compared to users, accountants will perceive a lower degree of decision usefulness to be associated with a change in accounting method that reduces judgment domain or indeterminacy. Using a survey questionnaire, developed around a series of accounting method-change scenarios, and administered to a sample of accountants and investment analysts (as an example of users), support was found for the hypothesis in relation to judgment domain, but not for indeterminacy.
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