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Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This paper discusses the role of process evidence in accounting research. We define process evidence broadly as data providing insight into how and why cause-effect relationships occur, and we provide a framework to guide the provision and evaluation of process evidence in accounting studies. Our definition allows for an expanded understanding of techniques for gathering process evidence. The framework highlights the importance of the study's goals and theory in choosing how to provide process evidence, as well as how much process evidence to provide. The paper also outlines the strengths and limitations of three approaches to providing process evidence: mediation, moderation, and multiple-study-based designs. We provide recommendations for best practices for each approach to minimize threats to validity and maximize the value of process evidence. [ABSTRACT FROM AUTHOR]

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts’ incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for management’s track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research. [ABSTRACT FROM AUTHOR]

A retraction is presented for the article "Relationship Incentives and the Optimistic/Pessimistic Pattern in Analysts' Forecasts" published on December 17, 2007 in Wiley Online Library.

A retraction of the article "Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information" is presented.

This paper reports an experiment demonstrating that MBA students overrely on old earnings performance when predicting future earnings performance in a laboratory setting. In the experiment, MBA students relied too heavily on old annual ROE information to predict future annual ROE. The experiment shows how a common cognitive error (overreliance on unreliable information) interacts with the structure of the earnings time series to create particular patterns of prediction errors. The results also suggest directions for research on two well-known anomalies, long-run overreactions (De Bondt and Thaler 1985, 1987) and post-earnings-announcement drift (Bernard and Thomas 1990). [ABSTRACT FROM AUTHOR]

A retraction is presented to the article "Analysts' Reactions to Earnings Preannouncement Strategies" published on December 17, 2002 in Wiley Online Library.

This article focuses on the contributions of Professor Nicholas Dopuch to credible financial reporting research at the University of Illinois in Champaign, Illinois, during the 1960s. Some of Dopuch's contributions include bringing about significant changes in accounting, regulation, practice, and scholarship. The article also explains that Dopuch was one of the leading proponents behind the idea that research in accounting should test conjectures and subject claims to refutation. A historical overview of accounting scholarship is also presented, which focuses on the environmental and research technology changes that have occurred from the 1960s to the 1990s.

The article discusses the reaction of analysts to qualitative warnings of adverse earnings in the United States. The article attempts to reconcile analysts' more negative forecast revisions and the apparently conflicting anecdotal evidence that suggests more positive responses to firms that warn. It is suggested in the article that two possible causes for negative reactions to warnings are; market particpants' believing that warning firms may cause a more permanent earnings decline, and an overreaction may occur.

This article presents findings of the authors study designed to determine whether results of prior studies of the determinants of audit expertise generalize to measures of actual performance. The authors provide an overview of previous studies of the determinants of audit expertise. The study showed that at the staff level, auditors with superior performance evaluations were distinguished by their technical knowledge while seniors with superior performance evaluations were distinguished by both technical knowledge and problem-solving abilities. The study also indicated that significant learning of tacit managerial knowledge occurs between the experienced staff and senior levels. The authors conclude that the results of the study have practical implications for the education and selection of entry-level auditors, as well as performance evaluation and retention/promotion decisions.

The article focuses on the likelihood of the effect of differential availability of information prices on laboratory financial markets. The authors explain the effect of differential availability on closing market prices and the impact of information availability on individual estimates of value. The article also provides evidence of under-reactions to non-earning financial statement information and discusses this impact. The authors state that earnings numbers are more widely reported than other annual report details and not all investors have the ability or incentive to analyze other annual report information.

This article presents a study on the impact of incentive bonuses on performance and accounting judgment decisions. The authors contend that understanding this interaction will yield insight on the cognitive processes underlying performance and the efficacy of incentives. To verify they conducted a cognitive experiment with auditing students on their ability to learn and retrieve knowledge. The study indicates that the affect of incentives depends on the ability of the decision maker and the difficulty of the job tasks instead of simply the type and size of bonus offered.

The article presents an exploration into the influence of professional experience in the structuring and the content of auditor decisions. Organizational practices concerning the higher trust put in more senior auditors are examined, seeking to identify correlative data on ability and knowledge differences of individual analysts. The authors' hypothesize a model through cognitive psychology, wherein experienced auditors are more capable of recognizing common statement errors due to increased exposure and therefore posses a stronger grasp of interpretive judgment towards the data presented.

This paper has two goals. The first is to develop a formal approach for examining how the auditor's memory store interacts with current audit evidence to determine judgment. The failure of less systematic efforts to examine these issues suggests the need for more formality and structure. The second goal is to use the approach to predict and demonstrate the judgmental effect of a specific knowledge difference in an abstract setting. The conflicting and inconclusive results of prior studies indicate the nontrivial nature of this task, even in an abstract setting. This study should be viewed as the first in a sequence of research, which will move from the artificial toward the realistic, leading to demonstrations of how knowledge differences allow experts to perform important auditing tasks that novices cannot. As a result, this initial study, by itself, is not designed to allow direct implications for audit practice to be drawn. [ABSTRACT FROM AUTHOR]

In this experiment, a group of experienced auditors performed a diagnostic task related to one of their customary procedures—the detection of material financial statement errors through preliminary analytical review. Although the analytical review task used here abstracted from many of the complexities of an actual audit environment, it provided an opportunity to test three theoretical propositions concerning the knowledge structures of experienced auditors. These concerned how perceived frequency and recency of experience affected the accessibility in memory of potential financial statement errors, and how auditors organize financial statement errors in memory. Models of memory suggest that auditors should develop error prototypes and perceptions of their frequencies firsthand from personal experience, secondhand from the experiences of associates, and through formal training sessions where case materials emphasize certain types of accounting errors (see Waller and Felix [forthcoming]). Presumably, standardized audit procedures are also aimed primarily at more likely (and important) errors. The results of this experiment suggest that perceived error frequencies play a major role in the accessibility of error hypotheses in analytical review in that such error frequencies were closely associated with the frequency with which individual error hypotheses were generated. These results can be attributed to the relationship between frequency of experience and the strength, of associations in memory, and the fact that prototypes of frequency experienced errors are associated with more retrieval properties. [ABSTRACT FROM AUTHOR]

The article provides information on the use of U.S. Financial Accounting Standards Board qualitative characteristics in accounting policy choices. The financial accounting standard setting involves making choices among the alternative accounting methods. According to the author the Statement of Financial Accounting Concepts (SFAC) No. 2: Qualitative Characteristics of Accounting Information identifies and defines the qualitative characteristics of accounting information and asserts that they should be the basis for choosing among accounting methods. The author has tested the effectivity of the SFAC by assessing the operation of the qualitative characteristics, comprehensiveness of the qualitative characteristics and the minimum amount of overlap in meaning among the characteristics.

The article assesses the accounting implications of behavioral decision theory. The authors discuss the relationship between task structure, cognitive representations of tasks and human information-processing capabilities and the inconsistency between human decision and an optimal model. The authors state that they believe normative models are essential to accounting research and that a thorough understanding of the limitations of normative models is crucial. The importance of contextual variations in cognitive representation is also discussed.

The article refers to the evaluation of credit risk in commercial loan decisions and discusses uncertainty reporting, which can affect perceived risk. Studies on the effects of disclosing uncertainty in the footnotes of financial statements and bankers' perceptions of audit reports are discussed. Six stages in a heuristic model, which analyzes disclosures of uncertainty and is related to behavioral decision theory, include problem recognition and cue evaluation. Relationships among the effect of uncertainty, management quality, and the company's financial performance are mentioned, as well as the effect of adding the auditor's qualifications to footnote disclosures. A sample case is provided in the appendix.

The article reports on a comparison of bankers' and auditors' perceptions and rating of the message content in ten types of audit reports in the United States. Three individual differences scaling (INDSCAL) models were used to map perceptions of, individual differences between, and similarity in ratings by the two subject groups. The study mentions variations of scope limitations and uncertainty reports such as litigation and asset realization. Statistics are given for directional cosines of fitted vectors of adjective scales in subject space and for adjective phrases and scale endpoints. Statement on Auditing Standard No. 2 is mentioned. Auditors found more similarity in the client- and circumstance-imposed scope limitation reports.

This article evaluates alternative descriptive models of individual risk-taking behavior in business decisions based upon a review of experimental studies. The authors develop a classification scheme of alternative risky choice models. The models differ in the "risk" construct employed and the manner in which it is combined with other parameters. They also evaluate the evidence concerning the validity of those models as predictors of actual business decision behavior. Furthermore, the authors discuss the existence of individual and situational differences in risk-taking behavior and their importance in the choice between models and the generalizability of their conclusions to decisions made in group contexts.

The question addressed by Ashton is of great interest to accountants, and his approach to the topic is innovative. However, serious questions concerning the way in which the conceptual network was operationalized, coupled with methodology deficiencies, question whether any conclusions can be drawn from the results. The major problems relate to the presentation of the accounting change to the subjects, the manipulation of the moderating variables information and importance, and the method of measuring the change in the subject's decision process. Procedures for removing the confounding effects of these and other problems are presented. [ABSTRACT FROM AUTHOR]

The article presents research and discussion evaluating the predictive utility of accounting ratio information towards the likelihood of business failure. Multiple previous studies are cited wherein either accounting methods or their organizational reactions could be seen as adequate business indicators and a study is presented to combine the two factors into a single computation. The study utilized various levels of accounting ratios and measured the accuracy of loan officers' predictions, weighed against firm compliance with the decisions.

Using the same questions as Libby and Rennekamp (2015), we survey 110 experienced managers to examine their beliefs about the relationship between self-serving attribution bias, overconfidence, and management's issuance of earnings forecasts. As in Libby and Rennekamp (2015), we find that participants agree that, in general, managers are overconfident. They also agree that other managers likely overestimate the extent to which they contribute to positive firm performance, and that both optimism about the firm's future performance, as well as managers' confidence in their ability to predict future performance, increase the likelihood that earnings forecasts are provided. Finally, participants agree that providing earnings forecasts amplifies the costs of negative outcomes and the benefits of positive outcomes, consistent with the experimental assumption in Libby and Rennekamp (2012). These findings suggest that the experimental findings in Libby and Rennekamp (2012) match experienced managers' beliefs about how real-world earnings forecast decisions are made. [ABSTRACT FROM AUTHOR]

We survey recent (mainly US) research on the effects of earnings presentation attributes on manager and user behavior. The literature we discuss relates to three primary earnings presentation attributes: (1) disaggregation (vertical and horizontal), (2) location (recognition vs. disclosure, which statement for recognized items, and within statement classification, labeling, and subtotals), and (3) narrative attributes (location of key amounts within narratives, readability, medium, and timing of disclosure). We show that disaggregation operates mainly by directly affecting information content. Location operates mainly by indirectly affecting information content through changes in managers' actionsandby affecting ease of processing. Narrative presentation attributes operate mainly by affecting ease of processing. These differences in mechanisms determine the implications of the presentation attributes for contracting and valuation uses of accounting information. They also have implications for future research and standard setting. [ABSTRACT FROM AUTHOR]

Current IFRS requires significant disaggregation of income statement numbers while such disaggregation is voluntary and much less common under U.S. GAAP. We examine whether voluntary disaggregation of income statement numbers increases the reliability of income statement subtotals because auditors permit less misstatement in the disaggregated numbers. In our experiment, experienced auditors require correction of smaller errors in disaggregated numbers. Auditors also believe that greater disaggregation will increase SEC scrutiny of uncorrected financial statement errors in the disaggregated numbers. However, the effects are substantially reduced if the disaggregated numbers are presented in the notes. Furthermore, there is significant disagreement among participants on whether disaggregated numbers are relevant materiality benchmarks, and on what current auditing guidance requires. These results suggest a potential deficiency in current audit guidance, which traditionally has been aimed at promoting consensus in practice among auditors. The results also suggest an unintended positive consequence of voluntary disaggregation for the reliability of income statement subtotals. Possible effects of management behavior and required disaggregation resulting from U.S. adoption of IFRS or the recommendations of the joint FASB/IASB financial statement presentation project are also discussed. [ABSTRACT FROM AUTHOR]

Prior studies document that managers consider a variety of costs and benefits when deciding whether to issue earnings forecasts. Using an abstract experiment and a survey of experienced financial managers, we provide evidence that managerial overconfidence may also contribute to this decision. Our experiment shows that participants engage in self-serving attribution, giving greater weight to internal than external factors as explanations for good performance. This increases confidence in improved future performance, which increases their willingness to issue forecasts. Two facets of the stable individual trait overconfidence, dispositional optimism and miscalibration, also contribute to confidence in improved future performance and willingness to issue forecasts. Consistent with these results, experienced financial manager survey participants believe other managers are likely to overestimate the extent to which they contribute to positive firm performance, and both overoptimism about firm performance and overconfidence in their ability to predict future firm performance contribute to issuance of earnings forecasts. [ABSTRACT FROM AUTHOR]

Prior research indicates that greater transparency in reporting formats facilitates the detection of earnings management. The current study hypothesizes and demonstrates that greater transparency in comprehensive income reporting also reduces the likelihood that managers will engage in earnings management in the area of increased transparency. In our experiment, 62 financial executives and chief executive officers decide which available-for-sale security to sell from a portfolio. We manipulate the transparency of comprehensive income reporting and the relationship of projected earnings to the consensus forecast in a 2 × 2 between-subjects design. When projected earnings are below (above) the consensus forecast, participants sell securities that increase (decrease) earnings. However, the rarely used, more transparent format for reporting comprehensive income significantly reduces both income-increasing and income-decreasing earnings management. Participants in the less transparent setting indicate that earnings management attempts will not be obvious to readers, will improve stock prices, and have no effect on management's reputation for reporting integrity. Conversely, respondents in the more transparent condition suggest that earnings management will be obvious to readers, harmful to stock prices, and damaging to reporting reputation. Results of this study suggest that more transparent reporting requirements will reduce earnings management in the area of increased transparency or change the focus of earnings management to less visible methods. [ABSTRACT FROM AUTHOR]

This study examines how the form of management's earnings guidance (point, narrow range, wide range) affects analysts' earnings forecasts. Results from two experiments demonstrate that: (1) guidance form has no effect on analysts' forecasts made immediately after the guidance; and (2) after the actual earnings announcement, guidance form and the relationship of the earnings guidance to actual earnings (guidance error) interact in their effect on analysts' forecasts. After the actual earnings announcement, guidance error leads to higher (lower) analysts' forecasts for firms with downwardly (upwardly) biased guidance; this effect of guidance error is magnified by a narrow range and reduced by a wide range, compared to a point estimate. These results suggest that treating the mean of the range endpoints as equivalent to a point estimate and failing to consider effects after the release of actual earnings may paint an incomplete picture of how management guidance affects analysts and investors. It also offers useful information to managers who issue earnings guidance, and presents a challenge to the psychology literature regarding the effects of information precision on judgment and decision making. [ABSTRACT FROM AUTHOR]

We examine the effects of increased capital market pressure and disclosure frequency-induced earnings/cash flow conflict on myopic behavior. In our experiments, experienced financial managers choose between projects where a conflict exists between near-term earnings and total cash flow. Managers more often choose projects that they believe will maximize short-term earnings (and price) as opposed to total cash flows in response to increased capital market pressure resulting from a pending stock issuance, holding constant agency frictions and other stock market pressures. When faced with increased capital market pressure, changes in disclosure frequency cause managers to behave more or less myopically depending on the impact of the change on the pattern of earnings and the resulting earnings/cash flow conflict. Our study provides insights into managers' beliefs about stock market pressures, mandatory reporting, and the availability of alternative communications channels, and contributes to literature on managerial myopia and earnings management, as well as current debates over disclosure frequency. [ABSTRACT FROM AUTHOR]

The article highlights the financial paper by authors Richard M. Frankel, Marilyn F. Johnson and Karen K. Nelson. In their paper a data is set to test several propositions, including one suggested by the U.S. authority Securities and Exchange Commission (SEC) about the relation between nonaudit fees paid by a registrant to its auditor and the registrant's earnings quality. This article discusses comments from participants at the accounting review conference on quality of earnings to evaluate approaches given by Frankel, Johnson and Nelson from both conceptual and operational perspectives. The article organizes discussion around a predictive validity model that shows conceptual relations between independent and dependent variables, as well as their operational measures and treatment of other causal factors. The article uses this model to describe and evaluate authors' approach, which blends complex behavioral and contractual relations with aggregate observable fee, accounting and market price data. The article also encourages others to conduct additional research to address the important questions raised by Frankel, Johnson and Nelson and the SEC.

ABSTRACT: This paper reports two experiments in which Big 5 audit managers estimate reported (audited) earnings conditional on analysts' consensus forecast, auditing standards, and auditor discovery of a quantitatively immaterial earnings overstatement. We find that auditors judge overstatement correction less likely if it would cause a missed forecast, even for objectively measured misstatements. This behavior is consistent with SEC Chairman Levitt's concerns about opportunistic corrections to manage earnings to forecasts. Also, SAS No. 89's mandated representations and communications do not increase corrections that would cause a missed forecast, indicating that the Auditing Standards Board has limited ability to reduce opportunistic corrections through such regulations. [ABSTRACT FROM AUTHOR]

Examines the effectiveness of two types of decision aids designed to alleviate the effects of one type of task-knowledge mismatch on auditors' judgments. Organization of audit planning tasks; Content and organization of auditors' knowledge; Specific processing problems caused by mismatch between task organization and knowledge organization.

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. [ABSTRACT FROM AUTHOR]

Presents the results of an experiment which focuses on the mismatch between auditors' tendency to structure their knowledge of financial statement errors with audit objective. Audit tasks' requirement of auditors' assessment of objectives; Effects of knowledge structures' mismatch with task structures.

ABSTRACT: 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 end 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 end 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 ware more consensual than the global judgments. These results are compared to those of prior studies which examined similar aids. [ABSTRACT FROM AUTHOR]

ABSTRACT: The audit risk model was used to generate hypotheses concerning the effect that internal control evaluation exerts on audit planning decisions. Specifically, directional predictions concerning the contingent nature of the effects of the susceptibility of accounting processes to error, the strength of the internal control design, and the strength of the related compliance tests were developed. These hypotheses were then compared to the behavior exhibited by a group of experienced auditors who completed a highly realistic series of case studies. The auditors' decisions were consistent with the predictions developed from the audit risk model. In addition, the paper introduces a modification of the standard policy-capturing method that allows the use of complex realistic case materials in a powerful, internally valid experimental design which decreases problems with experimental demand. It also provides initial evidence on experts' perceptions of the effectiveness of different approaches to compliance testing and further evidence on auditor consensus in a more structured audit environment. [ABSTRACT FROM AUTHOR]

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.

This article deals with the expansion of the predictive ability criterion to consider the effects of information on decision-maker's (DM) behavior. The analysis involves two parts. In the first part, an information relevance criterion that simultaneously considers both the information and the DM's interpretation and use of it is developed. Under this relevance standard called prediction achievement, information alternatives are evaluated based upon the accuracy of the predictions made by the DM. Efficient implementation of this relevance measure requires that the effects of different information alternatives on the DM's behavior be predicted based upon descriptive mathematical models. The second part of this research consists of a field experiment designed to test three necessary conditions for the use of one particular model in the prediction of two-group classification decisions. E. Brunswik's Lens Model brings the relationship between predictive ability and information utilization into bold relief.

The publication announces the retraction of the article "Capital Market Pressure, Disclosure Frequency-Induced Earnings/Cash Flow Conflict, and Managerial Myopia" by Sanjeev Bhojraj and Robert Libby, published in 2005, following the finding of academic misconduct by accounting scholar James E. Hunton whose data was used in the article.

The publication announces the retraction of the article "Does the Form of Management's Earnings Guidance Affect Analysts' Earnings Forecasts?" by Robert Libby, Hun-Tong Tan, and James E. Hunton which appeared in the publication in 2006, following the finding of academic misconduct by author Hunton.

The publication announces the retraction of the article "Financial Reporting Transparency and Earnings Management" by James E. Hunton, Robert Libby, and Cheri L. Mazza, which appeared in the publication in 2006, following the finding of academic misconduct by author Hunton.