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This article explores the alternative user treatments of the financial disclosures of deferred taxes in the U.S. in the 1990s. Predictive ability studies were seen as a means of operationalizing the decision-usefulness criterion. The attempts to operationalize the criterion have been applied to bankruptcy predictions and bank loan classifications. The predictive-ability criterion was also used to evaluate lease disclosures, general price level information and specific price level adjustments. Financial ratios were restated for the firms in the sample following these alternatives: liability treatment; stockholders' equity treatment; and asset reduction treatment. Each of the treatments is related to a possible treatment of the deferred income tax credit in the decision-making processes of financial statement users. The first alternative is based on the assumption that the financial statement user believes that the tax will be paid in the near future. The second alternative is based on the assumption that increases in the deferred taxes are de facto earnings. The third alternative treatment assumes that tax deductibility and taxability are factors in the valuation of assets. The stockholders' equity treatment is the equivalent of nonallocation or the liability method with a present value of zero for the liability.

A Bayesian model for nonsampling errors made by the auditor is investigated to determine the effects of such errors on audit inferences. Predictive distributions are used to illustrate that for "realistic" audit situations, Type II errors will have little effect on inferences for a given level of Type I error. Type I errors are shown to play a more critical role in determining the acceptability of an internal control. [ABSTRACT FROM AUTHOR]

Prior research on audit quality reduction acts has generally focused on nonmanagerial personnel in CPA firms. This study gathers perception data on the existence, extent, and possible factors associated with inappropriate partner behavior. A questionnaire addressing these issues was mailed to a national sample of senior managers and partners employed in auditing positions with public accounting firms. A large majority of the respondents had never observed four of the five inappropriate behaviors examined. However, approximately 25 percent of respondents indicated that they had observed one or more instances of inadequate workpaper review. Two economic factors (large client size and the presence of a fixed-fee audit contract) were most strongly associated with GAAP and GAAS violations. [ABSTRACT FROM AUTHOR]