bluuebunny/crossref_metadata_2025 huggingface dataset:
An Experimental Assessment of Recent Professional Developments in Nonstatistical Audit Sampling Guidance
Authors: Messier William F. , Kachelmeier Steven J. , Jensen Kevan L.
Published: April 2008

The American Institute of Certified Public Accountants has recently set forth significant revisions in its nonstatistical audit sample-size decision aid (AICPA 1999). In a controlled setting involving 149 experienced auditors, we test the effects of the new guidance on auditors' sample-size judgments, extending Kachelmeier and Messier's (1990) (KM) investigation of a previous AICPA (1983) decision aid.

We find that the current decision aid results in significantly smaller sample sizes than the previous aid. Further, auditors continue to “work backward” in their choice of decision aid inputs, resulting in sample sizes that are more intuitively acceptable. An optional supplemental worksheet added to the AICPA's guidance to assist the auditor in specifying tolerable misstatement generates a marginal increase in sample sizes, but does not eliminate the working-backward phenomenon. However, the supplemental worksheet significantly reduces sample size variability. Additional findings update the conclusions in KM by showing that the excess of decision-aided sample sizes over intuitive sample sizes in their study no longer applies. A final extension addresses a limitation in KM by showing that sample-size judgments are not sensitive to the variation of population size as a separate treatment factor. Overall, this study directs focus to an improved understanding of nonstatistical sampling judgments, which are of increasing importance in the contemporary audit environment.
The Effect of Internal Audit Outsourcing on Financial Analysts' Perceptions of External Auditor Independence
Authors: Swanger Susan L. , Chewning Eugene G.
Published: April 2008

The practice of outsourcing the internal audit function to the external audit firm has raised fears by many parties such as the SEC of possible independence impairment. The fear stems from the increased economic bond that exists when additional services are provided to an audit client, as well as the long-held view that internal auditing is a management function and, as such, is incompatible with the external audit function. This paper reports the results of a two-phase study of the perceptions of financial analysts regarding external auditor independence when a CPA firm performs both external and internal auditing services.

In phase 1, analysts' perceptions of auditor independence are greater when the client employs its own internal audit staff or outsources to a different CPA firm than when the external auditor also performs internal audit functions. Phase 2 results show that analysts' perceptions of auditor independence are higher when the internal audit services are provided by the staff of a different division of the CPA firm compared to a nostaff separation treatment. Perceptions do not differ between full and partial outsourcing treatments, which conflicts with the recent SEC rule limiting the extent of outsourcing arrangements.
The Effects of Corporate Governance Experience and Financial-Reporting and Audit Knowledge on Audit Committee Members' Judgments
Authors: DeZoort F. Todd , Salterio Steven E.
Published: April 2008

Interest in audit committees as part of overall corporate governance has increased dramatically in recent years, with a specific emphasis on member independence, experience, and knowledge. This paper reports the results of a study investigating whether audit committee members' corporate governance experience and financial-reporting and audit knowledge affect their judgments in auditor-corporate management conflict situations. A sample of 68 audit committee members completed an accounting policy dispute case and several knowledge and ability tests. The results indicate that, as expected, greater independent director experience and greater audit knowledge was associated with higher audit committee member support for an auditor who advocated a “substance over form” approach in the dispute with client management. Conversely, concurrent experience as a board director and a senior member of management was associated with increased support for management. Collectively, these findings have a number of implications for practice and research. The results provide justification for calls that audit committees be composed completely of independent directors. The results also support auditor concerns that varying knowledge levels lead to systematic differences in audit committee member judgments in disputes between auditors and management.
Free Cash Flow, Debt Monitoring, and Audit Pricing: Further Evidence on the Role of Director Equity Ownership
Authors: Gul Ferdinand A. , Tsui Judy S. L.
Published: April 2008

This paper tests the hypothesis that the positive association between Free Cash Flow (FCF) and audit fees is stronger (weaker) for firms with low (high) levels of director equity ownership. Based on the debt monitoring hypothesis, we also test the hypothesis that the FCF/director equity ownership interaction is less (more) likely to exist for firms with high (low) levels of debt. OLS regression analyses of 157 and 140 low growth Australian firms audited by Big 6 auditors for the years 1992 and 1993 provide support for the hypotheses.
Continuous Auditing: Building Automated Auditing Capability
Authors: Rezaee Zabihollah , Sharbatoghlie Ahmad , Elam Rick , McMickle Peter L.
Published: April 2008

The digital economy has significantly altered the way business is conducted and financial information is communicated. A rapidly growing number of organizations are conducting business and publishing business and financial reports online and in real-time. Real-time financial reporting is likely to necessitate continuous auditing to provide continuous assurance about the quality and credibility of the information presented. The audit process has, by necessity, evolved from a conventional manual audit to computer-based auditing and is now confronted with creating continuous electronic audits. Rapidly emerging information technology and demands for more timely communication of information to business stakeholders requires auditors to invent new ways to continuously monitor, gather, and analyze audit evidence. Continuous auditing is defined here as “a comprehensive electronic audit process that enables auditors to provide some degree of assurance on continuous information simultaneously with, or shortly after, the disclosure of the information.” This paper is based on a review of related literature, innovative continuous auditing applications, and the experiences of the authors. An approach for building continuous audit capacity is presented and audit data warehouses and data marts are described. Ever improving technology suggests that the real-time exchange of sensitive financial data will place constant pressure on auditors to update audit techniques. Most of the new techniques that will be required will involve creation of new software and audit models. Future research should focus on how continuous auditing could be constantly improved in various auditing domains including assurance, attestation, and audit services.
Audit Quality and the Pricing of Discretionary Accruals
Authors: Krishnan Gopal V.
Published: April 2008

Accrual-based earnings is considered superior to cash flows. Accruals allow managers to communicate their private and inside information and thereby improve the ability of earnings to reflect underlying economic value. However, managers could engage in aggressive reporting of accruals that would seriously undermine the informativeness of reported earnings. Since outsiders cannot directly observe earnings, high-accrual firms face greater agency costs relative to low-accrual firms. Auditing plays an important role in mitigating these agency costs by constraining opportunistic management of accruals. This study examines whether there is a linkage between audit quality and pricing of discretionary accruals. The findings indicate that the association between stock returns and discretionary accruals is greater for firms audited by Big 6 auditors than for firms audited by non-Big 6 auditors. Further, discretionary accruals of clients of Big 6 auditors have a greater association with future profitability than discretionary accruals of clients of non-Big 6 auditors.
Audit Qualification and Timing of Earnings Announcements: Evidence from China
Authors: Haw In-Mu G. , Park Kyungjoo , Qi Daqing , Wu Woody
Published: April 2008

This study extends the scope of timing research to China's emerging capital market by examining the effects of audit opinions and earnings surprises on the timeliness of annual earnings announcements, after controlling for firm size, the presence of losses, financial distress, auditor switches, and changes in the Chinese regulatory environment. Based on a sample of listed Chinese firms for 1995–1999, we observe that both audit opinions and earnings surprises have significant effects, as reported in Bamber et al. (1993). We also find a significant effect attributable to the magnitude of negative earnings surprises as shown by Begley and Fischer (1998). In addition, we document a significant interaction effect between audit opinions and earnings surprises. Positive earnings surprises with modified audit opinions are announced significantly later than unqualified negative earnings surprises.
The Influence of Business-Process-Focused Audit Support Software on Analytical Procedures Judgments
Authors: O'Donnell Ed , Schultz Joseph J.
Published: April 2008

Some large public accounting firms that emphasize the business risk audit methodology revised their audit support software to organize audit evidence around business process rather than transaction cycle. These business-process-focused (BPF) systems present client information grouped by value chain activities, while firms that use traditional transaction-cycle-focused (TCF) audit support software might group client information primarily by account classification. Our study examines whether the presentation differences between BPF and TCF audit support software influence auditors' risk judgment during planning-phase analytical procedures. In a field experiment, experienced audit seniors performed analytical procedures on case materials containing a variety of seeded risk factors. One group completed the exercise using software organized around the BPF while the other group used software organized around the TCF. Participants who used the BPF system identified more of the seeded risk conditions and assessed misstatement risk at higher levels than did their counterparts who used the TCF system. These findings provide the experimental evidence that audit support software organized around business processes can influence decision performance while conducting planning-phase analytical procedures.
The Role of Incentives to Manage Earnings and Quantification in Auditors' Evaluations of Management-Provided Information
Authors: Anderson Urton , Kadous Kathryn , Koonce Lisa
Published: April 2008

We conducted an experiment with 113 experienced auditors to examine the influence of two factors on the persuasiveness of a management-provided nonerror explanation for an unexpected fluctuation in revenue. We expected that auditors' evaluations of a management explanation would depend jointly on whether it is quantified (i.e., put into numbers) and the managers' incentives to manage earnings. Instead, we find that the persuasiveness of managers' explanations is determined solely by their incentives. Focus on managers' incentives is consistent with auditors attending to regulators ‘ recent concerns about earnings management. However, such a focus implies that when the likelihood of earnings management appears low, auditors fail to take into account information about sufficiency that is contained in the quantified explanation when they revise their planning judgments.
Board of Director Characteristics, Institutional Ownership, and Fraud: Evidence from Australia
Authors: Sharma Vineeta D.
Published: April 2008

Due to the high incidence of fraud in Australia, regulatory reports suggest strengthening the monitoring role of the board of directors (BOD). These reports recommend greater independence and no duality (chairperson of the BOD should not be the CEO) on the BOD. While there is no Australian evidence, research evidence in the U.S. supports these suggested reforms. It is not clear whether the research evidence observed in the U.S. will generalize to the Australian setting because of contextual differences. This study extends the U.S. findings to the Australian context and investigates the relationship between two attributes of the BOD, independence and duality, and fraud. In addition, I examine whether institutional ownership plays a role in the context of fraud. The more highly concentrated institutional ownership in Australia suggests the presence of some relationship. Using a matched sample of fraud and no-fraud firms from 1988–2000, I find that as the percentage of independent directors and the percentage of independent institutional ownership increases, the likelihood of fraud decreases. As expected, the results show a positive relationship between duality and the likelihood of fraud. These results support the call for strengthening the composition and structure of the BOD in Australia.
The Effect of Risk of Misstatement on the Propensity to Commit Reduced Audit Quality Acts under Time Budget Pressure
Authors: Coram Paul , Ng Juliana , Woodliff David R.
Published: April 2008

This paper examines the effects of time budget pressure and risk of misstatement on the propensity of auditors to commit reduced audit quality (RAQ) acts. Understanding the different conditions under which time budget pressure can impact on auditors' behavior is important because of the emphasis on meeting budgets in practice. A 2×2×2 mixed design was used with two between-subjects variables for time budget pressure and risk and a repeated measure for the type of RAQ (accepting doubtful audit evidence and truncating a selected sample). The dependent variable was the propensity to commit RAQ. The results support the contention that, under time budget pressure, the likelihood of RAQ is lower when the risk of misstatement is higher. However, this effect was observed for only one of the two RAQ acts examined, suggesting that these RAQ acts are not seen to be the same by auditors. Different risk responses conditioned on the type of RAQ may be indicative of a strategic response to use of RAQ under time budget pressure.
Audit Firm Tenure and Fraudulent Financial Reporting
Authors: Carcello Joseph V. , Nagy Albert L.
Published: April 2008

The Sarbanes-Oxley Act (2002) required the U.S. Comptroller General to study the potential effects of requiring mandatory audit firm rotation. The General Accounting Office (GAO) concludes in its recently released study of mandatory audit firm rotation that “mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence” (GAO 2003, Highlights). However, the GAO also suggests that mandatory audit firm rotation could be necessary if the Sarbanes-Oxley Act's requirements do not lead to improved audit quality (GAO 2003, 5).

We examine the relation between audit firm tenure and fraudulent financial reporting. Comparing firms cited for fraudulent reporting from 1990 through 2001 with both a matched set of non-fraud firms and with the available population of non-fraud firms, we find that fraudulent financial reporting is more likely to occur in the first three years of the auditor-client relationship. We fail to find any evidence that fraudulent financial reporting is more likely given long auditor tenure. Our results are consistent with the argument that mandatory audit firm rotation could have adverse effects on audit quality.
Nonaudit Fees, Auditor Independence, and Bond Ratings
Authors: Brandon Duane M. , Crabtree Aaron D. , Maher John J.
Published: April 2008

Recent accounting scandals and perceived audit failures have resulted in excessive criticism of the accounting and auditing professions. The financial press has expressed disdain at the presumably substandard work that was completed on audit clients, ostensibly at the expense of the public good. Our research investigates one aspect of this situation by exploring the effects that nonaudit services performed by a firm's external auditors have on perceived auditor independence in the bond market. Specifically, we analyze the effects that the magnitude and relative degree of nonaudit services have on the bond rating process. Regression results indicate that the amount of nonaudit services provided by a firm's external auditors is negatively associated with that client's bond rating. However, results of classification accuracy analyses fail to demonstrate any improvement in performance as a consequence of adding nonaudit fees to a benchmark prediction model, indicating no economic effect on the actual bond ratings. These results afford insights concerning bond rating analysts' perceptions of auditor independence and provide empirical evidence regarding the role that audit and nonaudit service fees play in establishing a firm's bond rating.
Recent Changes in the Association between Bankruptcies and Prior Audit Opinions
Authors: Geiger Marshall A. , Raghunandan K. , Rama Dasaratha V.
Published: April 2008

The intense legislative and media scrutiny after a series of high-profile corporate failures, coupled with the paradigm shift in the regulation of the auditing profession brought forth by the Sarbanes-Oxley Act, suggests that auditors' decisions would be more conservative in the period after December 2001. Based on analyses of 226 financially stressed companies that entered bankruptcy during the period from 2000 to 2003, we find that auditors are more likely to issue going-concern modified audit opinions in the period after December 2001. Since the post-December 2001 period coincides with recovery from a recession in the U.S., we also examine prior audit opinions for 93 companies entering bankruptcy in 1991 and 1992. We find that auditors were also more likely to issue prior going-concern modified audit opinions in 2002–03 than in the earlier recession recovery period. Following the technique used in Francis and Krishnan (2002), we document that the increase in going-concern modification rates for bankrupt companies after December 2001 is due to changes in auditor reporting decisions and not solely due to differences in client characteristics between the time periods studied.
The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era
Authors: Ettredge Michael L. , Li Chan , Sun Lili
Published: April 2008

This study analyzes the impact of internal control quality on audit delay following the implementation of the Sarbanes-Oxley Act (2002) (SOX). Unlike prior studies of audit delay that obtain information about internal control strength via surveys, or use fairly crude proxies for internal control quality, our study employs external auditor assessments of internal control over financial reporting (ICOFR) that are publicly disclosed in SEC 10-K filings under SOX Section 404. Thus, the empirical evidence provided in this study is both timely and reliable (i.e., not subject to small sample bias or weak proxies). Consistent with our expectation, we find that the presence of material weakness in ICOFR is associated with longer delays. The types of material weakness also matter. Compared to specific material weakness, general material weakness is associated with longer delays. Additional analyses indicate that companies with control problems in personnel, process and procedure, segregation of duties, and closing process experience longer delays.

After controlling for other impact factors, this study also documents a significant increase in audit delay associated with the fulfillment of the SOX Section 404 ICOFR assessment requirement. This suggests that Section 404 assessments have made it more difficult for firms to comply with the SEC's desire to shorten 10-K filing deadlines. Our finding thus supports and helps explain the SEC's decisions in 2004 and 2005 to defer scheduled reductions in 10-K filing deadlines (from 75 days to 60 days) for large, accelerated filers.
The Relationship between Auditor Characteristics and the Nature of Review Notes for Analytical Procedure Working Papers
Authors: Ballou Brian
Published: April 2008

This study investigates the auditor characteristics that are related to generation of evidence and documentation review notes by reviewers of audit working papers. To address this question, an analysis was conducted on the contents of review notes prepared in a laboratory experiment. The working papers contained no documentation deficiencies but contained insufficient evidence. As part of an effective review process, the auditor should generate review notes that call for additional evidence gathering. Generating documentation-oriented review notes created inefficiencies for carrying out the review process and corresponding audit task. Stepwise multiple regression analyses identified reviewer characteristics that were significantly associated with each type of review note. These results provide insights into the reviewer characteristics associated with focusing attention on one review-note classification instead of the other. This finding suggests opportunities for future research that more thoroughly explores and controls for the variables identified in this study.
National Culture and the Implementation of High-Stretch Performance Standards: An Exploratory Study
Authors: Chow Chee W. , Lindquist Tim M. , Wu Anne
Published: April 2008

This study explores how national culture affects employees' reaction to different modes of implementing high-stretch performance standards. An experiment was performed using Chinese and U.S. nationals to represent cultures that diverge on two relevant dimensions: power distance and individualism/collectivism. Consistent with culturally based expectations, Chinese nationals more readily accepted imposed high-stretch performance standards—relative to U.S. nationals—as manifested by the degree to which they performed up to those standards. Also, differences were found between Chinese and U.S. nationals' satisfaction with high-stretch performance standards under autocratic vs. consultative participation in the standard-development process. However, further analysis was unable to dismiss the possibility that this result, which was based on subjects' self-reports on Likert-scale questions, could have been an artifact of cross-national, response-set bias. Other findings indicated that national-culture effects arose in more complex ways than were originally conceived.
A Note on Self-Explanation as a Training Tool for Novice Auditors: The Effects of Outcome Feedback Timing and Level of Reasoning on Performance
Authors: Earley Christine E.
Published: April 2008

This study extends a previous experiment (Earley 2001), showing how a “self-explanation” training intervention promoted learning in an auditing context. A causal model is proposed to examine the effect of providing outcome feedback (i.e., the correct answer) prior to or after self-explaining on the level of reasoning exhibited in self-explanations, and then the effect of level of reasoning on performance.

The model was tested through an experiment in which auditors were trained to assess the reasonableness of client-provided discount rates used in real estate valuation. The following three relationships were tested: (1) the effect of outcome feedback timing on the level of reasoning exhibited, (2) the effect of outcome feedback timing (without considering reasoning level) on performance, and (3) the diminishing effect of outcome feedback timing on performance when level of reasoning is introduced as a covariate, with level of reasoning then having a significant effect on performance. The results support the causal model, indicating that in the absence of outcome feedback, auditors exhibit a lower level of reasoning in their self-explanations, which then adversely affects their performance.
The Effects of Cognitive Style Diversity on Decision-Making Dyads: An Empirical Analysis in the Context of a Complex Task
Authors: Cheng Mandy M. , Luckett Peter F. , Schulz Axel K-D.
Published: April 2008

Some research has suggested multiple-format accounting feedback in an attempt to accommodate varying cognitive information processing styles (Gardner and Martinko 1996). This costly information solution, however, has not been widely adopted in practice. An alternative approach, which fits nicely with current team-orientation practices in the work place, is to create combinations of workers. These work groups can bring to bear varying cognitive styles in solving complex business problems using accounting information. This study explores how cognitive style diversity affects the decision quality performance of dyads for a complex decision task. An experiment was performed to extend prior accounting studies into perception differences based on the sensor/intuitive dimension of the MBTI (Myers-Briggs Type Indicator) instrument, and how such differences affect users of performance reports in their decision-making processes. In this study, subjects were classified into sensor or intuitive dyad members, based on the Myers-Briggs MBTI instrument, and engaged in a task that involved a series of simulated production decisions with nonfinancial direct performance feedback. After controlling for task conflict, results showed significantly better decision performance for cognitively diverse dyads over homogeneous sensor dyads. Similar performance differences, however, were not observed between cognitively diverse dyads and homogeneous intuitive dyads. Task conflict was not significant in explaining differences in decision performance. The findings could have implications in the areas of management control system design and personnel management.
Decision Aids and Experiential Learning
Authors: Rose Jacob M.
Published: April 2008

Rose and Wolfe (2000) demonstrated that decision aid design is critical to learning from decision aids, and aids that produce less cognitive load result in superior learning by aid users compared to aids that produce more cognitive load. The current research investigates whether a tax decision aid has differential affects on the knowledge acquisition of accounting students with varying perceived aptitudes for tax and interest in tax as a career. Results indicate that participants with more interest in and perceived aptitude for tax acquire more tax-related knowledge during manual task completion than participants with less perceived aptitude and interest. Similar to prior research, decision aids generally decrease learning relative to unaided environments. When decision aids do not produce a heavy cognitive load, however, participants with less perceived aptitude for and interest in tax learn as much in aided environments as they learn in unaided environments.
Relative Weighting of Common and Unique Balanced Scorecard Measures by Knowledgeable Decision Makers
Authors: Dilla William N. , Steinbart Paul John
Published: April 2008

Prior research has found that decision makers with limited experience in using the Balanced Scorecard (BSC) ignored measures that reflect the unique strategy of a business unit and based their performance evaluations solely on measures common across units. The purpose of this study is to investigate whether decision makers who have had training and experience in designing BSCs exhibit the same behavior. Results of an experiment show that decision makers who are knowledgeable about the BSC attended to both common and unique measures, but placed greater emphasis on the former. These results hold in both a performance evaluation judgment and in a bonus allocation decision. We attribute these results to the knowledge participants acquired through classroom training on the design of the BSC, but cannot rule out an alternative explanation that our results differ from previous research because participants in our study were undergraduate accounting and information systems majors, rather than M.B.A. students.
The Effect of Obedience Pressure and Perceived Responsibility on Management Accountants' Creation of Budgetary Slack
Authors: Davis Stan , DeZoort F. Todd , Kopp Lori S.
Published: April 2008

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.
Audit Review: The Impact of Discussion Timing and Familiarity
Authors: Favere-Marchesi Michael
Published: April 2008

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.
The Effects of Prior Accounting Work Experience and Education on Performance in the Initial Graduate-Level Accounting Course
Authors: Krausz Joshua , Schiff Allen I. , Schiff Jonathan B. , VanHise Joan
Published: April 2008

This study explores the relationship between performance in entry-level graduate accounting coursework and prior accounting work experience and undergraduate accounting coursework experience. Prior accounting work experience is defined more precisely than in previous studies so that its effects on graduate performance can better be measured. Performance is compared using Chi-square tests, t-tests and Mann-Whitney tests. The results suggest that both educational and work experience are necessary for either to be of help. This differs from the findings in prior studies.
Accounting for Bonds With Accrued Interest in Conformity With Brokers' Valuation Formulas
Authors: Rusbarsky Mark , Vicknair David B.
Published: April 2008

This article explains how to apply brokers' valuation methods to accounting for bonds when interest payments do not coincide with settlement or balance sheet dates. We show how to calculate a bond's present value on these dates using a simple approach that conforms with the method used by brokerage institutions to compute the bond's “actual price.” We then clarify how a broker subtracts accrued interest from this actual price to arrive at the quoted price, and how this quoted price relates to the bond's carrying amount and “fair value” (per SFAS Nos. 107, 115 and 124). We also precisely compute the change in a bond's carrying amount over fractional periods after settlement and around balance sheet dates. Finally, we demonstrate how to integrate these refinements into intermediate textbook illustrations. Throughout, we provide instructions for computing bond valuations using spreadsheet application functions.
Interior Systems, Inc.: The Decision to Adopt EVA®
Authors: Bowen Robert M. , Wallace James S.
Published: April 2008

The purpose of the Interior Systems case is to introduce and critique the use of residual income measures for decision making, performance evaluation, and incentive compensation. In this case we focus on Stern Stewart's proprietary measure of residual income, Economic Value Added (EVA®). The case uses the setting of a multidivisional company that is struggling with the decision of what measure to use in performance evaluation. The company recognizes that the choice of performance measures is likely to affect managers' motivations and in turn decision making. The problem the company faces is which measure to use, especially in light of the differing key success drivers of the different divisions. The case has been used successfully at the undergraduate level, in M.B.A. programs, and in executive education programs.
Component Technologies, Inc.: Adding FlexConnex Capacity
Authors: Hertenstein Julie H.
Published: April 2008

Component Technologies, Inc. (CTI) manufactures components used in electronic devices. CTI is considering adding manufacturing capacity for FlexConnex to meet increased future demand. CTI's manufacturing planning staff identifies three options to meet this demand. The staff performs preliminary financial analyses to evaluate whether to conduct detailed planning for and evaluation of each of the three options. During their analysis, they consider which discount rate is more appropriate: the 20 percent rate, which the corporate finance manual states is the hurdle rate for capital investments, or 10 percent, which the staff believes is closer to the corporate cost of capital. They experiment with both discount rates, and two time horizons. This case requires you to calculate net present values (NPVs) and to analyze the effect of different discount rates and time horizons. It also asks you to consider the effect of other financial and nonfinancial issues on your analysis.
Espresso, Inc.: Analyzing the Impact of Employee Stock Options
Authors: Moyer Susan E. , Weihrich Susan G.
Published: April 2008

This case explores the effects of stock option awards on companies and their employees. We examine how options likely affect employee wealth by considering tax and cash-flow effects of the grant and exercise of the option and of the subsequent sale of stock. We also examine how the company reports stockoption transactions in its financial statements and footnotes and how the options affect the company's tax return. These issues are investigated for both incentive stock options and nonqualified stock options. In addition, the case's setting presents the challenges of balancing employee and corporate objectives when structuring this increasingly common form of compensation.
Developing a Process Approach in the Business Core Curriculum
Authors: Walker Kenton B. , Ainsworth Penne L.
Published: April 2008

This paper illustrates a business-process approach to delivering the core business undergraduate curriculum, consistent with the trend toward processmanaged organizations. In addition, it discusses how accounting education can be incorporated into this model and how a process-centered curriculum may give accounting students a broader and more integrated educational experience. This model conforms to recommendations from the academic accounting community and the accounting profession's demands for increased capabilities in accounting graduates.

Six business-process modules are outlined for the undergraduate business core curriculum, and the role of accounting in each of these modules is presented. In addition, we outline three teaching approaches to managing and delivering a process-centered program and discuss assessment of program outcomes. This proposed approach may provide business programs a mechanism for achieving several benefits that include: (1) the potential for a more effective way to deliver an integrated understanding of how businesses function, (2) a more efficient educational process, and (3) a framework for formulating and implementing a strategy for developing the accounting and business curriculum consistent with modern business practices.
Questrom vs. Federated Department Stores, Inc: A Question of Equity Value
Authors: Taylor Gary K. , Samson William D. , Gup Benton
Published: April 2008

This case is based on a factual situation facing the courts. Allen Questrom, recently retired Chief Executive Officer (CEO) of Federated Department Stores, is suing the company for the amount of incentive compensation he earned during the five years he was Federated's CEO. This incentive compensation was to be based on the increase in the firm's total equity value over this five-year period, a time during which Questrom rescued the retailer from bankruptcy. Questrom and Federated are in dispute over Federated's equity value as of January 28, 1995. Therefore, the court is being asked to estimate Federated's equity value as of January 28, 1995 and then determine the amount of compensation that Federated owes Questrom.

The presiding judge (Gilbert Snider) wants you to analyze selected information from Federated's financial statements. As part of your analysis, the judge has asked you to explain the role that certain components of the financial statements have with respect to firm valuation. You are asked to estimate Federated's total equity value as of January 28, 1995 (the end of the five-year period under consideration) using the “free cash flow” and the “residual income” valuation models. The “residual income” model, which combines historical financial accounting and earnings forecasts to value companies, has generated considerable excitement in financial accounting academic circles and among accounting and consulting practitioners. Variants of the residual income valuation model, such as Stern and Stewart's EVA® (Economic Value-Added) and McKinsey's Economic Profit Model, have been widely discussed by academics and utilized by consultants to value businesses in a variety of settings and purposes.
Using the Residual-Income Stock Price Valuation Model to Teach and Learn Ratio Analysis
Authors: Halsey Robert F.
Published: April 2008

This article provides an overview of the residual-income stock price valuation model and demonstrates its use in interpreting the DuPont return on equity (ROE) decomposition. The model provides theoretical support for the DuPont model's focus on ROE and aids in understanding the implications of the price-to-book and price-earnings ratios. I conclude with an application of the model in the valuation of Nordstrom, Inc.
The Canfield Learning Styles Inventory: An Assessment of Its Usefulness in Accounting Education Research
Authors: Eide Barbara J. , Geiger Marshall A. , Schwartz Bill N.
Published: April 2008

Recent reviews of accounting education research have called for continued assessment of learning style inventories in accounting contexts (Geiger and Boyle 1992; Rebele et al. 1998). This study presents a critical evaluation of the psychometric properties of the Canfield Learning Styles Inventory (LSI), proposed by Francis et al. (1995) as an instrument for possible use by accounting educators. The study administered two versions (standard and scrambled) to 531 accounting majors from eight universities, applying a test-retest strategy after a 4–5 week interval. The versions were examined for internal consistency reliability, test-retest reliability, classification stability, and construct validity. We found moderate internal consistency (item analyses scores weaker than those reported by Canfield [1988]) and a substantial amount of learner-type classification instability across the two administrations. In terms of construct validity, two-factor solutions were not consistent with those reported by Canfield (1988). Further, three-factor solutions also were not consistent with Canfield's three learning domains. Therefore, along with limited theoretical support and the lack of empirical justification, we find little support for the use of the Canfield LSI in accounting education research.
Laborers Local 829 Health and Welfare Plan: Testing Investments and Receivables
Authors: Hogan Thomas J. , Bierstaker James L. , Seltz William E.
Published: April 2008

Laborers Local 829 serves as a multi-employer health care provider for union construction members. The case focuses on accounting situations that might be faced on an audit engagement. The purpose of this case is to provide you with a realistic audit situation that requires you to think critically, plan and perform audit tests of investments and receivables, consider accounting issues related to receivables, and review and prepare audit working papers. Data for the case are based on an actual audit engagement performed by accounting practitioners. Names used, however, are fictitious. Investments consist of holdings similar to those of a mutual fund. Actual stock prices are used for the holdings.
The Association between the Directional Accuracy of Self-Efficacy and Accounting Course Performance
Authors: Christensen Theodore E. , Fogarty Timothy J. , Wallace Wanda A.
Published: April 2008

This study examines how accounting students' ability to assess their course standing mid-way through the term is associated with their success in the course. Drawing on the paradigm of self-efficacy, we explicitly assess mid-way through the course how aware students are of (1) their exam performance, having taken an exam but before receiving feedback, and (2) their final course grade. Path analysis results for a sample of 214 students suggest that the more conservative a student's self-efficacy (that is, the less optimistic or more pessimistic the self-assessment), the higher the second exam score and final course grade. This relationship holds even after controlling for cumulative GPA in accounting courses, average exam performance during the term, trajectory of achievement, number of accounting classes already completed, and the extent of involvement in extracurricular activities. Path analysis results also support the notion that student characteristics are associated with performance, both directly and indirectly (via their association with the conservatism of self-efficacy). We find that the direction of inaccuracy matters. When students' predictions are below outcomes, reflecting pessimism, subsequent performance improves. When predictions are above outcomes, reflecting optimism, subsequent performance deteriorates. These results suggest that the direction of inaccuracy in understanding current course standing is an essential element of students' success in the classroom, apparently due to the self-regulatory behavior prompted by such misalignment.
Resolving Difficult Accounting Issues: A Case Study in Client-Auditor Interaction
Authors: Johnstone Karla M. , Muzatko Steven R.
Published: April 2008

This case requires you to consider the complexities of auditing in terms of a realistic client-auditor interaction involving difficult accounting issues. The case is loosely based on an actual situation that occurred between an audit firm and its client. In the case you will assume the role of either the auditor or the client as you attempt to resolve inventory and accounts receivable valuation issues for which there are no “clear-cut” solutions. This case includes three sections. First, you will read an article containing an auditor-independence risk framework to help you understand how client-auditor interactions relate to auditor independence risk. Second, you will develop alternative solutions to the inventory and accounts receivable valuation issues in your respective auditor or client group. Third, you will interact with another group assuming the opposite role and you will resolve the valuation issues in some way. By completing the case, you will learn about client-auditor relationship/interaction issues, client-auditor economic incentives, and auditor independence risk issues.
Testing NCAA Compliance at Southeastern State University: A Case Study
Authors: Higgs Julia L. , Reisch John T.
Published: April 2008

A large part of an auditor's work includes evaluation of an organization's compliance with laws and regulatory requirements, internal policies and procedures, and other rules that an entity must follow. The objective of this case is to assist you in understanding both the importance of compliance auditing, and the need for auditors to exercise professional judgment when interpretation of rules is required. The case involves a hypothetical university's adherence to NCAA rules and regulations. The first part of the case provides exposure to various resources needed to develop an understanding of both intercollegiate athletics and compliance with rules established by its governing body, the NCAA. The second part requires you to use judgment in interpreting different scenarios that may or may not indicate compliance violations.
John Adams, Thomas Jefferson, and the Barbary Pirates: An Illustration of Relevant Costs for Decision Making
Authors: Caplan Dennis
Published: April 2008

The concepts of incremental cost, opportunity cost, sunk cost, and cost allocation are identified and discussed in the context of early U.S. foreign policy. The case is derived from an authentic exchange of views between Thomas Jefferson and John Adams about how the United States should protect its merchant shipping against the Barbary pirates. Both men compare the cost of waging war against the Barbary States with the cost of paying ransom for captured U.S. seamen and bribes to protect future shipping. Adams quantifies the opportunity cost associated with not taking any action. Jefferson articulates an incremental costing argument, on the assumption that the U.S. should build a navy regardless of U.S. policy toward the Barbary States. The case constitutes a brief introduction to management accounting by illustrating various cost concepts. The case lends itself to a discussion of how cost information can be chosen to support a particular course of action, and it can also prompt a discussion of the historical origins of management accounting.
Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Travel Revenue
Authors: Borthick A. Faye , Kiger Jack E.
Published: April 2008

The objective of the Fly Airline case is for you to learn to develop audit procedures in a context, e-ticket revenue, in which most of the evidence is available electronically, and in which many tests of controls and substantive tests can be performed using data stored in electronic form. In sequence, you will identify controls and their objectives, match controls to financial statement assertions for revenue, develop tests of controls, develop substantive tests for each assertion, and organize audit procedures into an effective and efficient audit program.
Evaluation of Network Operating System Security Controls
Authors: Dunn Cheryl L. , Gerard Gregory J. , Worrell James L.
Published: April 2008

Systems and financial statement auditors are often responsible for evaluating compliance with system security controls as part of their annual audit procedures. This assignment provides a practical learning experience that relates your course material to actual tasks practitioners perform. You are provided with simulated data from a realistic company example and are asked practitioner-relevant questions covering a variety of issues related to network operating system access. Monitoring and limiting network operating system access and mitigating the related risk is crucial since any application (including accounting applications) can be accessed, and potentially compromised, through the network operating system.