Accounting & MIS Working Papers
Working Papers
Accrual Accounting and Information Content: An Instructional Note
by John Fellingham, Steve T. Schwartz, Douglas Schroeder, and Richard Young
Abstract
This instructional note offers a student friendly development of the idea that the usefulness of accounting accruals is related to its incremental information content. In the information content approach, users start with a set of beliefs about events that are associated with a stream of future cash flows. Informed managers are able to use accruals to communicate what they privately know about those events, above and beyond what could be conveyed by disclosing current cash flows alone. In this way, the users revise their beliefs about future cash flows based on the disclosures supplied by the accounting system. Benefits to accruals then result, to the extent investors are able to adjust their portfolios based on their revised beliefs about firms’ future cash flows. The costs of an accrual system include not only those directly related to storing and retrieving information but also the indirect costs related to management’s incentives to manage earnings. Although it is rarely if ever reflected in the popular press, the benefits to allowing management discretion over accruals may outweigh the costs.
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Additional Evidence on Auditor's Risk Assessments
by Eric Spires and James Yardley
Abstract
Extant empirical research on auditors' risk assessments yields the following: (1) control risk (CR) assessments and inherent risk (IR) assessments are not highly positively correlated; (2) IR assessments are only weakly positively related to misstatement in financial statements; and (3) CR assessments may be positively related to detected misstatements, but this finding is not consistent across studies. In the present study, we extend these findings using data gathered from 79 audits by 19 U. S. accounting firms. We find an extremely strong positive correlation between IR and CR assessments, much stronger than in prior research. We also find that IR assessments have a positive relation with misstatement, and this relation holds even after controlling for the effects of risk assessment on audit evidence-gathering and for the effects of CR assessments. Further, a positive relation between CR assessments and misstatement still exists after controlling for effects of risk assessments on audit evidence gathering, but the relation disappears when effects of IR assessments are controlled.
In addition to refining past research findings, we present evidence on whether risk assessments incorporate available risk information, in particular information regarding industry and account type. Results show that the risk assessments do not incorporate fully information about industry.
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Capital Budgeting, the Hold-up Problem, and Information Systems Design
by Anil Arya, John Fellingham, Jonathan Glover, and K. Sivaramakrishnan
Abstract
Accounting systems incorporate both verified (monitored) and unverified (self-reported) information: a firm's cash balance is easily verified by comparing it to bank statements, sales forecasts are typically not verified, and accounting earnings have components that are verified to differing extents. Also, accounting provides information that is aggregated (coarse) and historical (late). In this paper we study a hold-up problem in a model of capital budgeting wherein these features of information turn out to be optimal.
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Cross-Cultural Differences in Choice Behavior and Use of Decision Aids: Comparisons of Taiwan, Japan, and the United States
by P.C. Chu, Eric Spires, C. K. Farn, and Toshiyuki Sueyoshi
Abstract
In a previous study, participants from two cultures (Japan and the United States) completed multi-attribute preferential choice tasks with and without use of computerized decision aids. The results of the study indicate that Japanese participants were less likely to invoke compensatory decision processes, which involve conflict-confronting assessment of trade-offs among attributes. Two cultural factors were identified that may help explain the results: collectivism/individualism and disposition toward logical thinking. This study seeks to better understand which of these forces has a greater influence on decision processes. Data were gathered from a third country, Taiwan, that is akin to both Japan and the United States in one of the cultural forces but not in both. Pair-wise comparisons of data from the three countries suggest that collectivism/individualism may account for differences in decision strategies. The collective evidence calls into question the generalizability across cultures of descriptive decision theories, which come largely from the West, and suggest the need for descriptive theories that incorporate cultural factors.
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Does Time Pressure on Users Negate the Efficacy of Decision Support Systems?
by P.C. Chu and Eric Spires
Abstract
Time pressure has been shown to impair decision performance. Specifically, decision makers tend to process less information, process information faster, and use less rigorous decision strategies when faced with moderate to severe time pressure. On the other hand, recent research has shown that properly designed decision support systems (DSSs) can induce decision makers to process more information and use more rigorous decision strategies, which can result in enhanced performance. Because decisions are often made under time pressure, it is important to assess whether the salutary effects of DSSs still hold in time-constrained environments. In this study, we address this issue in an experimental context. We replicate past research results regarding the effects of time pressure and DSSs taken separately, and show that the positive effects of DSSs are maintained (and possibly even enhanced) when decision makers are under time pressure.
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The Effect of Honesty Preferences and Superior Authority on Budget Proposals
by Frederick Rankin, Steven Schwartz, Richard Young
Abstract
This experiment is designed to provide clear evidence on the relevance of honesty preferences in budgeting and to address the extent to which honesty preferences are affected by budget approval authority. The simple experimental setting manipulates whether budget communication takes the form of a factual assertion or an offer under tight experimental controls. In doing so, it does a better job than previous studies of isolating the effects of honesty preferences. It also manipulates whether the subordinate unilaterally sets the budget or whether the subordinate submits a budget request with the superior retaining final authority. The findings are as follows. First, when the subordinate unilaterally set the budget slack was less when budget communication took the form of a factual assertion than when it took the form of an offer. Second, when the superior had final authority the budget communication manipulation had no effect, indicating honesty preferences were not relevant in this setting. Third, when the subordinate set the budget, communication in the form of a factual assertion was quite efficacious in increasing the superior’s earnings. Superior earnings were not significantly less than those under the more empirically proven control of superior final authority wherein the budget communication was in the form of an offer.
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A Fibonacci Characterization of a BLU Estimator
by Anil Arya, John Fellingham, Jonathan Glover, and Doug Schroeder
Abstract
We were intrigued by a numerical example in Strang [1988, p. 151]. The example presents a steady state model in which the best linear unbiased (BLU) estimator of an unknown parameter is constructed using three observations. We noted that in the BLU statistic the (Kalman filter) weights on the three observations were ratios of Fibonacci numbers. We wondered if this was true irrespective of the number of observations used in constructing the BLU statistic. As it turns out, it is. Also, the variance of the BLU statistic is the ratio of Fibonacci numbers. In fact, it is equal to the weight on the most recent observation in the BLU statistic. These results are driven by the fact that all multipliers and pivots of a tridiagonal, symmetric matrix that naturally arise in the steady state problem are themselves Fibonacci numbers.
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Generalizations as Data and Behavior Abstractions
by Dale Lunsford and Waleed Muhanna
Abstract
Generalization, a key information system modeling abstraction, defines a subset relationship between elements of two or more classes. The relationship is specified through a mechanism called inheritance whereby a subclass acquires (shares) properties from its immediate superclass, and, by induction, from all of its antecedent superclasses. This paper discusses two dimensions of the generalization abstraction and identifies three specific subtypes of generalizations. We examine the different treatment of generalizations in object-oriented analysis methods and structured analysis methods and hypothesize that those differences impacts the ability of the systems analyst to fully model an application domain. The results of one study, in which we employed generalizations as a measure of the semantic richness of an application domain, are summarized.
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Implementation in Principal-Agent Models of Adverse Selection
by Anil Arya, Jonathan Glover, and Uday Rajan
Abstract
This paper studies implementation in a principal-agent model of adverse selection. We explore ways in which the additional structure of principal-agent models (compared to general implementation models) simplifies the implementation problem. We develop a connection between the single crossing property and monotonicity conditions which are necessary for Nash and Bayesian Nash implementation. We also construct simple implementing mechanisms that rely on the single crossing property and on assumptions about the outcome set frequently made in the principal-agent literature. In our model, if implementation is to be achieved in a finite mechanism, the principal has to settle for approximate (instead of exact) implementation when the agents have incomplete information but not when they have complete information.
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The Joint Effects of Effort and Quality on Decision Strategy Choice with Computerized Decision Aids
by P.C. Chu and Eric Spires
Abstract
Research has recently focused on the effort-reduction or minimization role of computerized decision aids, and how users may employ aids to manage their effort, which in turn affects their choice of decision strategies. In this paper, it is argued that effort reduction or minimization is by itself not sufficient for inducing changes in decision strategy. Instead, decision aid effects on effort must be considered jointly with the decision quality associated with the various decision strategies. This is true even if the decision aid has no effect on decision quality. We present a framework that can be used to evaluate the joint effects of effort and quality on decision strategy choice. In addition, we reinterpret past research results in the light of the framework and also present new experimental evidence on the description validity of the framework.
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On the Communication Role of Alternative Systems Analysis and Design Methodologies: An Empirical Evaluation
by Dale Lunsford, Waleed Muhanna, and Hasan Pirkul
Abstract
One claimed benefit of the object-oriented analysis approach to system analysis is that it provides a more natural representation of the end-user's requirements, resulting in superior models; i.e., models that are more effective at communicating system requirements. This paper empirically investigates this often stated claim. A total of 56 subjects participated in an experiment in which we used a recall test to measure the computational equivalence (accuracy and speed of recall) of models associated with three methods: one process-oriented method and two object-oriented techniques. Another primary factor manipulated in the experiment was semantic richness of the task being modeled. In general, no significant differences in performance were observed. Results do, however, suggest that the Structured Analysis method may be computationally less efficient in terms of the accuracy of the recall of some behavioral elements and that the Object Modeling Technique may be computationally less efficient than other techniques in terms of the effort needed to achieve recall.
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Optionality, Decentralization, and Hierarchical Budgeting
by Anil Arya, Jonathan Glover, and Bryan Routledge
Abstract
This paper studies the effect of real options on organizational design. A timing option, where capacity can be filled now or later, arises because managers are limited in the number of projects they can implement. Taking on a good project now means that a great project may have to be forgone in the future. A goal incongruence arises because managers value the option created by their own capacity constraint differently than do firm owners. From the perspective of firm owners, the possibility of shifting projects around within the organization means that any one manager's capacity is not that important. Managers, on the other hand, value their own capacity highly but place no value on other managers' capacity. Our main result is that putting one of the managers in charge of project assignment mitigates this conflict of interest. We also show that if firm owners cannot commit to delegating project assignment decisions, a hierarchical budgeting scheme can be used as a substitute.
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A Systematic Approach to Developing Portfolios of Strategic Information Systems
by P.C. Chu and Gautam Ray
Abstract
Developing strategic information systems is challenging. The foremost barrier lies in conceiving ideas for strategic information systems. This paper provides a critique of the existing frameworks for identifying strategic information systems and presents a comprehensive and coherent model for conceiving strategic information systems. Central to the model is the concept of critical value activities. It is shown that strategic information systems grow from supporting critical value activities with high information intensity within the confine of the firmĂs technical competence. Firms can use the model to conceive strategic information systems systematically.
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A Theory-based Research Framework for Studying Systems Analysis Methods
by Waleed Muhanna and Dale Lunsford
Abstract
Recent studies examining the relative performance of various system analysis and design technique have yielded valuable insights, but the overall findings so far are rather inconclusive and the relative efficacy of alternative methods is far from being well understood. A primary reason for this, we believe, is the lack of a unifying theoretical framework to guide the research efforts. Building on research in the areas of cognitive psychology and information systems, this paper proposes a new theoretical research framework that we have found useful for exploring the role of models during information systems development. The research framework subsumes the notion of "cognitive fit" (Vessey 1991) which formed the conceptual basis for a number of related studies (Sinha and Vessey 1992, Vessey and Conger 1993, Agarwal et al. 1996a). As such, it provides a good foundation for additional empirical research, since it identifies a richer set of key independent variables that may be influential, the relationships among these independent variables, and the outcomes that should be achieved when using various methods.
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User Resistance and Strategies for Promoting Acceptance: TPS vs. DSS
by James Jiang, Waleed Muhanna and Gary Klein
Abstract
Understanding the factors that contribute to the success of systems development efforts is a central concern in the field of information systems (IS). One key factor to which many implementation problems have been attributed is users' resistance. This paper reports the results of a study investigating the link between resistance reasons and system types and assessing managerial perceptions of the importance of various strategies for promoting acceptance with respect to those types. Surveying 66 managers in a variety of organizations, our results suggest that DSS and TPS are resisted for different reasons, and that certain promotion strategies are more effective for TPS, compared to DSS. Additionally, our study makes explicit, based on system type, key reasons for user resistance and the remedies designed to promote acceptance. This improves our overall understanding of the resistance phenomenon and guides analysts in selecting an appropriate strategy for a given system type.
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Verbs Are Not Cases: A Valid Method of Applying Case Grammar To Document Retrieval
by P.C. Chu
Abstract
The Vector Space Model (VSM) has been the dominant paradigm in the field of document retrieval. Nevertheless, VSM is limited by the amount of semantics it can capture. Specifically, it is unable to represent thematic roles, a constraint that impairs retrieval precision. Case grammar in linguistics offers a theoretical foundation for capturing thematic roles. Although there have been studies applying case grammar to document retrieval, all these studies, in their adhering to the basic structure of VSM, make the same theoretical error in treating verbs as cases. This paper points out this error and discusses its consequences in practice. It also presents a new approach to applying case grammar to document retrieval, which is not only theoretically sound but brings many benefits.
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