An Experimental Investigation of Approaches to Audit Decision Making: An Evaluation Using Systems‐Mediated Mental Models*

The objective of this research is to articulate a decision‐making foundation for the systems audit approach. Under this audit approach, the auditor first gains an understanding of the auditee's economic environment, strategy, and business processes and then forms expectations about its performance and financial reporting. Proponents of this audit approach argue that decision making is enhanced because the knowledge of the system allows the auditor to focus on the most important risks. However, there has not been an explicit framework to explain how systems knowledge can enhance decision making. To provide such a framework, we combine mental model theory with general systems theory to produce a hypothesis we refer to as a systems‐mediated mental model hypothesis. We test this hypothesis using experimental economics methods. We find that (1) subjects make systematic errors under the setting without an organizing framework provided by the systems information, and (2) the presence of an organizing framework results in lower reporting errors. Importantly, the organizing framework significantly enhances decision making in the settings where the environment changed. Establishing a decision‐making foundation for systems audits can provide an important building block that, in part, can contribute to the development of a more effective and efficient audit technology ‐ an important objective now when audits are facing a credibility crisis.     

‘The city has been wronged and abused!’: institutional corruption in the eighteenth century

Corruption by office holders in eighteenth‐century British institutions, from state to local level, played an instrumental role in the emergence of modern bureaucracy, and the development of accountable, professionalized systems of administration. Due to the similarities between the institutional culture of eighteenth‐century Britain and those within many contemporary developing societies, social scientists have also sought to draw lessons from Britain's historical experience of corruption. Yet little is known about the extent, impact, and causes of corruption by eighteenth‐century office holders. This article presents the first detailed research into the topic. It utilises the rich administrative and financial records associated with the institution charged with funding and undertaking the maintenance of London Bridge—the Bridge House—to conduct a systematic qualitative and quantitative study of corruption by office holders. The article identifies an ingrained culture of corruption amongst Bridge House officers, and provides quantitative evidence of the substantial impact corruption had on the organization's finances. However, contrary to existing studies on corruption, this article concludes that, although extensive and significant, corruption did not perform a functional role in the context of this institution. The article also provides a methodology and comparator for future studies into this topic.     

International Business Alliance under Asymmetric Information: Technology vis‐à‐vis Information Advantage

We study the relationship between a multinational corporation (MNC) and a domestic firm under demand uncertainty. The MNC possesses a superior production technology, but the domestic firm is better at predicting market demand. We examine the MNC's preference for, and the ownership structure of, an international alliance (IA) and find, inter alia, that binding borrowing constraints have serious implications for the results. Interestingly, a firm's preference for and profits in IA do not necessarily increase as its advantage in market information or production technology increases. We also consider a dynamic setting with technology spillover and show that whether technology spillover hinders or facilitates IA once again depends on the nature of the credit market.     

The Impact of Multinational Presence on Domestic Investment: Firm‐Level Evidence from South Korea

In order to analyze the effects of foreign multinationals' presence on domestic firms' investment, we use a detailed firm level data set from South Korea for the 2006–2014 period. We combine it with the input‐output tables provided by the Bank of Korea to construct industry level measures of multinational presence in sectors that are horizontally and vertically linked, and estimate dynamic investment equations that are augmented with these foreign presence measures. We find a positive and significant effect of foreign presence in both horizontally and vertically linked industries on domestic firm's investment rate, with larger effects arising from multinational presence in the supplying sectors. Quantitatively, a 2 percentage point increase in the presence of multinational suppliers increases the domestic firm's investment rate by 3.24 percentage points. We also find that this effect is larger for small and medium firms, private firms, nonexporters, firms that are not part of a chaebol, and for firms in external finance dependent industries. A similar 2 percentage point increase in the foreign presence in downstream sectors increases the investment rate of domestic suppliers by 0.55 percentage points. This effect is larger if the domestic firm is part of a chaebol, or is in a less external finance dependent industry. Investment increase by 0.53 percentage points following a 2 percentage point increase in horizontal linkages.     

On Commitment Toward Knowledge Templates in Global Standard Setting: The Case of the FASB‐IASB Revenue Project

This article explores commitment to knowledge templates, in this case competing measurement models, in global standard‐setting processes. In particular, I examine the positions of board members of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on a proposal to use fair value accounting in the measurement of revenue. The proposal to measure revenue at fair value was deliberated between 2002 and 2008 as part of the joint revenue project of the FASB and the IASB. I analyze narratives of the board proceedings on the revenue project, which reveal the positions of board members over the life of the proposal. To make sense of these positions, I use Durocher and Gendron's (2014) framework on epistemic commitment, which speaks to one's allegiance to knowledge templates. The analysis shows that individual board member commitment to different knowledge templates is fairly static despite dynamic and contentious debate on this particular proposal. While stable, board member reactions to the proposed shift toward fair value fall into recognizable patterns showing how commitment to different templates entails prioritizing of different core principles and appeals to higher authorities. Finally, the analysis shows how commitment to knowledge templates varies depending on the professional affiliations of board members. For instance, the analysis shows relatively greater consistency of commitment between board members affiliated with academia and corporate preparers than between auditors. Overall, the study indicates the importance of micro‐level features in explaining the development of macro‐level accounting policy. These features are crucial to enhancing our broader understanding of the way in which accounting standards and rules ultimately develop.     

Latin American multinationals: A historical and theoretical approach*

Among the so‐called multinationals from the South, Latin American multinationals are outstanding for being pioneers. Their history goes even back to the end of the 19th century. In this article, we sketch a brief history of Latin American multinationals, but we concentrate on their development and growing importance since the 1980s within the context of economic reforms and globalization. We then apply a theoretical and typological perspective in order to characterize these multinational companies and to identify the elements that will condition their future behavior and development     

The Construction of the Efficient Office: Scientific Management,Accountability, and the Neo‐Liberal State

The office has been a central site of organizational planning, accountability, and control since the 19th century. Yet it has been the subject of relatively little accounting research. Through the dual theoretical lenses of Foucaultian and Labour Process theories, this study employs historical photo‐elicitation methodology to investigate the implementation of management control and accountability in the scientifically managed office which emerged in the United States during the late 19th and early 20th centuries. Our analysis reveals the manner in which accounting records created new modes of disciplinary control and surveillance within the office and how accounting tasks were de‐skilled in a gradually feminized and mechanized office environment. We also witness the role of accounting in the physical structuring of office space through the assembly line arrangement of office furniture to facilitate paper flows and the installation of record‐keeping systems of surveillance. In addition, our visually derived historical account of these transformations in office administration allows us to reflect on some contemporary issues. The production‐line design and efficiency so promoted by scientific management served as a forerunner to today's open‐plan office, as well as influencing contemporary office management philosophies such as Activity‐Based Working. Furthermore, we seek to inform current debates on the role of accounting in contemporary neo‐liberal society. In the history of the scientific office, we gain an early glimpse of the subsequent role that accounting comes to play within a neo‐liberal agenda as a powerful technology of micro‐measurement and micro‐management.     

Monetary Policy and Corporate Investment： Evidence from Chinese Micro Data

This paper investigates how a firm's characteristics restrict the influence of monetary policy changes on its investment behavior. Focusing on China's listed companies for a sample period from the first quarter of 2002 to the first quarter of 2011, we find that quantity‐oriented and price‐based monetary policies have heterogeneous impacts on corporate investment behavior, but the influence of monetary policies is constrained by the liquidity, inventory, size and asset–liability ratio of a firm. Firms with higher liquidity, lower inventory level and lower asset–liability ratios are less sensitive to the impact from two kinds of monetary policies. The larger the size of the firm, the less it is subject to influence from quantity‐oriented monetary policy; it responds more to price‐based monetary policy. The policy implication is that the monetary authorities should pay attention to the importance of policy‐making based on the monetary demand of microeconomic entities.     

Last‐Chance Earnings Management: Using the Tax Expense to Meet Analysts' Forecasts*

We assert that the tax expense is a powerful context in which to study earnings management, because it is one of the last accounts closed prior to earnings announcements. Although many pre‐tax accruals must be posted in the year‐end general ledger, managers estimate and negotiate tax expense with their auditors immediately prior to earnings announcements. We hypothesize that changes from third‐ to fourth‐quarter effective tax rates (ETRs) are negatively related to whether and how much a firm's earnings absent tax expense management miss analysts' consensus forecast, a proxy for target earnings. We measure earnings absent tax expense management as actual pre‐tax earnings adjusted for the annual ETR reported at the third quarter. We provide robust evidence that firms lower their projected ETRs when they miss the consensus forecast, which is consistent with firms decreasing their tax expense if non‐tax sources of earnings management are insufficient to achieve targets. We also find that firms that exceed earnings targets increase their ETR, but this effect is less significant. By studying the tax expense in total, rather than narrow components of deferred tax expense, our results provide general evidence that reported taxes are used to manage earnings.     

ZONE‐TARGETING MONETARY POLICY PREFERENCES AND FINANCIAL MARKET CONDITIONS: A FLEXIBLE NON‐LINEAR POLICY REACTION FUNCTION OF THE SARB MONETARY POLICY

We estimate a flexible model of the monetary policy reaction function of the South African Reserve Bank based on a representation of the policymaker's preferences that capture asymmetries and zone‐targeting behaviours. We augment the analysis to allow for responses to financial market conditions over and above inflation and output stabilisation to address the current debate on the importance of financial asset prices in monetary policy decision making. The empirical results show that the monetary authorities' response to inflation is zone symmetric. Secondly, the monetary authorities' response to output is asymmetric with increased reaction during business cycle downturns relative to upturns. Thirdly, the monetary authorities pay close attention to the financial conditions index by placing an equal weight on financial market booms and recessions.     

Getting to Know You: Trust Formation in New Interfirm Relationships and the Consequences for Investments in Management Control and the Collaboration

Trust is often posited to substitute for management control in interfirm transactions. However, this raises questions of how trust arises in new relationships, and whether trust that is not based on prior experience transacting together is sufficient to persuade managers to forgo investments in management controls. We use an experiment to test whether two features of the early stage of an interfirm relationship influence a buyer's initial trust in a supplier and have consequences for subsequent investments in management controls and in the collaboration. These two features are the autonomy of the buyer's manager to choose a supplier (i.e., delegation of decision‐making authority) and the supplier's willingness to share information with the buyer. We find that the buyer manager's initial trust in the supplier is associated positively with both the autonomy to choose the supplier and the supplier's willingness to share information. Information content and supplier characteristics are held constant, so these results are novel and distinct from prior studies of the antecedents of trust. We find that higher initial trust is associated with reduced expenditures for management controls and increased investments in the collaboration. Thus, we conclude that delegation of decision‐making authority and supplier information‐sharing behavior in the early stages of a relationship influence the formation of initial trust, which has real consequences for investments in management control and in the collaboration.     

Post‐Injury Work Outcomes Revisited

We use data for Ontario workers with permanent impairments resulting from work‐related injuries to investigate the complex relationships among post‐injury work outcomes: wages, accommodations, returning to the same or different employer, and duration of work absence. We argue the different aspects of post‐injury work experience may be jointly determined, making post‐injury job characteristics endogenous in a duration model. To explore the endogeneity issues we instrument post‐injury job variables from first‐stage equations and compare results from this “informed” model to a “naive” model that treats the variables as exogenous. We find that returning to one's pre‐injury employer is associated with more favorable post‐injury work outcomes, including higher wages, greater likelihood of job accommodations, and shorter durations of work absence relative to workers who change employers. We also find substantial differences between the naive and informed models, with accommodations having the predicted negative effect on duration only after we control for endogeneity.     

Discretionary Disclosures to Risk‐Averse Traders: A Research Note

Verrecchia (1983) investigates a manager's incentives for costly, discretionary disclosure of his information to risk‐averse traders when the functional form of prices is exogenously specified. We extend Verrecchia (1983) by deriving the endogenously determined functional form of prices that would arise when all traders have constant risk tolerance. We show that these endogenously determined prices are inconsistent with the assumed prices in Verrecchia (1983) when the manager elects to not disclose. We derive the manager's disclosure strategy for our setting and extend the comparative static results in Verrecchia (1990) for risk‐neutral traders to a setting where traders have constant risk tolerance and prices are endogenously derived. Further, in our setting, discretionary disclosure does not affect how traders price risk of different outcomes. Also, we offer a representation of risk‐averse traders' prices using risk‐adjusted distributions. Finally, these results provide implications for empirical‐archival discretionary disclosure studies.     

Risk Management in Small- and Medium-Sized Businesses and How Accountants Contribute*

We investigate how owners of small- and medium-sized enterprises (SMEs) perceive, make sense of, and practice risk management. Drawing on Schatzki's practice theory, we theorize on how and why risk management happens in SMEs. Thus, we fill a gap in the extant literature, which focuses almost exclusively on risk management within large organizations. We interview entrepreneurs and conduct site observations to gain insight into their risk management activities, the drivers that lead to the adoption of said activities, their attitudes toward risk management, and how their accountants may shape and contribute to risk management in SMEs. We find that rather than a specific set of formal processes, entrepreneurs view risk management as a mindset that emphasizes the preservation of key assets, creation of competitive advantages, and development of local talent and expertise. We observe practices that are mainly informal yet planned, deliberate, and fully integrated within the fabric of organizations that align with ideal forms of risk management. We also find that full-time, in-house accountants do help entrepreneurs with risk management, while external accountants, whose main activities relate to financial statement preparation and tax filings, do not systematically help entrepreneurs manage risk. We contribute to both the theory and practice of risk management by sharing empirical insights into how SME owners perceive, make sense of, and manage risk.     

跨国公司的领导艺术

本文主要从跨国公司领导者角度阐述了领导者在时空间隔、异国文化和思维的前提下,如何发挥领导职能,从事跨国经营,对于未来的国际形势、公司领导和人才的培养皆有深远的现实意义。     

Director Monitoring of Expense Misreporting in Nonprofit Organizations: The Effects of Expense Disclosure Transparency,Donor Evaluation Focus and Organization Performance

This study examines whether three factors—the transparency of expense disclosures, donor evaluation focus, and organization performance—influence how directors monitor management expense misreporting in nonprofit organizations. An experiment with 189 nonprofit directors finds that the enhanced transparency of expense disclosures increases director monitoring by reducing the tendency to accept management expense misreporting. Further, an organization's nonfinancial performance and the perceived fairness of donor evaluation focus interact to influence director monitoring practices. Specifically, when directors know an organization's nonfinancial performance is poor and understand that this performance will negatively influence the willingness of donors to contribute, directors monitor less if they think that donors are adopting a more balanced approach to organizational evaluation that focuses on both financial and nonfinancial performance; that is, there is a reverse fair process effect as this donor approach is perceived as being fairer than if donors focus solely on financial performance. However, monitoring is equally strong regardless of donor evaluation focus when directors know that an organization's nonfinancial performance is good and a donation is forthcoming.     

Distortions at the Border; Integration Inland: Assessing the Effect of WTO Accession on China's Agriculture

The main goal of the paper is to address the impact of the WTO on China's agricultural sector. To accomplish this goal we address two sets of issues. First, we seek to provide measures of the distortions in China's agricultural sector at a time prior to the nation's accession to WTO. This is accomplished by estimating the nominal rates of protection (NPRs) of the agricultural sector's major commodities using a new methodology to account for grain quality differences within China and between China and the world market. Second, we seek to assess how well integrated China's markets are in order to understand which areas of the country and which segments of the farming population will likely be isolated from, or affected by, the changes that WTO will bring. We find that NPRs differ among commodities. Some of China's agricultural commodities are well above and others are well below world market prices. We also find that if increased imports or exports affect China's domestic price at the border, its own domestic markets are mostly integrated so that price shifts in one area will affect prices in most of the rest of China. Our analysis finds, however, that a number of policy and structural factors limit the overall size of the shock.     

Host countries’ growth opportunities and China's outward FDI

In 2014, China proposed the Belt and Road policy, which has pushed China's outward foreign direct investment (OFDI) to over tens of billions of US dollars. However, existing studies have not reached a consensus about the decisive factors in China's OFDI. To verify whether China's OFDI activities are motivated by profits, this paper applies a measure of country‐specific growth opportunities adopted by Bekaert et al. (2007) to measure the growth opportunities of the target countries for China's OFDI. A multinational panel data model, based on data from 51 countries from 2003 to 2012, is used to explore the relationship between host countries’ growth opportunities and China's OFDI. Overall, the analysis finds that China's OFDI does not follow the host countries’ growth opportunities but exhibits different features toward developed countries and developing countries. For developed countries, China's OFDI follows host countries’ growth opportunities to some extent. In the case of developing countries, China's OFDI does not follow host countries’ growth opportunities. When we consider factors such as a host country's financial development and political stability, improvement in these factors improves the attractiveness of the host country to China's OFDI. It is also found that the 2008 global financial crisis did not have a very significant impact on China's OFDI activities.     

Endogenous,Intra‐household Decision‐making and its Impact on the Labor Supply of Couples in Rural India*

Using data for rural India, this paper analyzes households' labor supply decision‐making, taking into consideration non‐participation, endogenous intrahousehold bargaining and nutritional status. Analyses of unitary and collective models suggest that bargaining between household members forms the basis of households' decisions, and these decisions alter households' internal power balance. Analysis of households' internal bargaining process suggests that women's bargaining power increases when their wages are higher and they are better educated. The results indicate that it is crucial to account for the mechanics of decision‐making within households when studying the effects of changing labor market conditions or designing development policies to improve individual well‐being or to empower women.     

A Field Study of Control System “Redesign”: The Impact of Institutional Processes on Strategic Choice*

Abstract. This paper studies the role of an organization's accounting control system (ACS) as part of an interrelated control “package,” in which other control systems function either as substitutes or complements. Drawing on resource dependence and institutional theories, it argues that this control mix is not only contingent on the organization's technical environment but also on its institutional environment. In addition, the paper draws on empirical evidence to demonstrate how the design of the “package” is actively shaped by the strategic choices of its dominant coalition. The empirics are based on a longitudinal field study of one large, public teaching hospital in Australia that underwent material changes in its governance structure, culture, and accounting control system. Résumé. Les auteurs étudient le rôle du système de contôle comptable d'une organisation, à titre d'élément d'une « famille » de systèmes de contrôle reliés entre eux à l'intérieur de Iaquelle les autres systèmes de contrôle jouent le rôle de substituts ou de compléments. S'inspirant de la théorie de la dépendance des ressources et de la théorie institutionnelle, ils affirment que cette combinaison de systèmes n'est pas seulement tributaire de l'environnement technique de l'organisation, mais de son environnement institutionnel. Ils se fondent, en outre, sur des constatations empiriques pour démontrer comment la structure de la « famille » de systèmes est activement façonnée par les choix stratégiques du groupe dominant. Les données empiriques proviennent d'une étude longitudinale sur le terrain, menée auprès d'un important hôpital public universitaire australien dont la structure de régie, la culture et le système de contrôle comptable ont connu des transformations majeures.