User involvement in the standard-setting process: A research note on the congruence of accountant and user perceptions of decision usefulness

This is an exploratory study which examines whether accountants and users of financial statements hold congruent or incongruent views on the decision usefulness of accounting information. This issue is important to the question of whether users require direct involvement in the standard-setting process, or whether their views may be adequately represented in the process by other participants such as accountants. Drawing on the sociology of professions literature under which professionals, such as accountants, are assumed to seek to maintain the judgement domain and indeterminacy of their professional task, it is hypothesised that accountant and user views on decision usefulness will be incongruent in those situations where a change in accounting method reduces judgement domain or indeterminacy. Specifically, it is hypothesised that, compared to users, accountants will perceive a lower degree of decision usefulness to be associated with a change in accounting method that reduces judgement domain or indeterminacy. Using a survey questionnaire, developed around a series of accounting method change scenarios, and administered to a sample of accountants and investment analysts (as an example of users), support was found for our hypothesis in relation to judgement domain, but not for indeterminacy.     

Human information processing and its relevance to accounting: A laboratory study

The purpose of this research was to empirically test emerging behavioral science theories which have import in our understanding of the complex information processing and decision-making behavior of users of accounting information. A multi-stage laboratory experiment which utilized accounting students as decision-makers was used to test several research hypotheses. In the experimental tasks, the subjects knew the nature of the decision and had the opportunity to seek information at a cost to aid them in deciding on an alternative. The findings are supportive to the applicability of general and idiosyncratic information processing theories to managerial environments.     

How much is enough? An investigation of nonprofessional investors information search and stopping rule use

Regulators are concerned that the information overload in the current Internet-based disclosure environment may cause investors to overlook important information. To gain a better understanding of the information set gathered by investors, this study incorporates theories from information systems research to examine the cognitive stopping rules used by investors to terminate information search. We survey nonprofessional investors to gain insight into what information they gather and when they determine they have enough information to stop searching and make an investment decision. Demographic analysis shows that investor characteristics are associated with the particular stopping rule used. In addition, results show that the stopping rule used affects the amount and type of information gathered. We find that, in general, investors include very little financial information in their search, and the amount gathered depends on the stopping rule employed. Our results call into question the decision usefulness of accounting information for nonprofessional investors and should be of interest to accounting information systems researchers, regulators, and accounting practitioners.     

Investment-Based Cost Accounting as a Fundamental Basis of Decision-Oriented Management Accounting

Decision making concerns over cost allocations, especially common cost allocations, have a long history. They are well canvassed in Thomas (1969 ) and Wells (1978 ). This article revisits the cost allocation debate, albeit in a new setting, and rehearses arguments relevant to long- and short-term decision contexts. Here a means is proposed to address those problems, namely to adopt the investment-based approach to cost accounting. This approach draws on ideas of Hotelling (1925 ), Preinreich (1938 ) and Schneider (1961 ), and applies the notion of net present value in another setting, namely to cost accounting theory. Research has revealed no discussion of this in the Anglo-American literature. This article shows analytically that the investment-based approach offers a general basis for decision-oriented cost accounting, as it combines investment theory with cost accounting and thereby connects long-term with short-term decisions. While reviewing primarily European literature, it also examines several Anglo-American works. The analysis reveals how for three classical decision problems—production program planning, purchase order lot sizes, and break-even price limits—two different types of costs, namely depreciation and material costs, have to be based on cash flows and net present value. The proposed investment-based approach permits an examination of the extent to which cost accounting concepts and cost information are relevant to those decisions. This theoretical concept is used to derive pertinent cost dimensions and to solve traditional problems of cost allocation. A caution is that the investment approach is limited to decision facilitating cost accounting. Whether it may be possible to couple it with agency theory and its focus on decision influencing has not been explored and is an issue for further research.     

ACCOUNTING REGULATION: AN ALTERNATIVE PERSPECTIVE: A COMMENT

This paper presents a critique and development of a previous paper by Laughlin and Puxty. It argues that their worldview perspective is an advance on the established self-interest perspective, but is critical of its abstraction of worldviews from their formation within institutional contexts. An alternative interpretation of accounting regulation is offered which relates accounting regulations and standards to the location and investment of the providers and users of accounting information within existing politico-economic institutional arrangements.     

Methodological problems in functional fixation research: Criticism and suggestions

Accounting researchers have long been interested in how users of accounting information process the information in making decisions. One line of research argues that users become “functionally fixated” on the outputs of accounting systems. This line of research argues that form rather than substance becomes more important to (fixated) decision makers. This paper reviews the methodology employed in the accounting studies done to date. It concludes that flaws in the methodology used in these studies prevent us from determining if fixation exists. More importantly, these methodological flaws prevent us from answering the question of why it exists, if it does. The paper offers an alternative methodology to the one currently employed which it is argued will provide insights into the question.     

Decision Usefulness of Cash and Accrual Information: Public Sector Managers’ Perceptions

This study examines the usefulness of accrual accounting information for internal decision‐making contexts in the Western Australian public sector. Based on questionnaire responses of public sector managers, it was found that accrual accounting is perceived to be more useful than cash accounting in 16 of the 19 decision situations. These results suggest that the perceived usefulness of the accrual accounting system has improved with the passage of time. It may well be that perceptions of the usefulness of information derived from an accounting system will change over time as users gain familiarity and experience with a system.     

A dialogical framing of AIS–SEA design

Previous literature has proposed dialogical accounting as a means wherein accounting information systems can support competing, and potentially incompatible, information needs of various interested constituencies (Dillard and Yuthas, 2013). Here we extend that work by focusing on the design of social and environmental accounting (SEA) information systems that take pluralism seriously. We theorize the challenges of designing such systems wherein they are expected to address the needs of multiple users with different interests that may emerge from different economic, social, political and/or cultural perspectives, as they relate, for example, to sustainability reporting, ethical investment, participatory development studies and indigenous resource management. Using dialogic engagement, we attempt to move beyond traditional, and often highly constrained, conceptualizations of “stakeholder engagement” and propose a framework for undertaking systems design that can facilitate high quality and relevant SEA information systems that meet the needs of a wide range of actual and/or potential users. We provide an example of how the framework might be enacted using a framing methodology.     

Federal capital expenditures and budget deficits: Gross national product and labor implications

The issue of separating capital from operating expenditures has been largely ignored in discussions of the U.S. Federal Government's deficit. This paper attempts to overcome this void by conducting a simulation experiment designed to assess the macroeconomic consequences of separating capital from current expenditures under several alternative balanced budget rules and financing arrangements. The alternatives considered are directly related to management accounting issues and thus the purpose of this paper can be seen as compatible with the literature on the relationship between accounting techniques and economic analyses. The results of the study reaffirm the need for federal capital investment planning.     

Evidence on the effect of bond covenants and management compensation contracts on the choice of accounting techniques: The case of the depreciation switch-back

Provisions of bond indenture agreements and management compensation contracts are examined to derive testable implications concerning management's incentives to choose among alternative accounting techniques. The hypotheses are subjected to empirical examination by investigating the voluntary change from accelerated to straight-line depreciation for financial reporting purposes only. The methodology utilized incorporates an expectations model of accounting earnings in an attempt to separate out of the effects of earnings announcements from accounting change announcements which are often concurrent. The evidence from both price and non-price data is not consistent with the general hypothesis that bond covenants and management compensation contracts are important determinants of the decision to change depreciation techniques. Five potential explanations for the results are offered.     

Impact of accounting process characteristics on accounting outsourcing - Comparison of users and non-users of cloud-based accounting information systems

Prior literature informs us that a company's decision to outsource a business process depends on process characteristics such as how frequently the process is performed or how specific the assets required by the process are. In this article, we compare the effects of accounting process characteristics on outsourcing decisions across users of traditional and cloud-based accounting information systems (AIS). By focusing on outsourcing of accounting processes among small and medium sized enterprises, we investigate the effect of five business process characteristics (frequency, human asset specificity, uncertainty, information intensity, and need for customer contact) on the outsourcing decision. Our results reveal that process frequency has a weaker negative effect on the outsourcing decision among users of cloud-based AIS. This appears to contribute to users of cloud-based AIS outsourcing a larger variety of accounting processes. Compared to traditional AIS, the inherent properties of cloud-based AIS such as ubiquitous access, scalability, and integration seem to encourage users of cloud-based AIS to also outsource processes that are frequently performed.     

Venture Capitalists,Unquoted Equity Investment Appraisal and the Role of Accounting Information

This paper aims to add to the understanding of venture capitalists' investment decision-making behaviour by providing evidence relating to the general policies they adopt in their approaches to due diligence, valuation methods, benchmark rates of return and adjustments for risk. The evidence shows that in order to address potential adverse selection problems, venture capitalists use a wide range of accounting and non-accounting information and techniques relating to the specific factors concerning a particular investment. Unpublished accounting information and subjective information are important. Significant differences emerge in the approaches to valuation and use of accounting information for valuation purposes between types of venture capitalist, according both to their stage of investment focus and whether they were captive or independent.     

TIMELINESS OF ACCOUNTING REPORTS AND THEIR INFORMATIONAL CONTENT ON THE CAPITAL MARKET

Timeliness is recognized as an important characteristic of accounting information by the accounting profession, the users of accounting information, and the regulatory agencies. According to the evidence presented in this paper, accounting reports with shorter delay have a higher informational content than those with longer delay. At the time of release to the capital market, the effect of delay on the information content seems to be more significant in the case of the interim rather than the annual reports. This may be explained by the major characteristics which differentiate the information contained in the interim reports from that contained in the annual reports, the differences in their role in the investor's decision process, and the existence of substitute information.     

Revenue Recognition in the Construction Industry: An Experimental Study

There have been suggestions that loan officers do not consider there is a problem in the availability of alternative revenue recognition methods, provided that sufficient disclosure of recognition procedures is made to enable adjustment of financial statements. On the other hand, the accounting literature on'functional fixity' suggests such adjustments are not made. The functional fixity literature has relied exclusively on testing for an accounting method effect on user predictions and decisions. As a result, the evidence can be interpreted as users being fixated on earnings and ignoring information about accounting methods or alternatively they may have given attention to that information and attempted a transformation although the extent of the adjustment was'inadequate'. This paper suggests that the previous evidence on functional fixity is inconclusive about lenders' suggestions that they adjust financial statements and that different actions may be required by lending institutions depending on which interpretation of the functional fixity literature is made. This study uses the joint methodologies of analysis of variance and protocol analysis to focus on both whether adjustments are made as well as whether alternative methods of recognizing profit from longterm contracts affect the judgements of experienced lenders. The results show that the majority of subjects did not attempt to adjust for alternative methods of recognizing revenues.     

Zur Entscheidungsnützlichkeit eines IFRS-Abschlusses von Versicherern – Analyse der angedachten Regelungen zum endgültigen IFRS 4

In its Discussion Paper from May 2007 for the final IFRS 4 (“Insurance Contracts”), the IASB planned the “Current Exit Value” (CEV) to evaluate insurance liabilities. The aim of this article is to examine the impacts of the planned Current-Exit-Value-Approach on the decision usefulness of insurers' financial statements. In order to evaluate accounting rules, the criterion decision usefulness is divided into two sub-criteria – relevance and reliability. We found out that the Current-Exit-Value-Approach for insurance contracts in conjunction with fair value accounting of relating assets actually generates relevant information for users of insurers' financial statements. But we have serious concerns about a cost-adequate implementation of CEV approach. Furthermore, the reliability of accounting information based on a synthetic fair value is strongly questionable. Only extensive disclosure requirements can bring transparency to users and therefore assure reliable accounting information. Besides, there are other topics that should be reviewed before releasing a final standard (e.?g. customer relationship, credit characteristics of insurance liabilities, unit of account).     

How Firms Make Capital Expenditure Decisions: Financial Signals, Internal Cash Flows, Income Taxes and the Tax Reform Act of 1986

This paper empirically assesses the determinants of future net capital expenditures for a broad cross-section of COMPUSTAT firms from 1973 to 1989. We explore three general categories of factors expected to affect investment: (1) external equity financing, (2) internally generated accounting information, and (3) tax incentives. We find that external financing and information plays a role in that both positive stock returns and equity issuances indicate future increases in investment. The results suggest that high stock prices not only lower the cost of capital, but also signal good investment opportunities. Accounting information about internal sources and uses of funds are also important in the investment decision. In particular, net income and depreciation are positive indicators of future investment while there is a tradeoff between the payment of dividends and investment. Further, positive changes in available cash liquidity also motivate future investment. While taxes are not important in the investment decision on average, we find that firms with previously higher income taxes invested substantially more in 1985 and 1986. This coincides with the repeal of the investment tax credit and the accelerated depreciation schedules in the Tax Reform Act of 1986. We view this as evidence that federal tax policy in the 1980's induced firms with high income tax obligations to accelerate capital expenditures just before the favorable tax treatment of capital expenditures was eliminated.     

Jinan Qingqi Motorcycle Co., Ltd

The case deals with the decision in mid-1997 of StarInvest, an American investment company, on whether to subscribe to a new issue of 230 million B shares by Jinan Qingqi Motorcycle Co., Ltd. Qingqi Motorcycle is incorporated in the People’s Republic of China, and B shares were tradable only among foreign investors. The case solution is in the form of policy report from Daniel Campbell, asset manager at StarInvest, to his Investment Committee. The report contains his assessment of the opportunities and risks from China investment in general, and his recommendations on the Qingqi Motorcycle stock issue in particular. The objective of this case is to introduce students to the unique accounting issues and investment environment in China. From working on this case, the students should become familiar with the developmental steps and basic features of China’s accounting standards and capital markets. An important theme that should be emphasized by the instructor is that institutional environments are more important at influencing the accounting information in a country than the accounting standards as written on paper. The case has been used in an international accounting course offered to the MBA students. It could also be used in a similar course offered at the undergraduate level. Students having completed an introductory financial accounting course should have the required knowledge and skills to work on this case. The case can be used either as an individual assignment or as a group assignment.     

Functional fixation: Experimental evidence on the presentation of financial information through different digital formats

This study examines whether, in the presentation of financial information, digital formats address the concern over users’ functional fixation. The accounting literature indicates that the presentation of financial information either within the financial statements or in the notes to the financial statements often creates functional fixation where users of financial statements fail to adjust for differences in accounting policy. This leads users to judge what would otherwise be identical financial situations as being different due to the different accounting policies and methods adopted. It has been suggested that the use of digital formats in presenting financial reports may overcome functional fixation. Using an experimental design involving accountants in public practice, the results indicate that the use of digital formats to present financial reports does not fully overcome the issue of functional fixation in the processing of financial information. Although the participants were able to identify and extract relevant information, irrespective of whether or not the information was presented within the financial statements or in the notes to the accounts, the evidence indicates that functional fixation remained when the participants made final decisions based on available information. This suggests that functional fixation may not be caused by access to or extraction of information but by the level of perceived significance based on where the information is reported in the financial statements. In general, the results indicate that current technology may not be able to fully reduce functional fixation in the evaluation of financial information prepared in accordance with different accounting policies and methods.