Accounting for decisions and decisions for accounting

Behavioral decision theory (BDT) is concerned with “accounting for decisions”. The development of this interdisciplinary field is traced from the appearance of several key publications in the 1950s to the present. Whereas the 1960s saw increasing theoretical and empirical work, the field really started to flourish in the 1970s with the appearance of the review by Slovic & Lichtenstein (Organizational Behavior and Human Performance, pp. 549–744, 1971), and key papers on probabilistic judgment (Tversky & Kahneman, Science, pp. 1124–1131, 1974), and choice (Kahneman & Tversky, Econometrica, pp. 263–291, 1979). From the early 1980s to the present, BDT has seen considerable consolidation and expansion and its influence now permeates many fields of enquiry. After this brief history, eight major ideas or findings are discussed. These are: (1) that judgment can be modeled; (2) bounded rationality; (3) to understand decision making, understanding the task is more important than understanding the people; (4) levels of aspiration/reference points; (5) use of heuristic rules; (6) the importance of adding; (7) search for confirmation; and (8) thought as construction. Next, comments are addressed to differences between BDT and problem solving/cognitive science. It is argued that whereas many substantive differences are artificial, two distinct communities of researchers do exist. This is followed by a discussion of some major shortcomings currently facing BDT that include questions about the robustness of findings as well as overconcern with a few specific, “paradoxial” results. On the other hand, there are many interesting issues that BDT could address and several specific suggestions are made. Moreover, these issues represent opportunities for accounting research and several are enumerated. Finally, BDT presents “decisions for accounting” in the sense that scarce resources need to be allocated to different types of research that could illuminate accounting issues. The argument is made that BDT is one research metaphor or paradigm that has proved useful in accounting and that should be supported. Such support, however, may mean that some researchers may work on issues that, at first blush, might seem distant from accounting per se.     

Is accounting a global or a local discipline? evidence from major research journals

Accounting research is torn between two competing forces. On the one hand, a quest for general results and internationalization of financial markets calls for a global approach and international co-operation. On the other hand, domestic institutional settings call for research that deals with the relevant problems of the existing accounting systems. In this paper we address the issue of how global or local the accounting research community currently is through an analysis of empirical studies published by six leading English language accounting research journals from the U.S.A., Europe and Australia, during the period 1984–1993. Our findings indicate that accounting still is a rather local discipline by nature: both empirical evidence and authors are significantly clustered along country lines. We find that 77% of papers fall in a category where the origin of the researcher, data and the journal, is the same. Especially there is a close link between the origin of the researcher and that of the data. The interpretation of the empirical findings lead us to a view of competing research élites. A powerful and currently dominating U.S. academic élite is centred around The Accounting Review, the Journal of Accounting Research and the Journal of Accounting and Economics; and an emerging, mostly European élite around Accounting, Organizations and Society. The functioning of research élites produces competing quality criteria which are intertwined with methodological and cultural issues. The emerging “policentric oligarchy” of research élites helps to remove institutional barriers to the knowledge production process and offers legitimate outlets for a wider range of approaches.     

Accounting elites and accounting theory: A reply to Paul Montagna

In response to Paul Montagna's review, the author draws attention to a central claim of Accounting Regulation and Elite Structures: that despite vigorous efforts it is not possible to identify separate schools of accounting thought in Sweden. Instead, what one finds are common bases of reasoning in appeals to “practice”. Consumer-oriented and producer-oriented appeals are identified. It is argued that empirical research is not governed by a Grand Theory. Norms of accounting practice are argued to develop out of the interplay between individuals arguing from points of view they consider to be right. In communicative interaction between individuals representing diverse interests, there is a high likelihood that communication will be distorted. In such situations appeals to the “practicality” of a proposed solution are likely to be successfully made.     

A comparative analysis of the construct validity of coefficients in paramorphic models of accounting judgments: A replication and extension

This study adds to research which examines the construct validity of coefficients of cue importance in studies concerned with how decision-makers use accounting information in formulating judgments (see Larcker & Lessig, The Accounting Review, January, 1983, pp. 58–77; Selling & Shank, Accounting, Organizations and Society, 1989, pp. 65–77). Historically, accounting studies have modelled cue importance with almost exclusive reliance upon linear models. But as the Selling & Shank study indicates, inferring the importance of accounting cues through reliance upon only one kind of model can leave “method variance” undetected and raises threats to the construct validity of coefficients (see Cook & Campbell, Quasi-experimentation: Design and Analysis Issues for Field Settings, 1979, pp. 59–70). To the extent that cue importance appears similar across models, then the model coefficients are presumed more valid. While Selling & Shank compare linear models to process tracing models, we compare a linear model to an eigenvector-scaling routine known as the Analytic Hierarchy Process (see Saaty, The Analytic Hierarchy Process, 1980). As with Selling & Shank, we find that the importance of cues is sensitive to model choice, suggesting that more research is needed into method variance before judgments can be made with respect to the construct validity of linear coefficients in accounting studies.     

Professional accounting development in Nigeria: threats from the inside and outside

Over the years several, sometimes conflicting, theories attempting to explain the development of professions have emerged. The “functionalist” and “interactionist” theories have since lost the spotlight to a more critical approach based on the Weberian concept of closure. Limitations in the concept and practice of this neo-Weberain concept have led to suggestions that research into the sociology of professions, should also include historical analyses of professionalism that capture historical specificities with the aim of generating theory that sees beyond “just massive historical variation” [Collins, R. (1990). Changing conceptions in the sociology of the profession. In R. Torstendahl, & M. Burrage, The formation of professions: Knowledge, state and strategy. London: Sage Publications]. Such research should also investigate the structural conditions under which the professionalisation process takes place [Johnson, T. (1977). The profession in the class structure. In R. Scase, Industrial society: Class, cleavage and control. London: George Allen and Unwin.]. In order to achieve this, there is the need to critically study the relationship of the State and the profession [Klegon, D. (1978). The sociology of professions: an emerging perspective. Sociology of Work and Occupations, 5, 3, 259–283.] and to document more extensively, the process, rather than the product, of closure [Chua, W. F., & Paullaos, C. (1993). Rethinking the profession-state dynamic: the case of the Victorian Charter Attempt, 1885–1906, Accounting, Organizations and Society, pp. 128–691; Chua, W. F., & Paullaos, C. (1998). The dynamics of “closure” amidst the construction of market, profession, empire and nationhood: an historical analysis of an Australian Accounting Association. Accounting, Organizations and Society, 23 (2), 155–187; Ramirez, C. (2001). Understanding social closure in its cultural context: accounting practitioners in France (1920–1939), Accounting, Organizations and Society.]. Such is the approach of this article, which focuses on the development of the accounting professions in Nigeria. It critically examines the profession/ State dynamics that have helped shape the outcome of the various episodes in the history of the accounting profession in Nigeria. An important influence in this dynamics is the nature of government in place (i.e. military or civilian).     

tay's as good as cay: Reply

In a recent comment on our published work [Lettau, M., Ludvigson, S., 2001. Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56, 815–850], Michael Brennan and Yihong Xia [2005. tay's as good as cay. Finance Research Letters 2, 1–14] advance the following argument: A “mechanistic” variable tay, where t is a linear time trend, forecasts stock returns. Since “t has no foresight,” the argument goes, the predictive power of this variable must be attributable to what they call “look-ahead bias.” The authors assert that cay is subject to the same look-ahead bias (generated because we use the full sample to estimate the cointegrating parameters in cay), implying that its forecasting power must be spurious. In this response, we explain why this critique is misplaced.     

Exploring different views of exchange rate regime choice

The empirical distinction between de facto and de jure exchange rate regimes raises a number of interesting questions. Which factors may induce a de facto peg? Why do countries enforce a peg but do not announce it? Why do countries “break their promises”? We show that a stable socio-political environment and an efficient political decision-making process are a necessary prerequisite for choosing a peg and sticking to it, challenging the view that sees the exchange rate as a commitment device. Policymakers seem rather concerned with regime sustainability in the face of adverse economic and socio-political fundamentals.     

The average hospital

In 1998, the UK government introduced the National Reference Costing Exercise (NRCE) to benchmark hospital costs. Benchmarking is usually associated with “excellence”; the government emphasised the raising of standards in the 1997 White Paper “The New NHS: Modern, Dependable” that heralded the NRCE. This paper argues that the UK “New Labour” government's introduction of, and increasing reliance on, hospital cost benchmarking is promoting “averageness”. Average hospitals will be cheaper to run and easier to control than highly differentiated ones; they may also score more highly on certain measures of service improvement. The paper aims, through empirical investigation, both to demonstrate how the activities and processes of hospital life “become average” as they are transformed to comply with the cost accounting average and to indicate how the “average” is being promoted as the norm for hospitals to aspire to. To benchmark to average costs, comparisons are necessary. To compare hospital costs involves the creation of categories and classification systems for clinical activities. Empirical evidence shows that as doctors, patients and clinical practices are moulded into costed categories, they become more standardized, more commensurate and the average hospital is created.     

Efficiency audit: An assembly of rationalities and programmes

This paper focuses on the insertion of accounting and auditing knowledge into wider areas of practice, and examines the processes of auditing change through studying the development of “efficiency auditing” using events in one jurisdiction, the Province of Alberta, Canada, as an exemplar. These developments are interpreted through use of Miller and Rose's (1990; Rose & Miller, 1992) theoretical concerns with governmentality, and especially the links between generally stated political rationalities and more specific programmes for action. In studying the association of ideas of efficiency with auditing, and the developing belief that efficiency could be investigated or procured through audit scrutiny, it is argued that these events can be understood in terms of an intersection between wider discourse (concerning, for example, best management practice, appropriate auditing roles, etc.) and local circumstance. The specific interpretations that result are understood as providing one set of conditions by which auditing (and accounting are linked to the social (Burchell et al., 1985). Further research (Radcliffe, 1995) attends to the logistics of how one might audit for efficiency, using fieldwork to trace the technologies which provide practitioners with particular mechanisms for action (Miller & Rose, 1990). © 1998 Elsevier Science Ltd. All rights reserved.     

The two faces of organizational information

Organizational information, i.e. “facts” given and taken, and inferences drawn and established by participants within an organizational situation, may be examined in terms of its import to the relationship between an organization and its environment. A “locus” for organizational information is established in which information is classified as: (a) either inner- or other-directed: (b) either internally- or externally-based; and (c) either self- or other-referencing. Examples of organizational information in each of the eight possible categories are readily identified. Much, if not most, organizational information is probably best regarded as “two-faced”, i.e. as the product of inner- and other-directed needs taken together. For this reason, the basis, or justification of any item of organizational information is often obscure. This is seen to have consequences for organizational self-learning and self-delusion, and for the maintenance of organizational credibility and organizational secrets.     

A note on the interaction effects of non-financial measures of performance

Using principal-agent analyses, the effect of the interactions between two non-financial measures of performance in an agent’s incentive compensation scheme is studied. The agent can allocate effort between “meeting output targets” and “getting output that needs no rework.” The principal trades off (1) a penalty for not meeting output targets, and (2) cost of reworking output that is defective when initially produced. In a compensation mechanism that includes incentives based on measures of output that needs no rework, as well as total output, it is shown that the agent may respond to an increased weight on output that needs no rework by reducing effort allocated towards it. This occurs when the increased weight on the output that needs no rework is accompanied by a sufficiently steep decrease in the weight on total output in the compensation mechanism, leading to a reduction of all effort, and all output. Numerical analyses and implications for the use of multiple measures of performance-based incentives are provided.     

An “American Dream” theory of corporate executive Fraud

In this paper, we first describe a “Broken Trust” theory that was introduced by Albrecht el al. [Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2004). Fraud and corporate executives: Agency, Stewardship and Broken Trust. Journal of Forensic Accounting, 5, 109–130] to explain corporate executive Fraud. The Broken Trust theory is primarily based on an “Agency” theory from economic literature and a “Stewardship” theory from psychology literature. We next describe an “American Dream” theory from sociology literature to complement Albrecht el al.'s (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a “Fraud Triangle” concept to explain corporate executive Fraud. Finally, we provide some anecdotal evidence from recent high profile corporate executive Fraud to explore the American Dream theory. We conclude our thoughts on corporate executive Fraud from a teaching perspective.     

Syndicated Loans

This paper analyzes the market for syndicated loans, a hybrid of private and public debt, which has grown at well over a 20% rate annually over the past decade and which totaled over $1 trillion in 1997. We identify empirically the factors that influence a bank or nonbank's decision to syndicate a loan and the determinants of the proportion of the loan sold in the event of syndication. The evidence reveals a loan is more likely to be syndicated as information about the borrower becomes more transparent, as the syndicate's managing agent becomes more “reputable”, and as the loan's maturity increases. The lead manager holds larger proportions of information-problematic loans in its own portfolio. Loan syndications, like loan sales, appear to be motivated, in part, by capital regulations, and the liquidity position of the agent bank influences the likelihood of syndication, but not the extent. Our results confirm that information and agency problems affect the salability of debt claims and the extent to which a loan is “transaction oriented” rather than “relationship oriented” in the sense of A. Boot and A. Thakor (2000, J. Finance54, 679–713). Journal of Economic Literature Classification Numbers: D82, G20, G21, G24.     

On Accounting-Based Valuation Formulae*

This paper considers accounting-based valuation formulae. Its initial focus is on two problems related to residual income valuation (RIV). First, insofar valuation depends on theresent value of expected dividends per share, applying RIV requires clean surplus accounting on a per share basis. Awkwardly, equity transactions that change the number of shares outstanding generally imply eps ≠ Δ bvps − dps. A clean surplus equality holds only if one “re-conceptualizes” either end-of-period bvps or eps as a forced “plug”. Second, one cannot circumvent the per share issue by evaluating RIV on a total dollar value basis unless one introduces relatively subtle MM-type restrictions. In light of RIV’s unsatisfactory aspects, the paper proposes an alternative to RIV. This new approach maintains a strict eps-focus. It derives by replacing bvps _t in RIV with eps _{t +1} capitalized (i.e. divided by r). One obtains a formula such that the current market price equals next-period expected earnings capitalized plus the present value of expected abnormal earnings growth, referred to as AEG. A number of propositions then demonstrate the advantages of the AEG approach as compared to RIV. These results follow because eps _t+1 capitalized generally approximates market price better than bvps _t .*An earlier version of this paper was titled “Residual Income Valuation The Problems”.This revised version was published online in August 2005 with a corrected cover date.     

Reflections on Milton Friedman's contributions to open economy money/macro

Friedman's central contributions to open economy macroeconomics are contained in his essay “The Case for Flexible Exchange Rates.” The paper describes equilibrium in an open economy in terms of the flow market for domestic currency, and so presents the basic elements of The Monetary Approach to the Balance of Payments, which Mundell and Johnson developed later in the decade. An application of the argument includes the first definitive statement of the criteria which one finds in the literature on Optimum Currency Areas. The essay's model, in a better specified, more modern form, reappears in A Monetary History (with Anna Schwartz), where it serves as a basis for detailed analysis of particular episodes and as a framework for empirical work which continues to this day.     

Image theory: An alternative description of audit decisions

Building upon an analysis of audit decisions by Waller & Felix (1984) [in Moriarty, S. and Joyce, E. (eds) Decision Making and Accounting: Current Research (Norman, OK: University of Oklahoma Press, 1984)], an alternative to the expected utility and “heuristics and biases” characterization of decision-making is presented. In this alternative, Image Theory, decisions are about adoption of goals and adoption of plans for attaining the goals, as well as about whether the plans are succeeding. The audit process is interpreted in terms of Image Theory and the salient research issues that this interpretation suggests are examined.     

Consensus and accuracy in accounting studies of decision-making: A note on a new measure of consensus

Despite the common use of consensus amongst experts as a “surrogate for truth” in experimental studies of decision-making, there has been little discussion as to its appropriateness. A new measure of consensus for dichotomous predictions, which takes into account expert' confidence in the correctness of their decisions, is proposed and its relationship with accuracy is experimentally evaluated. The experiment also extends Ashton's (The Accounting Review, April 1985, pp. 173–185) empirical work on the conventional consensus measure by checking the robustness of Ashton's results to a different experimental setting (U.K. trade credit specialists) and to increases in the cues made available to experimental participants. The paper concludes that the new measure of consensus complements the conventional measure, in that it provides information over and above that provided by the conventional consensus measure. The paper also concludes that the results noted by Ashton for the U.S. also hold for the U.K. and are robust to increases in the cue set made available to participants.     

Valuing customers and loyalty: The rhetoric of customer focus versus the reality of alienation and exclusion of (de valued) customers

The accounting practice of customer valuation ostensibly emerged from the so-called “customer revolution" of the 1980s. Early conceptions centred around notions such as customer focus and providing value to customers, but these ideas have latterly given way to calculation of the financial value of customers to an organisation. Integral to customer valuation are the reconstruction of the customer as an asset (or liability) of the organisation, the segmentation of customers into identifiable groups, and the treatment of customers as dollars rather than people. Whilst rhetoric of “the customer is king" persists, accounting for customer valuation brings its own transformative terminology and has become a means for organisations to selectively focus on particular customers, rather than the customer in general. The paper examines the health insurance and banking industries as exemplars of the affects of customer valuation, and discusses pivotal issues of access, equity, alienation, and social exclusion. Customer valuation is shown to have become a means to increase shareholder income and wealth, almost inevitably at the cost of (further) marginalising the poor and disadvantaged.     

The civil justice system and going concern audit reports: Comments on “Auditors’ decision-making under going concern uncertainties in low litigation risk environments: Evidence from Hong Kong”

Lam and Mensah [Lam, K., Mensah, Y.M., 2006. Auditors’ decision-making under going concern uncertainties in low litigation risk environments: Evidence from Hong Kong. J. Account. Public Pol. 25 (6), this issue] provide some valuable insight on auditors’ choice of going concern audit reports in an environment where the civil justice system affords, from the standpoint of the plaintiff, fewer remedies and is more difficult to file a complaint than it is in the US. Hence, from the auditor’s standpoint, this environment can appropriately be described as a “low litigation risk environment”. In this comment, I first question whether a disclaimer of an opinion is any indication of either a quality audit or professionalism. Secondly, three alternative explanations for the empirical regularities are discussed. The Gatekeeper Story suggests auditors are simply not willing to risk reducing their reputational capital by acquiescing to clients that are not likely to survive their own financial distress. The Herding Story suggests that, when auditors are faced with uncertainties or a gap in the authoritative literature, auditors will herd together to form a common response that mimic one-another. The Value of Incumbency Story holds that as the value of incumbency declines with the client’s inability to survive, auditors will have fewer incentives to incur the incremental costs to gather sufficient competent evidential matter necessary to support an unqualified opinion.