The Effectiveness of Alternative Risk Assessment and Program Planning Tools in a Fraud Setting*

This study examines the impact of alternative risk assessment (standard risk checklist versus no checklist) and program development (standard program versus no program) tools on two facets of fraud planning effectiveness: (1) the quality of audit procedures relative to a benchmark validated by a panel of experts, and (2) the propensity to consult fraud experts. A between‐subjects experiment, using an SEC enforcement fraud case, was conducted to examine these relationships. Sixty‐nine auditors made risk assessments and designed an audit program. We found that auditors who used a standard risk checklist, structured by SAS No. 82 risk categories, made lower risk assessments than those without a checklist. This suggests that the use of the checklist was associated with a less effective diagnosis of the fraud. We also found that auditors with a standard audit program designed a relatively less effective fraud program than those without this tool but were not more willing to seek consultation with fraud experts. This suggests that standard programs may impair auditors' ability to respond to fraud risk. Finally, our results show that fraud risk assessment (FRASK) was not associated with the planning of more effective fraud procedures but was directly associated with the desire to consult with fraud specialists. This suggests that one benefit of improved FRASK is its relation with consultation. Overall, the findings call into question the effectiveness of standard audit tools in a fraud setting and highlight the need for a more strategic reasoning approach in an elevated risk situation.     

KINKED DEMAND CURVE THEORY AND THE MICRO FOUNDATIONS OF KEYNESIAN INVOLUNTARY UNEMPLOYMENT

This paper presents a macroeconomic model in which firms have kinked demand schedules owing to asymmetries in the dissemination of price information amongst consumers. It is then shown that nominal wage reductions may be unable to increase employment, let along secure full employment. The necessary condition is that the lower branch of the kinked marginal revenue schedule be negative. In this case, prices are unresponsive to nominal wage declines, and there is no Pigou effect from lower nominal wages.     

Optimal Financial Structure, Cost of Capital, and the Lease-or-Buy Decision

This note comments on the doubtful application of an economic concept of personal income to the non-personal business enterprise situation.
This paper presents a series of models which we believe properly reflect the relevant relationships in the lease or buy evaluation. The models present the proper cash flow variables for such an analysis and they present the impact on asset net present value of cost of capital and market risk assessment. Finally, the models reflect the simultaneous effect on asset and financial structure of the acceptance of a particular investment opportunity.     

Pension disclosures under SFAS No. 87: Theory and evidence*

Abstract. This study analyzes the choices made by 279 firms in response to the opportunity to adopt the new pension accounting standard. Statement of Financial Accounting Standard No. 87, in 1986 rather than 1987. It tests the influence of political and agency variables and three income-related variables on this accounting choice. The political variables, management compensation contracts, the magnitude of the income effect of adoption, whether the firm was a “bath” firm, and the earnings position of the firm relative to the prior year are all associated with the adoption choice. These results are analyzed further by considering specific debt covenants and by exploring alternate interpretations of the meaning of the change in earnings variable by assessing interactions between it and the political and agency variables. Résumé. L'auteur analyse les choix faits par 279 entreprises par suite de l'option qui leur était offerte d'adopter la nouvelle norme de comptabilisation des régimes de retraite. Statement of Financial Accounting Standard No. 87, en 1986 plutôt qu'en 1987. Il vérifie l'influence des variables politiques et des variables mandant-mandataire, ainsi que de trois variables se rattachant aux bénéfices, sur ce choix comptable. Chacun des facteurs suivants est associé à l'option d'adoption: variables politiques, contrats de rénumération des cadres, ampleur des conséquences de l'adoption sur les bénéfices, occasion de flambée des bénéfices et bénéfices de l'entreprise par rapport aux bénéfices de l'exercice précédent. Ces résultats font l'objet d'une analyse plus poussée dans laquelle l'auteur tient compte de clauses restrictives particulières et explore d'autres interprétations de la signification de la fluctuation de la variable des bénéfices en évaluant les interactions entre cette fluctuation et les variables politiques ainsi que les variables mandant-mandataire.     

Defining the Consumer Interest: Challenges for Advocates

From its birth, The Journal of Consumer Affairs has provided a forum for government officials, consumer activists, and academics to discuss the definition of the consumer interest and how best to pursue it. In the inaugural issue of JCA, published in the summer of 1967, three of the first four articles were titled “The View from Washington” (by Deputy Assistant Secretary of Labor David Swankin), “Is It Time to Re‐Evaluate the Consumer Protection Activities of the Federal Government?” (by Consumers Union president Colston E. Warne), and “The Consumer Interest—the Real Issue” (by Professor of Marketing Robert D. Schooler). When JCA began publication in 1967, a few landmark pieces of consumer legislation had already been passed concerning pharmaceuticals, cigarettes, and motor vehicles, but the heyday of the consumer movement—and consumer research—was just beginning. In his article, Warne wrote: “The time has come, I think, for consumers and consumer movements to face some highly unpleasant problems” (p. 24). Schooler chastised the federal government for being “misdirected toward real but secondary issues” (p. 40). Swankin called for an organization and a professional journal capable of creating “an intellectual climate in which the phrases ‘consumer interest,’‘consumer economics,’ and, yes, ‘consumer information’ can be developed and can flourish” (pp. 9–10). Nearly forty years later, and long after the zenith of the U.S. consumer movement, we still face a host of consumer problems and a federal government disinclined to address them. We do, however, have a respected journal in whose pages the consumer interest and consumer policy can be examined. On April 25, 2005, the University of Utah hosted a symposium on consumer policy in honor of the retirement of Dr. John R. Burton. John, who established the consumer studies program at the University of Utah, has devoted his career to teaching, research, and service that advance the consumer interest. Seven nationally renowned speakers, including professors Monroe Friedman, Loren Geistfeld, Jeanne Hogarth, Jean Lown, and Ivan Preston, presented papers pertaining to the consumer interest. Two of the seven papers are reproduced here. The first is by Stephen Brobeck, long‐time executive director of the Consumer Federation of America (CFA) and the editor of The Encyclopedia of the Consumer Movement. Dr. Brobeck's article examines how a major consumer advocacy organization like CFA decides what public policy positions are in the consumer interest. The article applies a general framework to the specific issue of automobile fuel economy standards. In the companion piece to this article, Michael Burton, an assistant professor of political science at Ohio University and the son of the symposium's honoree, draws on his experience as a congressional aide and vice presidential staff member to describe and defend the art of compromise as it applies to consumer politics. – Robert N. Mayer, University of Utah     

LaPlace Transforms as Present Value Rules: A Note

The present value equation in finance is shown to be equivalent to the Laplace transformation in mathematics. Based on this observation, the list of known analytic solutions for the present value problem is increased from a handful to more than one hundred. General properties of the Laplace transform are examined as well in light of the newly discovered significance for finance.     

The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study

A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid-ask spreads. In this paper, these variables are observed in a controlled setting—a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival—whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong-form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi-strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger-form market models predict equilibrium prices better than weaker-form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid-ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.