An Investigation of the Effects of Specialization in Audit Workpaper Review*

Abstract. This study examines the effect of specialization at the different stages of an audit workpaper review. Auditing literature advises focusing each review level on specific kinds of errors (i.e., seniors on mechanical errors and managers on conceptual errors), rather than having seniors and managers perform successive all-encompassing reviews. However, surveys of review practice suggest that all-encompassing reviews are common. To determine whether specialization at different levels of review improves reviewers' overall effectiveness, this study has 35 managers and 39 seniors actually perform a review of a realistic set of workpapers. Half the subjects performed specialized reviews, whereas the other half performed all-encompassing reviews. Overall accuracy rates in our study are consistent with prior research. In addition, the combined reviews of seniors and managers are more effective than those of either seniors or managers separately, demonstrating the benefits of hierarchical review. However, specialized review leads reviewers to be significantly less accurate than reviewers performing all-encompassing reviews. The results suggest specialization will not automatically improve review effectiveness, and that accounting firms may need to re-evaluate their review guidance and professional training on workpaper reviews.     

The Impacts of the California Beverage Container Recycling and Litter Reduction Act on Consumers

In late 1987 the California Beverage Container Recycling and Litter Reduction Act went into effect. Like mandatory beverage deposit legislation in other states, this Act is designed to promote returns through the payment of a redemption value. However, unlike traditional legislation, the Act attempts to promote recycling with lower redemption values and more state intervention. This paper presents a methodology for analyzing the impacts of beverage container recycling legislation on consumers. Applying this methodology to California, it is found that the Act will significantly reduce beverage container solid waste and litter, but the net benefits of the Act depend critically on consumers' valuations of intangible benefits.     

Sell‐Side Analyst Research and Stock Comovement

We document that a stock's price around a recommendation or forecast covaries with prices of other stocks the issuing analyst covers. The effect of shared analyst coverage on stock price comovement extends beyond analyst activity days. A stock's daily returns covary with the returns of other stocks with which it shares analyst coverage. These links between stock price comovement and shared analyst coverage are consistent with the coverage‐specific information we find in earnings forecasts; analysts who cover both stocks in a pair expect future earnings of the stocks to be more highly correlated than do analysts who cover only one stock from the pair. Collectively, our evidence indicates that analyst research produces coverage‐specific spillovers that raise price comovement among stocks that share analyst coverage. The strength of these spillovers is comparable to spillovers from broad industry and market information in analyst research.     

Implicit Tax Rates of the Expanded Earned Income Tax Credit for Welfare Recipients in North Carolina

High implicit tax rates for welfare recipients have been cited as a deterrent to additional work effort by these households. The expanded earned income tax credit (EITC), passed by Congress in 1993, was enacted in part to reduce the implicit tax rates and increase work effort by very low income households. This paper calculates implicit tax rates for a typical welfare family in North Carolina before and after the expanded EITC. Although the expanded EITC reduces implicit tax rates for the typical welfare household at very low levels of earnings, implicit tax rates are still found to be substantial, especially when work and child care costs are included.     

Testing Implications of Spatial Economics Models: Some Evidence from Food Retailing

Under certain conditions, spatial economics models predict an increase in product price after entry of new competitors in a market area. However, a review of spatial economics models suggests new competitors should cause lower prices in urbanized markets, although the effect is dependent on distance between the existing and new firms. An empirical analysis of entry in a local retail food market supports this hypothesis for food products but not nonfood products.     

THE EMERGENCE OF COPYING TECHNOLOGIES: WHAT HAVE WE LEARNED?

The past few decades have seen dramatic advancements in the technology of copying and the diffusion of copying technology to the general public. This paper surveys some of the recent academic literature dealing with this issue. We focus on (i) the effect of varying the extent of property rights enforcement by the government, and (ii) possible responses by producers of originals to consumers' ability to produce copies. The traditional view is that as the government increases property rights enforcement, there is a decrease in the social welfare loss due to underproduction and an increase in the social welfare loss due to under-utilization. In the first half of the paper, we show how the analyses contained in a number of recent studies throw doubt on this traditional viewpoint. In particular, varying the extent of property rights enforcement has effects that the traditional analysis ignores. As a result, the social welfare losses mentioned above can move in ways not recognized previously. The conclusion is that, contrary to what is sometimes suggested, choosing an optimal level of property rights enforcement by the government should not be viewed as a simple trade-off between these two social welfare losses. In the second half of the paper, we discuss possible market responses to consumers' ability to produce copies. Among other responses, we consider the role of price discrimination and complementary products when copying is possible.     

CURRENCY SUBSTITUTION, U.S. MONEY DEMAND, AND INTERNATIONAL INTERDEPENDENCE

A number of writers have argued in recent years that massive international currency substitution has been a major cause of exchange rate volatility and monetary instability in the United States and other major countries. Such analysis is frequently coupled with recommendations for a return to pegged exchange rates. This paper critically examines the evidence presented for this currency substitution view. It argues that the weight of latest research suggests that direct international currency substitution has not been of major quantitative importance for the U.S. However, empirical evidence supports traditional views that international capital mobility can generate substantial short-run monetary interdependence even under flexible exchange rates. Thus, even though international currency substitution is of little importance to U.S. monetary conditions, a broader range of international considerations may be of considerable importance for the U.S. economy.