Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information

We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock‐compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability. These results have implications for the interpretation of prior research on the reliability of recognized and disclosed numbers, for financial‐accounting standard setters who may want to consider the reliability effects of their recognition versus disclosure decisions, and for auditing standard setters who may wish to clarify auditors' responsibilities for preventing misstatements in disclosed amounts.     

A Model for the Determination of “Fair” Premiums on Lease Cancellation Insurance Policies

Lease cancellation insurance protects the lessor against early termination of a cancellable operating lease. This paper presents a contingent claims model for determining the “fair” premium for this type of insurance policy. Comparative statics are considered, and some numerical examples are presented to illustrate the model. Among other things, the insurance premium is sensitive to the expected rate of economic depreciation of the leased asset and to the leased asset's systematic and nonsystematic risk.     

Mixed Integer Programming Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption,Leisure, and Money

Swofford and Whitney (1987, 1988, 1994) investigated the validity of two key assumptions underlying representative agent models of macroeconomics. These assumptions are utility maximization and weak separability. Using mixed integer programming, we check revealed preference conditions for these assumptions. We find that M1, money defined by Friedman and Schwartz (1963), and a broad aggregate are weakly separable. We find that consumption goods and leisure and nondurables and services are weakly separable. We find that M2, M3, and MZM are not weakly separable. Finally, we find three categories of consumption, durables, nondurables and services, do not form an aggregate.