Ella Mae Matsumura

Supervisor Discretion in Target Setting: An Empirical Investigation

In a setting in which corporate headquarters dictates total sales targets, we study how supervisors allocate sales targets to individual stores. Specifically, we analyze whether supervisors strategically use discretion in the target-setting process to address compensation contracting issues. We first examine whether supervisors use discretion to manage compensation risk. The results are consistent with the agencytheoretic prediction that supervisors provide easier targets to stores facing higher levels of store-specific risk. Next, we examine whether discretion is used to mitigate fairness concerns. The results suggest that, consistent with behavioral arguments, supervisors use discretion to deal with fairness issues, even if the area of the supervisor’s discretion is not the source of the fairness concerns. Finally, we analyze whether supervisors use discretion in the target-setting process to reduce their potential confrontation costs. Consistent with research in psychology, we find that supervisors provide easier targets to store managers with relatively higher hierarchical status.

Second Partner Review: An Analytical Model:

This paper develops an analytical model to examine the role that second partner review plays in promoting accurate, unbiased decisions by an engagement partner who possesses imperfect information and is subject to economic pressures to bias judgment. Optimal strategies are derived in a single-period model. The model includes an engagement partner and a second partner who both choose a sample size and a qualified or unqualified audit report. The analysis identifies conditions under which second partner review induces the engagement partner to report with greater independence. In addition to providing predictions immediately testable in an experimental context, the comprehensive example demonstrates that second partner review can cause the engagement partner not only to report with greater independence but also to sample more. Central to our analysis is a general audit reporting model that applies to both one-partner and two-partner situations. This model provides definitions and demonstrates the effect of auditor independence and competence and the sufficiency and competence of evidential matter, audit risk, client pressure, and societal penalties (e.g., legal and reputational costs) on an audit partners reporting decision. Moreover, it demonstrates the importance of the engagement partners competence and work effort, as well as the reduction of underlying audit risk, in countering client pressure and promoting independent reporting. Because of the rigorous definitions of auditing concepts and the number of variables included, the model provides a flexible structure for studying other auditor reporting situations.

An Empirical Analysis of a Relative Performance-Based Incentive Plan: Evidence from a Postal Service

Using 1997-1999 annual performance evaluation data of 214 postal stores in Korea, we find that introduction of a relative performance evaluation (RPE)-based incentive plan is positively associated with financial performance and that under the new incentive plan, the degree of common uncertainty is positively associated with store profitability. We also find evidence that the incentive effect of the RPE-based plan is mitigated in stores at which the level of dysfunctional behavior is likely to be high. Finally, we find that the net benefits of introducing the RPE contract may be highly conditional on the degree of common uncertainty, which appears to be inversely related to the likelihood of dysfunctional behavior attributable to the RPE-based contract.

Comparative Performance of Two Multinomial-Based Methods for Obtaining Lower Bounds on the Total Overstatement Error in Accounting Populations

Accurately estimating a lower bound on the total overstatement error in an accounting population is important in many audit decision situations. This article reports the results of a simulation study of three lower-bound estimation procedures based on a multinomial model with a dollar-unit sampling scheme. The ability of each procedure to attain a specified confidence level is assessed with respect to changes in error rate and random sampling method. The simulation study shows that the tested procedures perform well in achieving specified lower-bound coverages on the total overstatement error in the chosen accounting populations. Coauthors are Robert Plante, Kam-Wah Tsui, and P. Kannan.

Comparison of the mean per unit and ratio estimators under a simple applications-motivated model

The mean per unit and the ratio estimators of the total score in a finite population are compared under a simple model motivated by insurance reimbursement in the pharmacy industry. Ranges of model parameters are given where one of the estimators is preferred, and when model parameters satisfy an equation, the ratio estimator is shown to be first order unbiased and never improved on by the mean per unit.

Managerial Accounting Research in Corporate Social Responsibility: A Framework and Opportunities for Research

Abstract Purpose The paper provides a research framework for analyzing CSR issues and suggests knowledge gaps that can be addressed by managerial accounting researchers. Methodology/approach The paper draws on frameworks introduced by Epstein (2008), Aguinis and Glavas (2012), and Hahn, Figge, Pinkse, and Preuss (2010). Findings Despite the potential tension between managing corporate social responsibility (CSR) performance and corporate financial performance, researchers have generally established a positive relationship between the two. However, the underlying mechanisms or processes linking CSR efforts to financial performance are not well understood. Managerial accounting researchers can help fill the knowledge gap on linkages between processes, performance measures, and incentives in achieving CSR goals. A particularly important area of potential research is how firms motivate creativity, both individually and collectively, to integrate CSR initiatives into firm processes. Originality/value The paper provides a framework for researchers starting out at the intersection of management accounting and CSR.

Capital Market Expectations of Risk Materiality and the Credibility of Managers’ Risk Disclosure Decisions

Research shows the capital market can refine firm risk inferences using Form 10-K risk disclosures, raising the question: do managers’ disclosure decisions credibly reflect their private risk materiality assessments? We use experts’ judgments about industry-level risk materiality to impute market expectations of climate-change risk (CCR) materiality to test whether the association between disclosing CCR in 10-K’s and firm risk (proxied by cost of equity (COE)) varies with market expectations. Using S&P 500 firms’ CCR disclosures over nine years, we find that disclosing firms’ COE is 26 bps lower than nondisclosers overall. In industries where the market expects CCR to be material, disclosing firms’ COE is 51 bps lower than nondisclosers, while in industries where the market expects CCR not to be material, disclosing firms’ COE is 20 bps lower than nondisclosers. Our results indicate that market CCR materiality expectations allow inferences about the credibility of managers’ risk disclosure decisions.

To Disclose or Not to Disclose Climate-Change Risk in Form 10-K: Does Materiality Lie in the Eyes of the Beholder?

We examine the relation between managers’ decisions whether to disclose climate-change risk (CCR) in Form 10-K and firm risk. Ambiguity about the materiality of CCR and the SEC’s inconsistent enforcement of CCR disclosures cause uncertainty about whether disclosing CCR is mandatory or voluntary. We hand-collect data over a seven-year period from about 3,000 Form 10-K filings of S&P 500 firms on whether they disclosed CCR. We use SASB’s Materiality Map™ to proxy for report users’ judgments of the materiality of CCR. We find that the cost of equity (COE) of disclosing firms is 21.3 bps lower than the COE of non-disclosing firms. More importantly, we find that for firms where report users judge CCR as material, the COE of disclosers is 49.1 bps lower than that of non-disclosers. In contrast, we find no association between disclosing CCR and COE for firms where report users judge CCR as not material.