Steven E. Kaplan

Positive theory, rationality and accounting regulation

Abstract Existing agency theory fails as a positive theory since it does not provide a theory of accounting regulatory development. Furthermore, the arguments against market failure theories in Watts and Zimmerman (1986) are inconsistent with positive theory in that they evaluate rather than predict the theories. In fact, the market for excuses arguments used by Watts and Zimmerman (1979) are capable of predicting the existence of market failure theories. That these arguments were not extended in Watts and Zimmerman (1986) seems to indicate an ideological bias. If Watts and Zimmerman wish to argue normatively, they should not do so under the guise of positive theory. The failure of agency theory to provide a prediction of accounting regulatory development stems from its reliance on a rationality assumption which is on one hand narrow and on the other hand broad and inconsistent. Richer theories relying on either a better specified rationality assumption or broader views of organizational behaviour are needed to predict and explain the development of accounting regulatory structures. A confluence of theories is most likely to provide the richest description.

An examination of information search during initial audit planning

Abstract This paper examines the initial planning processes of auditors, a research topic which has received very limited attention to date. In this empirical study auditors were given the results of analytical tests and asked to assess the likelihood that observed “abnormalities” were due to accounting error or irregularity as distinct from environmental change (i.e., an initial hypothesis). They were further asked to indicate the information they would seek in response to the test results, in an effort to resolve the issue adequately to proceed with planning the audit. The authors posit that: (1) for relatively inexperienced auditors, their initial hypothesis of cause will positively correlate with the type of information the auditors will subsequently seek (i.e., they will follow a hypothesis confirming strategy); and (2) for relatively experienced auditors, their initial hypothesis of cause will not correlate with the type of information sought but rather they will follow a balanced information search strategy. Support for this hypothesis was found using a rank measure of information seeking. A second measure of information seeking based on unranked questions, did not support the hypothesis, however.

An examination of tax reporting recommendations of professional tax preparers

Abstract This study reports on an empirical examination of the decisions of professional tax preparers. The paper is motivated by recent advances in the cognition literature. Based upon this literature we hypothesize that for ambiguous tax matters: (1) recent outcome information will influence the reporting recommendations of tax preparers, and (2) the amount of tax experience interacts with situational economic variables to influence the reporting recommendations of tax preparers. Concerning non-ambiguous tax matters, we hypothesize that (1) situational economic variables will affect recommendations made by tax preparers, and (2) neither recent outcome information nor years of experience will influence the recommendations made by tax preparers. The results of an experiment generally provide support for the hypotheses.

The effect of audit structure on the audit market

Abstract One way in which audit firms have begun to differentiate themselves is in the degree of structure employed in the audit approach. In this paper we argue that audit structure affects the relative competitiveness of the auditor in different client-market segments. No single audit structure represents an optimal choice for all clients. Rather, the attractiveness of each category of audit structure is contingent upon the degree of stability in the clients environment. Trends in intra-Big Eight market shares over the period 1976 to 1986 show that the auditor preferences of consumers of audit services are consistent with the environment in which the clients operate. The clients preference for a structured auditor increases with increased stability in the clients operating environment. Clients in unstable environments seem to have a preference for unstructured auditors. We attribute these changes to cost advantages that structured auditors have in stable environments, and that unstructured auditors have in unstable environments.

An Examination of the Effects of WebTrust and Company Type on Consumers’ Purchase Intentions

This study examines the effects of both WebTrust and company type on purchasing intentions in a B2C E-commerce setting. While past studies have focused on the incremental effects of Web assurance services on Web sites, this study extends research by exploring whether WebTrust strengthens purchasing intentions for both known, and unknown, companies. Professional literature suggests that Web assurance seals such as WebTrust will primarily benefit unknown companies. A second contribution of the paper is to propose and test a model of how WebTrust and company type each lead to greater purchasing intentions. Based on a mediation model, WebTrust is expected to influence purchasing intentions through assurance beliefs. Alternatively, company type is expected to influence purchasing intentions through the formation of trusting beliefs. Under our model, because each works through a separate mediating variable, WebTrust and company type are not substitutes for each other. The results support the proposed model showing that WebTrust is mediated by assurance beliefs and company type is mediated by trusting beliefs. These results have important practical implications as they show that all companies, not just the unknown, can benefit from displaying a WebTrust seal. Thus, the results from our study suggest that the potential market for Web assurance services should include all B2C E-commerce companies.

Auditors' reporting decisions for accounting estimates: The effect of assessments of the risk of fraudulent financial reporting

The dangers of management bias and the resulting increased need for auditors to be cognizant of environmental characteristics may be particularly acute in the area of accounting estimates. Accounting estimates pose relatively unique auditing problems because it is an area where management has significant discretion (to set estimates) and there is limited ability to apply traditional accounting controls. Thus auditors have difficulty obtaining conclusive evidence to challenge management′s estimates. Research examining auditors′ accounting estimate judgments, however, has been scant, especially with regard to the relationship of auditors′ assessment of materiality and risks of fraudulent financial reporting. Reports the results of an empirical study examining the reporting decisions of audit seniors and audit managers related to a client′s decision to change four accounting estimates relative to the prior year. The auditor′s task was to review the changes and to indicate whether audit adjustments proposed b...

Discussion of “The Psychology of Billing”

Hansen, Jackson, Schaefer, and Stewart (2017) examine the effects of three contextual features on tax professionals’ billing decisions in a case involving issue-specific tax research. In this discussion, we present a tax fee model. In contrast to determining a bill, our model views tax fees in a more comprehensive perspective. We subsequently use this model to discuss the design choices and limitations of their study and to provide suggestions for future research. This article is protected by copyright. All rights reserved.