Steven E. Salterio

The Balanced Scorecard: The Effects of Assurance and Process Accountability on Managerial Judgment

The balanced scorecard has been hailed as one of the major developments in management accounting in the past decade. Lipe and Salterio (2000) show that one of the key scorecard features, the inclusion of measures that are unique to the strategic objectives of a business unit, tend to be ignored by managers when making performance evaluation judgments. This study employs an adapted version of Kennedy’s (1993, 1995) debiasing framework to motivate two approaches to reducing this “common measures bias.” We examine whether increasing effort via invoking process accountability (i.e., requiring managers to justify to their superior their performance evaluations) and/or improving the perceived quality of the balanced scorecard measures (i.e., via assurance over the reliability and relevance of the performance measures) leads to managers’ increased usage of unique performance measures in their evaluations. Results suggest that either the requirement to justify an evaluation to a superior or the provision of an assurance report over all measures increases the use of unique measures in managerial performance evaluation judgments. Interestingly, the combination of the two approaches is not as powerful as the individual debiasers by themselves. Furthermore, we provide evidence that the common measures bias is not an easily correctable cognitive illusion that disappears when the potential for judgment inconsistency is pointed out to participants. Implications for theory and practice are discussed.

Doing Good Field Research: Assessing the Quality of Audit Field Research

Field research is increasingly being employed by audit researchers around the world including in North America. However, given that many doctoral programs, especially in North America, devote little or no time to this method, understanding what constitutes good auditing field research is problematic for many editors and reviewers. Hence, the goal of this article is simple: to provide editors and reviewers with a set of guidelines that can be employed to assess the quality of auditing field research as field research, not as an experiment or an archival study. In addition, this article might be helpful to those audit researchers who are teaching themselves field research methods to calibrate their understanding of rigorous and trustworthy field based research methods as well as for doctoral students and accounting departments interested in expanding their scope of course offerings. To achieve this goal we pose and answer ten questions about field research quality illustrating our responses with best practices observed in currently published or forthcoming papers. We also identify various methodological resources that will assist editors, reviewers and authors in developing a greater appreciation for and an ability to evaluate auditing research based on this method.

Financial Times Business School Rankings: A Nontraditional Assurance Case in Three Parts*

The Financial Times of London (FT) is a business newspaper, with daily editions published in the United Kingdom, continental Europe, the United States, and Asia, and an estimated daily readership of 10 million people. In 1999 the FT began to publish a ranking of what it considered to be the top business schools in the world. Since their inception, these rankings have become increasingly relied upon by potential students and business school administrators worldwide. The FTs ranking is unique compared with other rankings because of its special international focus. Given the prominence of these rankings and the FTs position as a well-respected business newspaper, the question of providing assurance over the business school rankings that the FT provides is particularly challenging.

CAP Forum on Enron: What If Andersen Had Shredded in Toronto or Calgary? The Potential Criminal Liability of Canadian Public Accounting Firms*

Both Canadians and Americans often assume that the legal system, like many other aspects of society, works the same in both countries. Just as these assumptions often fail to stand up to detailed scrutiny, so too may the assumption that Arthur Andersen LLP could have been charged with and convicted of obstruction of justice in Canada. In this paper, we examine the hypothetical question of what would have happened if a public accounting firm had shredded documents, fearing a provincial securities regulatory investigation in Toronto or Calgary. We examine the key differences between both the law and the institutional environment in Canada and the United States to determine whether such a prosecution could occur in Canada. We find that the letter of the law would probably have resulted in a successful prosecution. However, because of differences in the institutional environments, a criminal prosecution of a Canadian public accounting firm would probably never have occurred. The implications of this conclusion are discussed.

What Happens When Managers Plan Negotiations Instead of Partners

Most serious auditor client management (ACM) negotiations occur between audit partners and senior client management. Research also shows that audit managers often attempt to resolve issues with client management for several reasons, including efficiency. Prior negotiation research in other settings as well as accounting suggests that if partners employ different strategies than managers, different negotiation outcomes will occur. Thus, given the importance of ACM negotiation to the resulting financial statements, an understanding of the intended strategy usage of partners versus managers is important. Further, generic negotiation research provides conflicting predictions about which integrative strategies would be planned to be used when experience level versus power/status differs, the exact situation of partners and managers. We find that in the use of one strategy, working together on solving the issue cooperatively, partners and managers intend to approach negotiations the same way; but that for another strategy, bringing other potential issues into consideration, their intended strategy use differs. Focusing on intended distributive (win-lose) strategies usage, we find that while power/status and experience negotiation research predictions suggest both partners and managers should use the strategies in the same manner, our results show accounting context specific use. We find that partners and managers intended distributive strategies use interacted with important elements of the accounting context which could not be predicted beyond the general likelihood of their existence if experience and power/status matters interacts with context. Implications for both practice and research are discussed.

Effects of Client Pressure and Audit Firm Management Control Systems on Auditor Judgments

We examine the effects of pressures from client management and the audit firm’s own management control systems (MCS) on auditors’ willingness to accept an aggressive accounting that is preferred by client management. We find that auditors perceiving more pressure from client management to accept the client’s aggressive accounting react by increasing the size of the proposed adjustment needed to bring the client’s accounting into conformity with GAAP. However, we find that when client management promotes the jointness of interests they share with the auditor or the audit firm’s MCS focuses the auditor more on client service quality the auditor experiences increased affinity for the client and proposes lower adjustments in response to the same accounting facts. Furthermore, we find that the auditor’s proposed adjustment to client accounting leads to intended use of negotiation tactics that are consistent with the relative size of the proposed adjustment: larger proposed adjustments result in relatively greater auditor intentions to use contending tactics whereas smaller adjustments lead to increased intentions to use compromising tactics. Two implications emerge from our research. First, that client management, if subtle with its use of pressure, can nudge auditors towards accepting the aggressive accounting management wants. Second, the audit firm’s own MCS can facilitate auditor identification with client needs leading to a lesser willingness by auditors to challenge aggressive client management accounting.

Do Analysts Strategically Provide Cash Flow Forecasts? A Multi-Theory Multi-Methods Study

Our study delves into analysts’ motivation to issue concurrent cash flow forecasts in addition to earnings forecasts to achieve the analysts’ specific strategic objectives. To investigate this motivation, we use economics based signaling theory and psychology based support theory to develop our hypotheses and then employ multiple methods to investigate them. First, we perform archival tests using analyst forecasts found in the I/B/E/S database. Second, we analyze a hand collected sample of 412 sell-side analyst reports. Third, to complement the preceding research, we conduct field research on sell-side analysts’ forecasting activities. Our results indicate that sell-side analysts strategically choose to issue positive cash flow forecast revisions in an effort to diminish the negative impact on themselves of releasing bad (i.e. negative or downward) news in their earnings forecast revisions. Our results suggest that analyst decisions to issue cash flow forecasts are akin to managers’ strategic decisions to voluntarily disclose supplemental information to affect investors’ confidence in their primary news and may not be motivated by being an objective third party review of the future prospects of the companies they cover that institutional rhetoric suggests they are valued by capital markets for.

We Don't Replicate Academic Accounting Research – Or Do We?

The purpose of this introduction to this mini-forum on replication research in accounting is to explain the thought process behind the decision to publish back to back in the same issue of Contemporary Accounting Research two articles that have a substantial overlap in motivation, data and analysis. Indeed the two articles are definitely replications of each; albeit there are differences in the design choices that each set of authors made leading to dramatic differences in sample sizes. However, despite what differences there are, the articles arrive at the same conclusions. The topic is the rise of analysts’ provision of cash flow forecasts and the decline of the accruals anomaly – certainly issues that bear careful examination given the controversy associated over the relative sophistication of analysts’ cash flow forecasts and the changes over time in the most widely accepted and researched anomaly, the accruals anomaly. Nonetheless, given our alleged lack of a replication culture in accounting, I decided that a brief introduction and justification was in order as part of presenting these two articles and their associated commentaries.