William S. Waller

Slack in participative budgeting: The joint effect of a truth-inducing pay scheme and risk preferences

Abstract An incentive problem in participative budgeting occurs when a worker has private information about factors that influence his or her performance and the pay scheme is budget- or standard-based. This information, if communicated accurately by the worker, may be valuable to a manager for planning and control purposes. However, the worker has an incentive to bias its communication such that a relatively easy standard is set, thereby creating slack. To alleviate this problem, analytical research has proposed truth-inducing pay schemes that provide incentives for accurately communicating private information and maximizing performance. A conventional assumption underlying these schemes is worker risk neutrality, despite the wide-spread belief that risk aversion is more typical in organizational settings. This paper reports an experiment demonstrating that, when a (conventional) truth-inducing scheme is introduced, slack decreases for risk-neutral subjects but not for risk-averse subjects.

The auditor and learning from experience: Some conjectures

Abstract There has been little systematic study of the cognitive processes by which auditors learn from experience. The purpose of this paper is (1) to review selectively the learning and cognitive psychological literature pertinent to the questions of how and how well the “ordinary person” learns from experience and (2) to relate the conclusions from this literature to the case of the professional auditor. The paper also identifies some questions and methods for future behavioral research regarding the auditor and learning from experience.

Do cost-based pricing biases persist in laboratory markets?

Abstract Past accounting experiments have demonstrated significant effects of absorption vs variable costing systems on pricing decisions, but in individual settings that suppressed market features. The main finding of the current study is that a cost-based pricing bias did not persist in laboratory product markets. Given the opportunity to learn from profit and market feedback, sellers revised their price offers toward optimum in a manner that compensated for absorption vs variable cost signals. The effects of demand conditions, as revealed through actual trades, dominated the effects of alternative costing systems.

A BEHAVIORAL STUDY OF ACCOUNTING VARIABLES IN PERFORMANCE--INCENTIVE CONTRACTS.

Abstract The purpose of this paper is to report an experiment on the role of internal accounting variables in performance-incentive contracts. Unlike the previous behavioral studies in the area, subjects in the experiment interacted as competing employers and workers over a series of contracting periods. This procedure made it possible to examine the process by which accounting-based performance-incentive contracts were produced under conditions of information asymmetry and state uncertainty, as well as providing new tests that replicated the previous studies.

A cognitive footprint in archival data: Generalizing the dilution effect from laboratory to field settings

Abstract This paper delineates a bridging strategy for generalizing a theoretical proposition about human judgment from laboratory to field settings. This strategy encompasses experimental and archival methods, emphasizing each method’s complementary rather than competitive advantage. Basic experiments that use generic tasks and settings, and novice subjects, contribute empirical tests that maximize internal validity. Given a target area in the “real world” for generalizing the proposition, applied experiments that use tasks and settings with greater mundane realism, and professional subjects from the target area, contribute replicating tests that balance internal and external validity. As a complement to experimentation, archival research adds value by testing observable implications of the proposition in field settings. We relate the bridging strategy to judgment research on the dilution effect (i.e., the presence of nondiagnostic cues, when processed with diagnostic cues, causes judges to under-weigh the diagnostic cues) in psychology and applied areas. Finally, we contribute an archival data analysis that uncovers indirect evidence, or a cognitive footprint, of the dilution effect in a professional judgment setting where social and economic mechanisms potentially discipline systematic error.

Carrot or Stick? Contract Frame and Use of Decision-Influencing Information in a Principal-Agent Setting

A fundamental management accounting issue is how to incorporate decision-influencing information (e.g., an ex post state signal) into employment contracts. Our experiment examines the effects of contract framing on such information use in a principal-agent setting. In each of 40 rounds, participants (as employer and worker) negotiate a contract that specifies pay depending on an ex post state signal. State-signal pay is framed as either a bonus or a penalty over two groups. The results show that the bonus frame facilitates information use, because of worker loss aversion. Although both groups initially underweigh the state signal, the bonus group quickly converges toward the optimal weight, whereas the penalty group persistently underweighs the state signal.

The effects of context on the selection of decision strategies for the cost variance investigation problem

Abstract An important theme in research on behavioral decision making is that decision behavior is largely contingent on characteristics of the task and context. One variation on this theme is the appearance of contingency models that explain variation in decision behavior in terms of the effects that changes in task and context have on the relative net benefit of each available decision strategy. The L. R. Beach and T. R. Mitchell (1978 , Academy of Management Review , July, 439–449) model is an example of such a model. In the present study, the Beach and Mitchell (1978) model is used as a framework for generating hypotheses about the effects of two contextual variables—state uncertainty and significance of the decision—on the selection of decision strategies for the management problem of whether to investigate the cause of a cost variance. The hypotheses are supported by an experimental test.

Chapter 8 Brunswikian Research in Accounting and Auditing

Publisher Summary This chapter reviews Brunswikian research in accounting and auditing. It also describes accounting research and behavioral accounting research. Brunswikian research in internal accounting, external accounting, and auditing is also discussed. The objective of accounting is to provide useful information to decision makers whose actions determine the allocation of scarce resources in organizations and markets. A primary concern of accounting researchers and policymakers involves the direct and indirect effects of alternative accounting information systems on decision makers actions and related outcomes. Internal accounting (or managerial accounting) is concerned with providing quantitative, usually financial information to decision makers within an organization. However, external accounting (or financial accounting) is concerned with providing financial information to decision makers outside the reporting organization. Auditing is concerned with providing independent assurance to decision makers who use accounting reports that prescribed information systems have been employed in report preparation. It restrains both careless and creative accounting. The theoretical and methodological tools used by researchers to examine aspects of accounting and auditing have largely been imported from other disciplines in the social and behavioral sciences, especially economics and psychology.

A Behavioral Accounting Study of Strategic Interaction in a Tax Compliance Game

This paper reports an experiment on a tax compliance game based on the model of Graetz, Reinganum, and Wilde (1986). A model implication is that the audit rate, β, is insensitive to the proportion of strategic versus ethical taxpayers, ρ. Our hypotheses contrarily predict that auditors with limited rationality use ρ as a cue for adjusting β. The hypotheses assume a simple additive process: β = β′ + β″, where β′ depends on ρ, and β″ depends on a belief about the taxpayer’s strategy. The results show positive associations between ρ and β′, and between auditors’ uncertainty about ρ and β′. The auditors formed incorrect beliefs about the taxpayers’ responses, which affected β″. The auditors incorrectly believed that the taxpayers increased the rate of under-reporting income as ρ increased, and that the taxpayers expected a higher audit rate when the auditors faced uncertainty about ρ. The taxpayers correctly believed that β increased as ρ increased, and responded by decreasing the rate of under-reporting income.