When do analysts adjust for biases in management guidance? Effects of guidance track record and analysts' incentives

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for managements track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research

Effects of expectation and prior involvement on memory for audit evidence and judgment: The moderating role of accountability.

This dissertation investigates the effects of three important features of the audit environment on decision-making processes: reliance on prior year's working papers, repeated audit engagements, and the audit review process. It first analyzes the degree to which the first two variables affect the audit decision process. This issue has implications for the desirability of having repeated audit engagements as opposed to periodic rotation of audit personnel. It then examines whether awareness of a review can moderate the effects of prior involvements by causing the reviewee to process information more vigilantly, and make less extreme judgments. Two laboratory experiments were conducted using auditors from two Big Six public accounting firms. In Experiment 1, the effects of expectations from using prior year's working papers and prior audit involvement were investigated, using a financial viability assessment task. Results demonstrated that auditors' judgments were aligned with the judgments documented in prior year's working papers. In addition, there was evidence that prior audit involvement moderated the effects of expectations. Auditors who inherited the current year's audit from another auditor paid more attention to the current period's evidence that was inconsistent with their prior period's judgments. With positive expectations about the firm's financial viability, auditors who were involved in the prior period's audit recalled relatively more consistent evidence than inconsistent evidence, compared to auditors who inherited the prior year's audit. The current period's judgments made by the two groups of auditors were not significantly different. However, there was some evidence that prior involvement may lead to a tendency to make current year's judgments that have smaller deviations from the prior year's judgments. Experiment 2 demonstrated that when the prospect of a review was made salient, the effects of prior involvement were ameliorated.Ph.D.AccountingSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/129040/2/9308463.pd

Organizational levels and perceived importance of attributes for superior audit performance.

This paper examines the attributes considered to be importance for superior performance as an auditor and the changing importance of these attributes at difference levels of the firm. It also investigates whether auditors are aware of the relative importance of these attributes

Effects of auditors' concession timing on financial officers' negotiation judgements.

In this paper, we develop and test a conceptual model that posits how the timing of concessions made by an auditor to a client influences negotiation judgments. We conduct an experiment to investigate how financial officers’ negotiation-related judgments are influenced by negotiation strategies employed by auditors. We manipulate between-subjects four negotiation strategies that vary the timing of the concessions given, holding constant the total amount of concessions given. These concessions vary in terms of whether they are given before the start of the negotiation, after one round of negotiation, gradually during the negotiation, or at the end of the negotiation. In our experiment, financial officers negotiate with a hypothetical auditor over four rounds of negotiation. Our results support the use of giving gradual or delayed concessions, compared to giving concessions early in the negotiation process. Our results are consistent with a mediation model in which auditors’ negotiation strategies influence financial officers’ offers (given in the round just before the auditor makes a final decision), which affects their satisfaction with the negotiation outcome, and which, in turn, affects their intention to continue their relationship with the auditor. We also provide evidence on the strategies used by financial officers. Keywords: auditor-client negotiations, financial officers, negotiation strategy, concessions Data availability: Contact author

Mandatory management disclosure and mandatory independent audit of internal controls : evidence of configural information processing by investors

We conduct an experiment where alumni participants from a Canadian accounting and finance undergraduate program assume they are in one of four regulatory regimes (manipulated between-subjects) and make investment potential evaluations for two firms (manipulated within-subjects): a firm disclosing no material weaknesses (No-MW disclosure firm) and a firm disclosing material weaknesses (MW disclosure firm) in internal controls over financial reporting (ICFR). We find evidence of configural information processing. For the No-MW disclosure firm, mandatory (versus voluntary) disclosure of ICFR material weaknesses and mandatory (versus voluntary) independent ICFR audit are substitutes in enhancing investment potential evaluations. However, for the MW disclosure firm, neither mandatory disclosure nor mandatory audit has any effect on investment potential evaluations. Supplementary experiments with undergraduate participants suggest that the pattern of configural information processing is a function of participants' knowledge of company disclosure incentives and the assurance value of an audit, wherein undergraduates with lower levels of knowledge are less able to perceive the effects of mandatory disclosure and mandatory audit on investment potential evaluations. Our findings have implications for regulators who are concerned about balancing the costs and benefits of different regulatory mechanisms.MOE (Min. of Education, S’pore)Accepted versio

Management's responsibility acceptance, locus of breach, and investors' reactions to internal control reports

The triangle model of responsibility (Schlenker, Britt, Pennington, Murphy, and Doherty 1994) predicts that the extent that investors hold management responsible for an adverse event is jointly determined by the links among three elements—management, the adverse event, and the relevant accounting regulations/standards or public norms. Applying this theory, we conduct experiments to examine how the locus of breach (external versus internal) moderates the efficacy of management's responsibility acceptance (higher versus lower). Our results show that management's higher (versus lower) responsibility acceptance is a more effective strategy in the presence of an external breach, but not in the presence of an internal breach (Experiment 1). Follow-up experiments suggest that this result is driven by the relative strength of the triangle links underlying the external versus internal breaches, rather than the locus per se