Accountancy Dissertations

With the passage of Sarbanes-Oxley in 2002, external auditors face a new regulatory inspection process in addition to an increase in litigation (or engagement) pressure. It has been communicated that this new inspection process will place an increased emphasis on the efficiency of integrated audits while maintaining the same level of effectiveness. In an experiment, I explore how external auditors’ reliance decisions on the internal audit function will be affected by different inspection focuses, varying levels of engagement risk, and the level of risk associated with the audit test or procedure. While I expect that there will be significant main effects for inspection focus, engagement risk and the riskiness of the audit test, I explore the potential presence of a three-way interaction between these three factors. My findings suggest that the auditor reliance decisions are impacted by differing levels of engagement risk, the focus of the inspection process, and the riskiness of the audit tests. In general, as engagement risk increased, auditors’ reliance decreased. Also, as the riskiness of the audit test increased, auditors placed less reliance on the internal audit function. However, when the focus of the inspection changed, these factors interacted with one another. Specifically, when auditors faced a focus of both effectiveness and efficiency, their reliance decisions increased as engagement risk and riskiness of the test decreased, but when auditors faced a focus of effectiveness only, their reliance decisions were not impacted by the engagement risk when the riskiness of the test was high. Thus, the impact of engagement risk on auditors’ reliance decisions depends on the focus of the inspection process and the riskiness of the tests.

Given the importance of historical dividend policy to firms, I investigate whether dividend payers manipulate earnings through real activities to smooth dividend levels and dividend payout ratios. Using Compustat’s Execucomp database, I find evidence that dividend policy impacts both upward and downward real earnings management. I find that payers manipulate earnings upward through real activities to mitigate the shortfall of pre-managed earnings relative to prior year dividends when pre-managed earnings are lower than dividends paid in the prior year, suggesting that dividend levels are an important earnings benchmark. I document a stronger relationship between changes in pre-managed earnings and real earnings management for payers than for non-payers, suggesting that dividend policies impact real earnings management. Consistent with the importance of dividend policy in real earnings management, I show that dividend payers that follow conservative dividend policies manipulate earnings to a greater extent than dividend payers that do not follow conservative dividend policies.

This study investigates whether firm communication of non-contractual targets motivates managers to report their private information more honestly and, thus, improves the firm’s well-being. Specifically, I investigate how the level of a specific cost target affects reporting honesty. Drawing on economic and psychology theory, I predict there is an inverted-U relationship between the level of the specific cost target and managerial honesty. I conduct an experiment in which specific cost targets are manipulated at four levels (none, low, moderate, and high). Results support the predicted relationship because participants’ report more honestly overall when they are provided moderate cost targets. Further, honesty is the same regardless of whether the firm provides no specific target, a low target, or a high target. Thus, while moderate cost targets improve the firm’s well-being; the firm is never worse off providing a specific, non-contractual cost target to its managers. These findings suggest firms should not hesitate to communicate their specific cost preferences to their managers. The results of this study have implications for the design and use of management control systems by providing insights on how firms can increase managerial reporting honesty without incurring the costs associated with more formal mechanisms.

Although much research on corporate dividend policy exists, the evidence is far from conclusive. Understanding how dividend taxes affect firm-level decisions is crucial to evaluating dividend imputation credits which provide shareholder-level tax credits for dividends received or decreased shareholder-level dividend tax rates, which reduce the double taxation of dividends. Using changes in New Zealand and Australia’s tax regimes, this dissertation provides new evidence on the relationship between tax incentives for R&D investment and dividend payment. The results show that the theory that the tension between R&D investment and dividend payment decreases when a country previously not offering tax incentives for R&D investment or dividend payout, implements one, does not hold using New Zealand firms. Further, New Zealand dividend-paying firms with higher marginal tax rates behave in the manner predicted for firms moving from a tax regime offering a tax incentive for R&D investment to a tax regime offering tax incentives for both R&D investment and dividend payment. The results using Australian data, demonstrate that that the tension between R&D investment and dividend payment increases when a country previously offering only a tax incentives for R&D investment, offers one for both R&D investment and dividend payment. This result is driven by firms with high marginal tax rates. These findings demonstrate that the relationship between tax incentives for R&D investment and dividend payment varies according to firm marginal tax rates and typical dividend payment policies. It also reiterates the importance of considering firms’ abilities to use R&D tax incentives, via their marginal tax rates, when contemplating the effects a shareholder-level dividend tax decrease will have on R&D investment. This dissertation also provides new insight into the corporate dividend policy views. The results support the double taxation and tax irrelevance views in dividend-paying firms operating in a tax regime with dividend imputation and capital gains taxes. By documenting a significant decrease in R&D investment after a change in dividend taxes, this dissertation also highlights a void in the current corporate dividend policy views and shows the need for the inclusion of R&D investment.

I conduct an examination of the deferred revenue account. I provide descriptive evidence of deferred revenue both at an industry-level and a macro-level, and I examine whether managers use discretion in deferred revenue around earnings benchmarks. I develop a model to measure the normal change in short-term deferred revenue, and examine how the abnormal change varies across the pre-managed distribution of three common earnings benchmarks. My results show that managers delay recognition of revenue using deferred revenue when pre-managed earnings exceed benchmarks by a large margin, and accelerate the recognition of revenue using deferred revenue when premanaged earnings just miss or miss benchmarks by a large amount. I document the prevalence of accelerated revenue recognition, and show that meeting or just beating the annual consensus analyst forecast is where the most cases of suspected accelerated revenue recognition occur. The results are next strongest for the avoidance of earnings decrease benchmark and weakest for the avoidance of loss benchmark. I examine whether conventional abnormal accrual models reflect discretion in deferred revenue, and whether discretion in deferred revenue is associated with lower earnings quality. I show that deferred revenue changes are a leading indicator of future earnings. My results indicate that discretion in revenue can lower the predictability of sales regardless of whether it is of an aggressive or conservative nature.

Prior compensation literature documents and investigates trending practices in CEO incentive contracting by exploring the designs of individual contractual components (e.g., performance targets, pay type, etc.) rather than the overall contract structure. Using distance measures based on a comprehensive set of contract elements derived from firms’ proxy statements, I identify factors that are associated with a firm’s CEO compensation structure homogeneity, which describes the degree to which a firm’s CEO compensation structure is similar to industry practice. My study demonstrates that, consistent with the predictions under optimal contracting theory, a firm adopts a CEO compensation contract that is more similar to industry practice when the firm shares more common risks with its industry or when its owners share more common interests with its industry peers. However, the board of directors’ ability to communicate and obtain inside information, as well as the use of compensation consultants, also contributes to compensation homogeneity unexplained by general CEO/firm specific characteristics. Lastly, I find evidence that CEO compensation homogeneity has a negative association with shareholders’ wealth in the subsequent periods.

In today’s business environment, organizations have increased the use of tangible rewards in their reward and recognition systems. The purpose of my study is to examine the extent to which tangible rewards affect performance in multidimensional task environments, especially the performance on the uncompensated task dimension. Based on economic theory and prior research on tangible rewards, I do not make an ex-ante prediction on the relative efficacy of tangible rewards and cash rewards on the compensated task dimension performance. However, I rely on affect valuation theory to predict that tangible rewards motivate a higher level of performance compared to cash rewards on the uncompensated task dimension. Using an experiment, I find that even though cash and tangible rewards motivate similar levels of performance on the compensated task dimension, the uncompensated task dimension performance is higher under tangible rewards than cash rewards. Thus, my study reveals a positive effect of tangible rewards in multidimensional task environments. The findings of my study provide meaningful insights that can help firms make more informed decisions when designing their performance management and reward systems for multidimensional tasks.

This study explores whether employee responses to developmental feedback in a multitask setting differ when feedback focus on the task which is an employee’s relative strength (strength-congruent) or weakness (weakness-congruent), and wether employee response depends on whether the task is relatively more effort or ability driven. In a multitask setting, developmental feedback can be used to focus future employee efforts on one task over another. Using an experiment, I find that strength-congruent feedback on a more ability-driven task leads to a greater allocation of time to the task than when strength-congruent feedback is given on a more effort-driven task, or when weakness-congruent feedback is given. However, within the time spent on the task, I find greater performance improvement on the ability-driven task regardless of whether feedback is strength-congruent or weakness-congruent. This study broadens our understanding of the multitask environment and how employees allocate effort in the presence of communicated firm preferences.

Relative performance information (RPI) is commonly provided or available in many organizations. While RPI can be viewed as a control that firms use to influence employee effort and performance, the presence of RPI may also encourage employees to seek advice from the supervisor, which in turn breeds employees’ trust in the supervisor. This study investigates how RPI influences employee advice-seeking as well as how such advice-seeking affects trust in the supervisor. Using a laboratory experiment, I find that RPI motivates the non-bottom performing employees (i.e., top and middle performers) to seek advice from their supervisor more frequently. In contrast, the bottom performing employees are not significantly affected by RPI to seek advice. I also find that the non-bottom performing employees’ advice-seeking frequency positively influences their trust in the supervisor. Mediation analysis reveals that RPI has a positive effect on the non-bottom performing employees’ trust in the supervisor and this positive effect is mediated by their advice-seeking behavior. I discuss the implications of my findings for accounting theory and practice.

I experimentally investigate the impact of the level and salience of the ability heterogeneity on the effectiveness of relative performance information (RPI) on individual performance in tournaments. In my setting, the first stage is used to sort out the task abilities while the second stage consists of a tournament. My primary dependent variable is the effectiveness of the RPI provided at the end of the first stage, captured by the change of individual performance over the stages. Consistent with my predictions, I find that RPI’s effectiveness is more positive when the ability heterogeneity is low and salient than when it is high and salient, because the knowledge of ability heterogeneity influences participants’ performance expectations. I also find that RPI’s effectiveness is more positive when the ability heterogeneity is low and salient than when it is not salient, because both high and low performers attach greater value to the tournament outcomes in the former situation. Moreover, I find that RPI’s effectiveness is not more negative when the ability heterogeneity is high and salient than when it is not salient, as unequal competitions might give rise to additional value in winning the tournament. Finally, I find that performance reduction in low performers is smaller than that in high performers, once the ability heterogeneity become salient and low. My results suggest that when RPI is present, its effectiveness depends on the ability heterogeneity and its saliency that firms should consider when designing effective tournaments.

In a participative budgeting setting, this paper examines the relative merits of different choices regarding to whom to assign budget rejection authority in a hierarchical firm. While the participative budgeting literature has traditionally examined dyadic firms (i.e. firms consisting of only an owner and a worker), many firms exist as taller hierarchies. In such firms, the question of where to locate an important budgetary control – rejection authority – in order to promote improved budgetary reporting becomes meaningful. It is hypothesized that delegating budget rejection authority to the manager leads to increased slack consumption by the agent in comparison to the situation in which the principal retains such authority. Research questions address whether the agents report more accurately when both the manager and the principal have rejection authority by comparison to the arrangement in which only one of these individuals hold such power. Results generally suggest that delegating rejection authority to the manager does not entail agency related costs. Further, agent slack capture is least when the control is duplicated but this benefit comes at a substantial decrease in the amount of surplus the firm can capture.

This study investigates how two management controls, communication of the causal linkages between employees’ current actions and future outcomes and incentives that tie employees’ future-period compensation to their current actions, affect employees’ construal level mindsets. A construal level mindset refers to the abstractness of an individual’s mental representation of an object, event, or action. A high-level construal has been shown to benefit various types of decisions and behaviors, such as creative performance, negotiation, and knowledge transfer. Using an experiment, I find that communication of the causal linkages increases employees’ construal levels regardless of whether incentives tie employees’ future-period compensation to their current actions. The findings suggest that firms can use the communication of the causal linkages, a relatively low-cost management control compared with incentives, to capitalize on the various decisional and behavioral benefits of high-level construal mindsets.

Personal political ideology can be a source of inter-personal frictions and affect working relationships. In this study, I introduce the construct of firm-level Political Ideological Divergence at the Top (PID) – the difference in the personal political ideologies of the CEO and that of the board of directors – and examine the impact that PID has on a firm’s reporting quality. My results suggest that PID increases the level of monitoring that the board of directors impose on the CEO and improve financial reporting quality. In-depth analysis reveals PID between the CEO and non-executive directors can improve financial reporting quality while PID between the CEO and the independent chairman can sometimes lead to reduced financial reporting quality. I also find that PID is associated with an increase in the CEO’s donations to individuals and organizations that are not aligned with her political ideology during her tenure. Lastly, I find evidence that suggests firms with higher levels of PID have earnings announcements that are more informative and management earnings forecasts that are more credible. This study documents the first evidence that differences in personal beliefs of the CEO and the personal beliefs of directors can affect firm behavior, and that CEOs may actively take steps to mitigate such differences.

Managers have often used tournament incentive programs because of their ability to attract top talent and motivate employees to give their best effort (Grote 2005; McGregor 2006; Ng and Lublin 2010). However, because a tournament incentive structure explicitly evokes competition, prior economic literature has shown that the harmful effects of sabotage observed during a tournament can completely negate any benefits they have (Carpenter et al. 2010). The remedies suggested to reduce sabotage involve reducing the economic incentives that contribute to both beneficial and harmful behavior (Chen 2003). In the accounting literature to date, no remedy for the harmful effects of a tournament incentive has been investigated because the ability to sabotage has been restricted by way of tight experimental control. I utilize an experiment in which participants perform a real effort task which allows them to sabotage each other and receive relative performance feedback in real-time. I first predict that sabotage during a tournament will be higher than fixed pay because of the higher incentive to sabotage during a tournament. I then predict that by employing a code of ethics, I can activate the social norm of promise keeping which discourages those in a tournament from engaging in sabotage, while still giving their best effort. In the majority of cases, this allows the company to reap the previously observed benefits of a tournament incentive, while minimizing the previously observed costs that normally accompany a tournament incentive. However, I unexpectedly discover that a code of ethics can be able double-edge sword; In so much that, if violations persist despite certifications to follow the code, participants may become more discouraged and their behavior more detrimentally effects productivity than if those same violations occurred without a code. The implications of employing a code of ethics under these two incentive systems on overall productivity is explored.

An extension of the agency model of capital budgeting under private information shows that an owner’s investment in a risk management system (RMS) exacerbates the owner’s agency costs as it increases the expected slack available for managerial expropriation. This study experimentally examines the effects of an RMS on honesty in managerial reporting and the incremental effect of the owner’s willingness to invest in an RMS. Applying insights from a model of social norm activation and behavioral economics, I predict that an RMS will increase managerial honesty in reporting by increasing common expectations for truthful reporting. Furthermore, I predict that the owner’s willingness to invest will activate a trustworthiness social norm for managers that will strengthen the positive effect of an RMS. Consistent with my theory, I find that an RMS has a positive effect on managerial honesty in reporting, and this positive effect is greater when the RMS is the result of the owner’s investment choice. An analysis of exit questionnaire responses confirms that the owner’s investment in an RMS signaled trust and increased the manager’s trustworthiness. The results suggest that an RMS can play a corporate governance role despite the potential increase in agency costs, and the salience of the owner’s investment choice reinforces this role.

Participative budgeting plays an important role for information communication among hierarchies in organizations. In this study, I use a lab experiment to examine three research questions and investigate the role of supervisors in influencing subordinate honesty. First, I predict and find support that supervisory behavioral integrity, i.e. the alignment between a superior’s communication of a value of honesty and the superior’s behavioral honesty, is an effective informal control mechanism to influence employee honesty. However, the effectiveness of supervisory behavioral integrity in influencing employee honesty depends on the presence of shared financial interests between the superior and the subordinates, such that high supervisory behavioral integrity may promote employee honesty only in the presence of shared financial interests. In the absence of shared financial interests, supervisory behavioral integrity is no longer effective in influencing employee honesty. Finally, I investigate whether supervisory behavioral integrity, compared to supervisory behavioral honesty, has incremental effect on subordinate honesty. The results suggest that, compared to supervisory behavioral honesty, supervisory behavioral integrity has a stronger influence on subordinate honesty. Furthermore, high supervisory behavioral honesty is shown to have a demotion effect on subordinate honesty, i.e. subordinate honesty is lower when superior’s honesty is high than when it is low. Supplemental analysis provides potential explanations for the demotion effect. The implications of the findings for management accounting research and practice are discussed.

This study examines how reliance on the client’s internal audit function (IAF) affects auditors’ ability to persuade management to accept material weakness assessments of detected internal control deficiencies. I further investigate whether auditors’ ability to persuade management to accept material weakness assessments depends on the subjectivity the control deficiency assessment to varied interpretations (ambiguity). I apply group affiliation and persuasion theories to hypothesize that management will have higher group identification with the IAF than with the auditors. I predict that management’s group affiliation will lead them to be more accepting of auditors’ internal control assessments when the auditors rely on the client’s IAF than when auditors do not. Further, I hypothesize that the greater the ambiguity in the internal control deficiency assessment, the more persuaded management will be to accept the auditors’ control assessment in situations where the auditors rely on the IAF than when the auditors do not. I conduct an experiment using a 2 X 2 between-subjects design in which I manipulate auditors’ reliance on the client’s IAF during tests of the client’s internal controls (rely or not rely) and the level of ambiguity in the internal control deficiency assessment (less ambiguous or more ambiguous) in a SOX 404 Internal Controls Over Financial Reporting (ICFR) audit setting. The study’s findings provide evidence that relying on the client’s IAF can improve auditors’ likelihood of persuading the client when control assessments are more open to varied interpretations. This study sheds light on a previously ignored benefit of using the client’s IAF – as a persuasion tactic. Thus, my research contributes to two literature streams: factors influencing auditor-client negotiations and the effects of using the IAF on audit engagements. These results provide both practical and theoretical insights to academics, practitioners and auditing standard setters.

Motivated by the current PCAOB proposed standard regarding expansion of the auditor’s reporting model, this study investigates the effect of auditor reporting choice on management disclosure decisions. The proposed standard would require auditors to identify and provide information about the most significant audit and financial reporting issues encountered during the audit in a new section of the audit report on Critical Audit Matters (CAMs). I develop theory to predict how auditor choices about reporting on CAMs might affect manager disclosure decisions. In addition, the study investigates how the effect of auditor reporting choice on management disclosure decisions depends on a very important governance structure, the audit committee. I find that management reacts to the auditor shining a spotlight on a highly uncertain critical accounting estimate by increasing their own disclosure of the matter and that this effect varies directly with the strength of the audit committee’s oversight. In addition, I find that as auditors increase the level of detail provided by the auditor in its CAM reporting, management responds with increased disclosure. Finally, when the auditor provides a detailed CAM discussion, it appears that managers are likely to increase disclosure of quantitative information that would enhance the financial statement user’s ability to quantify the risk in a critical accounting estimate. The study provides ex ante insights on how a mandated change in the auditor’s reporting model might affect the level of information provided by management and received by investors.

This study investigated whether different instructional methodologies have an impact on learning a complex accounting task: tax provision work. To become proficient in making tax provision judgments, an accountant must understand the rules and principles of GAAP and the rules and regulations governing income tax reporting. However, these two sets of rules are often in direct opposition. Using cognitive load theory and constructivist learning theory as a framework, this study predicted how schema acquisition, a key component of learning, could improve tax provision performance. Greater schema acquisition should in turn lead to more accurate performance. Hypotheses include the following: (a) participants who learn using a systems instructional method will perform better than participants who learn using traditional instructional method, (b) participants who practice actively should perform better than participants who practice passively, and (c) the relationship between instructional method and performance will be moderated by the practice method. These hypotheses were tested using a 2 x 2 between-subjects experiment, manipulating instructional method and practice method as independent variables. The results of this study are inconclusive. The statistically significant findings are invalid due to potentially unequal pre-tax knowledge among the subjects, and several hypotheses were not supported. The results of this study had the potential to benefit theory, practice, and education by identifying the most effective combination of instructional method and practice method to build a tax provision schema in a novice learner. However, due to design flaws, this study did not realize that potential.