Description
During the Fall of 2014, approximately sixty accounting academics
as well as several thought leaders from practice and standing
setting convened in Chicago to participate in the AOS Conference
on Accounting Estimates. The Conference, which was made
possible by generous financial support from Deloitte LLP, generated
far more high quality submissions than we could fit into our short
two-day event. This heavy interest is perhaps unsurprising given
the growing and expansive role that accounting estimates play in
organizations’ internal and external reporting contexts.
Accounting, Organizations and Society 46 (2015) 1–4
Contents lists available at ScienceDirect
Accounting, Organizations and Society
journal homepage: www.elsevier.com/locate/aos
Editorial
Key takeaways and overarching themes: A foreward 2014 AOS
Conference on Accounting Estimates special issue
During the Fall of 2014, approximately sixty accounting aca-
demics as well as several thought leaders from practice and stand-
ing setting convened in Chicago to participate in the AOS Confer-
ence on Accounting Estimates. The Conference, which was made
possible by generous ?nancial support from Deloitte LLP, generated
far more high quality submissions than we could ?t into our short
two-day event. This heavy interest is perhaps unsurprising given
the growing and expansive role that accounting estimates play in
organizations’ internal and external reporting contexts.
In the end, we invited authors of six papers to present their
work along with six discussants, who provided helpful follow-on
commentary. Collectively the papers presented draw on different
theoretical frameworks and use different research methods. Below,
we attempt to preview overarching takeaways of each paper in
the order presented at the Conference. We thereafter provide short
synthesis of what these studies enable us to learn, drawing on the
papers as well as the discussants’ remarks, and what new ques-
tions they help us identify.
1. The effects of forecast type and performance-based
incentives on the quality of management forecasts
Forecast accuracy is an important determinant of the accuracy
of many forward-looking accounting estimates. Chen, Rennekamp,
and Zhou (2015, CRZ) use an abstract experiment to examine how
certain forecast characteristics interact with manager incentives to
in?uence forecast accuracy and optimism. They demonstrate that
preparing a disaggregated (vs. aggregated) forecast of future per-
formance on a task comprised of multiple components leads to
greater forecast accuracy, but only in the absence of performance-
based incentives. CRZ draw on motivated reasoning theory (Kunda,
1990) to predict that the presence of performance-based incentives
causes a greater increase in forecast optimism when managers pre-
pare a disaggregated (vs. aggregated) forecast. These increases oc-
cur because disaggregated forecasts provide more opportunities for
managers to inject bias into their predictions than when they fore-
cast a single summary measure.
In discussing CRZ, Hales (2015) commends the theoretical and
practical value of the variables chosen by the authors. He also sug-
gests that future research should more deeply examine the under-
lying process and potential advantages of other alternative fore-
casting techniques. In some organizational settings, division man-
agers likely make component forecasts that more senior managers
later aggregate.
2. Disclosure transparency about activity in valuation
allowance and reserve accounts and accruals-based earnings
management
A key concern with accounting estimates is that they pro-
vide managers with discretion to manage earnings. Cassell, My-
ers, and Seidel (2015, CMS) use archival methods to document
an association between the transparency of disclosures about cer-
tain valuation allowance and reserve accounts and the level of
discretion present in those accounts. They predict and ?nd that
accruals-based earnings management is lower in these accounts
when changes therein are more transparently disclosed in the ?-
nancial statements. This relationship holds whether the informa-
tion is disclosed in a comprehensive schedule or spread through-
out the notes. CMS posit that greater transparency about the activ-
ity in valuation allowance and reserve accounts facilitates investor
detection of earnings management, thus providing managers with
less ?exibility to manage earnings through those accounts.
Tucker (2015) proposes in her discussion that the relationship
CMS ?nd between transparency and earnings management could
also be interpreted using a joint-decision framework instead of a
misstatement framework. The joint-decision framework acknowl-
edges that management makes both reporting and disclosure de-
cisions around the same time and that transparent disclosures can
be a signal of better reporting quality. She suggests that future re-
search could seek to identify situations where reporting and dis-
closure quality act as complements or as substitutes.
3. Construal instructions and professional skepticism in
evaluating complex estimates
The subjective nature of many accounting estimates can make
them particularly di?cult to audit. Rasso (2015) uses an exper-
iment with professional auditors to investigate how the type of
documentation instructions auditors receive can in?uence the de-
gree of professional skepticism they apply when auditing a com-
plex estimate. He uses construal-level theory (Trope & Liberman,
2010) to predict that instructions promoting auditors to think more
broadly (high-level construal) will help auditors see the big pic-
ture when auditing an estimate and therefore apply more skep-
tical judgment and take more skeptical actions than auditors re-http://dx.doi.org/10.1016/j.aos.2015.10.006
0361-3682/© 2015 Elsevier Ltd. All rights reserved.
2 Editorial / Accounting, Organizations and Society 46 (2015) 1–4
ceiving instructions promoting a more narrow focus (low-level
construal). Consistent with theory, he ?nds that auditors using
high-level construal instructions collect signi?cantly more evidence
(skeptical action) and rate the fair value estimate as signi?cantly
more risky (skeptical judgment) than participants receiving low-
level construal instructions.
In their discussion, Frank and Hoffman (2015) suggest that
greater uncertainty could be driving the auditor’s response to the
high-level construal instructions. Since auditors are accustomed to
a more low-level approach, the unfamiliar instructions could have
prompted them to seek more evidence than usual and also per-
ceive more risk in the estimate. Frank and Hoffman caution that
further research is needed to determine whether and how account-
ing standards and practices should change in light of the theory
and ?ndings in this study.
4. The effect of an Audit Judgment Rule on audit committee
members’ professional skepticism: the case of accounting
estimates
In addition to auditors and managers, audit committee mem-
bers (ACMs) play an important role in ensuring the quality of
accounting estimates in ?nancial statements. Kang, Trotman, and
Trotman (2015, KTT) conduct a combination of an experiment and
survey using experienced ACMs as participants. They investigate
the effects of the presence of an Audit Judgment Rule (AJR) and
audit procedure type on ACM’s perceived degrees of comfort and
accountability. An AJR, as proposed by Peecher, Solomon, and Trot-
man (2013), prohibits inspectors and courts from second-guessing
well-reasoned auditor judgments made in good faith. KTT ?nd that
ACMs perceive greater accountability in the presence of an AJR
(vs. absence), given that the auditor employs standard procedures.
They also demonstrate that, in the presence of an AJR, ACMs’ per-
ceived overall comfort increases when the auditor uses innovative
procedures rather than standard procedures. However, the level of
ACM professional skepticism, as measured by the extent of ques-
tioning by the ACMs, is not signi?cantly affected by the presence
of an AJR or procedure type. One interesting ?nding is that the
presence of an AJR differentially affects ACMs with different back-
grounds, with former audit partners showing greater skepticism in
the presence of an AJR than other ACMs.
Vera-Muñoz (2015) agrees that communications between ACMs
and the auditors about accounting estimates are increasingly im-
portant and also emphasizes in her discussion of KTT how ACMs
are becoming overloaded with additional responsibilities. She rec-
ommends that future research examine how an AJR would affect
auditors’ professional skepticism and also investigate stakeholders’
perceptions of other types of innovative procedures, such as data
analytics.
5. The impact of risk modeling on the market perception of
banks’ estimated fair value gains and losses for ?nancial
instruments
Managers can undertake certain activities to help improve
the quality of their estimates. Bhat and Ryan (2015) conduct an
archival examination of the association between risk modeling and
the returns-relevance of unrealized fair value gains and losses
(FVGL) from ?nancial instruments. They use ?nancial statement
disclosures to proxy for whether or not ?rms engage in market risk
or credit risk modeling. They ?nd that ?rms disclosing engagement
in these modeling activities experience enhanced returns-relevance
of FVGL, especially when the underlying ?nancial instruments are
less liquid and more di?cult to value. Bhat and Ryan operational-
ize the liquidity and ease-of-valuation of ?nancial instruments by
where the associated FVGL are located in the ?nancial statements,
with FVGL recognized in the income statement as the easiest to
value, those recorded in other comprehensive income as the next
easiest, and those disclosed in the notes as the most di?cult to
value. They ?nd that market (credit) risk modeling is associated
with enhanced returns-relevance of FVGL recorded in other com-
prehensive income (disclosed in the notes), in line with the differ-
ential importance of each risk to the ?nancial instruments included
in those locations.
While the authors employ a two-stage regression to attempt to
control for factors that in?uence disclosure decisions, McDonough
and Shakespeare (2015) discuss how the research design makes it
di?cult to disentangle the risk modeling and disclosure effects.
They suggest that the joint disclosure of risk modeling activities
and other fair value disclosures could make estimates more veri-
?able, and therefore more reliable, for investors. Additionally, they
caution that disclosure of risk modeling may be correlated with
variation across managers in the ability to estimate fair values. Mc-
Donough and Shakespeare suggest that future research should at-
tempt to disentangle these factors.
6. The effect of alternative accounting measurement bases on
investors’ assessments of managers’ stewardship
Information in ?nancial statements is often used to eval-
uate managers. Anderson, Brown, Hodder, and Hopkins (2015,
ABHH) report an experiment that challenges the assumption that
amortized-cost information is superior to fair-value-based infor-
mation in assessing managers’ stewardship. Using attribution the-
ory (Ross, 1977), the authors predict and ?nd that investors tend
to attribute ?nancial outcomes to the manager and do not prop-
erly assess the impact of factors outside the control of the man-
ager. ABHH argue that fair-value-based information makes the role
of these exogenous factors more salient to the investors, allowing
them to better assess the individual contribution of the manager.
They provide evidence that the use of fair-value-based (amortized
cost-based) ?nancial information can lead to better (worse) stew-
ardship assessments in their experimental setting.
In their discussion, Emett and Nelson (2015) agree that ABHH
demonstrates that amortized-cost-based ?nancial information is
not always better than fair-value-based information in assessing
stewardship, but also caution that there are several limitations to
the generalizability of this study. They argue that the research de-
sign used in ABHH excludes many of the common features that
cause concern with fair-value-based ?nancial statements, such as
uncertainty in knowing whether a given shock is exogenous, per-
sistent, or actionable or whether a fair value estimate is measured
appropriately, which are critical to the evaluation of the usefulness
of such statements in assessing stewardship.
7. Synthesis
The studies presented at the Accounting, Organizations and Soci-
ety Conference on Accounting Estimates address important aspects
of the preparation, audit, and assessment of accounting estimates.
Each paper explores the role of a particular stakeholder in the ac-
counting estimate ?nancial reporting process and what types of
factors in?uence reporting quality. Starting with managers, Chen
et al. (2015) examine how the type of forecast managers produce
can affect the accuracy and optimism of the resulting forecasts. The
accuracy of these forecasts is important since they contain inputs
into models used by managers to generate estimates. Relatedly,
Bhat and Ryan (2015) show that the disclosure of risk modeling
activities undertaken by managers enhances the returns-relevance
of the associated fair value gains and losses. This demonstrates
that actions taken by management to improve inputs into valuation
models are generally perceived by investors to improve the quality
Editorial / Accounting, Organizations and Society 46 (2015) 1–4 3
of the estimates. Together, these two studies suggest that there is
variation in the quality of inputs used to generate accounting esti-
mates and that this variation is driven, in part, by how managers
approach the estimation process.
After managers generate an accounting estimate, the auditor
must provide reasonable assurance over it. This task is particu-
larly challenging due to the subjectivity inherent in accounting es-
timates and the professional judgment required to assess their ap-
propriateness. Rasso (2015) investigates a potential means of en-
hancing auditor professional skepticism through instructing au-
ditors to think broadly about audit evidence as it is received.
This study complements recent ?ndings by Gri?th, Hammersley,
Kadous, and Young (2015) showing that a deliberative mindset can
help auditors identify unreasonable estimates. Professional skepti-
cism over estimates is not only important for auditors, but for au-
dit committee members as well. Kang et al. (2015) examine how
changes in the regulatory framework in?uence audit committee
member perceptions of accountability in ensuring reasonable re-
porting of an accounting estimate and how the use of more inno-
vative procedures affects the comfort the member perceives over
the estimate. They ?nd that, despite differences in perceived ac-
countability, audit committee members maintain a high level of
professional skepticism when considering the appropriateness of
accounting estimates. Together, these studies indicate that auditors
tend to think too narrowly when approaching the audit of complex
estimates, but that certain interventions can help improve auditor
judgment and audit committee skepticism can help further push
auditors to probe deeper into the assumptions used by managers
to generate accounting estimates.
After the accounting estimate is generated by managers, au-
dited by the external auditors, and examined by the audit com-
mittee, the estimate must then be reported in the ?nancial state-
ments. Anderson et al. (2015) and Cassell et al. (2015) explore how
investors can use this information to assess the performance of the
company and the stewardship of managers, respectively. Cassell
et al. (2015) show that more transparent disclosures of certain val-
uation and reserve accounts is associated with less discretion in
the accounts. Tucker (2015) suggests that investors could use re-
porting transparency as a signal of the quality of the estimates in
the associated accounts since managers jointly decide how much
to disclose and the extent of any earnings management. Anderson
et al. (2015) demonstrate how fair-value-based ?nancial informa-
tion can improve how investors evaluate manager stewardship by
making exogenous factors more salient. Together, these studies
suggest that how fair values are disclosed in ?nancial reports mat-
ters for investor evaluation of company and manager performance.
Of course, this relationship can, in turn, affect manager decisions.
Overall, these studies help paint a picture of how the presence
of accounting estimates permeates the ?nancial reporting process
from the generation of the estimates by managers to the assess-
ment of the reported information by investors. It is important to
consider the role of the various stakeholders in the ?nancial re-
porting process because a potential di?culty for one stakeholder
(e.g. unconscious bias in formulating forecasts) is likely to result in
problems for another stakeholder (e.g. assessing the credibility of
disclosed estimates). Additionally, solutions proposed to ?x a prob-
lem for one stakeholder (e.g. using fair-value-based ?nancial state-
ments to evaluate stewardship) can lead to increased di?culties
for another stakeholder (e.g. auditing subjective estimates). By con-
tinuing to perform research that assesses the role that each stake-
holder plays in the ?nancial reporting of accounting estimates and
how those roles interact with each other, we can better understand
the process and how to address potential de?ciencies.
In addition to examining accounting estimate issues from the
perspectives of different stakeholders, the papers presented at the
Conference on Accounting Estimates provide a good example of
the use of methodological triangulation to examine a common ac-
counting problem using different research methods. Methodologi-
cal triangulation involves the bringing together of different tech-
niques, data sources, and researcher perspectives to explore a re-
search question (Harvey, MacDonald, and Hill, 2000). Each method
has strengths and weaknesses that combined can help provide a
more thorough understanding of a given topic. While archival re-
search methods are very useful for examining questions of whether
a phenomenon occurs, experiments can help answer questions of
how and why it occurs (Libby, Bloom?eld, and Nelson, 2002). For
example, Cassell et al. (2015) uses archival methods to determine
whether an association exists between transparency of ?nancial
estimate disclosures and earnings management in the related ac-
counts. However, it would be di?cult to use similar methods and
data to examine why managers would choose to use disclosure and
reporting quality as complements or substitutes, as Tucker (2015)
suggests. Instead, a researcher could conduct an experiment to ex-
amine what factors affect managers’ contemporaneous decisions
for transparency and earnings management. Together, such a pair-
ing of studies would help researchers, practitioners, ?nancial state-
ment users, and regulators better understand when transparency
provides a signal of reporting quality and whether enforcement of
transparency practices would improve reporting quality.
Regardless of method, research studies should have a strong
grounding in the construction or testing of theory. Empirical dis-
covery that furthers the development of causal theory is not only
aids immediate prediction but also re?nes understanding of likely
or testable boundary conditions. Further, without a well-articulated
theory and ruling out of alternative plausible explanations, it is dif-
?cult to assess whether the ?ndings in a given study are gener-
alizable or simply the product of a particular research design or
setting (Gassen 2015). For example, Frank and Hoffman (2015) dis-
cuss how the ?ndings of the Rasso (2015) study may be plausibly
attributed to an alternative explanation, in part because the oper-
ationalization of the main construct did not match the typical fea-
tures of the theory used to make predictions. Therefore, it is di?-
cult for regulators and practitioners to know how to implement
the proposed intervention in practice, given that the underlying
causal mechanism is not well understood. Similarly, McDonough
and Shakespeare (2015) note that the ?ndings of Bhat and Ryan
(2015) should be interpreted with caution because the authors
make predictions based on the construct of risk modeling activ-
ity, but the measure of this construct is contingent on disclosure
of such activity in the ?nancial statements and could re?ect vari-
ability in manager’s risk tracking abilities. In addition to shoring up
generalizability, theory development helps generate plausible alter-
native explanations for associations observed in a given study and
alternative research designs that would allow testing of competing
explanations.
Last, it is worth noting that accounting research likely will
make better progress to the extent researchers seek and learn from
feedback provided by experienced accounting practitioners, includ-
ing auditors, managers, regulators, and standard setters. Along
these lines we are very pleased that William Platt, with Deloitte
& Touche LLP, has provided a companion commentary on the con-
ference papers that interestingly reveals how some of the papers
already have revised his beliefs about how to go about developing
better accounting estimates.
References
Anderson, S., Brown, J. L., Hodder, L., & Hopkins, P. E. (2015). The effect of alterna-
tive accounting measurement bases on investors’ assessments of management
stewardship. Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.
aos.2015.03.007.
Bhat, G., & Ryan, S. G. (2015). The impact of risk modeling on the market percep-
tion of banks’ estimated fair value gains and losses for ?nancial instruments.
Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.aos.2015.04.004.
4 Editorial / Accounting, Organizations and Society 46 (2015) 1–4
Cassell, C. A., Myers, L. A., & Seidel, T. A. (2015). Disclosure transparency about ac-
tivity in valuation allowance and reserve accounts and accruals-based earnings
management. Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.
aos.2015.03.004.
Chen, C. X., Rennekamp, K. M., & Zhou, F. H. (2015). The effects of forecast type and
performance-based incentives on the quality of management forecasts. Account-
ing, Organizations and Society.http://dx.doi.org/10.1016/j.aos.2015.03.002.
Emett, S. A., & Nelson, M. W. (2015). Discussion of “the effect of alternative account-
ing measurement bases on investors’ assessments of management stewardship”.
Accounting, Organizations and Society (in this issue).
Frank, M. L., & Hoffman, V. B. (2015). Discussion of construal instructions and pro-
fessional skepticism in evaluating complex estimates. Accounting, Organizations
and Society.http://dx.doi.org/10.1016/j.aos.2015.04.005.
Gassen, J. (2015). Causal inference in empirical archival ?nancial accounting re-
search. Accounting Organizations & Society, 39, 535–544.
Gri?th, E. E., Hammersley, J. S., Kadous, K., & Young, D. (2015). Auditor mindsets
and audits of complex estimates. Journal of Accounting Research, 53(1), 49–77.
Hales, J. (2015). Discussion of “the effects of forecast type and performance-based
incentives on the quality of management forecasts”. Accounting, Organizations
and Society.http://dx.doi.org/10.1016/j.aos.2015.04.006.
Harvey, L., MacDonald, M., & Hill, J. (2000). Theories and methods. London: Hodder
and Stoughton.
Kang, Y. J., Trotman, A. J., & Trotman, K. T. (2015). The effect of an audit judgment
rule on audit committees’ questioning on accounting estimates. Accounting, Or-
ganizations and Society.http://dx.doi.org/10.1016/j.aos.2015.03.001.
Kunda, Z. (1990). The case for motivated reasoning. Psychological Bulletin, 108(3),
480–498.
Libby, R., Bloom?eld, R., & Nelson, M. W. (2002). Experimental research in ?nancial
accounting. Accounting, Organizations, and Society, 27, 775–810.
McDonough, R. P., & Shakespeare, C. M. (2015). Fair value measurement capabilities,
disclosure, and the perceived reliability of fair value estimates: a discussion of
Bhat and Ryan (2015). Accounting, Organizations and Society.http://dx.doi.org/10.
1016/j.aos.2015.05.003.
Rasso, J. (2015). Construal instructions and professional skepticism in evaluating
complex estimates. Accounting, Organizations and Society.http://dx.doi.org/10.
1016/j.aos.2015.03.003.
Ross, L. (1977). The intuitive psychologist and his shortcomings: distortions in the
attribution process. Advances in Experimental Social Psychology, 10, 173–220.
Trope, Y., & Liberman, N. (2010). Construal-level theory of psychological distance.
Psychological Review, 117(2), 440–463.
Tucker, J. W. (2015). The relation between disclosure quality and reporting quality:
a discussion of Cassell, Myers, and Seidel (2015). Accounting, Organizations and
Society.http://dx.doi.org/10.1016/j.aos.2015.05.002.
Vera-Muñoz, S. C. (2015). Commentary on “the effect of an audit judgment rule on
audit committees’ questioning on accounting estimates” (Kang, Trotman, and
Trotman). Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.aos.
2015.04.002.
Kamber Hetrick
Mark E. Peecher
?
University of Illinois at Urbana-Champaign, USA
?
Corresponding author.
E-mail address: [email protected]
doc_292607117.pdf
During the Fall of 2014, approximately sixty accounting academics
as well as several thought leaders from practice and standing
setting convened in Chicago to participate in the AOS Conference
on Accounting Estimates. The Conference, which was made
possible by generous financial support from Deloitte LLP, generated
far more high quality submissions than we could fit into our short
two-day event. This heavy interest is perhaps unsurprising given
the growing and expansive role that accounting estimates play in
organizations’ internal and external reporting contexts.
Accounting, Organizations and Society 46 (2015) 1–4
Contents lists available at ScienceDirect
Accounting, Organizations and Society
journal homepage: www.elsevier.com/locate/aos
Editorial
Key takeaways and overarching themes: A foreward 2014 AOS
Conference on Accounting Estimates special issue
During the Fall of 2014, approximately sixty accounting aca-
demics as well as several thought leaders from practice and stand-
ing setting convened in Chicago to participate in the AOS Confer-
ence on Accounting Estimates. The Conference, which was made
possible by generous ?nancial support from Deloitte LLP, generated
far more high quality submissions than we could ?t into our short
two-day event. This heavy interest is perhaps unsurprising given
the growing and expansive role that accounting estimates play in
organizations’ internal and external reporting contexts.
In the end, we invited authors of six papers to present their
work along with six discussants, who provided helpful follow-on
commentary. Collectively the papers presented draw on different
theoretical frameworks and use different research methods. Below,
we attempt to preview overarching takeaways of each paper in
the order presented at the Conference. We thereafter provide short
synthesis of what these studies enable us to learn, drawing on the
papers as well as the discussants’ remarks, and what new ques-
tions they help us identify.
1. The effects of forecast type and performance-based
incentives on the quality of management forecasts
Forecast accuracy is an important determinant of the accuracy
of many forward-looking accounting estimates. Chen, Rennekamp,
and Zhou (2015, CRZ) use an abstract experiment to examine how
certain forecast characteristics interact with manager incentives to
in?uence forecast accuracy and optimism. They demonstrate that
preparing a disaggregated (vs. aggregated) forecast of future per-
formance on a task comprised of multiple components leads to
greater forecast accuracy, but only in the absence of performance-
based incentives. CRZ draw on motivated reasoning theory (Kunda,
1990) to predict that the presence of performance-based incentives
causes a greater increase in forecast optimism when managers pre-
pare a disaggregated (vs. aggregated) forecast. These increases oc-
cur because disaggregated forecasts provide more opportunities for
managers to inject bias into their predictions than when they fore-
cast a single summary measure.
In discussing CRZ, Hales (2015) commends the theoretical and
practical value of the variables chosen by the authors. He also sug-
gests that future research should more deeply examine the under-
lying process and potential advantages of other alternative fore-
casting techniques. In some organizational settings, division man-
agers likely make component forecasts that more senior managers
later aggregate.
2. Disclosure transparency about activity in valuation
allowance and reserve accounts and accruals-based earnings
management
A key concern with accounting estimates is that they pro-
vide managers with discretion to manage earnings. Cassell, My-
ers, and Seidel (2015, CMS) use archival methods to document
an association between the transparency of disclosures about cer-
tain valuation allowance and reserve accounts and the level of
discretion present in those accounts. They predict and ?nd that
accruals-based earnings management is lower in these accounts
when changes therein are more transparently disclosed in the ?-
nancial statements. This relationship holds whether the informa-
tion is disclosed in a comprehensive schedule or spread through-
out the notes. CMS posit that greater transparency about the activ-
ity in valuation allowance and reserve accounts facilitates investor
detection of earnings management, thus providing managers with
less ?exibility to manage earnings through those accounts.
Tucker (2015) proposes in her discussion that the relationship
CMS ?nd between transparency and earnings management could
also be interpreted using a joint-decision framework instead of a
misstatement framework. The joint-decision framework acknowl-
edges that management makes both reporting and disclosure de-
cisions around the same time and that transparent disclosures can
be a signal of better reporting quality. She suggests that future re-
search could seek to identify situations where reporting and dis-
closure quality act as complements or as substitutes.
3. Construal instructions and professional skepticism in
evaluating complex estimates
The subjective nature of many accounting estimates can make
them particularly di?cult to audit. Rasso (2015) uses an exper-
iment with professional auditors to investigate how the type of
documentation instructions auditors receive can in?uence the de-
gree of professional skepticism they apply when auditing a com-
plex estimate. He uses construal-level theory (Trope & Liberman,
2010) to predict that instructions promoting auditors to think more
broadly (high-level construal) will help auditors see the big pic-
ture when auditing an estimate and therefore apply more skep-
tical judgment and take more skeptical actions than auditors re-http://dx.doi.org/10.1016/j.aos.2015.10.006
0361-3682/© 2015 Elsevier Ltd. All rights reserved.
2 Editorial / Accounting, Organizations and Society 46 (2015) 1–4
ceiving instructions promoting a more narrow focus (low-level
construal). Consistent with theory, he ?nds that auditors using
high-level construal instructions collect signi?cantly more evidence
(skeptical action) and rate the fair value estimate as signi?cantly
more risky (skeptical judgment) than participants receiving low-
level construal instructions.
In their discussion, Frank and Hoffman (2015) suggest that
greater uncertainty could be driving the auditor’s response to the
high-level construal instructions. Since auditors are accustomed to
a more low-level approach, the unfamiliar instructions could have
prompted them to seek more evidence than usual and also per-
ceive more risk in the estimate. Frank and Hoffman caution that
further research is needed to determine whether and how account-
ing standards and practices should change in light of the theory
and ?ndings in this study.
4. The effect of an Audit Judgment Rule on audit committee
members’ professional skepticism: the case of accounting
estimates
In addition to auditors and managers, audit committee mem-
bers (ACMs) play an important role in ensuring the quality of
accounting estimates in ?nancial statements. Kang, Trotman, and
Trotman (2015, KTT) conduct a combination of an experiment and
survey using experienced ACMs as participants. They investigate
the effects of the presence of an Audit Judgment Rule (AJR) and
audit procedure type on ACM’s perceived degrees of comfort and
accountability. An AJR, as proposed by Peecher, Solomon, and Trot-
man (2013), prohibits inspectors and courts from second-guessing
well-reasoned auditor judgments made in good faith. KTT ?nd that
ACMs perceive greater accountability in the presence of an AJR
(vs. absence), given that the auditor employs standard procedures.
They also demonstrate that, in the presence of an AJR, ACMs’ per-
ceived overall comfort increases when the auditor uses innovative
procedures rather than standard procedures. However, the level of
ACM professional skepticism, as measured by the extent of ques-
tioning by the ACMs, is not signi?cantly affected by the presence
of an AJR or procedure type. One interesting ?nding is that the
presence of an AJR differentially affects ACMs with different back-
grounds, with former audit partners showing greater skepticism in
the presence of an AJR than other ACMs.
Vera-Muñoz (2015) agrees that communications between ACMs
and the auditors about accounting estimates are increasingly im-
portant and also emphasizes in her discussion of KTT how ACMs
are becoming overloaded with additional responsibilities. She rec-
ommends that future research examine how an AJR would affect
auditors’ professional skepticism and also investigate stakeholders’
perceptions of other types of innovative procedures, such as data
analytics.
5. The impact of risk modeling on the market perception of
banks’ estimated fair value gains and losses for ?nancial
instruments
Managers can undertake certain activities to help improve
the quality of their estimates. Bhat and Ryan (2015) conduct an
archival examination of the association between risk modeling and
the returns-relevance of unrealized fair value gains and losses
(FVGL) from ?nancial instruments. They use ?nancial statement
disclosures to proxy for whether or not ?rms engage in market risk
or credit risk modeling. They ?nd that ?rms disclosing engagement
in these modeling activities experience enhanced returns-relevance
of FVGL, especially when the underlying ?nancial instruments are
less liquid and more di?cult to value. Bhat and Ryan operational-
ize the liquidity and ease-of-valuation of ?nancial instruments by
where the associated FVGL are located in the ?nancial statements,
with FVGL recognized in the income statement as the easiest to
value, those recorded in other comprehensive income as the next
easiest, and those disclosed in the notes as the most di?cult to
value. They ?nd that market (credit) risk modeling is associated
with enhanced returns-relevance of FVGL recorded in other com-
prehensive income (disclosed in the notes), in line with the differ-
ential importance of each risk to the ?nancial instruments included
in those locations.
While the authors employ a two-stage regression to attempt to
control for factors that in?uence disclosure decisions, McDonough
and Shakespeare (2015) discuss how the research design makes it
di?cult to disentangle the risk modeling and disclosure effects.
They suggest that the joint disclosure of risk modeling activities
and other fair value disclosures could make estimates more veri-
?able, and therefore more reliable, for investors. Additionally, they
caution that disclosure of risk modeling may be correlated with
variation across managers in the ability to estimate fair values. Mc-
Donough and Shakespeare suggest that future research should at-
tempt to disentangle these factors.
6. The effect of alternative accounting measurement bases on
investors’ assessments of managers’ stewardship
Information in ?nancial statements is often used to eval-
uate managers. Anderson, Brown, Hodder, and Hopkins (2015,
ABHH) report an experiment that challenges the assumption that
amortized-cost information is superior to fair-value-based infor-
mation in assessing managers’ stewardship. Using attribution the-
ory (Ross, 1977), the authors predict and ?nd that investors tend
to attribute ?nancial outcomes to the manager and do not prop-
erly assess the impact of factors outside the control of the man-
ager. ABHH argue that fair-value-based information makes the role
of these exogenous factors more salient to the investors, allowing
them to better assess the individual contribution of the manager.
They provide evidence that the use of fair-value-based (amortized
cost-based) ?nancial information can lead to better (worse) stew-
ardship assessments in their experimental setting.
In their discussion, Emett and Nelson (2015) agree that ABHH
demonstrates that amortized-cost-based ?nancial information is
not always better than fair-value-based information in assessing
stewardship, but also caution that there are several limitations to
the generalizability of this study. They argue that the research de-
sign used in ABHH excludes many of the common features that
cause concern with fair-value-based ?nancial statements, such as
uncertainty in knowing whether a given shock is exogenous, per-
sistent, or actionable or whether a fair value estimate is measured
appropriately, which are critical to the evaluation of the usefulness
of such statements in assessing stewardship.
7. Synthesis
The studies presented at the Accounting, Organizations and Soci-
ety Conference on Accounting Estimates address important aspects
of the preparation, audit, and assessment of accounting estimates.
Each paper explores the role of a particular stakeholder in the ac-
counting estimate ?nancial reporting process and what types of
factors in?uence reporting quality. Starting with managers, Chen
et al. (2015) examine how the type of forecast managers produce
can affect the accuracy and optimism of the resulting forecasts. The
accuracy of these forecasts is important since they contain inputs
into models used by managers to generate estimates. Relatedly,
Bhat and Ryan (2015) show that the disclosure of risk modeling
activities undertaken by managers enhances the returns-relevance
of the associated fair value gains and losses. This demonstrates
that actions taken by management to improve inputs into valuation
models are generally perceived by investors to improve the quality
Editorial / Accounting, Organizations and Society 46 (2015) 1–4 3
of the estimates. Together, these two studies suggest that there is
variation in the quality of inputs used to generate accounting esti-
mates and that this variation is driven, in part, by how managers
approach the estimation process.
After managers generate an accounting estimate, the auditor
must provide reasonable assurance over it. This task is particu-
larly challenging due to the subjectivity inherent in accounting es-
timates and the professional judgment required to assess their ap-
propriateness. Rasso (2015) investigates a potential means of en-
hancing auditor professional skepticism through instructing au-
ditors to think broadly about audit evidence as it is received.
This study complements recent ?ndings by Gri?th, Hammersley,
Kadous, and Young (2015) showing that a deliberative mindset can
help auditors identify unreasonable estimates. Professional skepti-
cism over estimates is not only important for auditors, but for au-
dit committee members as well. Kang et al. (2015) examine how
changes in the regulatory framework in?uence audit committee
member perceptions of accountability in ensuring reasonable re-
porting of an accounting estimate and how the use of more inno-
vative procedures affects the comfort the member perceives over
the estimate. They ?nd that, despite differences in perceived ac-
countability, audit committee members maintain a high level of
professional skepticism when considering the appropriateness of
accounting estimates. Together, these studies indicate that auditors
tend to think too narrowly when approaching the audit of complex
estimates, but that certain interventions can help improve auditor
judgment and audit committee skepticism can help further push
auditors to probe deeper into the assumptions used by managers
to generate accounting estimates.
After the accounting estimate is generated by managers, au-
dited by the external auditors, and examined by the audit com-
mittee, the estimate must then be reported in the ?nancial state-
ments. Anderson et al. (2015) and Cassell et al. (2015) explore how
investors can use this information to assess the performance of the
company and the stewardship of managers, respectively. Cassell
et al. (2015) show that more transparent disclosures of certain val-
uation and reserve accounts is associated with less discretion in
the accounts. Tucker (2015) suggests that investors could use re-
porting transparency as a signal of the quality of the estimates in
the associated accounts since managers jointly decide how much
to disclose and the extent of any earnings management. Anderson
et al. (2015) demonstrate how fair-value-based ?nancial informa-
tion can improve how investors evaluate manager stewardship by
making exogenous factors more salient. Together, these studies
suggest that how fair values are disclosed in ?nancial reports mat-
ters for investor evaluation of company and manager performance.
Of course, this relationship can, in turn, affect manager decisions.
Overall, these studies help paint a picture of how the presence
of accounting estimates permeates the ?nancial reporting process
from the generation of the estimates by managers to the assess-
ment of the reported information by investors. It is important to
consider the role of the various stakeholders in the ?nancial re-
porting process because a potential di?culty for one stakeholder
(e.g. unconscious bias in formulating forecasts) is likely to result in
problems for another stakeholder (e.g. assessing the credibility of
disclosed estimates). Additionally, solutions proposed to ?x a prob-
lem for one stakeholder (e.g. using fair-value-based ?nancial state-
ments to evaluate stewardship) can lead to increased di?culties
for another stakeholder (e.g. auditing subjective estimates). By con-
tinuing to perform research that assesses the role that each stake-
holder plays in the ?nancial reporting of accounting estimates and
how those roles interact with each other, we can better understand
the process and how to address potential de?ciencies.
In addition to examining accounting estimate issues from the
perspectives of different stakeholders, the papers presented at the
Conference on Accounting Estimates provide a good example of
the use of methodological triangulation to examine a common ac-
counting problem using different research methods. Methodologi-
cal triangulation involves the bringing together of different tech-
niques, data sources, and researcher perspectives to explore a re-
search question (Harvey, MacDonald, and Hill, 2000). Each method
has strengths and weaknesses that combined can help provide a
more thorough understanding of a given topic. While archival re-
search methods are very useful for examining questions of whether
a phenomenon occurs, experiments can help answer questions of
how and why it occurs (Libby, Bloom?eld, and Nelson, 2002). For
example, Cassell et al. (2015) uses archival methods to determine
whether an association exists between transparency of ?nancial
estimate disclosures and earnings management in the related ac-
counts. However, it would be di?cult to use similar methods and
data to examine why managers would choose to use disclosure and
reporting quality as complements or substitutes, as Tucker (2015)
suggests. Instead, a researcher could conduct an experiment to ex-
amine what factors affect managers’ contemporaneous decisions
for transparency and earnings management. Together, such a pair-
ing of studies would help researchers, practitioners, ?nancial state-
ment users, and regulators better understand when transparency
provides a signal of reporting quality and whether enforcement of
transparency practices would improve reporting quality.
Regardless of method, research studies should have a strong
grounding in the construction or testing of theory. Empirical dis-
covery that furthers the development of causal theory is not only
aids immediate prediction but also re?nes understanding of likely
or testable boundary conditions. Further, without a well-articulated
theory and ruling out of alternative plausible explanations, it is dif-
?cult to assess whether the ?ndings in a given study are gener-
alizable or simply the product of a particular research design or
setting (Gassen 2015). For example, Frank and Hoffman (2015) dis-
cuss how the ?ndings of the Rasso (2015) study may be plausibly
attributed to an alternative explanation, in part because the oper-
ationalization of the main construct did not match the typical fea-
tures of the theory used to make predictions. Therefore, it is di?-
cult for regulators and practitioners to know how to implement
the proposed intervention in practice, given that the underlying
causal mechanism is not well understood. Similarly, McDonough
and Shakespeare (2015) note that the ?ndings of Bhat and Ryan
(2015) should be interpreted with caution because the authors
make predictions based on the construct of risk modeling activ-
ity, but the measure of this construct is contingent on disclosure
of such activity in the ?nancial statements and could re?ect vari-
ability in manager’s risk tracking abilities. In addition to shoring up
generalizability, theory development helps generate plausible alter-
native explanations for associations observed in a given study and
alternative research designs that would allow testing of competing
explanations.
Last, it is worth noting that accounting research likely will
make better progress to the extent researchers seek and learn from
feedback provided by experienced accounting practitioners, includ-
ing auditors, managers, regulators, and standard setters. Along
these lines we are very pleased that William Platt, with Deloitte
& Touche LLP, has provided a companion commentary on the con-
ference papers that interestingly reveals how some of the papers
already have revised his beliefs about how to go about developing
better accounting estimates.
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Kamber Hetrick
Mark E. Peecher
?
University of Illinois at Urbana-Champaign, USA
?
Corresponding author.
E-mail address: [email protected]
doc_292607117.pdf