9 - Twenty years of judgment research in accounting and auditing

Summary

And that's the way it is.

Walter Cronkite

An accountant, in preparing the financial statements for a financial institution, must assess whether it is probable that certain loans are impaired, in part because that assessment is required under generally accepted accounting principles.

Several corporate executives are meeting with auditors from the company's independent accounting firm to try to settle a dispute about how to account for the recent divestiture of a subsidiary. The contending proposed accounting treatments will have significantly different effects on the company's expected reported earnings and financial position in the current year and subsequent years. Both parties must judge what is appropriate and fair in the circumstances. The executives are very sensitive to potential effects on the company's share price and their compensation arrangements. The auditors are very sensitive to potential effects on their exposure to legal liability.

The partner in charge of an audit is under pressure from the client to reduce the audit fee and is considering whether the introduction of some new audit software plus proposed changes in the client's accounting system will permit the fee to be reduced without impairing the quality of the audit.

The general manager of a manufacturing plant under severe competitive pressure is using accounting information to help determine the plant's production and marketing strategies. Related accounting information is used by the manager to calculate performance bonuses for the manager's senior subordinates and by head office to measure the plant's, and therefore the manager's, performance.