Management assertions

Abstract: An outline for a theory of financial statements is presented. Financial statements are viewed as products of both markets and political processes and the interactions among individuals and groups in these processes. Individuals are assumed to maximize their self-interests. Various hypotheses and data are provided to illustrate the theory. It relies heavily on theories of agency, economic regulation and public choice. At this stage, the theory has great promise in explaining the form and contents of financial statements. The theory contrasts with earlier normative theories of financial statements and offers an explanation for the forms they take.

Abstract: This paper examines whether accountability, defined as the requirement to justify one's judgments to others, mitigates recency. Recency refers to the tendency to overweight evidence received later in a sequence.' Ideally, judgments are influenced by the substance of evidence, not the order in which it is evaluated. Audit judgments may be prone to recency because auditing involves updating beliefs about financial statement assertions on the basis of new evidence. Indeed, audit judgment research documents recency in experiments with no explicit accountability requirements. These results have implications for audit efficiency and effectiveness if there are no mechanisms in the audit process to correct or mitigate these tendencies. One such mechanism is the

Abstract: We examine the financial reporting practices of small privately-held businesses that are not subject to SEC regulation. Specifically, we determine the factors associated with the production and use of financial statements for firms who have discretion in the preparation of financial statements and who do not face the demands of public equity markets. In addition, for firms that prepare financial statements, we determine the factors associated with the sophistication of the financial statements in terms of whether the financials are compiled, reviewed, and/or audited by a professional accountant and whether the firm produces accrual-based financial statements. Finally, we examine the potential benefits afforded firms producing financial statements, having audited financial statements, and having accrual-based financial statements. We find that firms with audited financial statements benefit in the form of greater access to credit and that firms with accrual-based financial statements benefit in the form of a lower cost of credit.