In a 1993 article in Accounting and Business Research, Meier, Alam, and Pearson

Question

In a 1993 article in Accounting and Business Research, Meier, Alam, and Pearson studied auditor lobbying on several proposed U.S. accounting standards that affect banks and savings and loan associations. As part of this study, the authors investigated auditors' positions regarding proposed changes in accounting standards that would increase client firms' reported earnings. It was hypothesized that auditors would favor such proposed changes because their clients' managers would receive higher compensation (salary, bonuses, and so on) when client earnings were reported to be higher. The following table summarizes auditor and client positions (in favor or opposed) regarding proposed changes in accounting standards that would increase client firms' reported earnings. Here the auditor and client positions are cross-classified versus the size of the client firm. (a) Auditor Positions Large Small Firms Firms Total 128 25 153 In Favor 15 143 Total 24 (b) Client Positions Large Small ims 132 Firms Firms Total In Favor Opposed Total 18 20 38 114 25 139 45 (a) Test to determine whether auditor positions regarding earnings-increasing changes in accounting standards depend on the size of the client firm. Use ? = .05. (Round your expected frequencies to 2 decimal places. Round your answer to 3 decimal places.) so (Click to select) Ho: independence for auditor positions regarding earnings-increasing changes b) Test to determine whether client positions regarding earnings-increasing changes in accounting standards depend on the size of the client firm. Use ? = 05 decimal places.) Round your answer to 3 so(Click to select) Ho: independence for client positions regarding earnings-increasing changes (d) Does the relationship between position and the size of the client firm seem to be similar for both auditors and clients? No Yes

Explanation / Answer

Ans:

a)

Test statistic:

Chi square=5.985

df=(2-1)*(2-1)=1

p-value=CHIDIST(5.985,1)=0.0144<0.05,so we Reject H0.

b)

Test statistic:

Chi square=18.893

df=(2-1)*(2-1)=1

p-value=CHIDIST(18.893,1)=0.0000<0.05,so we Reject H0.

d)Yes

Observed(fo) Large small Total in favor 15 128 143 opposed 9 25 34 Total= 24 153 177 Expected(fe) Large small Total in favor 19.39 123.61 143 opposed 4.61 29.39 34 Total= 24 153 177 Chi square=(fo-fe)^2/fe Large small Total in favor 0.994 0.156 1.150 opposed 4.180 0.656 4.836 Total= 5.174 0.812 5.985

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