Problem-centred research and knowledge-based theory in the professional accounting setting

Accounting~ OrganizationsandSociefy, VoL18,No. 5,pp. 451-466,1993. Printed in Great Britain

0361-3682/93 $6.00+.00 © 1993 Pergamon Press Ltd

PROBLEM-CENTRED RESEARCH AND KNOWLEDGE-BASED THEORY IN THE PROFESSIONAL ACCOUNTING SETTING* MICHAEL GIBBINS a n d KARIM JAMAL

University o f Alberta

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The paper discusses the merging need for theory development and much more extensive task and context analysis wifl~respect to cognitinn in the professinnal accoumin8 setting ("acctmneng" ~ ~ m~ the various acommting auditing, tax and related subjects about which accounting ~ exercise judgment~ The lmper examines how such theory development and task and context analysis can improve the research and its contributinn to ~ the wofesaioml settings that are the province of accounting

rtmear~ Our analysis reflects our propoml that accounting judgment research contribute more ~ m the general body of accounting research, and deal better with practitioners' pmblem~ From our analysis, we conclude that the lack of theory development is associated with several p r o b l ~ in ~ ~ i n ~ an over-emphasis on transference of simplified models from psychology, ~ use of normative criteria for evaluating performance, and an over-emphasis on accoumants and auditors ~ u~n a c ~ and auditing We offer a large number of constructive comments about task analysis, theory development and ofl~ersteps to guide future accounting judgment remmrch.

Understanding the behavior of a professional w h o is e x e r c i s i n g j u d g m e n t in a n a c c o u n t i n g , auditing, t a x o r o t h e r p r o f e s s i o n a l s e t t i n g ( c a l l e d a "professional accounting setting" henceforth) r e q u i r e s a t t e n t i o n t o a v a r i e t y o f factors. First, t h e r e is t h e p r o b l e m , o r task, t h e p e r s o n is d e a l i n g w i t h . S e c o n d , t h a t p r o b l e m o r task is part of a larger professional context or domain that s h a p e s t h e p r o b l e m a n d t h e p e r s o n ' s a p p r o a c h t o it. T h i r d , t h e p e r s o n a p p l i e s v a r i o u s judgment processes, involving perception, m e m o r y , p r e f e r e n c e s a n d o t h e r c o g n i t i o n s to t h a t p r o b l e m . F o u r t h , all o f this c o m e s t o g e t h e r in t h e c h o i c e , d e c i s i o n o r o t h e r b e h a v i o r t h e p e r s o n e x h i b i t s . This p a p e r a r g u e s for m o r e a c c o u n t i n g j u d g m e n t r e s e a r c h effort d i r e c t e d at t h e first t w o g r o u p s o f factors, t h e p r o b l e m o r task a n d t h e p r o f e s s i o n a l c o n t e x t , t h r o u g h a mutually reinforcing combination of theory development and field-oriented empiricism. T h e o b j e c t i v e s o f this effort t o f o c u s o n task

and context would be to produce better theory, t o p r o v i d e an i m p r o v e d task d e s c r i p t i o n b a s e for a c c o u n t i n g j u d g m e n t r e s e a r c h , a n d g e n e r a l l y to improve the contribution of such research to t h e b r o a d e r fields o f a c c o u n t i n g r e s e a r c h , a n d j u d g m e n t a n d c o g n i t i v e r e s e a r c h . P r o g r e s s in this d i r e c t i o n c a n b e s e e n in a n u m b e r o f s t u d i e s in r e c e n t years: this p a p e r offers s u g g e s t i o n s about how to accelerate and deepen that p r o g r e s s . W e a g r e e w i t h H o g a r t h ( 1991a, b ) t h a t the exploration of the professional setting o f c o g n i t i o n is a c o n t r i b u t i o n a c c o u n t i n g researchers are particularly well suited to make, and we hope that our examination of how to d o that w i l l e n c o u r a g e o t h e r r e s e a r c h e r s i n t e r e s t e d in a c c o u n t i n g p r o b l e m s . This p a p e r ' s a r g u m e n t s a b o u t t h e o r y , task and context may apply broadly to behavioral a c c o u n t i n g r e s e a r c h , s u c h as t h a t in t h e m a n a g e m e n t a c c o u n t i n g area, o r e v e n t o a c c o u n t i n g r e s e a r c h m o r e generally. H o w e v e r , w e r e s t r i c t

* We are grateful for advice from Jim Peters and two anonymous reviewers. 451

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our analysis to the professional setting of public accounting. Such a restriction helps to maintain focus and is consistent with the bulk of the extant accounting judgment research. Our analysis makes particular use of accounting judgment writing that has emphasized the professional context, such as Abdolmohammadi & Wright (1987), B~dard (1989), Bonner & Pennington ( 1991 ), Gibbins (1984), Gibbins & Mason (1988), Johnson et aL (1989), Libby (1990), and Waller & Felix (1984). Our critical comments and suggestions for improvement are focused primarily on the state of the research field, not o n any particular research method. In o r d e r to establish o u r arguments for better theory and m o r e attention to task and context, w e c o m m e n t first on aspects of theory, behavior, the problem and the c o n t e x t in accounting and auditing judgment researci~ We then bring the ideas together in an extensive discussion of taskoriented theory. Following that, w e make suggestions about h o w to accomplish the research goals identified and end with brief conclusions.

THEORY AND BEHAVIOR IN ACCOUNTING JUDGMENT RESEARCH

Cognitively oriented behavioral research in accounting (especially audit judgment research) has experienced phenomenal growth in the twenty years or so since it began. That said, it is interesting that there is as yet no clear understanding in the accounting and auditing research literature of what accountants and auditors do cognitively in their everyday environment. Part o f the reason is a lack of willingness o f the researchers and perhaps the auditors (sensitive about both firm and client confidentiality, as well as other factors) to embark on field research using real situations. Part is also due to the use of transferred ideas, whose theoretical niceties w e r e w o r k e d out primarily in the field of origin (e.g. psychology) and w e r e then applied in accounting. T w o aspects of this situation warrant further discussion: a reliance on imported performance

standar.ds in the accounting research, and a focus on the behavior of accountants rather than on the p h e n o m e n a of accounting.

Imported judgment performance standards A long history links normative, descriptive and empirical studies of accounting decision making, primarily using the experimental method. As suggested by R. Ashton etal. (1988), a c o m m o n research objective for accounting judgment research is to specify a judgment task, determine the "appropriate" response, and observe the e x t e n t to which behaviors ( o r judgment choices) of accountants differ from the appropriate ones. Appropriate responses have been determined largely by relying on theories, or hypotheses, developed by cognitive psychologists, statisticians, economists, decision theorists and others c o n c e r n e d with generic human information processing and behavior. The presumption has been that these theories are appropriate to accounting, thus there has not b e e n m u c h impetus to develop theory directly for the accounting setting. Some accounting studies have explicitly related general normative and accounting-relevant descriptive approaches (e.g.A. Ashton, 1982; Hilton, 1980; Lewis, 1980; Libby & Fishburn, 1977; Schepanski & Uecker, 1983). Research, w h e t h e r analytical, experimental or computational, that borrows a performance criterion from another field runs the risk that the criterion is inappropriate in the accounting setting because the criterion is likely to ignore factors in the task setting that help to condition natural behavior. This is especially likely if a simplified task is used to study a complex professional setting. The external norm may also incorporate factors that are not applicable in that setting or dominated by other factors in the setting (such as by procedures developed by practitioners to control error). If these misapplications happen, and it is likely not to be determinable from the research itself w h e t h e r they have happened, the imported and usually simplified rules applied to evaluate results (e.g. Chesley, 1976, re probability elicitation; SwieringaetaL, 1976, andJoyce & Biddle, 1981,

PROBLEM-CENTRED RESEARCH re heuristics and biases) are likely to identify judgment biases and o t h e r errors that are spurious. An e x a m p l e is the oft-used linear model criterion'for measuring judgment accuracy o f auditors serving as experimental subjects. Scott ( 1 9 7 3 ) and Gihbins & Wolf ( 1 9 8 2 ) p o i n t e d out that auditors may not have the symmetrical loss functions ( m e a n square e r r o r ) that the linear m o d e l requires, and Gibbins ( 1 9 8 2 ) s h o w e d that the linear m o d e l p r o d u c e s counter-intuitive results w h e n the mild c o m p l e x i t y of correlated information is introduced. Developing relevant p e r f o r m a n c e standards in an applied setting requires extensive analysis, as d e m o n s t r a t e d for e x a m p l e in the managerial r e s o u r c e allocation setting of Waller & Bishop (1990). The e x p a n d e d task and c o n t e x t analysis w e describe later should therefore be helpful to experimental and analytical researchers w h o wish to b e sure that the evaluation rules used in their studies are appropriate to the accounting setting.

A focus on the behavior o f accountants (auditors) rather than on the p h e n o m e n a o f accounting Cognitive research must study the cognitions of someone, so it m a y s e e m odd to say that accounting judgment research has overemphasized accountants, but in t e r m s of developing useful theory, that is indeed o u r belief. The views and actions of accountants are measured and then attempts are m a d e to s u b s u m e these u n d e r generalized principles, and the result is theoretical statements about h o w accountants will act u n d e r various conditions. The focus of behavioral accounting research on the decisions m a d e by the accountant has led to theory d e v e l o p m e n t being largely aimed at understanding the accountant, that is, a theory of the persons w h o carry out a specific kind o f task rather than a theory of the task itself, accounting or auditing. We note several fundamental p r o b l e m s with theorizing about p e o p l e doing accounting instead o f a b o u t accounting. As Hogarth ( 1991 a) noted, a principal finding of cognitive psychology

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is that humans are adaptive. This result has b e e n e x t e n d e d (e.g. Simon, 1981a; Anderson, 1990) to p r o p o s e that cognition is largely taskdetermined. Cognitive research requires p e o p l e a n d tasks: w e d o not p r o p o s e ignoring the accountants, but rather shifting the focus m o r e toward the task setting to which they m a y adapt. Without careful observation o f the task, it is difficult to relate the research results to important questions about the task and accountants' p e r f o r m a n c e o f it, such as effectiveness, efficiency, expertise and value. Understanding the response requires understanding the stimulus. The views and actions o f accountants are seldom o b s e r v e d in the field, so the theory of accountants is not grounded in the task environm e n t but instead is g r o u n d e d in the specialized setting of the research questionnaire, e c o n o m i c analysis or experiment. A study by Gibbins ( 1 9 7 8 ) is an example of this problem: the auditor subjects m a d e the "errors" in processing information predicted by "heuristics and biases" hypotheses, but protocols and debriefmgs indicated that s o m e apparent errors w e r e due not to faulty cognitive processing but instead to the auditors' attempts to c o p e with (and s o m e t i m e s rejection of) the unfamiliar research setting they found themselves in. The fact that auditor subjects are able to adapt to the research setting tells us something about their ability as h u m a n problem-solvers and something about task effects on their judgment (in this case, the research task) but little about the professional setting the subjects c o m e from. To e x t e n d o u r earlier c o m m e n t s about normative and other p e r f o r m a n c e criteria, the criteria used are largely uninformative about i m p r o v e m e n t in task p e r f o r m a n c e because they arise from general theory about p e o p l e rather than specific theory about the accounting task. To illustrate, if it is found that p e o p l e have trouble thinking u n d e r time pressure, w e have to know what the pressures are in the accounting setting and w h a t mechanisms might exist to deal with it before o u r general result can b e useful in accounting. For example, McDaniel ( 1 9 9 0 ) found audit structure to be an important factor

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in the operation of time pressure, so w e cannot say that, ceteris paribus, time pressure is a problem in accounting settings, because ceteris isn't paribus. Gefieral theory is not designed to reflect specific features of the accounting task environment, such as structure created by accounting firms to c o p e With b o u n d e d rationality (e.g. detailed written audit programs to o v e r c o m e auditors' m e m o r y limitations or other firm-specific auditing policies; Spires, 1991). A result of focusing on the people is theories, generalizations, about stable truths of human nature rather than attention to the dynamics of the task environment in which accountants find themselves. If change is a pervasive part of business and professional settings and if humans are such adaptable creatures, then an understanding of the dynamics of the task environment is likely to be very useful to the "applied science" of accounting. Leaving such dynamics out of the research means that research inevitably follows, not leads, changes in practice (Beresford, 1991) and misses m u c h of what makes the practice setting such a challenge to the practitioners. As an example, study of the interpersonal and sociological setting of accounting and auditing can inform cognitive theory development, by elaborating on social definitions of error, creating taxonomies of tasks and providing other understandings of the task and setting. Work such as that by Bosk ( 1 9 7 9 ) on physicians and Traweek ( 1 9 8 8 ) on physicists has done that in those fields. Bosk reported that physicians classified errors as "judgmental" ( g o o d decision under uncertainty, bad outcome), "technical" (mistakes made in learning the task but hopefully not repeated) and "normative" (disregard of accepted standards of c o n d u c t ) and that the severity of the social sanctions imposed was lowest for judgmental errors and highest for normative errors. The physicians had developed their own social definitions of performance. Bosk thus identified three different internal representations (technical, judgmental, normative) used by surgeons to interpret errors in their domain. These representations influence the data acquired about the errors as well as the

evaluation and consequences of various types o f errors. Similarly, accountants do have some ability to define the task as they see fit, so study of how accountants define and internally represent their task and its performance may be quite useful in developing theory about h o w the task is performed (Ross, 1966; Mattessich, 1980). Such theory development would be grounded in the task and would reach out to psychological and other theory through that task, rather than the present situation of grounding the theory in psychology and reaching out to accounting through accountants.

THE PROBLEM REPRESENTATION IN

JUDGMENT Even if the researcher wishes to study the accountant, doing that through the task is useful Cognitive problem solving is the activity of knowing: the acquisition, organization and use of knowledge to solve various professional tasks e n c o u n t e r e d by a human agent. Experienced problem solvers develop an extensive repertoire of knowledge and strategies for acquiring and evaluating knowledge. They c o m e to the professional task equipped with knowledge and a set of tools. Thirty years of problemsolving research by researchers such as NeweR, Simon, Tversky, and Kahneman, to mention only a few, indicate that human agents solve problems by first constructing an internal representation of a problem called a "problem space" or "frame". This internal representation contains knowledge of the initial state and goal ( o r e n d ) state of the problem as well as intermediate states that can be searched ( o r processed) to link the initial and goal states of a taslc Transitions from one state to another in the problem space (actions) are achieved by use of a process or strategy of acquiring and interpreting data fix~m the task environment. Cognitive problem solving can thus be characterized as consisting of the following steps:

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Initial data from the task environment elicit an internal representation ( p r o b l e m space o r frame) o f the task D The initial representation then activates a cognitive process or strategy for acquiring and interpreting new data from the task environment. The initial internal representation is modified as n e w data are processed until an end state (solution) is reached. The initial internal representation and those actions (processes) that modify this representation interact continuously with the task environment. They cannot be understood without an understanding of the task environment itself. This is particularly true in a professional setting such as accounting and auditing which features tasks that are quite c o m p l e x and an environment rich with significant social, professional and e c o n o m i c factors. Following our c o m m e n t s about the interpersonal setting, w e propose that the cognition and behavior o f p e o p l e in professional settings are influenced by the problems with which they are trying to deal. Those problems are e m b e d d e d in the organizational structures, applicable professional standards, performance incentives and other characteristics of the settings (Waller & Felix, 1984; Gibbins, 1984; Johnson et aL, 1989; Libby, 1990; Bonner & Pennington, 1991 ). This is hardly a revelation, in fact it is at the core of accounting judgment research's claim for legitimacy. The study of accountants and auditors exercising judgment is necessary because their professional setting alters the process of cognition and judgment so extensively that the results of studies in other settings ( w h e t h e r simplified or just different) cannot be assumed to extrapolate to the accounting and auditing setting. Though the point is not particularly controversial, its consequences are central to the present discussion o f the nature and contribution of accounting judgment research. Accounting judgment research is applied research. While there is no reason accounting researchers cannot contribute to a basic understanding of human cognition, either because

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accounting does involve cognition by humans or because some basic research may be undertaken by accounting researchers to clarify important issues not yet clarified by others (as suggested by Hogarth, 1991b), sooner or later accounting research must relate to some accounting problem, task or context. Though this partly reflects the institutional legitimacy and comparative advantage of accounting researchers, it goes d e e p e r than that. It reflects the fundamental role of the internal representation o f the problem in the cognition of the person dealing with it. Representation o f the problem is crucial. It has been strongly argued (e.g. Newell & Simon, 1972; Simon, 1981a) that problem-solving behavior is so much a function of the task, the problem, that understanding the behavior follows from an analysis o f the task m o r e than from an analysis of the person doing the task. Similarly, understanding the problem solving of auditors and o t h e r people having e x p e r i e n c e and expertise is d e p e n d e n t on understanding h o w they represent tasks as well as the cognitive processes and actions needed for acting on these representations in order to solve tasks ( B o n n e t & Pennington, 1991 ). For example, internal control evaluation tasks have been studied extensively in the auditing and accounting literature. Our approach to problem solving suggests that in order to develop a theory of internal control evaluation tasks w e need to specify the following: ( 1 ) How the auditor will internally represent (frame) the task; ( 2 ) What problem-solving process or strategy will be invoked to acquire and interpret additional data from the task environment; ( 3 ) How the internal representation will be modified as new data are acquired from the task environment; ( 4 ) What are the set of potential initial representations and final (goal) representations, and b o w does the problem-solving process act on various possible initial representations in order to reach a final (goal) representation. The problem-solving (psychology) literature provides examples of various problem-solving processes (strategies) that are used by human

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p r o b l e m solvers to act on various internal representations. These processes are also sometimes indexed t9 certain types of tasks. For example, a hypothesis generation and testing process can b e used to acquire and interpret data in a diagnostic task. (See Libby, 1985, for an application of such a process in an internal control evaluation task.) The problem-solving literature, however, does not specify the potential set of internal representations that can b e used by a c o m m u n i t y of professional p r o b l e m solvers such as accountants and auditors, and h o w these representations are modified as n e w data are sampled from the task environment. A major role of accounting researchers is therefore to understand the possible set of internal representations (frames) that can be used, for example, b y an auditor to p e r f o r m an internal control evaluation tasl~ These internal representations will d e t e r m i n e what additional data will b e sought, w h a t pieces of knowledge will b e brought to bear on the evaluation of data, h o w the knowledge is organized and w h a t hypotheses will b e generated to guide additional data acquisition and evaluation. Increasing the attention to internal representations w o u l d have m a n y consequences for accounting judgment research. These consequences, e x p l o r e d at length in this paper, include r e d u c e d reliance on simplified tasks in e x p e r i m e n t s or cognitive process studies, r e d u c e d reliance on simplified models of the economic and other contextual factors, increased care to e m b e d the research task in a c o n t e x t that is appropriate to the judgment skill that the professional subjects are e x p e c t e d to bring to the task, increased attention to descriptive task and c o n t e x t analyses, and (a particular focus in this p a p e r ) i m p r o v e d and m o r e helpful theory about accounting and auditing judgment.

TASK-ORIENTED THEORY ABOUT ACCOUNTANTS IN ACCOUNTING SETFINGS The existence of internal representations to guide p r o b l e m solving must be incorporated

into the theory of accountants' judgment. While w e have argued that there has b e e n too m u c h attention to accountants and auditors and too little to accounting and auditing, cognitive theory does have to consider the p e r s o n doing the thinking as central to the task performance. Especially in an applied setting w h e r e experience, expertise, incentives and o t h e r factors c o n n e c t the person and the setting, behavior is a function of b o t h p e r s o n and setting. It may even b e that the "main effects" of person or setting are less influential on behavior than is the interaction of the t w o (Bowers, 1973). W e offer some c o m m e n t s about the "main effects" before turning to the interactively oriented question of w h a t sort of theory d e v e l o p m e n t w o u l d b e useful for the professional accounting setting. A fundamental issue for accounting cognitive research is to understand h o w accountants and auditors deal with c o m p l e x problems, given their limited individual information processing abilities and the array of assistance available in the applied setting. Regarding h u m a n information processing, psychological studies c o n d u c t e d o v e r the last thirty years indicate that only a few basic h u m a n characteristics shape our problem-solving efforts (e.g. Newell & Simon, 1972; Simon, 1981a; Johnson & Hasher, 1987): ( a ) the problem-solving process is m e m o r y based; ( b ) knowledge is structured in the mind, and those structures are related to the apparent demands of the problem-solving environment; ( c ) the inputs and outputs (including perceptions and intentions) are held in short-term memory; ( d ) short-term m e m o r y (attentional m e m o r y ) is quite limited in capacity, leading easily to perceptual overload and p r o m o t i n g sequential processing of data; ( e ) short-term m e m o r y is sensitive to interruption, distortion and o t h e r sensory difficulties; (f) the elementary processes of m e m o r y recognition, recall and judgment are e x e c u t e d very rapidly, in tens or hundreds of milliseconds, and are d o n e largely automatically, without conscious intervention;

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( g ) the information processing system has access to an essentially unlimited long-term memory, which works very quickly w h e n cued by perceptual "or other short-term m e m o r y processes but which is slow in storing new chunks o f information (requiring seconds or tens o f seconds) and is fallible in operation, being subject to forgetting and misremembering; ( h ) such characteristics o f the processing system as storing of solutions or strategies in "chunks" are responsive to e x p e r i e n c e and to the conditions of that experience (such as reinforcement) but these characteristics are generally not o p e n to conscious examination or control. The benefits and limits these characteristics have for the operation of the human information processing system are primarily in its speed, response to changing circumstances and learning. rather than on the volume of processing that can be done. The exception is short-term attentional memory, which plays a major role in allocating cognitive resources to the c o m p o n e n t s of a task and thus is central to successful problem-solving performance. Complex problems, including those that professionals such as auditors e n c o u n t e r at least some of the time, demand the processing o f large amounts of information and knowledge and thus require efficiency in order to o v e r c o m e the attentional processing limitations. Professional problem solvers can attain efficiency by developing powerful internal representations that guide the selective sampling o f data from informationally rich task environments. T h e o r y development in the professional accounting setting thus requires an understanding of these internal representations that guide problem-solving behavior. The earliernoted adaptability o f humans causes problems for any search for general (principle) laws of human behavior, w h e t h e r in psychology or in accounting. Any o f the characteristics of human information processing noted above can be altered to some degree by individual or external circumstances. External m e m o r y aids, such as books, notepads, colleagues and checklists, enhance tremendously the thinking of which

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humans are capable. The auditor arrives at the problem equipped with various internal representations, processes or strategies for acquiring data from the task environment, and knowledge, ready to perform tasks that are anticipated. In an experimental, protocol or other research study, such an auditor is handicapped and likely mis-evaluated if he or she is made to perform unanticipated tasks without access to normal decision aids. Finding general principles that guide the selection of an internal representation (frame) is a difficult task. It is m o r e useful to search for relative principles: regularities that hold over several tasks or considerable stretches of time. Simon (1981a) proposed that there are three types of principle corresponding to three different forms of adaptation: ( 1 ) On the shortest time scale, adaptive agents change their behavior in the course of solving each new problem they encounter. The agent thus adapts continually to the environment in which he or she finds him or herself. ( 2 ) On a somewhat longer time flame, adaptive agents create knowledge that can be used to solve new problems successfully (e.g. the 50,000 patterns known by a chess grandmaster noted by Chase & Simon, 1973). This knowledge is m o r e stable and generally studies of expertise attempt to identify such knowledge. ( 3 ) On a longer time frame, adaptive systems evolve. The evolution may be Darwinian, by mutation and selection (e.& Johnson et aL, forthcoming) or social, through discovery of new knowledge and strategies across a class of adaptive agents (e.g. changes in auditing standards ). The argument that auditors and accountants are adaptive agents suggests that general principles are to be found not in the behavior of agents, but in the knowledge responsible for performance, and in the longer run mechanisms that bring about the adaptation - - their learning mechanisms. Unfortunately, the topic of organizational and individual learning has so far been largely absent from the accounting cognitive literature. There is, however, a revival of interest in learning both in cognitive science (e.g.

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Singley & Anderson, 1989) and the organizational analysis literature (e.g. the recent special issue of Organizational Science o n the topic of organizational learning, February 1991). An examination of learning by the profession, by organizations such as audit firms, bond rating agencies and banks, as well as by individual accountants, auditors, bankers and financial analysts, is likely to be a fi-uitful area of research inquiry. The above discussion indicates that general principles applicable to the accounting domain can be studied and described at different levels of abstraction. The issue of the appropriate ( o r useful) level of analysis has been a topic of major debate in the psychology, linguistic and cognitive science literature (e.g. Mart, 1982; Chomsky, 1965; Pylyshyn, 1984; NeweR, 1982; Rumelhart & McCleiland, 1985). An excellent summary of this debate is provided in the first chapter of Anderson (1990). Anderson concluded that Marr's ( 1 9 8 2 ) analysis is particularly insightful and w e find it useful in the examination of theory development in accounting cognition. Marr proposed that an information processing device can be understood at three different levels of abstraction, which he called computational theory, representation and algorithm, and hardware implementation. Marr argued that w e need to make a distinction between what (computational theory) and h o w (representation and algorithms and their realizations). The first of Marr's three levels is the abstract computational theory of a device ( o r agent). At this level, Marr argued that "the performance of the device is characterized as a mapping from one kind of information to another, the abstract properties of this mapping are defined precisely, and its appropriateness and adequacy for the task at hand are demonstrated". The questions to be addressed at this point are what is the goal ( o r information processing problem being solved) and w h y is this problem being solved. Marr proposed that a critical step in formulating a computational theory is the discovery of a set of constraints that permit the attainment of a unique solution to the information processing problem being solved. Marr's domain of

c o n c e r n was vision, but for an initial attempt at constructing a computational theory in an accounting setting, see Johnson et aL (forthcoming) for an application to the task o f fraud detection. Marr's second level of analysis is the choice of a representation for the input and output and the algorithm used to transform one into the other. The questions addressed at this stage are to determine h o w this computational theory can be implemented and to specify both a representation and an algorithm. This is similar to the attempt to understand an expert's knowledge in studies of expertise (see Peters, 1990, for a preliminary application of this level of analysis to the audit task of risk identification). Marr's third level of analysis is the details of h o w the algorithm and representations are realized physically - - the detailed set of implementation rules. These rules will change over time as the environment changes. Although all three levels of understanding are required, Marr argued that the first level, computational theory, is critical because the other levels, algorithms and specific detailed rules, can be better understood by understanding the nature of the problem being solved than by examining the mechanism and hardware in which it is embodied. We have mentioned a few cognitive processingoriented accounting studies as examples of being problem oriented. Significant attention to the task/problem representation improves accounting judgment studies' ability to provide valid positive and empirical results and to contribute to theory development (e.g. Abdolmohammadi & Wright, 1987; Gibbins, 1988). Several recent studies have included improved task characterizations (e.g. Bormer, 1990; Bonner & Lewis, 1990; Bonner & Pennington, 1991; Frederick, 1991; Moeckel,

199o). SUGGESTIONS FOR THEORY DEVELOPMENT

Task and context analysis While w e p r o m o t e more mutually supporting theory development and task and context

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analysis, this is partly a matter of emphasis: w e do not p r o p o s e that accounting judgment researchers abandon o t h e r goals, but rather that the field pay m o r e significant attention to theory d e v e l o p m e n t and task analysis. Similarly, w e do not p r o p o s e that only o n e theory, or o n e approach, be developecL The factors w e will describe b e l o w are amenable to various theoretical perspectives. In any case, o u r field is not friendly to single explanations o f the world! In its last a t t e m p t to take a position on accounting research, the American Accounting Association decided that no posRion could be taken. The Statement of Accounttng Theory and Theory Acceptance ( AAA, 1977) declared that all theories are flawed w h e n viewed from the perspectives o f o t h e r theories, that theoretical closure cannot b e dictated and had to wait for consensus a m o n g researchers, and that until then, research w o u l d not b e o f m u c h policy assistance to practitioners. W e see no consensus yet, and believe that policy assistance requires at least a theoretical structure relevant to accounting settings, and of w h i c h normative, empirical and positive uses m a y then b e made. The t h e o r y d e v e l o p m e n t w e outline is highly task-oriented. It w o u l d focus o n accounting, on accounting tasks and the internal representations and processes that have b e e n d e v e l o p e d b y accountants to c o p e with the demands of those tasks. It w o u l d take accounting cognitive researchers back toward accounting and away from general cognitive psychology, but would, w e believe, result in a contribution to cognitive psychology also, as the d e m a n d s of a c o m p l e x professional setting o n cognition are u n d e r s t o o d (Hogarth, 1991a). W e suggest that the research b e r o o t e d in the peculiarities of accounting and seek its explanations there. Accounting judgm e n t research w h i c h has investigated the effects of accounting task characteristics on behavior includes, for example: McDaniel (1990), a study of time pressure and audit structure, A. Ashton (1991), w h i c h focused o n e r r o r rates and l e a r n i n g and Spires ( 1991 ), a study of audit firm policies. O t h e r kinds o f studies are useful h e r e too; e.gr Bedard (1989), an examination of audit planning working papers, and Dirsmith &

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Haskins (1991), an examination of the theory o f risk assessment. Research should also investigate w h a t knowledge is required to p e r f o r m auditing and o t h e r professional tasks and h o w that knowledge is organized; e.g. Frederick & Libby (1986), o n internal control judgments, Bonner & Lewis (1990), on knowledge creation for specific tasks, Peters (1990), on risk hypothesis generation, and Jamal (1991), on concurring partner review. The characteristics of accounting tasks and the internal representations that influence the c o n t e n t and organization o f accountants' knowledge, as shaped b y the demands of those tasks, are central building blocks in this theory development. We p r o p o s e that the necessary theory deve l o p m e n t and task analysis b e organized into three general stages, though m u c h backtracking and discarding of blind alleys will be involved. Roughly, the stages are detailed task and c o n t e x t analysis, d e v e l o p m e n t of processing and other induced theories relevant to that task and context, and p r o d u c t i o n o f explanations on the basis of those theories. I m p r o v e d specification of the knowledge required to p e r f o r m accounting tasks is key to the theory d e v e l o p m e n t w e outline and w o u l d develop throughout the three stages. The third-stage explanations m a y b e put to empirical use, to test the theories, positive use, to make predictions of behavior in the s e t t i n g or normative or design use, to assist practitioners, as well as to educate the next generation of accountants. Turning to the first stage, task and context analysis, w e have argued that the c o r n e r s t o n e of judgment and cognitive theory d e v e l o p m e n t in the professional accounting and auditing setting is a thorough understanding of that setting. Prior to generating theory, w e p r o p o s e a focus on understanding what that theory is to b e about, on research that is descriptive of what professionals e n c o u n t e r in the field. This would involve non-intrusive and o t h e r naturalistic procedures, perhaps with the help of nonbehavioral archival data, and coping with a fair a m o u n t of conceptual and methodological messiness. At this gage, the research may have a

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taxonomic aspect. We have a great deal to learn about the demands of accounting tasks and the internal representations, as well as processes or strategies, developed by accountants to cope with these demands. Therefore, the painstaking job of describing that variety is important. Identification of various accounting task demands and types of internal representations may be as important for us as taxonomic classification has been for biology, for example. As the parameters of human information processing hardware place only a few constraints, albeit important ones, on the process of human thought, the task analysis should include descriptions of the strategies or processes that accountants acquire and use to perform their tasks. An understanding of the potential set of internal representations that can be adopted o n a particular task as well as task features that influence the adoption of a specific representation are likely to be very useful in theory development. Exploratory and descriptive studies in ecologically rich settings are needed, using as guidance the theoretical backdrop provided by accounting judgment and cognitive research and by general accounting research. As this is a pre-theory stage, the idea would be to use existing theories to provide lists of factors to look for and relationships to expect. This would have to be done with care and should use multiple methods and perspectives, so that the existing theories do not blind the researchers to what is going on in the setting. Likely approaches include unstructured and structured interviews, observation and analysis of tasks and task performance, study of archival records of task performance, analysis of the incentives and constraints of the setting, and generally systematic observation of the behavior of accountants in their applied setting. As an example starting point, preliminary hypotheses about the nature of the problemsolving process or strategy can be derived by characterizing problems in terms of what orientation or activity is being selected by a problem-solving agent such as an auditor. Clancey ( 1 9 8 5 ) identified a variety of problem types, from which a problem-solving process

may be tentatively identified (including, to mention only a few: interpretation, diagnosis, design, planning and prediction), Gibbins ( 1 9 8 4 ) suggested justification and rationalization, and other taxonomies are available in the problem-solving literature (e.g. Newell, 1969; Simon, 1975). Newell ( 1 9 7 3 ) argued that once the problem-solver's goals and the structure of the task environment are known, some determination of feasible problem-solving processes can be made. An auditing example is provided by Johnson e t a L (1991). Based on a classifying concurring partner review as a diagnostic task, they proposed a diagnostic m e t h o d involving generating and testing hypotheses about faults (audit risks). The result of this phase would be a set of specifications of w h a t must be done to perform a task that is e m b e d d e d in the professional setting. It would be a preliminary depiction of the information processing problem being solved, for example in Marr's ( 1 9 8 2 ) sense of a computational theory. A related effort would be to understand the content of professional accountants' knowledge structures (representations and processes), something the literature has lacked and suffered without (Gibbins, 1984; Waller & Felix, 1984; Libby, 1990), but which is being addressed more recently (e.g. Bormer & Lewis, 1990; Choo & Trotman, 1991; Frederick, 1991). An additional benefit would be, w e predict, that a thorough investigation of the professional setting would raise the profile of accounting and reduce the over-concentration on audit techniques that the accounting judgment research has exhibited. As Gibbins & Mason ( 1 9 8 8 ) and Mason & Gibbins ( 1 9 9 1 ) showed, there are significant judgment problems associated with accounting and financial disclosure, theoretically and practically at least as significant as the usually studied auditing problems. It might even encourage some broadening away from public accounting to other cognitively interesting accounting settings such as managerial accounting (Swieringa & Weick, 1987). Our belief is that the professional setting has been under-exploited: the simple models imported from psychology are

PROBLEM-CENTRED RESEARCH easier to apply to the simple end of professional accounting (such as application of standard audit techniques) than to the areas w h e r e more sophisticated professionalism is involved, such as use of accounting for resource allocation decisions and pricing decisions, conflicts with clients o v e r disclosure, top management fraud or misrepresentation, setting and interpretation of accounting and auditing standards, dual management of audit and consulting relationships with clients, and systems design.

Theory generation The second and third steps will be recursive, as theory is generated and tested and improved, and m u c h additional Step 1 task analysis will also undoubtedly continue. The objective of this second step is to develop a dynamic theory (e.g. Mohr, 1982; Simon, 1981b) that is cognitive but is e m b e d d e d in the professional setting. Dynamic theories are ones in which the initial state of a psychological system such as human m e m o r y is represented in a symbolic form and processes for manipulating these symbols are formulated as mental operations. Dynamic theories can be formalized as c o m p u t e r programs which allow future states of the system to be predicted by use o f simulations. In combination with the task analysis of the first stage, this stage would p r o d u c e the accounting-based theory that could not c o m e from psychology, though psychology and other disciplines would contribute to it. It would amount to a fairly detailed definition of the operation o f professional accounting expertise, of the internal representations and processes required to p r o d u c e task performance. It would place individual cognition in the professional setting, and w e e x p e c t it would therefore contain c o m p o n e n t s such as: task-related goals (e.g. detection, causal attribution), social influences ( e . g accountability or justification, politics), sequence issues (e.g. stages of the audit ), information gathering (e.gy search, recall, standards, rules), incentives (e.g. performance rewards, time pressure, e c o n o m i c pressure, audit structure), and other features of the setting (e.g. strategic behavior, dynamic and non-static

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settings, and group factors (Solomon, 1987). Assuming that task adaptation happens (Simon, 1981 ), the analyses of this stage would p r o d u c e cognitive models of the knowledge involved in performing a task, dealing with a problem. See Peters ( 1 9 9 0 ) for analysis of a risk hypothesis generation task, Jamal ( 1 9 9 1 ) regarding problem-solving processes used to perform a concurring p a r m e r review task, and B~dard & Biggs ( 1 9 9 1 ) regarding pattern recognition in analytical review. All three studies included extensive task analysis. Analytical review is one task that has received substantial attention in recent years (e.g. Libby, 1985; Heiman, 1990; B~dard & Biggs, 1991 ) and should be an early candidate for the m o r e extensive context-rich analysis w e propose. We may e x p e c t that accountants can use different internal representations and processes to perform the same task, and therefore e x p e c t some interaction b e t w e e n the accountants, the task, and the above sorts of setting factors. The acceptance o f variety w e argue for suggests that the theory will need to pay attention to the individuals and their experiences, styles and strategies. This m o r e micro approach implies that averaging all subjects and doing statistical tests o n the means obtained from large numbers of subjects will not be helpful in generating the dynamic theories that are needed. An example here is in the value o f a variety of approaches to solving a decision problem. If auditors use different approaches, then imposition of audit structure such as the review process produces (as an output) an interaction among different types of auditors, so, strategically, the audit firm can present a sort of randomized process to management even if no auditors individually are behaving randomly. Hogarth & Makridakis (1981 ) proposed that in competitive environments, inconsistency in behavior rules can be functional by increasing the difficulty that others have in predicting one's actions. In this second step, accounting researchers will need to consider the extent to which accountants and their setting are like and unlike other e x p e r i e n c e d or expert problem-solvers and tasks (see e.g. B~dard, 1989). A likely issue

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is the effect of environmental factors on the content and organization of accountants' knowledge. For example, a chess grandmaster has played 50,000 games and has stored m a n y chess patterns in m e m o r y . The grandmaster consults no books or o t h e r grandmasters while playing. On the other hand, an audit partner has 20 clients and makes extensive use of audit guidelines, manuals, standards, databases, consultations with o t h e r experts, and must justify major decisions prior to action. A significant theoretical question with substantial practical i m p o r t is h o w the accountant's knowledge is organized, h o w his or her expertise works, in such a distributed environment. The accounting cognitive research to date has not paid great attention to the structure of organizations and firms in w h i c h accounting and auditing decisions are m a d e and the tools and decision aids available in the accounting e n v i r o n m e n t ( w e n o t e d exceptions such as McDaniel's ( 1 9 9 0 ) study on time pressure and structure and Spires' ( 1 9 9 1 ) study of firmspecific policies for internal control tests; see also Solomon ( 1 9 8 7 ) about group and audit t e a m perspectives). The use of teams, audit manuals, and o t h e r aids, and such factors as the quality review process, place significant constraints on individual cognition. As w e suggested earlier, little is k n o w n about h o w these factors c o m p e n s a t e for or even exacerbate h u m a n knowledge limitations. Theoretical research would also assist the d e v e l o p m e n t of theory at this step, such as in the use o f analytical proofs or numerical examples, or simulation. Creating explicit simulations (likely on computers, as suggested earlier) of the knowledge and actions needed to solve the p r o b l e m s identified in the first step w o u l d help to explore theoretical issues and fine-tune the theories for empirical and o t h e r applications. As an e x a m p l e here, Lopes ( 1981 ) simulated various gambles o v e r thousands or millions o f plays and found that s o m e asymptotic assumptions o f utility theory w e r e not valid o v e r the shorter runs o f plays that p e o p l e could c o n t e m p l a t e in a lifetime. Such a simulation can test assumptions and processing structures

without taking the time of practising auditors, but its usefulness is likely to b e in direct p r o p o r t i o n to the quality of the theory it is simulating. Reconsideration of the value of simulation is an example of the broadening o f research m e t h o d s and perspectives that w e believe is central to the theoretical progress w e p r o p o s e (see also Hogarth, 1991a, p. 286). Production o f e x p l a n a t i o n s The third step w o u l d b e to apply the theories and models to professional tasks. The application may b e positive, empirical or normative. We see all three uses of theory to b e relevant to improving theory, and h o p e that the second step will have d e v e l o p e d models that c o n n e c t to other areas of accounting research and that therefore emphasize different uses in concert with the emphases in those o t h e r areas. For example, models of strategic auditing in the experimental markets paradigm (e.g. Kachelmeier, 1990; Dopuch & King, 1991) should be enriched b y the field w o r k and theory d e v e l o p m e n t w e outline. This theory validation and application stage is crucial to the theory d e v e l o p m e n t w e propose, but w e see it as happening several years d o w n the road. W e do not p r o p o s e a rush to test small-scale hypotheses immediately, rather w e p r o p o s e that researchers do a significant amount of theoretical " h o m e w o r k " first, with that h o m e w o r k rooted in the accounting setting rather than in the psychology discipline. An understanding of the demands of accounting tasks and experimentation (in the broadest meaning of the w o r d ) with task variables provides an improved understanding of the setting of accounting and an e v e n t u a l opportunity to develop decision aids for accountants. Such decision aids would b e based on a fundamental understanding of the task setting and therefore should b e sufficiently sophisticated to b e useful in addition to the host of decision aids, organizational structures and o t h e r assistance already available to auditors and o t h e r accountants.

PROBLEM-CENTRED RESEARCH

CONCLUSIONS W e have argued that there has not b e e n enough theory d e v e l o p m e n t or task and c o n t e x t description in accounting judgment and cognitive research and have suggested ways of changing the situation. Accounting judgment research has not yet exploited the professional setting very deeply, nor attended fully to its theoretical implications. More attention to that setting w o u l d strengthen the theory, and m o r e theory w o u l d strengthen the research's contribution to professional accountants' concerns, helping to define the objectives of the accounting research as differentiated from m o r e general cognitive and j u d g m e n t research. O u r p u ~ is to b e constructive in suggesting a stronger reliance on theory. Accounting judgment research is an evolving and unfocused discipline, and that is o n e of its charms. But b e t t e r theory will help it carry m o r e weight. T h e r e are doubtless several ways to go about getting the i m p r o v e m e n t s in theory, and in the value o f theory to the academic and practical spheres, that w e ask for. O u r suggestion really amounts to focusing the research effort on a c o m p l e x task chosen from the practice o f accounting and understanding that task thoroughly. W e p r o p o s e greater effort in addition to ( n o t replacing) the c o m m o n

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present practice of designing small studies to investigate simple questions, and h o p e that the kinds o f studies w e have identified as i m p r o v e m e n t s on this practice will increase. In developing the thorough understanding of accounting tasks that w e propose, an array of m e t h o d s and theoretical perspectives will b e necessary, and w e think this broadening of the connections b e t w e e n accounting judgment research and the real complexities o f the task on the o n e hand, and the rest of accounting (and related) research on the o t h e r hand, will bring great benefits to the accounting judgment field and eventually to the practice of accounting. We realize there is a danger o f mixing levels of analysis and theoretical perspectives into a witches' broth, but believe the field is mature enough to handle the strain. Indeed, w e believe the grounded theoretical d e v e l o p m e n t w e propose will strengthen the field and significantly raise its stature and contribution. While w e see theoretical d e v e l o p m e n t as lying at the heart of the w o r k to be done, the approach w e have p r o p o s e d w o u l d have significant descriptive contributions as well. Demonstration of a sufficient theory (understanding) to apply ~o professional accounting behavior would b e feasible to attempt, and a highly credible and useful result.

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