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.

You will need to type in the FOUR pieces of data into Minitab, along with column headings LARGE and SMALL (firms). Data go into the white cells in Minitab, starting with row 1. Column headings go in the grey shaded cells in Minitab. Do not type in the totals, as those are not new pieces of data.

a) Auditor Positions

	Large Firms	Small Firms	Total
In Favor	15	128	143
Opposed	9	25	34
Total	24	153	177

(b) Client Positions

	Large Firms	Small Firms	Total
In Favor	16	116	132
Opposed	19	26	45
Total	35	142	177

(a) Test to determine whether auditor positions regarding earnings-increasing changes in accounting standards depend on the size of the client firm. Use α = .05. (Round your expected frequencies to 2 decimal places. Round your answer to 3 decimal places.)

x2 =  ; so  (Click to select)  Do not reject  Reject   H₀: 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 α = .05. (Round your answer to 3 decimal places.)

x2 =  ; so  (Click to select)  Do not reject  Reject   H₀: 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?

• Yes

• No

Answer 1

a)

Applying chi square test of independence:

Expected	Ei=row total*column total/grand total	large	small	Total
	In favor	19.390	123.610	143
	Opposed	4.610	29.390	34
	total	24	153	177
chi square    χ2	=(Oi-Ei)2/Ei	large	small	Total
	In favor	0.994	0.156	1.1498
	Opposed	4.180	0.656	4.8362
	total	5.1744	0.8116	5.986
test statistic X2 =		5.986

Reject   H₀: independence for auditor positions regarding earnings-increasing changes.

b)

Expected	Ei=row total*column total/grand total	large	small	Total
	In favor	26.100	105.900	132
	Opposed	8.900	36.100	45
	total	35	142	177
chi square    χ2	=(Oi-Ei)2/Ei	large	small	Total
	In favor	3.908	0.963	4.8717
	Opposed	11.462	2.826	14.2876
	total	15.3702	3.7890	19.159
test statistic X2 =		19.159

Reject   H₀: independence for client positions regarding earnings-increasing changes.

d)

No