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	19	124	143
Opposed	10	24	34
Total	29	148	177

Client Positions

	Large Firms	Small Firms	Total
In Favor	26	106	132
Opposed	20	25	45
Total	46	131	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.)

x^2 =  ; so  (Click to select)  Reject  Do not 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.)

x^2 =  ; 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) 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.)

		Col 1	Col 2	Total
Row 1	Observed	19	124	143
	Expected	23.43	119.57	143.00
	O - E	-4.43	4.43	0.00
	(O - E)² / E	0.84	0.16	1.00
Row 2	Observed	10	24	34
	Expected	5.57	28.43	34.00
	O - E	4.43	-4.43	0.00
	(O - E)² / E	3.52	0.69	4.21
Total	Observed	29	148	177
	Expected	29.00	148.00	177.00
	O - E	0.00	0.00	0.00
	(O - E)² / E	4.36	0.85	5.21
		5.214	chi-square
		1	df
		.0224	p-value

x^2 =  5.214; so 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.)

		Col 1	Col 2	Total
Row 1	Observed	26	106	132
	Expected	34.31	97.69	132.00
	O - E	-8.31	8.31	0.00
	(O - E)² / E	2.01	0.71	2.72
Row 2	Observed	20	25	45
	Expected	11.69	33.31	45.00
	O - E	8.31	-8.31	0.00
	(O - E)² / E	5.90	2.07	7.97
Total	Observed	46	131	177
	Expected	46.00	131.00	177.00
	O - E	0.00	0.00	0.00
	(O - E)² / E	7.91	2.78	10.69
		10.685	chi-square
		1	df
		.0011	p-value

x^2 = 10.685 ; so 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