Chapter 3: The Research Process Flashcards
What is the accounting research process?
A step by step process that researchers can apply to a wide range of open-ended accounting issues.
What are the steps in the accounting research process?
- Understand the business (industry)
- Understand the transaction
- Define the research problem
- Stop and think about possible solutions
- Search for guidance
- Analyze the alternative treatments
- Justify and document your conclusion
Simplified Research Process
- Understand the facts
- Define the problem
- Stop and think
- Search for guidance
- Analyze and document alternatives
- Justify and document conclusion
Why is it important to understand a company’s business for researching a transaction.
Gives the appropriate context for considering company-specific accounting issues.
What should you understand during the pre-research step?
- What are the primary business activities?
- What are the key revenue sources, and costs?
- What accounting practices are unique to this industry?
- What are some of the peer group companies in this industry?
What are some resources to learn a company’s business or industry?
- AICPA Audit and Accounting Guides
- Deloitte Accounting Research Tool (DART)
- Hoovers
- Mergent
- IBIS
-Search Engines - Publicly available financial reports (10-K)
Which sections of a 10-K look for to understand a company?
- Business (Item 1)
- Critical accounting policies and estimates
- Significant Accounting Policies
What are resources for understanding a transaction?
- Transaction documents (contracts)
- Talking to transaction stakeholders
- Documents from previous similar transactions
- Industry peers with relevant experience
Why is it impotant to identify the researchable question?
Doing so will bring focus to the researcher.
What is the benefit of step 3 of the research process (Stop and think)?
It facilitates the researcher remaining objective and mitigates the researcher anchoring on the first idea.
What are the steps of “Search for Guidance” (step 4)?
- Browse to the topic
- Copy potential Topics into a document
- Consult all required reading
- Consult nonauthoritative sources
- Review the collected guidance
What are common biases?
- Confirmation Bias
- Availability Bias
- Recency Bias
- Anchoring and Adjustment
- Group Think
- Hindsight Bias
- Escalation of commitment
Confirmation Bias
Inclination to seek information supporting our existing viewpoint and to downplay information supporting different options.
Availability Bias
Tendency to weight more heavily that information which is readily available, and to overlook information which takes more time or effort to gather.
Anchoring and Adjustment
The tendency to fixate on initial information received, and failing to adjust adequately for subsequent information.
Group Think
Prioritizing the views of the most vocal, most respected, or most senior, member of a group.
Hindsight Bias
Thinking - after the fact, once the outcome is known - that you would have made the right decision, or that you know the right answer all along.
Escalation or commitment
Staying with a decision even when you suspect or have evidence that the decision is wrong.
How do you overcome bias
- Acknowledge that biases exist
- Obtain information and viewpoints from a variety of sources
- Seek information that will challenge your existing views
- Listen and understand when someone disagrees with you
- Apply a systematic research process that enables you to evaluate issues carefully and methodically
Decision Matrix
A systematic, importance-weighted decision making technique where numerical values are assigned to the importance of each decision criterion.
