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Numeric-to-verbal translation of probability expressions in SFAS 5

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  • Ning Du
  • Kevin Stevens
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    Abstract

    Purpose – The purpose of this paper is to investigate how accountants interpret verbal uncertainty expressions with a focus on numeric-to-verbal translation. Design/methodology/approach – Accounting for loss contingencies (SFAS 5) were chosen as a setting to study this research question. The approach used was a behavioral experiment where participants choose probability phrases for 11 numeric probabilities for two default conditions. Findings – The results indicate a clear pattern, where thresholds for accrual and disclosure decisions can be easily identified in the numeric-to-verbal translation. Also, the base rate appears to affect the assessment of the uncertainty related to potential default, but does not affect mapping of numeric values to verbal terms. Research limitations/implications – The use of 11 probabilities does not cover all regions of the [0, 1] probability line and may leave regions of the probability interval not mapping to any SFAS 5 phrase. Also, this study uses upper-level undergraduate accounting students, whose judgments are similar to novice auditors but may differ from experienced auditors. Practical implications – The evidence suggests that unlike verbal-to-numeric translation, which is unstable and context dependent, numeric-to-verbal translation is quite consistent among individuals, and is unlikely to be affected by the contextual information. The results complement prior findings in auditors' judgment, and suggest that interpreting uncertainty expressions can be improved if auditors are encouraged to use numeric-to-verbal translation when they apply accounting and auditing standards in forming an opinion on the financial report. Originality/value – This is the first paper to examine the mapping of numeric probabilities to verbal probability terms.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

    Volume (Year): 26 (2011)
    Issue (Month): 3 (March)
    Pages: 248-262

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    Handle: RePEc:eme:majpps:v:26:y:2011:i:3:p:248-262

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    Related research

    Keywords: Accounting standards; Communication processes; Loss; Probability analysis; Uncertainty management;

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    1. Hoffman, Vicky B. & Patton, James M., 2002. "How are loss contingency accruals affected by alternative reporting criteria and incentives?," Journal of Accounting and Public Policy, Elsevier, vol. 21(2), pages 151-167.
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