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

Author

Listed:
  • Ning Du
  • Kevin Stevens

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.

Suggested Citation

  • Ning Du & Kevin Stevens, 2011. "Numeric-to-verbal translation of probability expressions in SFAS 5," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(3), pages 248-262, March.
  • Handle: RePEc:eme:majpps:v:26:y:2011:i:3:p:248-262
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    References listed on IDEAS

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    1. repec:bla:joares:v:34:y:1996:i:2:p:281-299 is not listed on IDEAS
    2. 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.
    3. repec:bla:joares:v:19:y:1981:i:2:p:482-501 is not listed on IDEAS
    4. repec:bla:joares:v:20:y:1982:i:2:p:756-765 is not listed on IDEAS
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