Probable at First Glance, but Unlikely After Closer Look: The Role of Cognitive Reflection Ability on the Assessment of Probabilistic Expressions

SynopsisResearch problemWe investigate whether accountants’ cognitive reflection ability affects how they assess the probabilistic numerical thresholds of the probabilistic expressions probable, remote, virtually certain, and reasonable certainty in the context of international financial reporting standards.Theoretical reasoningIn the psychology literature, impulsivity is associated with aggressive behavior, and reflective individuals are more prone than impulsive individuals to access slow and effortful (Type 2) reasoning in order to overcome the initial response provided by fast and impulsive (Type 1) reasoning. Considering that accounting conservatism requires a higher degree of verification to recognize events that increase rather than decrease net assets, we argue that impulsivity is associated with aggressive accounting and reflectivity is associated with a conservative interpretation of probabilistic expressions.Test hypothesisReflective accountants are more conservative than their impulsive peers when making numerical assessments of probabilistic expressions associated with accruing or disclosing an event.Target populationAccounting professionals, including preparers, auditors, and tax analysts.Adopted methodologyWe collected data from 569 accounting professionals using a survey questionnaire, in partnership with the Brazilian Accountants Association (Conselho Federal de Contabilidade, or CFC), a federal agency with the mandate of guiding, regulating, and supervising the accounting profession in Brazil, to assess professionals’ cognitive reflection ability, collect their demographic characteristics, and evaluate their assignment of numerical values to probabilistic expressions.AnalysesWe employed t-tests, median tests, and standard deviation tests; we also conducted several robustness tests that replicated our main results.FindingsOur results confirm that reflective accountants are more conservative in their probability assessments than their impulsive peers. Our findings have three main implications. First, standard-setters could avoid the use of or develop guidance about terms with low communication efficiency. Second, analysts and standard-setters should consider that the comparability of accounting information across firms depends on the preparers’ cognitive reflection ability. Third, we present an additional explanation (accountants’ cognitive reflection ability) for accounting conservatism and differences in the interpretation of uncertainty expressions.