GODFREYHODGSONHOLMESTARCACHAPTER 13 BEHAVIOURAL RESEARCH IN ACCOUNTING

Behavioural accounting research: definition and scopePositive research encompassesCapital markets researchasks how do securities markets react to accounting informationAgency theory researchasks what are the economic incentives that determine the choice of accounting methodsBehavioural accounting researchasks how do people actually use and process accounting information

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Behavioural accounting research: definition and scopeCapital markets research looks at the macro level of aggregate securities marketsAgency and behavioural research both focus on the micro level of individual managers and firms*

Behavioural accounting research: definition and scopeCapital markets and agency research are both based on economics and assume everyone is a rational wealth maximiserBehavioural research is based on psychology, sociology and organisational theory and generally makes no assumptions about how people behave

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Behavioural accounting research: definition and scopeDefinition*The study of the behaviour of accountants or the behaviour of non-accountants as they are influenced by accounting functions and reports. Hofstedt & Kinard

Behavioural accounting research: definition and scopeThe major type of BAR is Human judgement theory (HJT) orHuman information processing (HIP)Looks at the judgement and decision making of accountants and auditors and the influence their output has on users judgements and decision makingaim is to explain and predict behaviour and improve decision making*

Why is BAR important?It discovers how people use and process accounting informationIt provides valuable insights into the ways different types of decision makers produce, process and react to particular items of accounting information and communication methods

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Why is BAR important?It provides useful information to accounting regulators It leads to efficiencies in the work practices of accountants and other professionals

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Development of behavioural accounting researchHJT research began in 1954The term BAR appeared in 1967 Last 30 years has seen an explosion in BARespecially auditingimportance of judgementthe Brunswik lens model

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An overview of approaches to understanding information processingThree major research approachesBrunswik lens modelthe dominant approachprocess tracingbuild representative decision treesprobabilistic judgementprobability statements based on Bayess theorem*

The Brunswik lens modelUsed as an analytical framework and the basis for most judgement studies involving prediction (e.g. bankruptcy)evaluation (e.g. internal control)

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The Brunswik lens modelHas provided valuable insights regardingpatterns of cue use evident in various tasksweights that decision makers implicitly place on a variety of information cuesthe relative accuracy of decision makers of different expertise levels in predicting and evaluating a variety of tasks the circumstances under which an expert system and/or model of human behaviour outperforms humans

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The Brunswik lens modelValuable insights (continued)the stability (consistency) of human judgment over timethe degree of insight decision makers possess regarding their pattern of use of datathe degree of consensus displayed in a variety of group decision tasks

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The Brunswik lens modelThe model usually has good predictive powersit removes much of the random error due to human things such as tiredness, illness or distractionAn important limitation is that it is not a good descriptor of how people actually make decisionsso process tracing methods developed*

Process tracing methodsProvides an explanation about how a decision is madeprocess tracing or verbal protocolproduces a decision tree to represent the decision processclassification and regression trees (CART)*

Probabilistic judgementUseful where initial beliefs about a prediction or evaluation need to be revised as new data arrives

Posterior odds = Likelihood ratio x Prior odds

Found use of rules of thumb to simplify complex judgment tasks

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Lens model studies the evidenceaccuracy of humans predictions of business failuremodel of human behaviourinformation overload literaturejudgement confidence literature

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Process tracing studies the evidenceBrunswik lens models and process tracing style studies are different technologies with the same objective of modelling decision processes as completely as possible

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Format and presentation of financial statementsLibby (1976) 3 options for improved decision makingchanging the presentation and amount of informationeducating decision makersreplacing decision makers with a model of themselves or with an ideal cue-weighting model

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Format and presentation of financial statements*

Format and presentation of financial statementsLittle research has been undertaken regarding ideal presentation formatse.g. graphs versus tablese.g. colour versus black & whiteMixed resultsNo well developed and tested theory

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Probabilistic judgement studies the evidenceThree rules of thumb (heuristics)representativenessavailability anchoring and adjustment

Expert judgement and rules of thumb

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Probabilistic judgement studies the evidenceRepresentativeness When judging the probability that a particular item comes from a particular population of items, peoples judgement will be determined by the extent to which the item is representative of the population

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Probabilistic judgement studies the evidenceAvailabilityThe assessment of the probability of an event is based on the ease with which instances of that event come to mind*

Probabilistic judgement studies the evidenceAnchoring and adjustmentAn initially given response serves as an anchor, and other information is used to adjust that response*

Accounting and behaviourThe techniques adopted and the subsequent interpretation of reported information are matters of perspectiveAccounting is a direct function of human behaviour and activityTwo-way influence

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Limitations of BARFrequent contradictions between the findings of similar studiesHuman information processing is far more complex than the development of current research theories and methodsResearch settings fail to adequately replicate real-world settingsShould policy be influenced by research on individual decision makers

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Limitations of BARThe major limitation is the lack of a single underlying theory to unify diverse research questions and findingshas borrowed from a multitude of disciplines and contexts and so no common frameworkA single theory is unlikely in the foreseeable future

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Issues for auditorsThe process of auditing is often treated as a black boxwhat are the characteristics of better auditorswhat are the factors that affect auditors judgementresearch challenges in balancing realism and simplicity in research design*

SummaryIf we are to have a better understanding about how people use accounting information, then we need to study peoples actual behaviours and decision processesBAR can be used to explain and predict behaviour and improve decision makingResearch in this area has relied heavily on the Brunswik lens model, process tracing methods and the probabilistic judgement modelThere are significant limitations in BAR

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Key terms and conceptsBehavioural accounting research (BAR)Human judgement theory (HJT)Human information processing (HIP)Brunswik lens modelProcess tracing methodsClassification and regression trees (CART)Probabilistic judgementRules of thumb (heuristics)RepresentativenessAvailabilityAnchoring and adjustment

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