GODFREY HODGSON HOLMES TARCA

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GODFREYHODGSONHOLMESTARCA

• CHAPTER 13
• BEHAVIOURAL RESEARCH IN ACCOUNTING

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Behavioural accounting research definition
and scope

• Positive research encompasses
• Capital markets research
• asks how do securities markets react to
  accounting information
• Agency theory research
• asks what are the economic incentives that
  determine the choice of accounting methods
• Behavioural accounting research
• asks how do people actually use and process
  accounting information

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Behavioural accounting research definition
and scope

• Capital markets research looks at the macro level
  of aggregate securities markets
• Agency and behavioural research both focus on the
  micro level of individual managers and firms

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Behavioural accounting research definition
and scope

• Capital markets and agency research are both
  based on economics and assume everyone is a
  rational wealth maximiser
• Behavioural 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 scope

• Definition

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

• The major type of BAR is
• Human judgement theory (HJT) or
• Human 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
  making
• aim is to explain and predict behaviour and
  improve decision making

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Why is BAR important?

• It discovers how people use and process
  accounting information
• It 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 research

• HJT research began in 1954
• The term BAR appeared in 1967
• Last 30 years has seen an explosion in BAR
• especially auditing
• importance of judgement
• the Brunswik lens model

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An overview of approaches to understanding
information processing

• Three major research approaches
• Brunswik lens model
• the dominant approach
• process tracing
• build representative decision trees
• probabilistic judgement
• probability statements based on Bayess theorem

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The Brunswik lens model

• Used 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 model

• Has provided valuable insights regarding
• patterns of cue use evident in various tasks
• weights that decision makers implicitly place on
  a variety of information cues
• the 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 model

• Valuable insights (continued)
• the stability (consistency) of human judgment
  over time
• the degree of insight decision makers possess
  regarding their pattern of use of data
• the degree of consensus displayed in a variety of
  group decision tasks

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The Brunswik lens model

• The model usually has good predictive powers
• it removes much of the random error due to human
  things such as tiredness, illness or distraction
• An important limitation is that it is not a good
  descriptor of how people actually make decisions
• so process tracing methods developed

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Process tracing methods

• Provides an explanation about how a decision is
  made
• process tracing or verbal protocol
• produces a decision tree to represent the
  decision process
• classification and regression trees (CART)

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Probabilistic judgement

• Useful 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 evidence

• accuracy of humans predictions of business
  failure
• model of human behaviour
• information overload literature
• judgement confidence literature

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Process tracing studies the evidence

• Brunswik 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
statements

• Libby (1976) 3 options for improved decision
  making
• changing the presentation and amount of
  information
• educating decision makers
• replacing decision makers with a model of
  themselves or with an ideal cue-weighting model

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Format and presentation of financial statements
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Format and presentation of financial
statements

• Little research has been undertaken regarding
  ideal presentation formats
• e.g. graphs versus tables
• e.g. colour versus black white
• Mixed results
• No well developed and tested theory

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Probabilistic judgement studies the evidence

• Three rules of thumb (heuristics)
• representativeness
• availability
• anchoring and adjustment
• Expert judgement and rules of thumb

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Probabilistic judgement studies the evidence

• Representativeness
• 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 evidence

• Availability
• The assessment of the probability of an event is
  based on the ease with which instances of that
  event come to mind

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Probabilistic judgement studies the evidence

• Anchoring and adjustment
• An initially given response serves as an anchor,
  and other information is used to adjust that
  response

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Accounting and behaviour

• The techniques adopted and the subsequent
  interpretation of reported information are
  matters of perspective
• Accounting is a direct function of human
  behaviour and activity
• Two-way influence

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Limitations of BAR

• Frequent contradictions between the findings of
  similar studies
• Human information processing is far more complex
  than the development of current research theories
  and methods
• Research settings fail to adequately replicate
  real-world settings
• Should policy be influenced by research on
  individual decision makers

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Limitations of BAR

• The major limitation is the lack of a single
  underlying theory to unify diverse research
  questions and findings
• has borrowed from a multitude of disciplines and
  contexts and so no common framework
• A single theory is unlikely in the foreseeable
  future

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Issues for auditors

• The process of auditing is often treated as a
  black box
• what are the characteristics of better auditors
• what are the factors that affect auditors
  judgement
• research challenges in balancing realism and
  simplicity in research design

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Summary

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

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Key terms and concepts

• Behavioural accounting research (BAR)
• Human judgement theory (HJT)
• Human information processing (HIP)
• Brunswik lens model
• Process tracing methods
• Classification and regression trees (CART)
• Probabilistic judgement
• Rules of thumb (heuristics)
• Representativeness
• Availability
• Anchoring and adjustment

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