The Effect of Ambiguity on Loss Contingency Reporting Judgments

This paper reports the results of an experiment that examines the influence of uncertainty about the probability that a future loss will occur ("ambiguity") on auditors' and financial statement users' judgments about appropriate reference to contingent losses in audit reports. Ap...

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Bibliographic Details
Published in:The Accounting review 1997-04, Vol.72 (2), p.257-274
Main Authors: Nelson, Mark W., Kinney, William R.
Format: Article
Language:English
Subjects:
Accounting
Ambiguity
Auditing
Auditing standards
Auditors opinions
Auditors reports
Conservatism
Estimate reliability
Expectation gap
Financial audits
Financial reporting
Financial statements
Hypotheses
Judgment
Litigation
Losses
Modeling
Psychological research
SAS 58
Statements on auditing standards
Studies
Uncertainty
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Summary:This paper reports the results of an experiment that examines the influence of uncertainty about the probability that a future loss will occur ("ambiguity") on auditors' and financial statement users' judgments about appropriate reference to contingent losses in audit reports. Application of Einhorn and Hogarth's (1985) ambiguity model suggests that, with respect to losses of low (high) probability, both auditors and users will act as if an ambiguous probability of loss is higher (lower) than a precise probability of the same magnitude, thus demonstrating a conservative (unconservative) reaction to ambiguity. In addition, since auditors may jeopardize client relations when they unnecessarily make audit report reference to contingent losses, auditors may react less conservatively to ambiguity than do users. The results of the experiment support these predictions.
ISSN:0001-4826
1558-7967