ACC706: Accounting Theory & Practice

Topic 7

BEHAVIOURAL RESEARCH IN ACCOUNTING

 Behavioural Accounting Research (BAR)

“BAR is defined as the study of the behavior of accountants or the behavior of non
accountants as they are influenced by accounting functions and reports.”

How and why did BAR emerged as an area of study?

Capital Market Research

Agency Theory

Behavioural Accounting
Research
 Scope of Behavioural Accounting Research
All three schools of research can be considered as “positive research”:
1. Capital markets research – how does securities market react to accounting information.
2. Agency theory – what are the economic incentives that determine the choice of
accounting methods?
3. Behavioral accounting research – how do people actually use and process accounting
information?
Scope School of Research
Looks at the macro level of aggregate securities markets Capital market research
Focus on the micro level of individual managers and firms Agency theory & BAR
Based on economics and assume everyone is a rational Capital market research
wealth maximiser & Agency theory

Based on psychology, sociology and organisational theory BAR

and generally makes no assumptions about how people
behave
Types of Behavioural Accounting Research
1. Human Judgement Theory (HJT)
2. Human Information Processing (HIP)

• Aims is to explain and predict behavior and improve decision making.

• Looks at the judgement and decision making of accountants and auditors and the
influence their output has on users’ judgements and decision making.

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’
 Importance of Behavioural Accounting Research

• 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.

• It provides useful information to accounting regulators.

• It leads to efficiencies in the work practices of accountants and other professionals.

 Approaches to Understand Information Processing

A model that provides an analytical framework for

Brunswik Lens investigating the decisions, judgements or predictions
Model made by information users. The model has been used to
consider decision usefulness of accounting information.

An attempt to build a decision tree representation of a

Process Tracing
person’s judgements. Also known as ‘verbal protocol’
Methods
method.

Model used to assist in situations where initial predictions

Probabilistic need to be adjusted in light of additional information.
Judgement Decision processes are represented as probability
statements based on Bayes’s theorem.

‘Model’ – description of a person’s decision making process.

 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)
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 behavior’
outperforms humans.
- 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.
 Brunswik Lens Model (Cont’d)

Has good predictive powers:

• A comparison of a prediction of a lens model equation and the decisions of a human
decision maker usually shows that lens model is better predictor of the event of interest
than the person from whom the model was derived.

Limitation:
• Not a good descriptor of how people actually make decisions.

Do researchers need models to represent descriptive power?

 Process Tracing Methods

• Provides an explanation about how a decision is made by constructing a ‘decision tree’ to

represent the decision processes.
• Process tracing method  decision trees derived are good descriptors of people’s
decision processes. But according to Lens Model, process tracing method are not always
good predictors of the event of interest.
• Classification and regression trees (CART) – response to general limitations of lens model
and process tracing methods.
• CART uses statistical methods to partition or split the output of a decision maker’s
judgement into decision nodes that maximize the power of the model to correctly predict
the classification of different cases into the right type of decision.
• CART can turn to be relatively complex.
 Probabilistic Judgement

• Is useful for looking at situations in accounting where initial beliefs about a prediction or
evaluation need to be revised once further evidence becomes available.
• Argues that normatively correct way to revise initial beliefs, stated as subjective
probabilities, is by applying Bayes’s theorem:
Posterior odds = Likelihood ratio x Prior odds

Posterior odds – revised probability.

Likelihood ratio – amount by which prior expectations should be revised.
Prior odds – initial probability or base rate.

The evidence from numerous slides suggests that accountants and auditors invoke a series of
“rules of thumb” – discussed in following slides.
 Evidences to Approaches

Lens Model Studies

• Accuracy of humans’ predictions of business failure.
• Model of human behavior.
• Information overload literature.
• Judgment confidence literature.

Process Tracing Studies

• Brunswick lens model and process tracing style studies are different technologies with the
same objective of modeling decision processes as completely as possible.
 Evidences to Approaches
Probabilistic Judgement Studies
Three rules of thumb are defined in the literature:
Representativeness
When judging the probability that a particular item comes from a particular population of
items, people’s judgement will be determined by the extent to which the item is
representative of the population.
Availability
The assessment of the probability of an event is based on the ease with which instances of
that event come to mind.
Anchoring & Adjustment
An initially given response serves as an anchor, and other information is used to adjust that
response.
Accounting Behavior
• The techniques adopted and the subsequent interpretation of reported information are matters of
perspective.

• Accounting is a direct function of human behavior and activity.

• Two-way influence.
Limitations of BAR
• Frequent contradictions between the findings of similar studies simple mean human information
processing is far more complex than the development of current research theories and methods.
• Studies on the same topic have produced conflicting results.
• Research settings fail to adequately replicate real-world settings.
• Researchers question: whether policy should be influenced by research on individual decision
makers?
• The major limitation is the lack of a single underlying theory to unify diverse research questions
and findings.
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.

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
Little research has been undertaken regarding ideal presentation formats.
- e.g. graphs versus tables
- e.g. color versus black & white
- Mixed results
- No well developed and tested theory
END OF TOPIC 7