Debiasing the Effect of Examples in Financial Reporting

• In Event: Financial Reporting

Abstract

Accountants often determine the appropriate accounting for ambiguous or complex business transactions by looking to examples, but previous research suggests that they overrely on features that these transactions share with examples. This paper investigates whether providing explicit instructions about the appropriate weight to place on transaction features is an effective debiaser of overreliance on common features. Using an experiment, we find that participants adjust their judgments in the direction indicated by instructions, but that overweighting of common features is not eliminated by these instructions. Thus, despite the partial debiasing effect of guidance about appropriate weighting, participants consistently overestimate the likelihood that a transaction qualifies for the same treatment as an example. These findings have implications for standard setters, who develop examples to aid implementation of accounting standards, and for accounting practitioners, who rely on examples in classifying transactions.

Authors

• Gregory Paul Capps, The University of Texas at Austin

• Lisa Koonce, The University of Texas at Austin

• Brian Joseph White, The University of Texas at Austin