Probable at First Glance, but Unlikely After Closer Look: The Role of Cognitive Reflection Ability on the Assessment of Probability Expressions

• In Event: Accounting

Abstract

Making numerical probabilistic assessments of probability expressions is a central and vital task for accountants who prepare or audit financial reports. This study investigates whether accountants’ cognitive reflection ability affects the assessment they make about the probability associated with the terms probable, remote, virtually certain and reasonable certainty in the context of international accounting standards. Results from a survey with 569 accountants confirm that reflective accountants, compared to their impulsive peers, are much more reluctant to accrue or disclose net assets increasing events than decreasing events. Hence, we identified that impulsiveness impacts the timing of recognition of changes in net assets, what we have called ‘cognitive-conditional conservatism.’ Additionally, results reinforce that the interpretation of such probability expressions is context-dependent and that the terms remote and virtually certain have higher communication efficiency than probable and reasonable certainty. These findings have three main implications. First, standard-setters could avoid the use of, or develop guidance about, low communication efficiency terms. Second, analysts and standard-setters should consider that accounting information comparability across firms is dependent on preparers’ cognitive reflection ability. Third, we presented an additional explanation (accountants’ cognitive reflection ability) for accounting conservatism and differences in the interpretation of uncertainty expressions.

Authors

• Ricardo Cardoso, Brazilian School of Public and Business Administration

• Rodrigo Leite, Rio de Janeiro State University

• André Carlos B. Aquino, University of São Paulo