Auditors interpretations of `in-isolation' verbal probability expressions: A cross-national study

Mark Shying
Department of Accounting and Finance
Victoria University
Footscray Park Campus
PO Box 14428
MMC
Victoria 8001

Mark.shying@vu.edu.au
Phone 61 3 9688 4632
Fax 61 3 9688 4901

Auditors interpretations of `in-isolation' verbal probability expressions: A cross-national study

Abstract. This study examines the numerical interpretation of 20 verbal probability expressions by 55 auditors employed in Hong Kong, Malaysia and Singapore by determining the minimum numerical threshold they assign to verbal probability expressions used in accounting standards. The study seeks to assess the degree of between-group consensus about the numerical interpretation of these expressions.

The findings indicate that the numerical interpretation of one expression "virtually certain" is sensitive to cross-national differences and that the two expressions "probable" and "more likely than not" are not numerically interpreted as synonyms. Furthermore, the results indicate that the International Accounting Standards Committee (IASC) should use caution when developing accounting standards using verbal probability expressions.

Keywords: verbal probability expressions; cross-national; IASC; numerical interpretation; auditors.

Data and the relevant part of the research instrument are available on request from the author.

1. Introduction
Stig Enevoldsen, in his role as chairman of the International Accounting Standards Committee (IASC), recently wrote

Today a wide variety of accounting regimes exist around the world, using different accounting languages and sometimes giving different interpretations of the same events and transactions. This is an unfortunate situation which undermines the credibility of financial reporting. The case for moving towards one international accounting language is compelling - and I believe that, in the long term, the continuing development of that global language should be entrusted to a truly international accounting standard-setting body. The IASC is the only such body in existence today (Taylor and Hall 1999 foreword).

Accounting standards, be they developed by domestic standard-setters or the IASC, often use verbal probability expressions to denote levels of probability in prescribing recognition, measurement and disclosure of events and transactions in financial reports. Different interpretations of the same verbal probability expression have the potential to undermine the credibility of financial reporting. Earlier accounting and non-accounting related studies of verbal probability expression show that verbal probability expressions are numerically interpreted differently within and among groups (e.g., Amer et al. 1995; Laswad and Mak 1994).

Some researchers suggest that standard-setters should consider clarifying the implied numerical probability levels associated with different verbal probability expressions used in accounting standards (e.g., Laswad and Mak 1994; Reimers 1992; Harrison and Tomassini 1989). Non-accounting related studies of verbal probability expressions also suggest that using numerical rather than verbal probability expressions to denote probability improve communication. However, there has been little agreement as to whether this should be a point numerical probability or whether a numerical band would suffice (Brun and Teigen 1988; Beyth-Maron 1982). Nevertheless, clarification of the implied probability levels associated with verbal probability expressions may lead standard-setters to reconsider their continued use of verbal probability expressions.

This study uses a questionnaire research instrument to determine the minimum numerical probability threshold assigned by auditors employed in Hong Kong, Malaysia and Singapore to different verbal probability expressions that are used in accounting standards. Furthermore, the study seeks to determine whether or not two verbal probability expressions "probable" and "more likely than not", that are considered by the IASC to be synonyms, are numerically interpreted as synonyms. The results indicate that one verbal probability expression "virtually certain" is numerically interpreted as representing a significantly different probability and that the two verbal probability expressions "probable" and "more likely than not" are not numerically interpreted as synonyms.

The remainder of the paper is structured as follows. The next two sections provide some further discussion of verbal probability expression research and the development of the research questions underlying the study. Following that, the methodology is described. The fifth section presents the analysis of data and discusses the results, and the final section offers a summary and concluding comments on the implications of the study, together with limitations.

2. Verbal probability expressions
General forecasting researchers have developed a research instrument that requires the research subject to use their judgement and decision-making processes. The research method has been used to obtain data from medical practitioners, parents of young children, psychology students, psychology academics and political forecasters (Brun and Teigen 1988; Budescu and Wallsten 1985; Beyth-Marom 1982).

The research method requires that research subjects be provided with one or two research instruments. The first research instrument contains verbal probability expressions using a word scale. For example, Beyth-Marom (1982) required research subjects to interpret 30 verbal probability expressions using a 100 point numeric scale. This approach is called an `in-isolation' study, as the verbal probability expressions are devoid of context. A second research instrument requires that research subjects be provided with a vignette. They are then required to perform certain tasks. For example, Beyth-Marom (1982) required subjects to substitute numbers for the verbal probability expressions that were embedded in the vignette. In contrast with the `in-isolation' studies this type of study uses an `in-context' design.

The analysis of the data obtained using the two research instruments typically indicates a lack of agreement, among research subjects, about the numeric meaning of verbal probability expressions. Brun and Teigen (1988) report finding that the range of numerical translations given to each verbal probability expression embedded in a context are in many cases the subject of a higher level of variability than when the verbal probability expression is judged in-isolation.

As some accounting standards contain verbal probability expressions, accounting researchers have used the `in-isolation' research method (for example, Laswad and Mak 1997; Amer et al. 1995, 1994; Davidson and Chrisman 1993; Houghton and Walawski 1992; Reimers 1992; Jiambalvo and Wilner 1985) to elicit the numerical interpretation of verbal probability expressions. New Zealand standard-setters, USA accountants and auditors and Canadian accounting students have constituted the research subjects used in these studies (e.g., Laswad and Mak 1997; Amer et al. 1995; 1994; Davidson and Chrisman 1993). It is apparent that the meaning of verbal probability expressions used in accounting standards is not intended to be context-dependent (Amer et al. 1995). Rather the accounting standard is developed with the intention of affecting accountants' approach to the recognition, measurement and disclosure of events and transactions in financial reports. If the lack of agreement about the numeric meaning of verbal probability expressions reported in the general-forecasting literature were to be repeated in the financial reporting setting, then the accounting standards are unlikely to be consistently applied by accountants in a like manner.

There appear to be three important findings reported in the accounting literature (Amer et al. 1995; Laswad and Mak 1994). First some findings suggest there is a large range of numerical translations given to each verbal probability expression (Harrison and Tomassini 1989). Second, research subjects are often presented with a group of verbal probability expression and asked to provide the numeric equivalent for each expression. Often research subjects are unable to discriminate numerically, i.e., some verbal probability expressions are numerically interpreted as synonyms (Laswad and Mak 1997; Amer et al. 1994; Reimers 1992) while some expressions that are word synonyms are not numerically interpreted as synonyms (Laswad and Mak 1997). Third, there is both between-group and within-group disagreement in the numerical interpretation of verbal probability expressions (Amer et al. 1994; Davidson and Chrisman 1993; Houghton and Walawski 1992; Chesley 1986; Jiambalvo and Wilner 1985; Brackner 1985). In summary the findings of the accounting studies do correlate with the findings reported by the general-forecasting researchers.

In all instances the research subjects have been drawn from a group that in a nationalistic sense is somewhat homogenous (for example, New Zealand standard-setters, USA accountants). International Accounting Standards (IAS's) are developed to have application throughout the world. Davidson and Chrisman (1993) suggest that the characteristics of language may be a cause of between-group differences, yet the IAS's must be comprehensible and understood by a diverse range of financial statement preparers. Unlike the research subjects used in previous accounting studies, the users of IAS's are not a homogenous group. Since the literature indicates that there are differences among research subjects drawn from homogenous groups, there may be less agreement among auditors from different countries in their interpretation of verbal probability expressions when compared with other more homogenous groups. Different interpretations of verbal probability expressions would be unacceptable to the IASC as not only does it have the potential to undermine the credibility of financial reporting, it strikes at the very core of the development of the global accounting language.

3. Research questions

Previous reviews of research on verbal probability expressions published in the accounting and general forecasting literature indicate that there are wide disagreements regarding the interpretation of verbal probability expressions. However, previous studies have used subjects drawn from homogenous groups. I am not aware of any cross-national accounting research regarding verbal probability expressions. Cross-national research would appear to be a first step in any examination of the differences between nations in the interpretation of verbal probability expressions. An assessment of auditors from different countries will assist in understanding the level of agreement in their interpretation of verbal probability expressions. The research question `Do cross-national differences effect auditors interpretation of verbal probability expressions?' can be restated as the following null hypothesis:

H1: There is no significant difference in the numerical interpretation of `in-isolation' verbal probability expressions used in accounting standards between auditors employed in Hong Kong, Malaysia and Singapore.

Laswad and Mak (1997) report finding that the two verbal probability expressions "probable" and "more likely than less likely" are numerically interpreted as having different meanings despite the Statement of Concepts for General Purpose Financial Reporting in New Zealand defining "probable" as "more likely than less likely". The decision by the IASC to issue IAS 37 `Provisions, Contingent Liabilities and Contingent Assets' with the paragraph

it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation (paragraph 2b)

clearly indicate that the two verbal probability expressions, "probable" and "more likely than not", are required to be numerically interpreted as synonyms. The second research question `Are verbal probability expression synonyms numerically interpreted as synonyms?' can be restated as the following null hypothesis:

H2: There is no significant difference in the numerical interpretation of the `in-isolation' verbal probability expressions "probable" and "more likely than not" by auditors employed in Hong Kong, Malaysia and Singapore.

4. Methodology

The study uses as subjects, auditors of `big 5' accounting firms employed in Hong Kong, Malaysia and Singapore. Prior to the collection of the data I did not possess any information about the subjects other than they had as a minimum obtained the level of `manager' in their firms. I did not have possession of the interpersonal characteristic information necessary for a matched sample design. Having rejected the experimental design as impractical for the purposes of the study, the survey method employing a cross-sectional design was employed.

4.1 Research Instrument

A questionnaire, which includes 20 alphabetically ordered verbal probability expressions used in accounting standards, was used in this study. The 20 verbal probability expressions represented a sub-set of 40 verbal probability expressions that had been the subject of prior accounting research (Laswad and Mak 1997; Amer et al. 1995, 1994; Davidson and Chrisman 1993; Houghton and Walawski 1992; Reimers 1992; Harrison and Tomassini 1989; Chelsey and Wier 1985; Jiambalvo and Wilner 1985) and/or used in various IAS's. The 20 verbal probability expressions used in the instrument were selected for two major reasons. First, they represented the range of verbal probability expressions used by accounting standard-setters. Second, they provided data that could be used for the second part of the study, not reported here, a comparison of subjects' `in-isolation' numerical interpretation with `in-context' judgements.

Respondents were requested to evaluate each verbal probability expression independently and provide the minimum numerical probability on a scale of zero percent to 100 percent that they associate with each of the expressions.

A particular issue that arose when wording the questions concerned the `preferred reading language' of respondents. As respondents came from Hong Kong, Malaysia and Singapore, consideration was given to whether it was necessary to have the questionnaire translated from English into Bahasa Malaysia and Chinese. The professional accounting bodies in Malaysia and Singapore indicated that both Malaysian and Singaporean accounting standards are only released in the English language. The professional accounting body in Hong Kong indicated that accounting standards have traditionally been released in the English language, but more recently are released in both English and Chinese versions. Consequently, I take the view that as accounting practitioners in the three countries work with English language accounting standards it is appropriate to present them with an English language questionnaire.

4.2 Choice of nations - Hong Kong, Malaysia and Singapore

The survey for the study was carried out in Hong Kong, Malaysia and Singapore. The accounting standards in these countries are either based or largely based on the IAS's issued by the IASC (IASC 1997). Hong Kong had fairly extensive accounting standard before the corresponding IAS's were issued. Recently, the local accounting standard setting body has made a concerted effort to bring its own accounting standards into substantial conformity with the IAS's. In contrast, historically Malaysia and Singapore have adopted all the IAS's, whilst developing local accounting standards for topics not covered by the IAS's. Two purposes were served in making the decision to carry out the survey in Hong Kong, Malaysia and Singapore. First, I could be confident in assuming that each auditor practising in Hong Kong, Malaysia and Singapore was knowledge about the verbal probability expressions contained in the questionnaire. Second, the analysis of the data could take place within a group and/or between groups.

4.3 Subject selection

It was considered necessary that all the subjects should have been subjected to the range of work experiences that required them to interpret verbal probability expressions. Furthermore, I considered it paramount that all subjects be auditors in a `big 5' accounting firm, have obtained as a minimum the position of manager, and work in a country that has adopted the IAS's. Birkett (1993) states that a competent practitioner is identifiable with a person who has gained full professional membership - `three years of full time study and three years of appropriately guided and supervised work experience' (Birkett 1993, 17). In addition, it is expected that a competent practitioner will become more proficient and even expert as they are subjected to experience of varying types throughout their careers. I contemplated it to be highly likely that auditors of manager level and above would as a minimum meet the definition of a competent practitioner, thereby making them suitable subjects for the study.

A total of 55 auditors, consisting of 18 employed in Hong Kong, 17 employed in Malaysia and 20 employed in Singapore, participated in the study. The auditors were drawn from all of the `big 5' accounting firms. The broad geographic area was covered by personally administering the survey instrument in the offices of the `big 5' accounting firms. Ninety-five percent of the participants were university/poytechnic graduates. Fifty-three percent of the participants had five to nine years accountant/auditor employment experience (with 8 years employment the mean experience for this group). The employment experience of the remainder exceeded nine years. Information was sought from the subjects regarding their experience of applying IAS's containing verbal probability expressions. Ninety-one percent of the participants indicated that they had some experience with this type of reporting decision. Little variability was evident when subjecting employment experience and reporting decision experience to a country by country examination. With the exception of three Malaysia domiciled participants all subjects were graduates (see Table 1).

Table 1

Summary of demographic data on respondents
  Hong Kong Malaysia Singapore All respondents
University/Polytechnic
graduate
100% 82% 100% 95%
Employment
experience

5-9 years
10 years plus

56%
44%
59%
41%
45%
55%
53%
47%
Experience with
reporting decision

No experience
Some experience

17%
83%
0%
100%
10%
90%
9%
91%
Gender

Female
Male

60%
40%
47%
53%
44%
56%
51%
49%





5. Results and data analysis

Table 2 presents the mean and median numerical interpretations of each of the twenty verbal probability expressions. Mean and median interpretations span virtually the entire range of the probability range with the expression "remote" having the lowest numerical probability threshold. The Hong Kong employed subjects and Malaysia employed subjects interpreted the expression "assurance beyond any reasonable doubt" as having the highest numerical probability threshold. In contrast the Singapore employed subjects interpreted the expression "virtually certain" as having the highest numerical probability threshold.

Table 2

Descriptive statistics for numerical interpretations of verbal probability expressions
Verbal probability expression in descending order Hong Kong Malaysia Singapore
  Mean Median Std. Dev. Mean Median Std. Dev. Mean Median Std. Dev.
Assurance beyond any reasonable doubt 90.5 95 11.18 95.18 95 5.04 89.8 95 11.72
Virtually certain 82.28 90 14.34 93.35 95 7.5 90.4 95 12.34
Highly probable 81.11 80 7.58 82.06 80 10.91 81.25 80 10.5
Highly likely 78.61 80 9.97 78.88 80 11.15 80.25 80 10.32
Reasonably certain 75.67 75 8.93 77.71 80 15.11 80.3 80 8.09
Expected 72.06 70 15.66 72.94 75 14.8 72.8 75 13.73
Reasonable assurance 70.61 70 10.16 71.47 75 12.84 74 70 7.18
Reasonably expected 72.72 75 8.32 71.18 75 12.44 71.8 70 10.44
Reasonable evidence 70.33 70 11.2 69.47 75 13.12 74 72.5 9.54
Likely 65 60 10.43 63.88 65 12.32 65.5 67.5 8.41
Probable 62.44 65 15.19 63.35 70 14.02 62 60 11.17
Reasonably possible 57.61 60 17.12 55.35 60 27.12 64.75 67.5 12.3
More likely than not 54 51 6.96 57.18 55 9.86 56.55 55 8.5
Possible 46.44 50 13.89 45.88 50 24.48 51.8 50 17.41
Uncertain 29.11 30 19.81 26.12 25 21.63 32.2 30 17.07
Remotely likely 14.83 10 10.62 17.06 15 15.89 18.5 12.5 14.55
Not expected 18.94 20 12.23 13.65 5 15.18 13 10 12.61
Highly improbable 15.28 15 8.59 10.59 10 9.12 14.05 10 12.23
Remote possibility 10.94 10 7.68 11.82 10 11.89 14.5 10 8.62
Remote 8.55 10 7.43 9.11 5 12.5 12.45 10 10.47
Italics denote deviation from verbal probability expression descending order.



The hypothesis of no significant group differences in the numerical interpretation of the verbal probability expressions was tested using oneway Analysis of Variance (ANOVA). The results presented in Table 3 shows that the hypothesis of no group difference is rejected for one verbal probability expression, "virtually certain", at the .05 level. As a significant overall difference exists, the next step in the analysis was to determine which group means were significantly different from one another.

Table 3
Test of hypothesis for between group differences
Verbal probability expression   Sum of squares Degrees of freedom Mean square F value Significance
Virtually certain Between groups .117 2 .05841 4.164 .021*
  Within groups .729 52 .01403    
  Total .846 54      
* Denotes significant at the .05 level.


A conservative approach developed by Tukey (Klockars and Sax 1986), the Honestly Significant Difference Test (HSD), was used to make pairwise comparisons on the verbal probability expression "virtually certain". The pairwise comparison results are summarized in Table 4. The mean responses from Malaysia were found to be significantly higher than that from Hong Kong. There was no statistically significant difference between the means of Hong Kong and Singapore or the between the means of Malaysia and Singapore. The pairwise comparison results indicate that the Hong Kong employed auditors and the Malaysia employed auditors have a significantly different numerical interpretation of the verbal probability expression "virtually certain". "Virtually certain" represents a threshold recognition test used in IAS 10 `Contingencies and Events Occurring After the Balance Sheet Date' and IAS 37. Therefore, the overall effect of the Hong Kong auditors assigning lower numerical probabilities to the verbal probability expression "virtually certain" is to increase the instances that a `contingent asset' will be accrued in the financial statements. The Hong Kong employed auditors would appear to take a more liberal approach to the recognition of gains and assets, in contrast to the more conservative approach adopted by the Malaysia employed auditors.

Table 4

Summary of HSD pairwise comparison test for three groups
Dependent
variable
(a) Country (b) Country Mean
difference
(a-b)
Standard
error
Significance 95% Confidence
interval
            Lower
bound
Upper
bound
Virtually
certain
Hong Kong Malaysia
Singapore
-.1108
-.0812
.04
.038
.021*
.097
-.2074
-.1741
-.0141
-.0116
  Malaysia Hong Kong
Singapore
.1108
.0295
.04
.039
.021*
.732
.0141
-.0647
.2074
.1238
  Singapore Hong Kong
Malaysia
.0812
-.0295
.038
.039
.097
.732
-.0116
-.1238
.1741
.0647
* Denotes significant at the .05 level.



The hypothesis of no significant differences in the numerical interpretation of the verbal probability expressions "probable" and "more likely than not" is not a between group test. Consequently, all numeric interpretations of the two verbal probability expressions were pooled and subjected to a paired samples t-test. The paired sample statistics are presented in Table 5.

Table 5

Paired sample statistics
Verbal probability expression Mean score Standard deviation Standard error
More likely than not .5591 .08449 .011394
Probable .6256 .1323 .01784



The results of the paired sample t-test presented in Table 6 shows that the hypothesis of no statistically significant difference is rejected at the .05 level. This may indicate that the definition of "probable" as meaning "more likely than not" used in IAS 37 is not appropriate. There are two overall effects of the subjects assigning a higher numerical probability to the verbal probability expression "probable" than that assigned to "more likely than not". The first effect is to decrease the instances that a `contingent liability' and losses will be accrued in the financial statements. The second effect is to decrease the instances that a `contingent asset' will be note disclosed in the financial statements.

Table 6

Test of hypothesis for differences in the numerical interpretation of the verbal probability expressions "probable" and "more likely than not"
 

Paired differences

     
Verbal probability expression Mean differences Standard deviation Standard error mean 95% confidence interval of the difference T value Degrees of freedom Significance
(two tailed test)
        Lower Upper      
Probable and more likely than not .0665 .1565 .02111 0242 .1089 3.153 54 .003*
* Denotes significant at the .05 level.

6. Summary, conclusions and limitations

The hypothesis of no group difference in the numerical interpretation of verbal probability expressions is rejected for one verbal probability expression, "virtually certain", at the .05 level. This result indicates that a significant overall difference does exist in the numerical interpretation of the verbal probability expression "virtually certain" among auditors employed in Hong Kong, Malaysia and Singapore.

The pairwise comparison tests identified the mean responses from Malaysia to be significantly higher than that from Hong Kong. The result is interesting, as it would appear that the Hong Kong employed auditors take a more liberal approach to the recognition of gains and assets, in contrast to the more conservative approach adopted by the Malaysia employed auditors. There was no statistically significant difference between the means of Hong Kong and Singapore or the between the means of Malaysia and Singapore.

The hypothesis of no statistically significant difference in the numerical interpretation of the verbal probability expressions "probable" and "more likely than not" is rejected. This is an interesting finding as it may indicate that the definition of "probable" as meaning "more likely than not" used in IAS 37 is not appropriate. Conservative financial reporting is the consequence of the auditors assigning a higher numerical probability to the verbal probability expression "probable" than that assigned to "more likely than not".

The results of the first hypothesis indicate that the numerical interpretation of verbal probability expressions is sensitive to cross-national differences. This result provides some support for the environmental hypothesis `that the environment has a systematic and discernable influence on national accounting practices' (Baydoun et al. 1997, 1). It is not the purpose of this study to identify and/or classify the various elements that may be influencing the numerical interpretation of verbal probability expressions. While there may be cultural differences at work, an examination of Hofstede's (1980) classification of Hong Kong, Malaysia and Singapore as members of the same cluster does not make such a view intuitively appealing. Alternatively the Sapir-Whofian linguistic hypotheses that a given language predisposes its users to `certain choice of interpretation' (Whorf 1951, 85) may be a factor effecting the numerical interpretation of verbal probability expressions. Although all 55 respondents having a working knowledge of the English language it is not necessarily their first language. It may be possible that the subjects' who are bilingual or not fluent in English, numerically interpret verbal probability expressions in a manner that is different from English language speakers. Davidson and Chrisman (1993) have previously suggested that the characteristics of language may be a cause of between-group differences.

The findings of the first hypothesis indicate that there remains an opportunity for further research to uncover elements that may be influencing the numerical interpretation of verbal probability expressions.

The results of both the first and the second hypotheses indicate that the IASC (and standard-setters in general) should use caution when developing accounting standards using verbal probability expressions. The IASC needs to ensure that the verbal probability expression is interpreted in a consistent manner as different interpretations of the same verbal probability expression have the potential to undermine the credibility of financial reporting. It may be useful for the IASC to consider undertaking a study similar to the one reported here. Accountants and auditors in a wide range of countries could be surveyed using a research instrument similar to the one used in the present study, with the results used by the IASC to select verbal probability expressions that adequately cover the probability range. The IASC may also wish to reconsider the practice of defining a verbal probability expression as meaning another verbal probability expression (e.g., "probable" as meaning "more likely than not"). While guidance in the interpretation of verbal probability expressions may be useful, the IASC must ensure that it selects terminology that is numerically interpreted as a synonym. Action on these matters by the IASC will improve the effectiveness of the resulting global accounting language.

The generalizability of the results of this study is subject to two limitations. First the study examined the numerical interpretation of `in-isolation' verbal probability expressions. It may be that the research subjects do not ordinarily interpret verbal probability expressions in the manner required by the research instrument. It may be that the research subjects are familiar with interpreting and applying verbal probability expressions within a context. It may be that the statistically significant differences identified in the present study would not be replicated in an `in-context' study. Second, as the research subjects could not be randomly selected from their respective populations, there is always a possibility of sampling bias. However, I would contend that as all research subjects can be defined as competent practitioners, the results are generalizable to all competent practitioners from the three countries.

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