SUMMARY

ACCOUNTING THEORY
(SUBJECT CODE: ECAU601401)
Chapter 13
BEHAVIOURAL RESEARCH IN ACCOUNTING
(Godfrey et.al. Accounting Theory 7th Ed)

Lecturer:
Mrs. Siti Nuryanah, S.E., M.S.M., M.Bus.Acc., Ph.D.

Group Member
1. Eggie Auliya Husna 1706105246
2. Fendhi Birowo 1706105290
3. Yolanda Tamara 1406612275

SALEMBA EXTENSION CLASS

ACCOUNTING PROGRAM
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF INDONESIA
YEAR 2018
MINDMAP FOR CHAPTER 13

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 CHAPTER 13
BEHAVIOURAL RESEARCH IN ACCOUNTING

A. BEHAVIOURAL ACCOUNTING RESEARCH: DEFINITION AND SCOPE

Behavioural accounting research has been defined as:
“The study of the behaviour of accountants of the behaviour of non-accountants as they are
influenced by accounting functions and reports.”
Behavioural accounting research (BAR), capital markets research and agency theory
research can all be called ‘positive’ research in the sense that they all are concerned with
discovering ‘facts’:
CAPITAL MARKETS RESEARCH
- Capital markets research asks ‘how do securities markets react to accounting
information?’;
- Capital markets research looks at the macro level of aggregate securities markets.
AGENCY THEORY
- Agency theory asks ‘what are the economic incentives that determine the choice of
accounting methods?’;
- Agency theory focus on the micro level of individual managers and firms.
Both capital markets research and agency theory derived from the discipline of economics
and dispense with people’s actual motivations by assuming that everyone is a rational
wealth maximiser.
BEHAVIOURAL ACCOUNTING RESEARCH
- Behavioural research asks ‘how do people actually use and process accounting
information?’
- Behavioural research focus on the micro level of individual managers and firms.
- Behavioural accounting is derived from other disciplines such as psychology, sociology,
and organisational theory, and generally makes no assumptions about how people
behave; rather , its objective is to discover why people behave as they do.
Applications of BAR Studies:
1. Auditing  to improve auditor’s decision making. For example, when auditors are
planning the way they will conduct an audit of a particular client, they must assess how
much risk is associated with the client.
2. Management accounting  to help explore and understand the various incentive and
disincentive issues associated with different types of budgeting processes and how
organisational form and accounting systems can affect the behaviour of individuals
within firms.
The major type of BAR in financial accounting area (where the main focus is on the
information contained in financial statements for users external to the firm) has become
known as Human Judgement Theory (HJT) or Human Information Processing (HIP) and
encompasses the judgement and decision making of accountants and auditors and the

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 influence of the output of this function on users’ judgements and decision making. The aim
of research within this model is often more than that of explaining and predicting behaviour
at an individual or group level. It is also concerned with improving the quality of decision
making. In the context of financial accounting, that aim translates into improving decision
making by both producers (including auditors) and users of accounting reports.

B. WHY IS BAR IMPORTANT?

There are a number of very good reasons that BAR is important to accounting practioners
and others:
1. BAR research is specifically examines the decision-making activities of the preparers,
users, and auditors of accounting information;
2. BAR can provide valuable insights into the ways different types of decision makers
produce, process and react to particular items of accounting information and
communication methods;
3. BAR can potentially provide useful information to accounting regulators such as the
Australian Accounting Standards Board (AASB).
4. The findings of BAR can also lead to efficiencies in the work practices of accountants
and other professionals.
An Overview of Approaches to Understanding Information Processing
The basic objective of HIT research is to describe the way in which people use and
process pieces of accounting (and other) information in a particular decision-making
context. We call our description of a person’s decision-making processes a ‘model’. So, for
example, we may use HJT research techniques to ‘model’ (or represent) the way in which a
bank loan officer processes various information items (or ‘cues’ as they are called) such as
the profit and cash flow figures to make a decision about whether to approve a loan
application from a company.
THE BRUNSWIK LENS MODEL AND THE EVIDENCE
Since the mid-1970s, the Brunswik lens model has been used as an analytical
framework and the basis for most judgement studies involving prediction (e.g. of
bankruptcy) and/or evaluation (e.g. of internal control). Researchers use the lens model to
investigate the relationship between multiple cues (or pieces of information) and decisions,
judgements or predictions, by looking for regularities in the responses to those cues. The
decision maker (e.g. bank loan officer) is viewed as looking through a lens of cues (e.g.)
financial ratios) which are probabilistically related to an event, in order to reach a conclusion
about that event (e.g. likelihood of loan default/non default). However, one important
limitation of the Brunswik lens approach is that it is not a good descriptor of how people
actually make decisions.
Many studies have used the lens model framework to examine the accuracy of humans’
predictions of business failure. This task is important and realistic for people such as
investors, bank loan officers, other lenders and auditors. It has generally been researched by

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providing the subject with a number of numerical cues across repetitive cases of actual
business success and failure, drawn from archival data. Thus, in this task (as opposed to
others described later), a ‘correct’ solution exists as a benchmark against which to compare
human performance. Libby was the first to research the task of assessing business failure.
What has emerged in the literature is the question whether disclosing to the subjects the
actual rate of failure is necessary to achieve realism in the task. On the other hand,
researchers cannot hope to gain evidence from this task setting unless a ‘reasonable’ number
of actual failure cases are included in the materials provided.
PROCESS TRACING METHODS AND THE EVIDENCE
In process tracing, the decision maker may again, for instance, be given a series of case
studies to analyse but this time is asked to verbally describe each step gone through when
making the decision. These verbal descriptions are recorded by the researcher and then
analysed to produce a ‘decision tree’ diagram to represent the decision processes of the
decision maker. In general terms, the decision trees derived from process tracing methods
are intuitively good descriptors of people’s decision processes.
However, relative to Brunswik lens models, process tracing methods are not always
good predictors of the event of interest. One reason for this is that decision makers often
have difficulty explaining all the steps they go through. Some researchers have tried to
overcome the general limitations pf both lens and process tracing methods by combining the
predictive and descriptive powers of the two approaches. One such alternative is a statistical
technique known as ‘classification and regression trees’ (CART) that uses statistical
methods to partition (or split) the output of a decision maker’s judgements into decision
‘nodes’ that maximize the power of the model to correctly predict the classification of
different cases into the right type of decision.
The relative predictive power of lens and process tracing models has been studied in
business context by Larcker and Lessig and Selling and Shank. In a share selection scenario,
Larcker and Lessig found that process tracing models outperformed the statistical linear
models, but Selling and Shank found the opposite when the two approaches were compared
in a task involving the prediction of bankruptcy. These differences in the studies may reflect
our earlier comment that the type of decision task requires different styles of decision
processing.
PROBABILISTIC JUDGEMENTS AND THE EVIDENCE
The probabilistic judgement model 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. An investor’s revision of an investment decision in the light of
new evidence concerning the outcome of a lawsuit against a firm is an example of this type
situation. This model argues that the ‘normatively’ correct way to revise initial beliefs,
stated as subjective probabilities, is by applying Bayes’s theorem, a basic tenet of
conditional probability theory. Bayes’s theorem states that the revised (posterior) probability
in the light of additional evidence is equal to the original belief (base rate) multiplied by the

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amount by which prior expectations should be revised; that is, by the informativeness or
diagnosticity of the the new data.
Thus:
Posterior odds = Likelihood ratio x Prior odds
(revised (amount by which prior (initial probability or base rate)
probability) expectations should be revised)
HJT research within probabilistic judgements model has consistently demonstrated that
humans possessing a variety of skill levels and, observed over a variety of tasks, revise their
prior probabilities to a lesser extent that Bayes’s theorem prescribes. This conservatism has
been attributed to the use of rules of thumb and biases which are adopted as a means of
simplifying complex judgements in order for humans to cope. Three rules of thumb are
defined in the literature as follows:
1. Representativeness
2. Availability
3. Anchoring and adjustment
FORMAT AND PRESENTATION OF FINANCIAL STATEMENTS
The lens model is useful in examining financial statement presentation issues as well as
in analysis of predictive judgements. It permits analysis of human judgement accuracy in
terms of determining the extent to which the individual detects essential properties of the
judgement task and consistently applies judgement policy. If changing the report format of
information results in improving either of the above characteristics, human judgement
accuracy should increase. The decision-usefulness objective, adopted in the conceptual
framework , depends partly on the user’s ability to interpret the data for a given investment
or credit decision. The impact of a change in the report format on subjects’ ability to detect a
change in the financial status of the firm can similarly be examined within a lens model
framework.

Figure 1. Chernoff Faces Representing Changes in Financial Conditions

The multidimensional graphics most researched have been in the form of schematic or
Chernoff faces as illustrated in figure 1 above. Stock and Watsons concluded that a
multidimensional graphics approach would be useful whenever cost or data availability
makes good statistical models impossible to build, especially if the results using
multidimensional graphics are at least as the results of a model.

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C. REPRESENTATIVENESS: THE EVIDENCE
AVAILABILITY: THE EVIDENCE
The basis of this rule of thumb is that likelihood judgements are based on retrieval from
memory of relevant instances or construction of plausible scenarios. The more instances
recalled, or the greater the ease with which one can recall instances or generate plausible
explanations for an event, the higher will be the judged probability of occurence of the
event. However, this requires a large sample of probabilities to improve prediction accuracy.
ANCHORING AND ADJUSTMENT: THE EVIDENCE
From Joyce and Biddle research, it was expected that practising auditors would adjust
for changes in internal controls by adjusting audit scope but that the adjustment would be
insufficient as anchoring on the initial internal control would occur. No evidence of
anchoring and adjustment was found. However, Kinney and Uecker did find evidence of
anchoring and adjustment in analytical review (ratio analysis) and compliance test (audit test
of internal controls) tasks.
EXPERT JUDGEMENT AND RULES OF THUMB
The research involving expert judgement is concerned with examining the thought
processes of experts and the determinants of expertise. Numerous studies in auditing have
confirmed that audit experts have better recall, integrative abilities, and error frequency
learning ability than do novices. Audit experts exhibit evidence of all three rules of thumb
and it is not clear that this necessarily results in inferior quality in decision making. The
double-entry nature of bookkeeping means that audit tests often overlap and mechanisms
exist (e.g. partner review) which try to assure quality. Process tracing methods may be a
good way of learning more about the differences between the decision process of experts
and novices. This knowledge would be valuable for training purposes.

D. ACCOUNTING AND BEHAVIOUR

Accounting is a function of human behaviour and activity. As such, accounting
information will influence behaviour, both in the methods adopted to measure and report
information, and in response to the information disclosed. The response to information are a
function of human perspectives and are therefore not divorced from the personal aims and
interests of users.
It is important to consider the factors which influence changes in accounting systems and the
nature of reported information. Zimmerman provides two important observations about the
factors affecting the accounting system:
1. Changes in the accounting system rarely occur in a vacuum
2. Alterations in the firm organisational architecture are likely to occur in response to
changes in the firm’s business strategy.
Accounting is not a one-way process, with accounting information influencing
behaviour or prompting a response on the part of some user group. However, the influence is

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 two-way, with individuals (or groups of individuals) directly and indirectly affecting the
structure of accounting systems and information disclosures.

E. LIMITATIONS OF BAR
The overview of Behavioural Accounting Research (BAR) has shown that it makes us
learn a great deal about how different decision makers use accounting information.
However, it has also revealed that there is significantly much more for us to learn in this
area. The frequent and frustrating contradictions between the findings of similar studies
simply mean that human information processing is much more complex than the
development of current research theories and methods.
These limitations of BAR had also meant that it is yet to achieve the same level of
dominance in the academic literature presently enjoyed by the capital markets and agency
theory research schools. Other limitations of BAR are:
1. The lack of a single underlying theory which helps in the unification of the diverse
research questions and findings of BAR;
2. BAR researchers have borrowed from a multitude of disciplines and contexts and have
no common framework whithin which to develop useful generalisations for policy
makers. There is also no signal that such theory is likely in the foreseeable future.
Beside its limitations, BAR has some value for the development of accounting
researchers and practitioners, such as:
1. BAR methods have been used by many groups of decision makers to develop expert
systems and other practical tools for information processing and training purposes in
the workplace;
2. BAR offers the promise of revealing systematic errors made by all decision makers
within specific contexts that have implications for improvement at the macro level;
3. BAR have a significant role in the development of Triple Bottom Line Reporting, in
which it helps the accounting researchers and policy makers in developing emerging
areas of non-financial measurement of accounting theory; and
4. BAR will help future researchers to develop richer hypotheses and tests of how
decision makers process accounting information.

F. ISSUES FOR AUDITORS

BAR can investigate how auditors perform their audit tasks and make their judgements.
Archival studies of auditor choice often treat the process of auditing as a black box. Results
that Big or specialist auditors are associated with higher audit fees and a lower cost of
capital interpreted as evidence that these auditors are higher quality, but it is not direct
evidence of better auditing performance. BAR attempts to go inside this black box to
examine the characteristics of better performing auditors and investigate factors that affect
auditor’s performance.

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REFERENCES
Godfrey, Jayne, Allan Hodgson, Ann Tarca, Jane Hamilton, and Scott Holmes. (2010).
Accounting Theory, 7th Ed. John Wiley & Sons, Inc. (GOD)