BEHAVIOURAL ACCOUNTING RESEARCH

BEHAVIOURAL ACCOUNTING RESEARCH: DEFINITION AND SCOPE

Behavioral accounting research is defined as:

Study the behavior of accountants or non-accountant behavior in which they are influenced by the
accounting and reporting functions.

Behavioral accounting research (BAR), capital market research and agency theory
research can be called 'positive' research in the sense that they are associated with finding 'facts':
capital market research asking 'how does the securities market react to accounting
information?'; Agency theory asks 'whether economic incentives influence in choosing an
accounting method?'; And behavioral research asks 'how exactly do people use and process
accounting information?' However, they are also very different in many ways. For agencies,
capital market research looks at the macro level of aggregate securities markets, whereas agency
theory and behavioral focusing on the personal micro level of managers and firms. Capital
market research and agency theory are derived from economics and override the actual
motivations of people with the assumption that everyone is the maximizer of wealth. Behavioral
accounting, on the other hand, is derived from other disciplines such as psychology, sociology,
and organizational theory, and generally does not make assumptions about how people behave,
especially, the purpose of knowing why people behave as Which they do. As a consequence, the
other three accounting research groups are intended to answer very different types of questions
about accounting practice.
The main types of BARs in this area are known such as human judgment theory (HJT) or
human information processing (HIP) and include consideration and accountant and auditor
decision making and affect the output function in users 'making judgments and decisions'.

WHY IS BAR IMPORTANT? WHY IS BAR IMPORTANT?

There are some very good reasons that BAR is very important for accounting practitioners and
others:
 It has been noted at the beginning of this chapter how other accounting research
groups such as the capital market and agency theory do not equip with answers to
questions about how people use and process accounting information. To fill in the gaps
requires a study that specifically examines the decision-making activities that prepare
(presenters), users, and auditors of accounting information.
  BAR can provide valuable meaning in different types of ways in the results,
processes, and reactions of decision makers on the facts (information) of accounting
information and communication methods. We can use it to improve decision making
in a variety of ways.
 BAR has the potential to provide useful information to accounting regulators such as
the Australian Accounting Standards Board (AASB). As the principal purpose of
accounting is to provide 'useful for decision' information, AASB members continue to
deal with issues where accounting methods and what type of disclosures will prove
'beneficial' to users of financial statements.
 BAR can also lead to efficiency in the practice of accountant work and other
professions. Like, the senior expertise and experience of members of an accounting
firm can be recorded and utilized by the BAR method to develop a computerized skill
system for a variety in the decision making context.
Development of behavioral accounting research - Development of behavioral accounting
research (BAR)

The term BAR first appeared in the 1967 literature, but the HJT research became its foundation
in the psychology literature with Ward Edward's seminal work in 1954. The application of
research on accounting and auditing can be accepted in 1974 when Ashton published an
experimental study of internal control considerations By the auditor.
The development of HJT research in accounting gives a great deal on the adaptation of
research methods have been used well in the psychology literature, model of the Brunswik
lens. This technique represents a powerful new research approach that can be applied to old
questions that pay attention to data users.
The basic purpose of HJT's research is to explain the ways that people use and part of the
process of accounting information (and others) in a fact the context of decision-making. We
describe one's decision-making process as a 'model'. Thus, for example, we may use HJT's
engineering research on the 'model' (or illustrate) the way that bank loan officers process with the
various principal ways of accounting information (or 'cues' as they mention) such as earnings and
cash flow figures for a decision about Whether to approve a loan from a company.
Although brunswik lens modeling methods predominate for the development of decision-
making models, there are also two research approaches. One is called 'process tracing', another is
known as a probabilistic judgment paradingma, where in deciding a decision represents the
possibility of a statement based on Baye's proposition. 3 Another approach to explain (modeling)
decision making is: availability, anchoring and adjusment, and expert judgment
Model Brunswik Lens
Since the mid-1970s, the brunswick lens model has been used as the analytical framework
and the basis for most research opinions that require forecasts (such as bankruptcy) and / or
evaluation (such as internal control). Researchers use lens models to investigate relationships
from multiple pieces of information and decisions. Decision or prediction by looking at the
similarity of the response to the information tersebut.Pengambilan seen as looking from the lens
of information that is probability related to the event to reach conclusions about the incident.
In shaping this model, subjects are asked to provide decisions for several types of cases based
on the same information. For example, they can be asked to estimate whether a company might
fail with pre-defined obsolescence ratios. Then a linear model will be established to present how
the information is processed by the individual. Then a regression analysis is used by assigning
dependent variable and independent variable to get a model.
With Brunswik lens model researchers can get how important an information in the model is,
whether significant for the model or not. In addition the model can also determine the
relationship of decision makers with information for them. In addition we can also know the
importance of information from a different point of view, suppose a manager sees that profit is a
very important information when the stakeholders do not see profit as very important
information. Thus we can change the manajamen's point of view to produce better results. The
use of this model has paved the way for important discoveries as follows:
 Patterns in the use of information in various models
 The weighting that decision makers use for information
 Accuracy of decision makers from various fields in predicting and evaluating
 Consistency of decision making
 The degree of view that decision-makers have about the data pattern
Process Tracing Methods
Decision-making models derived using the Brunswik lens model typically have good
predictive power. The lens model is a much better predictor because the lens statistic model
displaces many of the random errors commonly present in human prejudices such as fatigue,
pain, or lack of concentration, but this model also has limitations because it is not a good
predictor of how people actually make decision.
Knowledge of the processes and ways of decision-making by humans can help find the
weaknesses of the process so that those weaknesses can be eliminated. This can produce better
predictions than ever before.
 In the process of tracing, decision-making is given a series of case studies for analysis, but
this time they are asked to describe verbally every step taken in decision-making. Then the
verbal description is recorded and analyzed to produce a decision tree to describe the decision-
making process.
The decision tree derived from the intuitive process tracing method is a good description of
the human decision-making process. However, relative to the Brunswik lens model, the process
tracing method is not always a good predictor. This is because decision makers often have
difficulty in explaining all the steps they go through.
Researchers try to overcome the limitations of both models by combining the descriptive and
predictive powers of the two approaches, for example by a statistical technique known as
classification and regression trees (CART). CART uses statistical methods to divide the decision
maker's bias into the taints that maximize the power of the model to precisely predict the
classification of different cases into appropriate decision types. CART combines dominant forces
to precisely clarify analytical recommendations with intuitive descriptions of their decision-
making processes.
Probabilistic Judgment
This model is useful for looking at accounting situations where initial beliefs about
predictions or evaluations should be revised when new evidence exists. This model argues that
the most normative way to revise this initial belief, expressed as subjective probability, is by
applying Bayes theater (a tenet Basis on conditional probability theory). Bayes's Theorem states
that the probability of revision due to additional evidence is equal to the initial belief multiplied
by how much initial expectations should be revised. Revisions involving auditors and
accountants provide evidence that accountants and auditors have a set of rules of thumb because
of the complexity of the type of judgment they have to make with the limited information they
have.
Lens Model Studies --- The Evidence
Using the lens model as a research tool allows for judgment consistency analysis, whether
the model of human behavior can predict more accurately than the human itself. This model also
allows analysis of the ability of the guides to predict the event in question. In addition, this
model also provides insight about the degree of consensus among decision makers.
Consistent evidence suggests that humans are able to develop principles or models to solve
task successes / failures using financial ratios, but they are not able to do so when their own
models are used mathematically. This is because they become ignorant of the instructions and
the brand becomes inconsistent in applying their decision rules due to fatigue and boredom.
 Abdel-Khalik and El-Sheshai concluded that the choice of human information, not the
electoral process, limits accuracy.Simnett and Trotman found that although subjects had been
able to use performance when asked to apply an arbitrary guide weighting. These authors
concluded that when humans can not choose their own ratios, the performance of brand
information processing is decreased.
As the amount of information increases, initially the use and integration of information
increases. However, at some point, additional information leads to a decrease in the amount of
information integrated into decision-making tasks.Chewning and Harrell find theoretical
evidence when someone is given more than 8 clues (financial ratio). Libby argued that additional
invalid hints into a more valid set of directives would degrade performance, but other research
did not detect any such relationship.

Process Tracing Studies – the evidence

The Brunswik lens model implicitly treats the decision process as a linear combination of
instructional information while the decision tree derived from the tracing process explains the
decision-making steps in which the information content of a data interacts with other information
from the data. Larcker and Lessig found that process tracing models were better than statistical
liner models, but selling and shank found opposite results when both approaches were compared
in a task involving bankruptcy predictions.
The complexity of human decision making involves deeper research to understand the types
of decision characteristics to determine the information processing style that [aling after.
Format and Presentation Of Financial Statements
In 1976 Libby observed that there are three basic options available to improve decision making:
1. Change the presentation and amount of information
2. Provide education to decision makers
3. Replace decision makers with model of themselves or with ideal or with on ideal
cueweighting model
Given the importance of first-time advice to accountants, auditors, regulators and standard
builders, there is little research done to find the ideal accounting presentation format. The
voluntary study tends to examine the changes that are radical to the presentation of financial
statements in the form of multidimensional charts. The lens model is useful in examining the
issue of financial statement presentation as well as predictive judgment analysis. The lens model
allows for the analysis of human judgment accuracy in determining the extent to which the
individual detects an important judgment task and consistently uses judgment policy. If a change
in the format of information results in an increase in both characteristics then the human
judgment should increase.
Chernoff fces describes changes in financial condition. His face was built by mapping
transformed financial variables into facial shapes. Mathematical precision is manifested by the
length of the nose, eyebrow angle and mouth shape used to represent changes in financial
condition from one period to the next. A multidimensional graph approach would be useful when
cost or data availability makes statistical models impossible to build, especially if the results
using the same multidimensional graphs are somewhat good with the results of the
model. Currently the financial statement preparers no longer prepare graphics such as chernoof
faces but with the use of more conventional colors and graphics. The use of varied graphs and
tabular forms will influence decision making. Graphical reports are useful for low levels of
complexity while tabular reports for high complexity levels. No form of presentation is best in all
situations. In the context of auditing, the ricchiute finds that judgment about adjustments to
accounts is influenced by the way information is presented to the auditor Visual and or auditory.
So and smith investigate the impact of color charts, gender, complexity of tasks, and different
presentation formats in preditive accuracy with sample undergraduate business students. The
result is colorless graphs are not effective when the task is complex and women are more
interested in color graphics. Another study was conducted by inviting the decision makers to
work with one of a set of data; Combinations of tables and bar charts, or tables with chernoff
faces or just with tables. When situations where the complexity of information is high, use only
with tables leads to higher accuracy, the use of graphics and pictorial representatations data leads
to a decrease in the effectiveness of users from decision making. The reason is the decision
maker chooses an easier option when the situation is complex, but the graphical and pictorical
represent data is sometimes more abstract and less detailed than the information presented in
tabular form

Probabilistic Judgment Studies – The evidence

In many accounting contexts and especially auditing there is no true solution with comparable
judgments to assess the accuracy of them. One way to address the lack of benchmarks in
performance appraisals is to examine consensus on particular decisions in a number of decision
makers. Another way is to use a mathematical or statistical model. The HJT study in this model
has consistently demonstrated that humans have varying expertise and different tasks, revising
their probabilities to a lower level than Bayes's theory. This conservatism has been linked to the
use of rules of thumb and bias that are adopted as a means Facilitate complex judgments so that
people can cope.
Three rules of thumb
 Representativeness
This rule states that when the probability assessment comes from the population. Assessment
of people will be determined by the extent to which items represent the population. The items
or events seen by the more representative decision makers will be judged to have a greater
probability of occurrence than the less representative. Researchers point out that the use of
the rule of thumb can lead to poor decisions because decision makers ignore other relevant
data that are not part of the stereotype.
 Availability
The availability of the rule of thumb refers to the probability of an event based on the ease of
examples like those in mind. The probabilities associated with sensational occurrences are
biased overestimated.
 Anchoring and adjustment
Refers to a general judgment process whereby a process is initially generated or reponsed
such as an anchor and other information is used to adjust the response. The consequence of
the rule of thumb is the possibility of inadequate adjustment in changing circumstances.
REPRESENTATIVENESS: THE EVIDENCE
The man who first reported the existence of representativeness and the tendency to ignore base
rates are Kahneman and Tversky.The use of base-rate information has led to the hypothesis that
reasoned probabilistic involving contingent processing.
 Availabilty: Evidence
The basis of the rule of thumb is the possibility of judgments based on retrieval of relevant
exemplarily memory or scenario entrance akal.Bagaimanapun also it requires a large probability
samples to improve the prediction accuracy.
 Anchoring and Adjusment: Evidence
Kinney and Uecker find evidence of anchoring and adjustment in the analytical review (ratio
analysis) and compliance test (test audit of internal control).
 Expert Judgment and Rules of Thumb
The studies involving expert judgment to the conclusion that humans have short-term memory
with a very limited capacity (4-7 chunks) and long-term memory virtually unlimited.
ACCOUNTING AND BEHAVIOUR
Accounting comes as a direct governing function for individual and group activities. There
are several different perspectives on accounting, which indicate the existence of several possible
accounting perspectives. The key issues are what techniques are adopted and the interpretation of
an information reported. , The existence of competing interests among the various people who
provide interpretation of financial reports reported by the company.
Accounting information will influence the behavior of both adopted methods for measuring
and reporting information and responding to information that is notified. According to
Zimmerman, the accounting system is a fundamental component of an organizational
architecture with managers constantly adapting to ensure the best structure for the
company. Zimmerman offers two important observations about factors affecting the accounting
system:
1. The accounting system change when there are changes in the company's business
strategy and other organizational changes at the same time, particularly in relation
to the position of correct decisions and performance evaluation system and also
rewards.
2. Changes in organizational architecture, including a change in the accounting
system caused by external shocks from technology and shifting market
conditions.
Accounting information significantly affects the behavior of individuals, both within the entity
and externally. However the existence of a two-way influence, for individuals directly and
indirectly affect the structure of accounting systems and disclosure of information.
LIMITATION OF BAR
A review of the BAR has shown that there is a large role of accounting information on the basis
of decision-making. The complex information process makes us realize that the development of
research on accounting theories and methods is still not enough. BAR has several limitations,
namely:
1. Research on the same topic gives contradictory results, making it confusing when
making decisions.
2. The experimental subjects used in the study are often different from real
judgments.
 3. Accounting researchers question whether the rules should be influenced by the
results of individual decision-making research or not.
Overall, the biggest limitation in BAR is the absence of a single theoretical basis that can help
incorporate the diverse questions in the BAR research and discovery. BAR's researchers borrow
much thought from different disciplines and do not share the same framework with each
other. This makes it difficult to generalize to policy makers. Even so it is undeniable that the
BAR method is a valuable research tool. Bar method has been widely used to develop
information processing and training in the world of work. In addition, BAR can also show
systematic error.

CASE 13.2

1. If cash is the best measure of success, why have the accounting profession and regulators
persevered with analysing debt-to-equity ratios?

There is far less discretion as to the timing of disclosures under the cash flow model. Adoption of
cash flow can distort earnings and reduce the capacity of management to smooth income.
Arguably however, accrual accounting may allow investors to form unbiased or more informed
judgements about the long-term prospects of a company, or accrual-accounting-based
information cues may be better predictors of future cash flows than current cash flows. The debt-
to-equity ratio provides a different perspective that is still linked to cash flows. It considers the
total level of debt compared to the total level of finance provided by equity and allows for an
evaluation of the ability of the firm to service its level of debt

2. What do the analysts mean by the term ‘nasty surprise’?

A ‘nasty surprise’ is reported earnings or some other accounting measure that have not been
anticipated (or fully anticipated) and have the potential to adversely affect the future cash flows
or other aspects of the operations of a firm.

3. Why does the market so readily interpret a cash-flow problem as a sign that a company’s
financial position might be deteriorating but was apparently prepared to focus on debt-to-
equity ratios for a number of years?
The literature indicates that the market is not ‘fooled’ by the debt-to-equity ratios – that the
market adjusts in order to provide a measure of actual value. Markets can still be wrong
(‘fooled’) in their assessments of companies of course — if there is fraud or unexpected risk.
Focussing on the debt-to-equity ratio might lead some to interpret a company as being an
efficient manager of financing opportunities. However, cash flow analysis is also important as it
provides an opportunity to assess whether a firm is able to adequately service escalating levels of
debt.

4. The article refers to the need to ‘sort the wheat from the chaff’ by focusing on companies
that are coping well. How are such judgements made?

Expectations about good or bad investments are based on a range of factors including:

 Industry trends and past performance

 Current and expected factors impacting on the industry and the individual firms
 statements made by the firm about expected performance
 Media commentary
 Past performance of the firm
 Independent evaluations by analysts
 Statements by the ASX