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Judging the probability of a contingent loss: An empirical study

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  • KENNETH E. HARRISON
  • LAWRENCE A. TOMASSINI

Abstract

. This paper reports the results of research in which experienced auditors interpreted the criteria of Statement of Financial Accounting Standards No. 5 (SFAS 5): Accounting for Contingencies. The research focuses on two issues: (1) the nature and degree of consensus in the auditors' interpretations, and (2) the extent to which these interpretations depend upon the type of contingent loss. Forty†five experienced auditors (managers, principals, and partners) from “Big 8†CPA firms responded to a research instrument that elicited their interpretation of SFAS 5 probability criteria. Our analysis focuses upon the thresholds between the “remote†and “reasonably possible†criteria and between the “reasonably possible†and “probable†criteria. Our results indicate: (1) threshold means of 0.16 and 0.68, respectively; (2) more auditor consensus for the first threshold than for the second; (3) the first threshold was significantly lower than indicated by previous research; and (4) the thresholds were generally not dependent upon the type of contingent loss.

Suggested Citation

  • Kenneth E. Harrison & Lawrence A. Tomassini, 1989. "Judging the probability of a contingent loss: An empirical study," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 642-648, March.
    • Handle: RePEc:wly:coacre:v:5:y:1989:i:2:p:642-648
    DOI: 10.1111/j.1911-3846.1989.tb00730.x
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    References listed on IDEAS

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    1. G.R. Chesley, 1986. "Interpretation of uncertainty expressions," Contemporary Accounting Research, John Wiley & Sons, vol. 2(2), pages 179-199, March.
    2. Schultz, Jj & Reckers, Pmj, 1981. "The Impact Of Group Processing On Selected Audit Disclosure Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 19(2), pages 482-501.
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    1. K. Raghunandan, 1993. "Predictive Ability of Audit Qualifications for Loss Contingencies," Contemporary Accounting Research, John Wiley & Sons, vol. 9(2), pages 612-634, March.
    2. Sumit Sarkar & Ram S. Sriram, 2001. "Bayesian Models for Early Warning of Bank Failures," Management Science, INFORMS, vol. 47(11), pages 1457-1475, November.
    3. T. S. Amer & Phil Drake, 2005. "Qualitative Expressions of Magnitude: The AuditorÕs Responsibility," American Journal of Business, Emerald Group Publishing, vol. 20(1), pages 29-36.
    4. Marc Badia & Miguel Duro & Bjorn N. Jorgensen & Gaizka Ormazabal & Hans B. Christensen, 2020. "The Informational Effects of Tightening Oil and Gas Disclosure Rules," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1720-1755, September.
    5. Tarek Amer & Karl Hackenbrack & Mark Nelson, 1995. "Context†Dependence of Auditors' Interpretations of the SFAS No. 5 Probability Expressions," Contemporary Accounting Research, John Wiley & Sons, vol. 12(1), pages 25-39, September.
    6. Du, Ning & Stevens, Kevin T. & McEnroe, John E., 2011. "Improving consistency in interpreting SFAS 5 probability phrases," Research in Accounting Regulation, Elsevier, vol. 23(1), pages 67-70.
    7. Joseph Aharony & Amihud Dotan, 2004. "A Comparative Analysis of Auditor, Manager and Financial Analyst Interpretations of SFAS 5 Disclosure Guidelines," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(3‐4), pages 475-504, April.
    8. K. Raghunandan & Richard A. Grimlund & Albert Schepanski, 1991. "Auditor evaluation of loss contingencies," Contemporary Accounting Research, John Wiley & Sons, vol. 7(2), pages 549-569, March.

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