Interpretation of probability expressions by financial directors and auditors of UK companies

Jon Simon

European Accounting Review, 2002, vol. 11, issue 3, 601-629

Abstract: Probability expressions, such as 'remote', 'possible', 'probable' and 'virtually certain', have been used extensively in accounting. However, little is known about how these expressions are interpreted. It is important to understand how these expressions are interpreted by preparers of financial statements as significant inconsistencies will reduce the comparability between companies' financial statements. This paper reports the results of a survey of financial directors of large UK listed companies and UK auditors concerning the interpretation and the communication efficiency of thirty frequently used probability expressions. This paper fills two gaps in the literature. First, it surveys attitudes to probability expressions in the UK of two important groups of individuals involved in the financial reporting system and, second, it explicitly measures the 'communication efficiency' of these expressions. The results show that while many probability expressions were seen to have similar meaning and have a high degree of communication efficiency, several had low communication efficiency. Policy implications involve a reassessment of the use of probability expressions with low communication efficiency, and the adoption of well-understood probability expressions with high communication efficiency.

Date: 2002
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DOI: 10.1080/09638180220125599

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