Miscommunication Of Uncertainties In Financial Statements: A Study Of Preparers And Users

Abstract

The focus of this study is management's communication of uncertainty (attested to by auditors) and the potential for miscommunication due to the communication mode used in accounting disclosures. Two hypotheses are addressed to determine if financial statement users differentiate among three levels of uncertainty (using SFAS No. 5 as a vehicle for study), and whether their judgments differ when numerical probabilities replace the prescribed verbal expressions in communicating these uncertainties. The participants for this study are drawn from commercial loan officers from a major regional bank. Results lend evidence that both the level of uncertainty and the mode of communication are significant factors influencing the level of risk revision in an uncertainty exercise. Support is found that miscommunication may exist between the preparers and users of financial statements. However, support is not found that the “vagueness” of SFAS No. 5 verbal expressions of uncertainty is detrimental to users’ decision-making abilities.