Ambiguity intolerance and financial reporting alternatives

Accounting, Organizations and Society. Vol. 6, No. 1, pp. 53-67. © Pergamon Press, 1981. Printed in Great Britain.

0361-3682/81/0301-0053 $02.00/0

AMBIGUITY INTOLERANCE AND FINANCIAL REPORTING ALTERNATIVES ARCHIE W. FAIRCLOTH University of Louisville, Louisvale, K Y, U.S.A.

and DAVID N. RICCHIUTE* University of Notre Dame, Notre Dame, IN, U.S.A.

Abstract

Authoritative accounting pronouncements almost always require more, rather than less, financial reporting disclosures and accountants rarely, if ever, act to overturn the required disclosures. Since the personality literature suggests that desire for more information is linked to an individual's intolerance for ambiguity, this study tested selected hypotheses about the relationship between accountants' intolerance for ambiguity and their desire for f'maneial reporting alternatives. The findings of the study did not disclose a significant relationship between accountants' intolerance for ambiguity and their desire for f'maneial reporting alternatives. However, the results did disclose a relationship between education level and two dependent variables: desire for disclosure and consistency of desired disclosures with generally accepted accounting principles. Therefore, additional research should pay more attention to the effects of demographic information, which may in fact be more informative than many previously tested variables such as personality characteristics. Several research studies in accounting have o f accountants, intolerance for ambiguity, was attempted to assess the relationship between an systematically related to their preferences for information user's cognitive psychological specific alternative accounting disclosures. characteristics and resultant individual behavior The paper begins by briefly explaining the (e.g. Ijiri et al., 1966; Livingstone, 1967; Revsine, intolerance for ambiguity variable and, from the 1970; and McGhee et al., 1978). Based upon results o f two studies in the personality literature, several o f these studies Dermer (1973, p. 512) relating the variable to an accountant's desire for made the important observation that " . . . alternative financial disclosures. In turn, two information usage is an idiosyncratic or subjec- related accounting studies are reviewed and the tively determined process and that relationships do methodology and results o f the present study exist between an individual's cognitive makeup presented. and the amount and type o f information he perceives to be relevant" (emphasis added). Although the literature has addressed the INTOLERANCE FOR AMBIGUITY implications o f cognitive factors upon the use o f accounting information, the relationship between Interest in the intolerance for ambiguity accountants' cognitive characteristics and variable derives from the pioneering efforts of accounting information has not been explored Frenkel-Brunswick (1949, 1951). More recently, adequately. In general, this study investigated the the personality and social psychology literature relationship between accountants' intolerance for have paid considerable attention to this variable. 1 ambiguity and their desire for alternatives in An ambiguous situation can be defined as " . . . financial reporting. The purpose o f the study was o n e which cannot be adequately structured or to determine if a potential cognitive characteristic categorized by an individual because o f the lack o f *This project was completed while Mr. Ricchiute Was Coopers & Lybrand Research Fellow in Accountancy at the University of Notre Dame. 53

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ARCHIE W. FAIRCLOTHand DAVID N. R1CCHIUTE

sufficient cues" (Budner, 1962, p. 30). Thus, in ambiguous situations an individual's decoding system is unable to interpret clearly a phenomenological (i.e. perception and evaluation) or an operative (i.e. natural and social) signal. An individual who experiences ambiguity can respond through either submission or denial; submission is "the recognition of the situation as an ineluctable fact of existence which the individual cannot alter", and denial "the performance of some act by which the objective r e a l i t y . . , is altered to suit the desires of the perceiver" (Budner, 1962, p. 30). For example, in ambiguous situations an individual can either elect to ignore the problem (submission) or seek additional information (denial). The following section relates intolerance for ambiguity and desire for disclosure.

However, they rarely mount organized campaigns to overturn authoritative pronouncements. Rather, accountants cope with the additional disclosures. As a result, this study addresses the following question: Is the accountants' ability to cope with additional disclosures (i.e. more information) explained in part by their intolerance for ambiguity? Prior research by Budner (1962) and Norton (1973) suggests that it is. PRIOR ACCOUNTING RESEARCH

The results of prior ambiguity intolerance research in accounting have been conflicting. While Dermer (1973) found that an individual's cognitive characteristics impacted information preferences, McGhee et al. (1978) found no such relationship. Dermer (1973) studied the relationship between a manager's cognitive characteristics and RELATING AMBIGUITY INTOLERANCE his or her perceptions of the importance of AND DESIRE FOR DISCLOSURE information to job performance. The results of the Prior studies by Budner (1962) and Norton study supported the accounting implications of (1973) support a potential relationship between intolerance for ambiguity. Dermer tested two intolerance for ambiguity and the desire for hypotheses: one relating intolerance for ambiguity additional information. In general, both Budner with the amount of information perceived to be (1962) and Norton (1973) found that the higher important and a second relating intolerance for the individual's intolerance for ambiguity, the ambiguity with the types of information perceived more information he or she will seek in an effort important. Forty-four subjects were selected from to become more confident about decisions. These the sales supervisors, district and regional sales findings provide support for a hypothesis that managers of a large integrated oil company. Each intolerance for ambiguity may be operating in subject responded to two questionnaires: one those accountants who desire reporting more related to the perceived importance of 72 job alternative financial disclosures (i.e. more informa- aspects to a sales manager's job performance and a tion). That is, accountants with higher intolerance second represented Budner's (1962) intolerance for ambiguity may have a greater desire for for ambiguity instrument. reporting alternative financial disclosures (e.g. The first hypothesis, intolerance for ambiguity LIFO and FIFO), rather than a single disclosure and the amount of information perceived (e.g. LIFO only). important, was tested by correlating the BudnerA purpose of studying this potential relation- scale with the number of job aspects deemed ship is to identify a partial explanation for unimportant. The hypothesis was supported by accountants' ability to cope with the general trend product-moment correlations (-0.33; n=44) signiin financial reporting towards disclosing more and ficant at the 0.05 level. The second hypothesis, more information. For example, in the United intolerance for ambiguity and the types of States, authoritative accounting pronouncements information perceived important, was tested by issued by the Financial Accounting Standards correlating selected categories of job aspects with Board (FASB) rarely discontinue disclosures the Budner scale. Although not significant (alpha = required by previous pronouncements; rather, they 0.05), the product-moment correlations were in almost always require additional disclosures (i.e. the direction expected. Thus, the second hypomore information). Accountants often express thesis was only partially supported. Despite limitations as to generalizability, dissatisfaction over individual pronouncements. J See, for example: Atmeave (1964); Brehmer (1976); Budner (1962); Draguns & Multari (1963); Frederiksen (1967); Martin & Westie (1950); MacKay& Bever (1967); Murstein (1960); Newell& Simon (1972); Norton (1975).

AMBIGUITYINTOLERANCEAND FINANCIAL REPORTING ALTERNATIVES Dermer's results suggest nevertheless that an individual's cognitive characteristics can indeed have an impact upon information preferences. As Dermer (1973, pp. 518-519) states: " . . . if the effects of variations in accounting variables are to be isolated, care must be taken to avoid confounding these with the effects of individual differences . . . . It is clear the subject warrants further study." In contrast, McGhee et al. (1978) investigated and found no relationship between intolerance for ambiguity and decisions (based upon eight financial cues) about whether to include firms in an investment portfolio. Dependent variables were individual judgments, judgment confidence and the amount of evaluative information desired. The subjects, MBA students, were asked to assume the role of a junior security analyst whose primary responsibility was screening financial reports and advising which firms to include in an insurance company's investment portfolio. The study hypothesized that in an ambiguous environment people classified as intolerant of ambiguity would be less confident of the judgments and therefore seek more information to increase their judgment confidence. Prior to the experiment, a panel of experts classified the cues as either congruent (all favorable or all unfavorable) or incongruent (some favorable, some unfavorable). Those cues classified as congruent were designated unambiguous as to cue direction, and those classified as incongruent were designated ambiguous. The study revealed no significant differences (analysis of variance) in mean dependent.variable scores between the groups classified as to their intolerance for ambiguity. Those individuals classified differently regarding intolerance for ambiguity did not have significantly different levels of confidence in their judgments or desire to seek different amounts of information. Because their findings differ, the results of these two studies considered together are inconclusive. While Dermer's (1973) results suggest that Budner's (1962) and Norton's (1973) conclusion (i.e. the higher an individual's intolerance for ambiguity, the more information he or she will seek) may be applicable in accounting settings, McGhee et al.'s (1978) results do not. The study reported in the following sections of this paper reports additional evidence about intolerance for ambiguity in general and about the relationship between intolerance for ambiguity and desire for reporting alternative financial disclosures in particular.

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The present study is also important for two reasons beyond the study of intolerance for ambiguity. First, this study concerns professional subjects (CPAs) rather than student surrogates. Thus, the results may be directly attributed to characteristics of the sampled accountants rather than to characteristics of surrogates acting as accountants. Second, the findings relate to financial disclosure, which is important because decisions made by professional individuals preparing financial statements may also affect decisions made by the users of those statements. Thus, determining whether disclosure of information is affected by personality characteristics is important in order to determine whether users differ as to cognitive variables as well as other more traditionally discussed variables such as professional affiliation. Determining the impact of personality characteristics upon decisions regarding disclosure may also increase the likelihood of improving the quality of decisions based on that information.

METHODOLOGY Subjects In a review of human information processing research in accounting, Libby & Lewis (1976, p. 245) identify two relevant sources from which accountants' interest in decision-making is derived. Source Accounting information users as decision-makers

Accountants as decisionmakers

Accountants' interest To improve the information set and/or increase the ability of decisionmakers to use accounting information To aid accountants in making choices and evaluating information in accounting policy, auditing, advisory, and managerial situations

The second source, accountants as decisionmakers, was the primary interest of this study. Certified public accountants were employed as sample subjects since they represent a highly influential group in the determination of accounting and reporting policy in the United States. Further in their review, Libby & Lewis (1976) summarize six accounting studies of cognitive style. Interestingly, no less than four of these studies (Driver & Mock, 1975; Mock & Vaserhelyi, 1976; San Miguel, 1976; and McGhee etal., 1978)

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ARCHIE W. FAIRCLOTHand DAVID N. RICCHIUTE

employed students as surrogates for various decision-making groups. Only Mock et al. (1972) and Dermer (1973) used actual decision-makers (i.e. business men, as well as students, and oil company sales personnel, respectively). Given the recent criticism of student surrogation (e.g. Abdel-Khalik, 1974; Diekhaut et al. 1972; and Anderson, 1974) and that no prior research employed accountants as decision-makers, the present study focused upon certified public accountants. In an effort to promote generalizability and increase the potential number of sample subjects, a mail survey rather than controlled experiment was conducted. Obviously, survey research sacrifices significant experimental controls typically available in controlled experiments. The sacrifice seemed appropriate, however, since no prior accounting studies of cognitive style have included a large number of professional participants. I"

.

Hypotheses The study investigated two major null hypotheses as follows: H~ : Accountants' intolerance for ambiguity, professional affiliation, and education level are not significantly related to their desire for alternatives in financial reporting. H2: There is no significant correlation between accountants' intolerance for ambiguity and their desire for alternatives in financial reporting. Professional affiliation and education level were included as independent variables in Hi to determine if accountants' desire for financial reporting alternatives was related to two reasonable demographic-related variables aside from intolerance for ambiguity. The purpose of H2 was to disclose the direction of any relationship between intolerance for ambiguity and desire for financial reporting alternatives. Two subhypotheses were also tested, although they were not necessarily motivated by the major interest to the study, intolerance for ambiguity and desire for financial reporting alternatives. Rather, they address the issue that accountants' disclosure choices may have been influenced by their familiarity with disclosures required by generally accepted accounting principles (GAAP). That is, accountants' disclosure choices may have been influenced by GAAP rather than, or in

addition to, intolerance for ambiguity. Of course, the subhypothesis cannot lead to a conclusion that respondents were, or were not, influenced by GAAP: they can only consider a "potential limitation which is not unique to this or any other questionnaire which includes financial accounting and reporting alternatives" (Ricchiute, 1979, p. 71). The relationship between intolerance for ambiguity and the consistency of accountants' disclosure choices with generally accepted accounting principles (GAAP) was tested through the following two subhypotheses, also stated in the null: Ha: Accountants' intolerance for ambiguity, professional affiliation, and education level are not significantly related to the consistency of disclosure choices with GAAP. H4: There is no significant correlation between accountants' intolerance for ambiguity and the consistency of disclosure choices with GAAP. Sample instruments Data for the study was gathered from mail survey questionnaire packets sent to 1,000 randomly selected certified public accountants (CPAs) drawn from the AICPA List o f Members. Each packet consisted of three sections: the disclosure questionnaire, the Norton (1975) questionnaire, and selected demographic questions. All three sections were to be completed by respondents who were not told of the purpose of the study (i.e. disguised questionnaire). The disclosure questionnaire consisted of 18 financial statement disclosure situations. The disclosure situations were selected from the professional accounting literature on the basis of three general criteria: (1) various alternative solutions were available for the situation; (2) alternative solutions could be reasonably interpreted as generally accepted or not; and (3) accountants could be expected to be familiar with the situations. Below each situation were listed various alternative disclosure solutions. Respondents were asked to determine whether the alternatives: (A) should not be disclosed; (B) should be one alternative disclosed under some circumstances; (C) should be one alternative disclosed at all times; and (D) should be the only one disclosed. Instructions accompanying the questionnaire packet requested that respondents

AMBIGUITYINTOLERANCEAND FINANCIAL REPORTING ALTERNATIVES provide their own opinions, regardless of generally accepted accounting principles governing each disclosure situation; the instructions stated:

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respondents were to rank their agreement along a seven-point interval scale. The Norton quotient, compiled from summed response scores for all "'Please provide your own opinion which may or questionnaire items, represented a measure of a may not agree with generally accepted accounting respondent's intolerance for ambiguity. The higher practices". a respondent's Norton quotient, the higher his or Two scores were calculated for each completed her intolerance for ambiguity. disclosure questionnaire: the "desire for disThe Norton questionnaire was selected from closure" quotient and the "consistency with among several other ambiguity instruments on the GAAP" quotient. The disclosure quotient was basis of its reported reliability and validity. Norton derived from scores assigned to each of the four (1975) reported high internal reliability (1"= 0.88), alternative ranks (A,B,C,D) on the disclosure high test-retest reliability (r = 0.86), adequate questionnaire. Ranks A and D were considered correlation with other measures logically related to similar in the sense that financial disclosures in ambiguity intolerance (i.e. criteria-related accordance with either would result in disclosing validity), and strong construct validity in four only one alternative treatment of a financial separate experiments. situation. Ranks A and D were each assigned a Mean Norton quotients were calculated for score of 0. In contrast, Ranks B and C were each of four respondent groups, ranging from considered similar in the sense that financial lower (Group 1) to higher (Group 4) Norton disclosures in accordance with either would result quotients. Groups 2 (low-medium) and 3 (highin more than one approach (i.e. alternatives) to medium) represented, [espectively, those respondisclosing a financial situation. Ranks B and C dents whose Norton quotients fell on or within were assigned a score of 1. The disclosure quotient one-half standard deviation below and above the for each questionnaire was calculated as the ratio grand mean of all Norton quotients. Groups 1 of the number of times Rank B or C was selected (low) and 4 (high) represented, respectively, those to the total number of disclosure selections. Since respondents whose Norton quotients fell beyond there were 71 disclosure selections, a respondent one-half standard deviation below and above the who, for example, selected Ranks B or C 35 times grand mean. The purpose of reporting group mean would achieve a disclosure quotient of 0.49 (i.e. scores was to provide an indication o f trends 35/71). The higher a respondent's disclosure across dependent variables. quotient, the higher his or her desire for A final section of the questionnaire packet alternatives in financial reporting. requested demographic information. The The GAAP quotient represented the ratio of requested information included respondents' selected disclosure solutions which were in professional affiliation and education level. accordance with GAAP to the total number of disclosure selections. Since the disclosure question- Hypothesis testing naire included 18 disclosure situations, a responAnalysis of variance was used to test H1 and H3 dent who, for example, selected ten disclosure and thereby reveal if significant differences existed solutions that were in accordance with GAAP among the classifications within the independent would achieve a GAAP quotient of 0.55 (i.e. variables as they related to the disclosure and 10/18). The higher a respondent's GAAP quotient, GAAP quotients. The analysis included two the higher the consistency of his or her choices dependent and three independent variables, the with generally accepted accounting principles. The data sources and operational measures of which disclosure questionnaire is reproduced as an are recapped in Table 1. Discriminant analysis was appendix to this paper. The circled items indicate also employed to determine if the independent agreement with GAAP. variables could statistically distinguish between The Norton [19 75)questionnaire 2 was adopted those individuals with high or low disclosure and from a recent study appearing in the personality GAAP quotients. Low or high scores were defined literature relative to measures of ambiguity by scores more than one standard deviation below intolerance. The questionnaire consisted of 61 or above the mean, respectively. Thus, discriminon-financial preference items about which nant analysis provided both a measure of the 2The questionnaire was used with the permission of Professor Robert W. Norton, Department of Speech Communication, University of Michigan and is available upon request from the authors.

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ARCHIEW. FAIRCLOTHand DAVIDN. RICCHIUTE TABLE 1. Variables, data sources and operational measures Variable

Data source

Operational measure

Dependent: Desire for alternatives in financial reporting

Disclosure questionnaire

Disclosure quotient

Consistency with GAAP

Disclosure questionnaire

GAAPquotient

Intolerance for ambiguity

Norton questionnaire

Norton quotient

Professional affiliation

Demographic questions

CPA in public practice vs. CPS not in public practice (e.g. industry, government, etc.)

Education level

Demographicquestions

Undergraduate vs. graduate

Independent:

characteristics on which the low and high groups might differ and analysis of the spatial relationships among the low and high groups. H2 and H4 were tested by product-moment correlations between accountants' intolerance for ambiguity (Norton quotient) and each of the two dependent variables (GAAP quotient and disclosure quotient). This same procedure was also employed to determine the relationship between the dependent variables in H~ and H3, desire for alternatives in financial reporting and consistency of disclosure choices with GAAP, respectively. Product-moment correlations were employed because they measure the strength of the relationship between two interval level variables. In effect, the procedure revealed the proportion of variance in one variable explained by the other variable.

RESULTS Usable responses were received from 186 of 917 delivered questionnaire packets, resulting in a response rate of 20.2%. Of the usable responses, 115 resulted from an original mailing and 71

resulted from a follow-up mailing. This section reports the results of the mail survey; the following section discusses the implications of the results.

Desire for more alternatives in financial reporting (n; , n2 ) The results of the analysis of variance indicated that education was the only dependent variable affecting desire for alternatives in financial reporting at the 0.05 level (F = 0.03 I, omega square of the main effects = 3.04%). Thus, H1 was not rejected and resulted in the conclusion that of the three independent variables, only accountants' education level was significantly related to their desire for financial reporting alternatives. Table 2 reports mean response scores across all independent variables when desire for alternatives was the dependent variable. As results of the analysis of variance would suggest, only differences between mean responses for undergraduate and graduate degree respondents were significant (alpha = 0.05). Some linear trend was apparent between mean disclosure quotients in the four Norton groupings (Table 2). Therefore, a resulting subhypothesis (H2: stated in the null) was that no significant

TABLE 2. Mean responses across independent variables dependent variable: disclosure quotient Professional affiliation

Norton quotient

CPAs in public practice

CPAs not in public practice

(1) Low

(2) Lowmedium

0.43 (117)

0.44 (69)

0.37 (31)

0.40 (58)

Education level

(3) Highmedium

(4) High

0.47 (68)

0.45 (29)

Undergraduates

Graduates

0.41 (131)

0.48 (55)

AMBIGUITYINTOLERANCEAND FINANCIAL REPORTING ALTERNATIVES

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TABLE 3. Mean responses across independent variables dependent variable: GAAP quotient Professional affiliation

Norton quotient

CPAs in public practice

CPAs not in public practice

(1) Low

(2) Lowmedium

0.68 (117)

0.73 (69)

0.68 (31)

0.66 (58)

correlation existed between accountants' intolerance for ambiguity and their desire for financial reporting alternatives. This hypothesis was tested by correlating respondents' Norton quotients with their desire for disclosure quotients. The resultant product-moment correlation was 0.0972 (n = 186), which was significant at the 0.084 level. Thus, the subhypothesis was not rejected (alpha = 0.05) and resulted in the conclusion that the correlation between accountants' intolerance for ambiguity and their desire for alternatives in financial reporting was not significant. The results of discriminant analysis, when desire for alternatives in financial reporting was the dependent variable and intolerance of ambiguity the discriminating factor, indicate that intolerance of ambiguity had little ability to distinguish between those individuals with low or high desires for alternatives in financial reporting. The analysis correctly classified 55.7% of the individuals with low disclosure quotients and 61.0% of the individuals with high disclosure quotients; overall correct classification was 58.3%.

Consistency with GAAP (Ha, 1-14) The analysis of variance indicated all three independent variables (main effects) were significant at the 0.05 level when consistency with GAAP was the dependent variable. The F values and levels of significance for the three variables were: Norton quotient, 5.641, 0.001 ; professional affiliation 5.813, 0.017; and educational level 5.214, 0.024. Further, no interactions were significant either between (two-way) or among (three-way) independent variables at the specified level of alpha. Omega square for the main effects = 9.95%. Thus, based on this procedure, H3 was rejected and resulted in the conclusion that accountants' intolerance for ambiguity, professional affiliation, and education level were significantly related to the consistency of choices with generally accepted accounting principles.

Education level

(3) Highmedium

(4) High

0.75 (68)

0.69 (29)

Undergraduates

Graduates

0.68 (131)

0.74 (55)

Table 3 reports mean response scores across all independent variables when consistency with GAAP was the dependent variable. Differences between mean responses for paired group Norton quotient respondents need not all have been significant to have resulted in the significant F level per the analysis of variance. The Newman-Keuls q probabilities test (Hays, 1973) of significant differences was employed to test for significant differences between each of six possible pairings (i.e. four groups paired two at a time). The results indicate that the significant results of the analysis of variance were due to Group 3 (high-medium), which differed significantly at the 0.01 level from each of the other groups. The critical q value and the corresponding q values at the 0.01 level of significance for the differences between Group 3 and the other groups are: Group 1, 25.00, 17.46; Group 2, 32.14, 19.71; and Group 4, 21.43, 13.99. No discernible linear trend was apparent between mean GAAP quotients and the four Norton groups (Table 3). That is, the four Norton groups (low, low-medium, high-medium and high) did not result in increasingly higher GAAP quotients. A subhypothesis (H4) resulting from the mean GAAP quotients across Norton groups (stated in the null) was that no significant correlation existed between accountants' intolerance for ambiguity and the consistency of their choices with GAAP. This subhypothesis was tested by correlating respondents' Norton quotients with their GAAP quotients. The resultant productmoment correlation was 0.0654 (n = 186)which was significant at the 0.181 level. Thus, the subhypothesis was not rejected (alpha = 0.05) and resulted in the conclusion that the correlation between accountants' intolerance for ambiguity and the consistency of their choices with GAAP was not significant. The results of the discriminant analysis, when consistency of disclosure choices with GAAP was

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ARCHIE W. FAIRCLOTH and DAVID N. RICCHIUTE

the dependent variable and intolerance for ambiguity the discriminating factor, indicate that intolerance for ambiguity had little ability to distinguish between those individuals whose disclosure choices were relatively low or high regarding consistency with GAAP. The analysis correctly classified 53.8% of the individuals with low disclosure quotients and 62.5% of the individuals with high disclosure quotients; overall correct classification was 58.6%. Note in Table 3 that the 69 CPAs-not-in-publicpractice had a slightly higher GAAP quotient than CPAs-in-public-practice; thus, their responses were more consistent with GAAP. Since no more than eight respondents from that group (CPAs-not-inpublic-practice) were employed in any one industry, there is no a priori reason to suspect that the higher GAAP quotients did not result from random chance.

Relationship of dependent variables A product-moment correlation was employed to test the relationship between desire for alternatives in financial reporting and consistency of disclosure choices with GAAP, i.e. the two dependent variables. The purpose of the test was to determine what proportion of a dependent variable was explained by the other dependent variable, rather than the independent variables. The resultant product-moment correlation was 0.5797 (n = 186) which was significant at the 0.001 level. Thus, approximately 34% (omega square) of the variance in one dependent variable was explained by the other dependent variable.

Demographic data The questionnaire packet included questions relating to demographics. There were no significant differences in the results of the hypothesis tests when responses were grouped according to these variables.

Nonresponse bias Nonresponse bias represents a particularly serious problem in mail survey research. The presence of nonresponse bias, if it exists, suggests that the viewpoint of nonrespondents was significantly different from that of respondents. One method of determining if nonresponse bias has been introduced is to assume that late respondents are roughly similar to nonrespondents (Oppenheim, 1966). The test for nonresponse bias 3See, for example: NeweU& Simon (1975); Brehmer (1976).

is then to compare the dependent variables (i.e. disclosure quotient, GAAP quotient) for the n respondents of the last m weeks of responses with those of a random sample of size n drawn from the returns of the remaining (earlier) weeks. However, since the researcher chooses the sizes of both m and n, an additional source of bias may be introduced by the test. To alleviate this additional source of bias, the test for nonresponse bias was conducted for various sizes of m. The test was conducted for the cumulative number of respondents, n, for each week of responses (beginning with the last week) until the number of respondents for the last m cumulative weeks exceeded the number of remaining respondents. A t-test was used to compare both of the dependent variables for the early and late respondents. For the ten response weeks tested, the resultant significance levels were all greater than 0.12 (alpha = 0.05). These results led to the conclusion that the viewpoint of nonrespondents would not have been significantly different from that of respondents.

DISCUSSION

Effects of intolerance for ambiguity on decisionmaking The findings of this study did not disclose any relationship between intolerance for ambiguity and desire for financial reporting alternatives. Discriminant analysis revealed that intolerance for ambiguity did not successfully distinguish between the two groups classified according to desire for financial alternatives. Further, analysis of variance did not detect significant differences between the desire for disclosure among the four groups classified according to intolerance for ambiguity. In addition, no significant correlation existed between the intolerance for ambiguity quotient and the desire for disclosure quotient. These findings support psychological studies stressing that personality characteristics have a limited effect on decision-making. 3 The findings also support those of McGhee et al. (1978), who found that subjects classified differently regarding intolerance for ambiguity did not seek significantly different amounts of information regarding the ratings of companies in investment portfolio selections. Interestingly, a significant correlation existed

AMBIGUITYINTOLERANCEAND FINANCIAL REPORTINGALTERNATIVES between desire for alternatives in financial reporting and consistency of disclosure choices with GAAP, i.e. the two dependent variables. This indicates that pronouncements by authoritative bodies (e.g. FASB, APB, etc.) had more impact on the responents' desire for alternatives in financial reporting than did the personality characteristic under study. Potential interacting variables The topic of the relationship between intolerance for ambiguity and decision-making is far from settled. In short, accounting studies concerned with intolerance for ambiguity have generated conflicting results. Dermer found significant positive correlations between intolerance for ambiguity and amounts of information perceived to be important; McGhee et al., as well as the present study, found that subjects classified differently regarding intolerance for ambiguity did not seek significantly different amounts of information. Given that accounting research has generated conflicting evidence, other variables may be interacting and thereby confounding the findings of this type of behavioral research. The following discussion underscores several potentially confounding factors which may help to explain the conflicting research results in general and the results of the present study in particular. Payne (1976) found that an individual's information search patterns vary with the complexity of a task. Therefore, as task complexity increases, personality characteristics such as intolerance for ambiguity may have a variable rather than stable effect. Another confounding factor, supported by Posner (1973), is that the way in which information is organized and filed may also have an important effect on decision-making. In addition, Slovic & Lichtenstein (I 971) found that when the task is highly predictable, an individual's reactions are highly consistent and predictable, but when the task becomes highly unpredictable, reactions are inconsistent and predictable only to a limited degree. Schroeder et al. (1967) examined the relationship between environmental complexity (i.e. excessively diverse and/or numerous dimensional units of information) and conceptual structure (i.e. the individual's ability to discriminate between stimuli as the number of perceived dimensions increase and to create new attributes of information). They found that no matter how

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relevant t h e information, if it is presented after maximum abstraction is reached, the decisionmaker's structure will tend to fix a set of rules that resolves ambiguity by eliminating certain information from consideration. Another possible confounding factor may be functional fixation (Ijiri et al., 1966; Ashton, 1976), which refers to an individual attaching a meaning to a title or object and being unable to see alternative meanings or uses. Ashton (1976) designed an experiment to determine the extent of the existence of such a phenomenon in an accounting environment. Ashton tested the effect of the magnitude of cognitive change regarding: (a) whether data increases or decreases in importance after an accounting change; and (b) the amount of information concerning the accounting change. When the data was evaluated based on median analysis of variance, results suggested that a large proportion of the subjects failed to adjust their decision processes significantly in response to the accounting change, thereby providing evidence of the existence of a functional fixation in an accounting situation. This same phenomenon (functional fixation) may cause an individual to continue to desire, or refuse to desire, certain types of accounting information. The above factors, e.g. task complexity, cue ambiguity, task environment ambiguity, or functional fixation may explain a portion of the conflicting results of studies regarding cognitive characteristics. The relationship among these factors should be researched further. Education level and professional affiliation Education level was significantly related to both dependent variables, although the omega square for all main effects, including education, was only 3.04%. Further, with respect to education level, graduate respondents (n = 55) were more desirous of financial reporting alternatives (Table 2) and more consistent with GAAP (Table 3) than were undergraduate respondents (n = 131). Thus, education level was more dominant than either the primary cognitive variable of interest, intolerance for ambiguity, or professional aff'diation in explaining the desire for financial reporting alternatives and the consistency of choices with GAAP among sample subjects. Although not typically identified as a cognitive variable in and of itself, education level could be significantly related to an individual's cognitive makeup. Significant interactions between eduea-

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ARCHIE W. FAIRCLOTH and DAVID N. RICCHIUTE

tion level and intolerance for ambiguity could potentially support this hypothesized relationship. However, the interactions were not sigrificant. Thus, the evidence points to an additional research issue, i.e. the relationship between education level and cognitive variables other than accountants' intolerance for ambiguity. These conclusions are quite tentative, however, since the omega square was small.

CONCLUSION The findings of this study did not disclose any relationship between intolerance for ambiguity and desire for financial reporting alternatives. Although analysis o f variance disclosed differences in consistency with GAAP according to intole-

rance for ambiguity, no significant correlation existed between the two variables. These findings tend to support a related accounting study by McGhee et al. (1978). However, several factors, such as the way an individual's information search patterns vary, may be confounding the relationship between tested personality characteristics such as intolerance for ambiguity and other variables such as decision-making. Future research should attempt to test the relationship o f these various types o f personality characteristics to determine their impact upon important topics such as decision-making. The present study also disclosed a relationship between education level and the two dependent variables: desire for disclosure and consistency with GAAP. Therefore, additional research should also consider the effects o f demographic information, which may in fact be more important than many previously tested variables such as personality characteristics.

BIBLIOGRAPHY Abdel-Khalik, A. Rashad, On the Efficiency of Subject Surrogation in Accounting Research, The Accounting Review (October, 1974), pp. 743-750. Ashton, R., User Prediction Models in Accounting: An Alternative Use, The Accounting Review (October, 1975), pp. 712-722. Ashton, R., Cognitive Changes induced by Accounting Changes: Experimental Evidence on the Functional Fixation Hypothesis, Studies on Human Information Processing in Accounting, Supp. to Journal o f Accounting Research (Vol. 14, 1976), pp. 1-17. Attneave, F., Triangles as Ambiguous Figures, American Journal of Psychology (Vol. 81, No. 3, 1968), pp. 447-453. Brehmer, B., Social Judgement Theory and the Analysis of Interpersonal Conflict, Psychological Bulletin (November, 1976), pp. 985-1003. Budner, S., Intolerance of Ambiguity as a Personality Variable, Journal o f Personality Assessment (Vol. 30, 1962), pp. 29-50. Cunningham, W., Anderson, W. T. Jr. & Murphy, J. H., Are Students Real People?, Journal of Business (July, 1974), pp. 399-409. Definer, J. D., Cognitive Characteristics and the Perceived Importance of information, The Accounting Review (July, 1973), pp. 511-519. Diekhaut, J., Livingstone, L. & Watson, D.H., On the Use of Surrogates in Behavioral Experimentation, Supp. to The Accounting Review (Vol. 47, 1972), pp. 455-470. Draguns, J. & Multari, G., Responses to Cognitive and Perceptual Ambiguity in Chronic and Acute Schizophrenics, Journal o f A bnormal and Social Psychology (Vol. 66, 1963), pp. 24-30. Driver, M. & Mock, T., Human Information Processing, Decision Style Theory, and Accounting information Systems, The Accounting Review (July, 1975), pp. 490-508. Frederiksen, J. R., Cognitive Factors in the Recognition of Ambiguous Auditory and Visual Stimuli, Journal of Personality and Social Psychology (Vol. 4, No. i, 1967), pp. 1-17. Frenkel-Brunswik, E., Intolerance of Ambiguity as an Emotional and Perceptual Personality Variable, Journal of Personality (Vol. 18, 1949), pp. 108-143. Frenkel-Brunswik, E., Personality Theory and Perception, in R. R. Blake and G.V. Ramsey (eds), Perception: An Approach to Personality (New York: The Ronald Press Company, 1951), pp. 356-419. Hays, W. L., Statistics for the Social Sciences (New York: Holt, Rinehart, and Winston, 1973). Ijtri, Y., Jaedicke, R.K. & Knight, K. E., The Effects of Accounting Alternatives on Management Decisions, in R.K. Jaedicke, Y. ljiri, and O. Nelson (eds), Research in Accounting Measurement (Sarasota, Florida: American Accounting Association, 1966), pp. 186 -199.

AMBIGUITY INTOLERANCE AND FINANCIAL REPORTING ALTERNATIVES Libby, R. & Lewis, B., Human Information Processing Research in Accounting: The State of the Art, Accounting, Organizations and Society (1977), pp. 245-268. Livingstone, J.L., A Behavioral Study of Tax Allocation in Electric Utility Regulation, The Accounting Review (July, 1967), pp. 544-552. Martin, J. G. & Westie, F. R., The Tolerant Personality, American Sociological Review (August, 1959), pp. 521-528. MacKay, D. & Bever, T. G., In Search of Ambiguity, Perception andPsychophysics (Vol. 2, 1967), pp. 193 -200. MacBride, L. & Moran, G., Double Agreement as a Function of Item Ambiguity and Susceptability to Demand Implications of the Psychological Situation, Journal o f Personality and Social Psychology (Vol. 6, No. 1, 1967), pp. 115-118. McGhee, W., Shields, M. D. & Bixnberg, J. G., The Effect of Personality on a Subject's Information Processing, The Accounting Review (July, 1978), pp. 681-697. Miller, H., Environmental Complexity and Financial Reports, The Accounting Review (January, 1972), pp. 31-37. Mock, T., Estrin, T. & Vasarhelyi, M., Learning Patterns, Decision Approach and Value of Information, Journal o f Accounting Research (Vol. 10, No. 1, 1972), pp. 129-153. Mock, T. & Vasarhelyi, M., A Cross-Contextual Investigation of Cognitive Style and Accounting Information, working paper (University of Southern California, 1976). Murstein, B., The Measurement of Ambiguity for Thematic Cards, Journal of Projective Techniques (Vol. 24, No. 4, 1960), pp. 419-423. NeweU, A. & Simon, M. A., Human Problem Solving (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1972). Norton, R.W., Measures of Ambiguity Intolerance, Journal of Personality Assessment (December, 1975), pp. 607-619. Oppenheim, A. N., Questionnaire Design and Attitude Measurement (New York: Basic Books, 1966). Payne, J. W., Task Complexity and Contingent Processing in Decision Making: An Information Search and Protocol Analysis, Organizational Behavior and Human Performance (August, 1976), pp. 366-387. Posner, M. I., Cognition: An Introduction (Chicago: Scott-Foresman, 1973). Revsine, L., Data Expansion and Conceptual Structure, The Accounting Review (October, 1970), pp. 704-711. Ricchiute, D. N., Standard Setting and the Entity-Proprietary Debate, Accounting, Organizations and Society (1979), pp. 67-76. San Miguel, J., Human Information Processing and its Relevance to Accounting: A Laboratory Study, Accounting, Organizations and Society (1976), pp. 357-373. Schroeder, H., Driver, M. & Struefert, S., Human Information Processing (New York: Holt, Rinehart, and Winston, 1967). Slovic, P. & Lichtenstein, S., Comparison of Bayesian and Regression Approaches to the Study of Information Processing in Judgement, Organizational Behavior and Human Performance (June, 1971), pp. 649-744.

63

64

ARCHIE W. FA1RCLOTH and DAVID N. RICCHIUTE

APPENDIX: DISCLOSURE QUESTIONNAIRE 4 Should be one alternative disclosed under some circumstances (13)

Should be one alternative disclosed at all times (C)

A A A

(~(ARB No.43) (~)(ARB No.43) ~)(ARB No.43)

C C C

D D D

A

(~)(ARB No.43)

C

D

C

D

C C

D D

Should not be used (A)

Alternative responses I.

II.

IlL

IV.

V.

Inventory valuation on the balance sheet should assume the following flow of cost. 1. LIFO 2. FIFO 3. Average 4. Specific identification 5. Other (please describe).

A

B

Should be the only one used (D)

Accounting for costs in the oil industry should be based on: 1. Full cost 2. Successful effort 3. Other (please describe).

A A A

B

C

D

Research and development costs should be: 1. Expensed 2. Capitalized 3. Other (please descr~e).

A (~)(SFAS No.2)

B B

C C

(~(SFAS No.2) D

A

B

C

D

C C C C

D D D D

Depreciation should be based on: 1. Straight-line 2. Double-declining 3. Sum of years digits 4. Annuity 5. Decrease in the net realizable value of the asset 6. Other (please descr~e). Dollar amounts reported in financial statements should: 1. Not be adjusted for general price level changes 2. Be adjusted for general price level changes 3. Other (please describe).

A A A A

(~(SFAS No.19) ~)(SFAS No.19)

~ ( A R B No.43) ~_~(ARB No.43) ~)(ARB No.43) ~)(ARB No.43)

(~)(ARB No.43)

B

C

D

A

B

C

D

A

B

C

(~) (APB St.No.4)

(~)(APB St.No.4)

B

C

D

A

B

C

D

4 References to GAAP responses are circled within the questionnaire. References alongside each circled response are to the U.S. authoritative pronouncement (Accounting Research Bulletins, Opinions of the Accounting Principles Board, Accounting Principles Board Statements, and Statements of the Financial Accounting Standards Board) in effect at the time of the study.

AMBIGUITY INTOLERANCE AND FINANCIAL REPORTING ALTERNATIVES

VI.

VII.

Interperiod income tax allocation: 1. Should follow current practice 2. Should not be used (only the current liability and rehted expense would be shown) 3. Other (please describe). In regard to convertible bonds on the balance sheet: 1. All proceeds should he reported as debt 2. All proceeds should be reported as equity 3. Other (please describe).

VIII. Fixed assets in the balance sheet should he reported at: 1. Historical cost 2. Current replacement cost 3. Net realizable value 4. Fair market value 5. Other (please describe). IX.

X.

The common stock equivalence test should be applied to convertible debt: I. At the date of issue only 2. At the various f'mancialstatement dates (may be a CSE one year but not the next) 3. Other (please describe). Business combinations should be accounted for under the I. Purchase method 2. Pooling method 3. Market value method 4. Other (please describe).

65

Should not be used

Should be one alternative disclosed under some circumstances

Should be one alternative disclosed at all times

Should be the only one used

(A)

(B)

(C)

(D)

A

B

C

(~ (APB No.I)

(~(APB No.ll)

B

C

D

A

B

C

D

A

(~)(APB No.14)

C

D

A

(~)(APB No.14)

C

D

A

~)(APB No.14)

C

D

A

B

C

(~(ARB No.43)

(~)(ARB No.43)

B

C

D

~

B B

C C

D D

A

B

C

D

A

B

C

(~)(APB No.l)

(~)(APB No.15)

B

C

D

A

B

C

D

C C

D D

(ARB No.43) (ARB No.43)

A A

(~)(APB No. 16) ~_~)(APB No.16)

(~(APB No.16)

B

C

D

A

B

C

D

ARCHIE W. FAIRCLOTH and DAVID N. RICCHIUTE

66

Should not be used (A) XI.

Xll.

Lessees should: 1. Record property rights and related contractual obligations on the balance sheet 2. Not record property rights and related contractual obligations on the balance sheet 3. Other (please descr~e). Inventory in the balance sheet should be reported at: 1. Historical cost 2. Lower of cost or market 3. Current replacement COSt

4. Net realizable value 5. Net realizable value less normal profit 6. Fair market value 7. Other (please describe). Xlll. Cost of human asset development (i.e, training programs) should be: 1. Capitalized o n the balance sheet and amortized 2. Charged against income when incurred 3. Other (please describe). X1V. Unfunded prior service cost that is not a legal obligation: 1. Should be recognized as a liability on the balance sheet 2. Should not be reCOgnized as a liability on the balance sheet 3. Other (please describe).

Should be one alternative disclosed under some circumstances (B)

Should be one aRernative disclosed at all times (C)

Should be the only one used (D)

A

(~) (APB No.31)

C

D

A

(~)(APB No.31)

C

D

A

B

C

D

A

B

(~(ARB No.43)

D

A

B

C

( ~ (ARB No.4)

A A

~ ( A R B No.43) (.B)(ARB No.43)

C C

D D

A (~)(ARB No.43)

~ ) (ARB No.43) B

C C

D D

A

B

C

D

(~(APB St.No.4)

B

C

D

A

B

C

(~) (APB St.No.4)

A

B

C

D

A

(~)(APB No.8)

C

D

A

(~(APB No.8)

C

D

C

D

A

B

AMBIGUITY INTOLERANCE AND FINANCIAL REPORTING ALTERNATIVES

Should not be used (A) XV.

Research and development cost should be: 1. Capitalized on the balance sheet and amortized 2. Charged against income when incurred 3. Other (please describe).

XVI. Unconsolidated subsidiaries should be accounted for under the: 1. Cost method 2. Equity method 3. Market value method 4. Other (please descr~e). XVII. Cost of goods sold on the income statement should assume the following flow of cost. 1. LIFO 2. FIFO 3. Average 4. Specific identification 5. Other (please descr~e). XVIII. Depreciation should be based on 1. Historical cost 2. Current replacement cost 3. Net realizable value 4. Fair market value 5. Other (please describe).

Should be one alternative disclosed under some circumstances (B)

Should be one alternative disclosed at all times (C)

67

Should be the only one used (D)

(~(SFAS No.2)

B

C

D

A

B

C

(~) (SFAS No.0)

A

B

C

D

C C C

I)

C

D

A A A A

~ ( A P B No.1 8) (~)(APB No.IS) ~)(APB No.18) B

D D

A A A

( ~ ( A R B No.43) (~)(ARB No.43) ~ ) ( A R B No.43)

C C C

D D D

A

(~)(ARB No.43)

C

D D

A

B

C

A

B

C

(~)(ARB No.43) (~)(ARB No.43) A~)(ARB No.43)

B B B

C C C

D D D

A

B

C

D

(~ (ARB No.4)