Auditor evaluation of loss contingencies

Abstract. This paper examines the probability judgments made by auditors for their financial statement footnote disclosure decisions and their audit report additional paragraph decisions in the presence of material loss contingencies. In the United States these judgments are governed by SFAS No. 5 and SAS No. 58. Two prior studies have reported inconsistent results pertaining to the degree of compliance of auditors with the judgment and decision-making process implied by SFAS No. 5. In contrast, SAS No. 58 has not previously been examined with respect to auditor compliance. Results from an experiment with 64 audit partners from six firms were consistent with the hypothesis that audit partners employ the same (compensatory) judgment process when making footnote disclosure decisions as when making additional paragraph decisions. This process led the partners to make judgments for the additional paragraph decision that were in accordance with SAS No. 58. In contrast, their judgments for the footnote disclosure decision were consistent with a decision theory model of auditor behavior rather than the noncompensatory process implied by SFAS No. 5. Additional aspects of the study pertain to the additional paragraph decision of auditors. Observed judgments for these decisions are consistent with the hypothesis that additional information is conveyed beyond that provided by only a footnote disclosure. This is contrary to some recent discussions of the standards. Resume. Les auteurs etudient les jugements relatifs aux probabilites portes par les verificateurs dans le cadre de leurs decisions relatives a la presentation des pertes eventuelles importantes sous forme de notes infrapaginales dans les etats financiers ou de paragraphes supplementaires dans le rapport des verificateurs. Aux Etats-Unis, ces jugements sont regis par le SFAS no 5 et le SAS no 58. Deux etudes anterieures ont donne des resultats dissemblables en ce qui a trait a la mesure dans laquelle les verificateurs se conforment au processus de jugement et de prise de decisions que suppose le SFAS no 5. Le respect par les verificateurs des normes du SAS no 58 n'a fait, quant a lui, l'objet d'aucune analyse. Les resultats d'une experience menee aupres de 64 associes reponsables de la verification dans six cabinets ont confirme l'hypothese selon laquelle les associes responsables de la verification utilisent le meme processus de jugement (compensatoire) lorsqu'ils decident de presenter les pertes eventuelles sous forme de notes infrapaginales que lorsqu'ils optent pour les paragraphes supplementaires. Ce processus a amene les associes a porter des jugements pour l'ajout de paragraphes supplementaires conformes au SAS no 58. Par opposition, leurs jugements relatifs a la presentation sous forme de notes infrapaginales etaient conformes a un modele de comportement du verificateur inspire de la theorie de la decision plutot qu'au processus non compensatoire que suppose le SFAS no 5. D'autres aspects de l'etude portent sur la decision des verificateurs relative a l'ajout de paragraphes supplementaires. Les jugements observes relativement a cette decision sont conformes a l'hypothese selon laquelle d'autres renseignements sont transmis, outre ceux qui sont fournis par voie de simples notes infrapaginales. Ces resultats viennent contredire certaines analyses recentes portant sur les normes.