Traditional and alternative methods of measuring the understandability of accounting narratives

Abstract

General rightsThis document is made available in accordance with publisher policies. Please cite only the published version using the reference above. Full terms of use are available: http://www.bristol.ac.uk/pure/about/ebr-terms 1 Investigating new methods of measuring the understandability of accounting narratives.Michael John. Jones* and Malcolm Smith** * University of Bristol **Edith Cowan University, Western Australia AcknowledgementsWe recognise the research assistance of Jacqui Whale in the construction of this paper. We would also like to thank participants at the 14 th Annual Financial Reporting and Business Communication conference in Bristol in July 2010, particularly the discussant Garcia Beatriz Osman. We would also like to thank participants at seminars given at the British Accounting and Finance Conference in April 2011 in Birmingham, UK and at the European Accounting Association in Rome in April 2011. Finally, we would like to thank the two reviewers of this paper for their informed comments. 2 ABSTRACT PurposeThe study explores the use of alternative measures of 'understandability' on accounting texts. This includes the Meaning Identification test (MIT) and the Sentence Verification Technique (SVT), which have not previously been used by accounting researchers, as well as variants on the traditional CLOZE tests such as the C-Test. Design/methodology/approach The prior literature in accounting has strongly argued that readability and understandability are different, if related topics. There has also been considerable criticism of the existing measures, such as the Flesch test and Cloze Procedure, which have been used to assess the readability and understandability of accounting narratives. This study focuses on the understandability of accounting texts and evaluates how reliable the Cloze test is as a measure of comprehension. An experiment was designed and conducted to measure users' performance with a variety of comprehension measures. Findings The study concludes that the outcomes from the MIT and SVT comprehension tests are not significantly associated with those from the CLOZE tests. This implies that while the Cloze test is a good measure of the predictability of accounting narratives, and of textual redundancy, it does not necessarily measure the understandability of the text. Originality/value These measures of understandability, which have not previously been used in accounting, would enable researchers to test the communicational effectiveness of using different accounting narratives such as annual reports or prospectuses. Such a measure could be used to improve the understandability of accounting narratives. The strengths and weaknesses of the various tests are assessed. It is suggested that there is a need for further experimentation especially with the MIT test.

South African financial reporting students' reading comprehension of the IASB Conceptual Framework

“…The reading comprehension of other accounting texts 3 has been explored. The focus thereof is on financial reports (Adelberg, 1979;Jones & Smith, 2014;Smith & Taffler, 1992), textbooks (Adelberg & Razek, 1984;Bargate, 2012;Cornachione, 2004;Raabe, Stevens, & Stevens, 1984); US GAAP (Adelberg, 1982;Stead, 1977;Stevens et al, 1983), Government Accounting Standards (GASB) (Shaffer et al, 1993) and Australian GAAP (Patel & Day, 1996). This exploratory study introduces reading comprehension of IFRS to the literature.…”

The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes

“…Indirect evidence about these concepts has been obtained using empirical proxies, e.g. assessments of the value relevance of financial information based on regressions of price on accounting items such as earnings (Barth et al 2001, Hail 2013; of the determinants of asymmetric timeliness of earnings, based on regressions of earnings on returns (Basu 1997, LaFond andWatts 2008); of the benefits of comparability, as measured by the similarity of a firm's earnings-return relationship to other firms (De Franco et al 2011); and of the understandability of accounting narratives based on readability and comprehension tests Taffler 1992, Jones andSmith 2014). However, there is no direct empirical evidence on the role of the QCs in managements' accounting decisions.…”

The influence of neoliberal economics on small business accounting research: A critical evaluation of agendas and methodologies

“…If the small business is to be looked to as a source of creativity and innovation within a broader business context, then there is a risk that this creativity and innovation is being overlooked or even stifled by the imposition of normative accounting technologies. As such, the study of accounting within the small business context is ideally suited to a linguistic approach, as language is commensurate with meaning (Jones and Smith, 2014). Workplaces are recognised as sites of multiple, often contradictory interests and narratives, which are not easily reconciled.…”