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An evaluation of the FASB's conceptual framework from a user's perspective.

INTRODUCTION

The Financial Accounting Standards Board (FASB) has been criticized for not requiring firms to report information that is interpretable and useful for financial statement users (CICA, 1980). The FASB's conceptual framework is the foundation from which accounting standards are derived. Therefore, any accounting conceptual framework, if it is properly followed, must embody a set of qualitative characteristics that ensures financial reporting provides users with adequate information for decision making. The U.S. financial accounting conceptual framework was established in the late 1970's and early 1980's. Statement of Financial Accounting Concepts (SFAC) No. 2 (1980) indicates that there are five main qualitative characteristics of accounting information: understandability, relevance, reliability, comparability, and consistency.

The conceptual framework was formed with the intention of providing the backbone for principles-based accounting standards (Nobes, 2005). Despite these intentions, the Securities and Exchange Commission (SEC) has criticized the accounting standards setting board for becoming overly rules-based, which paves the way for the structuring of transactions in the company's favor (SEC, 2003). Moreover, critics of the framework have stressed that the movement towards rules-based standards is a consequence of inadequacies in the accounting conceptual foundation. Nobes (2005) argues that the need for rules-based accounting standards is a direct result of the FASB trying to force a fit between accounting standards and a conceptual framework that is not fully developed.

The need for a strong conceptual framework is not only necessary for the establishment of principles-based accounting standards but also for the development of international accounting standards. Most industrialized countries have seen the need and benefits for adopting International Financial Reporting Standards (IFRS). Nevertheless, the United States, in particular the FASB and SEC, has been reluctant to move toward full adoption of IFRS (SEC, 2002; Tweedie, 2004). Instead, the U.S. has opted to tackle the task of achieving convergence between U.S. GAAP and IFRS. Thus, since IFRS is primarily principles based, the accounting conceptual framework within the U.S. must provide an adequate foundation that will facilitate the convergence with IFRS (Nobes, 2005). Interestingly, the FASB has even depicted its conceptual framework as 'incomplete, internally inconsistent, and ambiguous' (FASB, 2002).

A coherent and strong conceptual framework is vital for the development of principles-based accounting standards and their convergence with the international accounting standards. Furthermore, the FASB's current conceptual framework has been criticized as being inadequate for guiding standard setting. However, we are unaware of any empirical evidence that supports the criticisms of the current conceptual framework. Additionally, none of the critics have looked at the conceptual framework from the most important viewpoint, the user's perspective. Therefore, the purpose of this paper is to empirically analyze the adequacy of the conceptual framework in influencing an individual's intention or propensity to use/rely on financial statements. Our study contributes to the accounting literature by being the first to provide empirical evidence to evaluate the previous criticisms of the FASB's conceptual framework, doing so from a user's perspective. The results of our study have the potential to provide the FASB and other accounting policymakers with further evidence supporting the need to develop a principles-based conceptual framework. In addition, our study helps pave the way for additional research that aids in developing an improved conceptual framework that enhances the standard setting process.

We developed a survey instrument to analyze individuals' intentions to rely on financial statements using Ajzen's (1991) Theory of Planned Behavior. The five main qualitative characteristics identified within the conceptual framework were hypothesized to represent the dimensions of a user's attitude toward relying on financial statements. We find that the reliability characteristic of the conceptual framework represents the only significant dimension of a person's attitude that affects their intention to rely on financial statements. However, the understandability characteristic appears to contribute to users' attitude towards using financial statements, as it is approaching significance in our model. Within the context of the Theory of Planned Behavior, social pressures did not influence intentions to use/rely on financial statements. Nevertheless, we find that familiarity with accounting plays a vital role in shaping individuals' intentions to use/rely on financial statements for decision making.

This paper is organized as follows. First, we present the development of the FASB's conceptual framework, criticisms of such framework, and prior research examining the conceptual framework. Next, we hypothesize how the qualitative characteristics of the framework will influence users' intentions to rely on financial statements for decision making. We then present our instrument, participant information, and the corresponding statistical analysis of the study. Finally, we discuss the conclusions from the study, limitations, and areas for future research.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Structured accounting standard setting within the U.S. began in the early 1930's with the enactment of the Securities and Exchange Commission Acts. These acts gave the power of accounting standard setting to the SEC. The SEC delegated the authority to set accounting standards to the private sector, specifically the American Institute of Certified Public Accountants (AICPA), in 1938 (Wyatt, 1991). Even before the stock market crash of 1929, many in the profession questioned the adequacy of the accounting model and numerous discrepancies existed in firm's financial reporting (Previts & Merino, 1998). The solution to the accounting problems prior to the stock market crash was the adoption of Paton and Littleton's (1940) income determination model, which focuses on cost allocation and the matching of revenues with expenses. Through focusing on cost, Paton and Littleton (1940) argued that accounting can use an objective and verifiable means of assessing the performance of management. Paton and Littleton (1940) asserted that any accounting standard should be principles-based in nature and have a conceptual foundation that guides the direction of standards.

To facilitate the adoption of Paton and Littleton's historical cost income model, the American Accounting Association (AAA) issued a string of statements between 1936 and 1948 that supported the implementation of historical cost accounting and acted like a conceptual framework. Despite the efforts of the AAA, there was no true conceptual framework from which standards could be based. In 1939, the AICPA established the Committee on Accounting Procedure (CAP) as the official body for setting accounting standards, known as Accounting Research Bulletins (ARBs). CAP was then replaced by the Accounting Principles Board (APB) in 1959 as the authority for standard setting.

CAP's failure resulted from its inability to meet the SEC's instruction to limit the alternatives in accounting through its problem-by-problem approach to standard setting (Previts & Merino, 1998). The APB also tried to issue accounting standards in an environment that lacked a conceptual framework. This contributed to a lack of cohesiveness within the standards, since the APB had no basis for their conclusions on each standard. Ultimately, this led to the demise of the APB as the Financial Accounting Standards Board (FASB) took over accounting standard setting in 1973 (Wyatt, 1991).

Prior to the establishment of the FASB, the Trueblood Committee was formed to analyze the purpose of financial reporting and develop a set of objectives for financial statements (Previts & Merino, 1998). The FASB followed the recommendations of the Trueblood Committee and established accountings first official conceptual framework in the late 1970's and early 1980's (Wyatt, 1991). This framework, with a few changes, still provides the basis for the FASB's standard setting today.

Statement of Financial Accounting Concepts (SFAC) No. 2 (1980) develops and discusses the qualitative characteristics that make accounting information useful. SFAC No. 2 separates the qualitative characteristics as possessing either user-specific or decision-specific qualities. The overall user-specific characteristic of accounting information is that it must be understandable. For this reason, the FASB has placed understandability at the top of the qualitative characteristics hierarchy. Under understandability, within the conceptual hierarchy, are the decision-specific characteristics that influence decision usefulness. The primary decision-specific qualitative characteristics identified by the FASB are relevance and reliability. Then, comparability and consistency are considered to be secondary decision-specific characteristics by the FASB. See Table 1 for the FASB's definition of each characteristic previously discussed.

The current accounting conceptual framework has been criticized for being overly rules-based. Even the Financial Accounting Standards Board has openly acknowledged that the existing conceptual framework is inadequate for establishing current accounting standards (FASB, 2002). An overly rules-based framework creates the opportunity for companies to structure and record transactions which do not faithfully reflect the actual underlying economic substance (SEC, 2003; Nobes, 2005; Benston, Bromwich & Wagenhofer, 2006). Without a robust principles-based framework, the FASB is left with little option but to issue rules-based accounting standards as an attempt to force a fit between standards and a conceptual framework that has not been fully developed (Nobes, 2005). These standards pose a unique dilemma for accounting practitioners as they have to choose between which accounting rules to use rather than applying the best theoretically sound accounting principle (Shortridge & Myring, 2004). These choices often lead to less informative or misleading financial statements as companies engage in structuring accounting transactions that meet the letter but not the intent of GAAP (Benston, Bromwich & Wagenhofer, 2006). Thus, there is a need to develop a conceptual framework that is consistent with principles-based accounting standards. Such a framework will not only serve as guideposts to aid accounting standard setters but will also facilitate the convergence between U.S. GAAP and IFRS (SEC, 2002; Tweedie, 2004).

Despite all the criticisms of the conceptual framework, there appears to be no empirical evidence to support these claims. The purpose of this paper, then, is to empirically examine individuals' intentions to use/rely on financial statements in order to determine whether the qualitative characteristics of accounting information contribute to their reliance on financial statements. We decided to examine the conceptual framework from a user's perspective since the objective of financial reporting is to provide useful information for decision making. Additionally, we chose to focus our investigation on the qualitative characteristics of the framework given they are the backbone from which all accounting standards are born.

We analyzed the conceptual framework and potential financial statement users' intentions within the context of Ajzen's (1991) Theory of Planned Behavior. Ajzen's (1991) research findings indicate we can determine individuals' intentions to perform a behavior through analyzing their attitude, subjective norms, and perceived behavioral control. Within this perspective, we adapted Ajzen's (1991) Theory of Planned Behavior to an individual's propensity to rely on accounting financial statements (see Figure 1). As depicted in Figure 1, the Theory of Planned Behavior predicts there is a positive association between individuals' intention and their performance of a particular behavior. As individuals' intention to use/rely on financial statements become stronger, they are more likely to use/rely on these statements in their decision making process. This theoretical prediction has been empirically verified by Ajzen (1991) and other studies, thus we did not reexamine the reliance portion of Theory of Planned Behavior in this study.

Our research model analyzes the qualitative characteristics of accounting information in conjunction with an individual's intention to rely on financial statements. Specifically, we use the qualitative characteristics of accounting information to represent the attitude dimension for determining individuals' intention to use/rely on financial statements. This relationship is depicted in our research model within Figure 2. In order to assess the adequacy of the conceptual framework's influence on individuals' intention to use/rely on financial statements, we applied the relevant accounting and information quality literature in developing our hypotheses.

Information is defined as "data that have been organized and processed to provide meaning to a user" (Romney & Steinbart, 2009: 5). Accounting information is valuable because it has the potential to help users of financial statements to improve their decision making process. Nevertheless, information cannot be useful unless those who use it are able to understand it and perceive its significance (FASB, 1980; Wang & Strong, 1996; Strong, Lee & Wang, 1997; Fedorowicz & Yang, 1998; Libby, Libby & Short, 2009; Spiceland, Sepe & Nelson, 2010). Thus, individuals are less likely to use/rely on information which they cannot understand. Given this relationship between data, understandability, and adoption, we propose the following hypothesis:

[FIGURE 1 OMITTED]

H1 Financial statements that possess the characteristics of understandability will have a positive association with an individual's intention to use/rely on financial statements.

In order for users to determine whether the information they received is of better (or more useful) or inferior (or less useful) quality, information must possess the qualities of relevance and reliability (FASB, 1980). Accounting information is considered relevant when users of financial statements are able to use it to make a difference in their decision making process (FASB, 1980; Wang & Strong, 1996; Strong, Lee & Wang, 1997; Fedorowicz & Yang, 1998; Libby, Libby & Short, 2009; Spiceland, Sepe & Nelson, 2010). Conversely, reliability is the key attribute in information quality (Wang & Strong, 1996). To be considered reliable, accounting information must be reasonably free from error and bias as well as represent what it purports to represent (FASB, 1980; Fedorowicz & Yang, 1998; Libby, Libby & Short, 2009; Spiceland, Sepe & Nelson, 2010). Thus, individuals are more likely to use/rely on financial statements that are perceived to be relevant and reliable. Based on the characteristics of relevant and reliable accounting information, we hypothesize the following:

H2 Financial statements that possess the characteristic of relevance will have a positive association with an individual's intention to use/rely on financial statements.

H3 Financial statements that possess the characteristic of reliability will have a positive association with an individual's intention to use/rely on financial statements.

In addition to the above, information is only useful when users are able to compare it on a consistent basis. Unlike relevance and reliability, comparability and consistency represent the qualities of accounting information that allow users to examine the relationship between two or more pieces of information and from one time period to the next, which results from companies not changing their policies and accounting procedures (FASB, 1980; Fedorowicz and Yang, 1998; Libby, Libby & Short, 2009; Spiceland, Sepe & Nelson, 2010). Comparability and consistency also enhance accounting information users' decision making process in regards to benchmarking (FASB, 1980). Thus, individuals are more likely to use/rely on financial statements that lend themselves to between company comparisons and within company analysis. This translates into the following hypotheses:

H4 Financial statements that possess the characteristic of comparability will have a positive association with an individual's intention to use/rely on financial statements.

H5 Financial statements that possess the characteristic of consistency will have a positive association with an individual's intention to use/rely on financial statements.

Finally, we are interested in assessing the influence of the accounting qualitative characteristics on the other determinants (familiarity and social pressure) that affect individuals' intentions, as discussed by Ajzen's theory (1991). Literature in the information system area demonstrates that familiarity is a determinant of individuals' intention to use/rely on a particular system from which they have prior involvement (Davis, 1989; Jackson, Chow & Leitch, 1997). Given that accounting is simply a system of identifying, analyzing, recording, and presenting information, the system's literature can be directly applied to individuals' perception of financial statements. As a result, prior experience and involvement with accounting information should increase individuals' intention and willingness to use financial statements for future decision making. Based on this theoretical association, we propose the following hypothesis:

H6 Familiarity with financial statements will have a positive association with an individual's intention to use/rely on financial statements.

Social pressure is defined as "a person's perception that most people who are important to him think he should or should not perform the behavior in question" (Fishbein & Ajzen 1975: 302). Prior literature shows that individuals' behavior is heavily influenced by the consideration of what others think they should or should not be doing (Lu, Yao & Yu, 2005; Bressler & Bressler, 2006). That is, individuals have the tendency to conform to known views or what they perceive others want them to do. Thus, individuals are more likely to use/rely on financial statements for decision making when they think others are expecting them to do so. Thus, our final proposed hypothesis is:

H7 Social pressure on individuals to use/rely on financial statements will have a positive association with an individual's intention to use/rely on financial statements.

[FIGURE 2 OMITTED]

METHODOLOGY

We developed a survey instrument to measure an individual's intention to rely on financial statements by using Ajzen's (1991) Theory of Planned Behavior. We have seven determinants in our model. The first five determinants, understandability, relevance, reliability, comparability, and consistency, are the qualitative characteristics identified in SFAC No. 2. These five determinants relate to different dimensions of an individual's attitude toward financial statements. The last two determinants, social pressures and familiarity are included within the context of the Theory of Planned Behavior.

We conducted a pilot study to assess both the reliability and the validity of our survey instrument. A total of 35 completed surveys from college students were collected via an online surveyor. We did not discover any conclusive findings in our pilot study because of the limited sample size. However, we received constructive feedback from an expert panel consisting of nine active business researchers. We refined our survey questions based on their recommendations. A copy of the survey instrument used in this study is included in Appendix A. Accounting researchers argue that unless a theory exists to justify the need of using professional subjects, student participants should be the default choice (Peecher & Solomon, 2001; Libby, Bloomfield, & Nelson, 2002). Thus, in the context of our study, the use of student subjects is an appropriate proxy for financial statement users.

Data was collected online by students enrolled in 10 (5 lower level, 1 intermediate level, and 4 upper level) business classes at a large public university located in the southwest part of the U.S. Extra credit was offered to some of the students by their instructors to encourage participation. The combined student enrollment in these 10 classes was 459. A total of 245 completed surveys were collected via an online surveyor. The response rate was 53.4%. All of the responses were usable in our analysis. To check for a non-response bias, we contacted each of the 10 instructors to determine whether there were significant differences in class performance between respondents and non-respondents. Since no significant differences were observed, we concluded that both respondents and non-respondents possessed similar business and accounting backgrounds to complete our survey. The distribution of our student sample was as follows: 54% female and 46% male; 1% freshman, 23% sophomore, 35% junior, 24% senior, and 17% graduate students; 48% accounting major and 52% non-accounting major; 56% of the respondents have 0 to 1 year of professional work experience, 27% have 2 to 4 years of experience, and 17% have more than 5 years of experience. We believe our sample is representative of a broad set of potential and current users of financial statements.

We first performed principal components factor analysis using the varimax rotation method, suppressing factor loadings that were less than 0.40. This analysis is shown in Table 2. This analysis was done to ensure we correctly identified and measured the constructs of our research model. The factors load cleanly except for the comparability and consistency determinants, which both loaded on factor 2 (see Table 2). Thus, it appears that our participants did not view any differences between the determinants of comparability and consistency. This is understandable and not completely unexpected given the interrelatedness of the two determinants. Given the factor loadings for the comparability and consistency constructs, we included the constructs in our subsequent analysis as both one factor and two factors. We report the results of treating the constructs as two factors. However, our results are not affected if the constructs are treated as one factor. All of our determinants have a Cronbach's alpha above 0.7. Nunnally (1978) suggests that a Cronbach's alpha of 0.7 or higher indicates that a construct has good internal consistency. As such, our survey instrument demonstrates an acceptable level of internal consistency.

We conducted an inter-item analysis to ensure that there is appropriate convergent validity among the constructs. Table 3 shows that the overall correlations within constructs are greater than the correlations between constructs. Thus, it provides evidence that there is convergent validity among the various constructs.

We also performed an inter-factor analysis to ensure that there is discriminant validity among our constructs. Table 4 shows that all of the inter-factor correlations are less than the Cronbach alphas. This provides support that there is discriminant validity among the constructs.

We performed confirmatory factor analysis by using LISREL to run the single factor structure for all of our constructs. The results of the single factor analysis are shown in Table 5. The table includes the model's goodness of fit measures of chi-square, p-value, RMSEA, ECVI, NFI, CFI, RMR, GFI, and AGFI for factors that have more than three measurement items. We correlated only a handful of error terms for some of the factors according to the LISREL modification index before reporting the goodness of fit statistics on Table 5. Nevertheless, the NFI and CFI for all of these factors were either one or above 0.90 prior to the correlation of any error items. After the modification process, all of the factors have insignificant chi-squares. Our GFI and AGFI also indicate that the model is a good fit. Thus, taken as a whole, all of the goodness of fit statistics in Table 5 provides support for construct validity.

RESULTS

We used structural equation modeling (SEM) to test the hypothesized relationships among understandability, relevance, reliability, comparability, consistency, familiarity, social pressures, and intention. SEM allowed us to simultaneously analyze all of the relationships between the qualitative factors and individuals' intentions to rely/use financial statements. Figure 3 depicts our LISERL structural model.

Table 6 shows the inferential results of our proposed model from LISERL: adjusted Chi-Square = 1.39, RMSEA = 0.04, GFI = 0.87, AGFI = 0.84, Bentler and Bonett's NFI = 0.93, and Bentler's CFI = 0.97. The goodness of fit measures indicate our proposed research model appropriately depicts the relationship among the constructs of interest. Analysis on the individual relationships within Table 6 indicates that two of our hypotheses are supported. Specifically, we found support that financial statements which possess the characteristic of reliability have a positive association with an individual's intention to use/rely on financial statements (H3). In addition, we also found that familiarity with financial statements has a positive association with an individual's intention to use/rely on financial statements (H6).

The hypothesized relationships between reliability and intention as well as familiarity and intention were statistically significant. The other hypothesized relationships were not statistically supported. However, we noticed that the qualitative characteristic of understandability is nearing significance. Typically, a minimum sample size in order to perform SEM is between 150 and 200 participants. Our sample size is just above this minimum required sample size. Thus, it is our expectation that the understandability determinant would become significant with an increased sample size. Moreover, from a logical perspective, it appears reasonable to presume that individuals will only use (rely on) understandable information for decision making.

We used analysis of variance to further examine our hypotheses by controlling for the potential covariates of gender, years in college, major, and years of professional work experience. We find that major is the only covariate that significantly influenced participants' intention to rely on financial statements (the ANOVA analysis is presented in Table 7). Specifically, students who are majoring in accounting are more likely to have the intention to rely on financial statements than those who are not majoring in accounting. The lack of significance pertaining to the potential covariates provides evidence that our findings are attributable to the characteristics of the conceptual framework versus homogeneity issues with the participant pool. The significance related to the participant's major reinforces our previous SEM finding that familiarity with accounting information plays an important role in determining whether financial statements will be utilized for future decision making.

DISCUSSION AND CONCLUSION

The purpose of our study is to provide an empirical analysis of the criticisms against the FASB's conceptual framework. Our overall results suggest that the current conceptual framework does not adequately align the objectives of financial reporting with the users of financial statements. Nevertheless, our findings have some interesting implications for the conceptual framework and future standard setting.

Our findings suggest that reliability is the only qualitative characteristic that has a positive and statistical significant relationship with intention. The accounting profession has long faced a difficult choice between reliability and relevance in financial reporting, as there is an inherent tradeoff between the two (Vatter, 1947; Paton & Littleton, 1940). Reliable information possesses the characteristics of objectivity and verifiability, which is associated with historical cost accounting. Relevance, on the other hand, pertains to any information that will influence the user's financial decision. Many times the most relevant information is often current or prospective in nature. Thus, we are often left with the impossible task to provide accounting information that maximizes the characteristics of both relevance and reliable since relevant information is not always verifiable.

We expected to see relevance as a significant factor in users' intentions to use/rely on financial statements since the recent accounting standards have moved toward fair value accounting measures, which are considered to be more relevant than reliable information (Ciesielski & Weirich, 2006). However, our results show reliability as a more important factor influencing individuals' intentions to use/rely on financial statements for decision making. We reasoned that the current accounting curriculum could be influencing our results since it is rooted in Paton and Littleton's historical cost approach, which focuses on reliability of information.

In the context of the Theory of Planned Behavior, we find familiarity to be a statistically significant factor influencing an individual's intention to use/rely on financial statements. Thus, as an individual becomes more familiar with financial statements, he or she is more likely to have the intention to use/rely on them when making decisions. Our ANOVA analysis provides further support for this as it indicates that intention to use/rely on financial statements is significantly different between accounting majors and non-accounting majors. This provides some evidence that accounting may have became too difficult for individuals who are not proficient in it to understand. It appears that the movement towards rules-based accounting standards could be a contributing cause for this disparity in intention. That is, the accounting standards have become too complex upon their execution that the average reader of accounting information can no longer discern the main objective of each financial statement element. This finding is troubling since it contradicts the primary objective of accounting, which is to provide useful accounting information for decision making. Accounting information should be useful for all people who want to use/rely on it rather than only being useful to those with a proficient understanding and detailed training. Additionally, under no circumstances, should accounting information provide an advantage to individuals who happen to be experts within the field. Accounting should be a tool and not a barrier.

[FIGURE 3 OMITTED]

LIMITATIONS AND FUTURE RESEARCH

As with any research study, this study is subject to a number of limitations. First, a common criticism of prior studies that examine financial reporting issues is that students do not represent actual users of financial statements in the marketplace. Nevertheless, Elliott, Hodge and Kennedy (2007) found that the use of students as a proxy for investors is a valid methodological choice. As previously discussed, Peecher and Solomon (2001) argue accounting researchers should consider using students as the default experimental subjects unless there is a theory to suggest otherwise. Thus, we believe that our use of student subjects is appropriate and is consistent with prior literature. Second, we did not test the knowledge of our participants in the area of accounting and finance. Such knowledge may influence a person's intention to use/rely on financial statements for decision making. Nevertheless, we believe that all of our participants meet the FASB's criteria of average investors "who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence" (FASB, 1978).

Despite the above limitations, our study contributes to the literature by being the first to empirically examine the FASB's conceptual framework from a user's perspective. The results of our study not only help inform the FASB in their standards setting process, but also pave the way for numerous additional research endeavors. The first question that needs to be addressed is what the conceptual framework should look like if the current one is found to be inadequate. Next, future research could provide greater insight into the positive and negative effects of moving towards a more principles-based approach to accounting standards setting. Then, we could look at the steps that are necessary to move the profession to a principles-based accounting and reporting structure.

Finally, it is worth investigating why our respondents chose reliability over relevance when deciding to use/rely on financial statements. We need to know whether the FASB's movement towards fair value accounting, with a relevance emphasis, is incongruent with financial statements users' expectations. We should also examine whether the selection of reliability is a function of our education curriculum which might need to be adjusted to become more aligned with the current trend in accounting practice.
Appendix A
Survey Instrument

For each of the following Not Very Very
statements, please Indicate how Important Important
important the following
characteristics are in deciding
whether or not you would rely
on financial statements for
making decisions.

Financial statements are 1 2 3 4 5
clearly presented

Financial statements are 1 2 3 4 5
discernable

Financial statements are 1 2 3 4 5
easily understandable

Financial statements are 1 2 3 4 5
comprehendible

Financial statements are 1 2 3 4 5
interpretable

Financial statements make a 1 2 3 4 5
difference in decision making

Financial statements contain
items that are relevant for 1 2 3 4 5
decision making

Financial statements help
predict future outcomes for 1 2 3 4 5
decision making

Financial statements reduce 1 2 3 4 5
uncertainty for decision making

Financial statements provide
information that is timely for 1 2 3 4 5
decision making

Financial statements provide 1 2 3 4 5
information that can be relied
upon

Financial statements represent 1 2 3 4 5
reality

Financial statements are 1 2 3 4 5
verifiable

Financial statements are 1 2 3 4 5
unbiased

Financial statements are 1 2 3 4 5
prepared with integrity

Financial statements are 1 2 3 4 5
comparable across companies

Financial statements can be 1 2 3 4 5
used to compare (similarities
or differences) companies

Financial statements are 1 2 3 4 5
prepared using similar
procedures

Financial statements are 1 2 3 4 5
prepared using similar inputs

Financial statements could be 1 2 3 4 5
used to contrast different
accounting policies

Financial statements are 1 2 3 4 5
prepared in a consistent manner

Accounting methods are applied 1 2 3 4 5
uniformly over time in the
financial statements

Financial statements allow 1 2 3 4 5
users to compare information
from two or more time periods

Financial statements reflect 1 2 3 4 5
that same the accounting
treatment was used for similar
events over time

For each of the following Strongly Strongly
statements, please indicate how Disagree Agree
strongly you feel the following
statements contribute to your
reliance on financial
statements.

I use financial statements 1 2 3 4 5
since everybody else uses them

If I do not use financial
statements, I will be at a 1 2 3 4 5
disadvantage compared to others
who do use them

I use financial statements 1 2 3 4 5
because my friends use them

I use financial statements 1 2 3 4 5
because my colleagues use them

I am familiar with different 1 2 3 4 5
financial statements

I am familiar with various 1 2 3 4 5
aspects of financial statements

I feel capable of interpreting 1 2 3 4 5
the information presented
within financial statements

I feel confident about using 1 2 3 4 5
financial statements for
making decisions

I feel comfortable about 1 2 3 4 5
reading financial statements

I intent to use financial 1 2 3 4 5
statements in the future

I intent to read financial 1 2 3 4 5
statements on a regular basis

I intent to use financial 1 2 3 4 5
statements rather than relying
on the advice of others

Demographic

What is your age?
What is your gender?
What year are you in college?
What is your major?
How many years of professional
work experience do you have?


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Byron Pike, Minnesota State University, Mankato

Lawrence Chui, University of St. Thomas
Table 1 : FASB Definition of the Qualitative Characteristics of
Accounting Information

Understandability Information cannot be useful to decision
 makers who cannot understand it

Relevance Information must be timely and it must
 have predictive or feedback value

Reliability Information must have representational
 faithfulness and it must be verifiable
 and neutral

Comparability Information must enable users to
 identify similarities in and differences
 between two companies

Consistency Information must conform from
 period-to-period with unchanging
 policies and procedures

Table 2: Factor Analysis and Reliability Statistics

 Factors

 1 2 * 3

I feel capable of interpreting the h3 0.89
 information presented within financial
 statements
I am familiar with various aspects of h2 0.83
 financial statements
I feel confident about using financial h4 0.81
 statements for making decisions
I am familiar with different financial h1 0.79
 statements
I feel comfortable about reading h5 0.77
 financial statements

Financial statements are prepared using d3 0.72
 similar procedures
Financial statements can be used to d2 0.70
 compare (similarities or differences)
 companies
Financial statements are comparable d1 0.67
 across companies
Financial statements are prepared using d4 0.67
 similar inputs
Financial statements reflect that same e4 0.62
 the accounting treatment was used for
 similar events over time
Financial statements allow users to e3 0.58
 compare information from two or more
 time periods
Accounting methods are applied uniformly e2 0.51
 over time in the financial statements

Financial statements are comprehendible a4 0.83
Financial statements are interpretable a5 0.78
Financial statements are easily a3 0.75
 understandable
Financial statements are discernable a2 0.56
Financial statements are clearly a1 0.56
 presented

Financial statements provide information c1
 that can be relied upon
Financial statements represent reality c2
Financial statements are unbiased c4 0.43
Financial statements are verifiable c3

I use financial statements because my g3
 friends use them
I use financial statements because my
 colleagues use them
I use financial statements since g1
 everybody else uses them

Financial statements help predict b3
 future outcomes for decision making
Financial statements contain items that b2
 are relevant for decision making
Financial statements make a difference b1
 in decision making

I intent to read financial statements i2
 on a regular basis
I intent to use financial statements in i1
 the future
I intent to use financial statements i3
 rather than relying on the advice of
 others
% of variance explained (total = 65.01%)
Alpha 0.907 0.826
Mean 3.774 4.284
Std. Deviation 0.764 0.625

 Factors

 4 5 6

I feel capable of interpreting the
 information presented within financial
 statements
I am familiar with various aspects of
 financial statements
I feel confident about using financial
 statements for making decisions
I am familiar with different financial
 statements
I feel comfortable about reading
 financial statements

Financial statements are prepared using
 similar procedures
Financial statements can be used to
 compare (similarities or differences)
 companies
Financial statements are comparable
 across companies
Financial statements are prepared using
 similar inputs
Financial statements reflect that same
 the accounting treatment was used for
 similar events over time
Financial statements allow users to
 compare information from two or more
 time periods
Accounting methods are applied uniformly
 over time in the financial statements

Financial statements are comprehendible
Financial statements are interpretable
Financial statements are easily
 understandable
Financial statements are discernable
Financial statements are clearly
 presented

Financial statements provide information 0.76
 that can be relied upon
Financial statements represent reality 0.73
Financial statements are unbiased 0.60
Financial statements are verifiable 0.57

I use financial statements because my 0.89
 friends use them
I use financial statements because my 0.86
 colleagues use them
I use financial statements since 0.83
 everybody else uses them

Financial statements help predict 0.75
 future outcomes for decision making
Financial statements contain items that 0.69
 are relevant for decision making
Financial statements make a difference 0.68
 in decision making

I intent to read financial statements
 on a regular basis
I intent to use financial statements in
 the future
I intent to use financial statements
 rather than relying on the advice of
 others
% of variance explained (total = 65.01%)
Alpha 0.809 0.842 0.700
Mean 4.234 2.487 4.304
Std. Deviation 0.670 0.920 0.576

 Factors

 7 Label

I feel capable of interpreting the Familiarity
 information presented within financial
 statements
I am familiar with various aspects of (FAMI)
 financial statements
I feel confident about using financial
 statements for making decisions
I am familiar with different financial
 statements
I feel comfortable about reading
 financial statements

Financial statements are prepared using Comparability
 similar procedures
Financial statements can be used to (COMP)
 compare (similarities or differences)
 companies
Financial statements are comparable
 across companies
Financial statements are prepared using
 similar inputs
Financial statements reflect that same Consistency
 the accounting treatment was used for
 similar events over time
Financial statements allow users to (CONS)
 compare information from two or more
 time periods
Accounting methods are applied uniformly
 over time in the financial statements

Financial statements are comprehendible Understandability
Financial statements are interpretable (UNDE)
Financial statements are easily
 understandable
Financial statements are discernable
Financial statements are clearly
 presented

Financial statements provide information Reliability
 that can be relied upon
Financial statements represent reality (RELI)
Financial statements are unbiased
Financial statements are verifiable

I use financial statements because my Social pressures
 friends use them
I use financial statements because my (SOCI)
 colleagues use them
I use financial statements since
 everybody else uses them

Financial statements help predict Relevance
 future outcomes for decision making
Financial statements contain items that (RELE)
 are relevant for decision making
Financial statements make a difference
 in decision making

I intent to read financial statements 0.78 Intentions
 on a regular basis
I intent to use financial statements in 0.74 (INTE)
 the future
I intent to use financial statements 0.62
 rather than relying on the advice of
 others
% of variance explained (total = 65.01%)
Alpha 0.774
Mean 3.793
Std. Deviation 0.830

* Comparability Factor - Alpha = 0.757, mean = 4.0793, Std. Deviation
= 0.6578

* Consistency Factor - Alpha = 0.709, mean = 4.2721, Std. Deviation
= 0.61357

Table 3: Inter-Item Correlation

 a1 a2 a3 a4 a5 b1 b2

a1 1.00 0.44 0.53 0.52 0.44 0.31 0.44
a2 0.44 1.00 0.37 0.40 0.37 0.19 0.20
a3 0.53 0.37 1.00 0.62 0.55 0.20 0.29
a4 0.52 0.40 0.62 1.00 0.63 0.23 0.27
a5 0.44 0.37 0.55 0.63 1.00 0.23 0.22
b1 0.31 0.19 0.20 0.23 0.23 1.00 0.49
b2 0.44 0.20 0.29 0.27 0.22 0.49 1.00
b3 0.29 0.12 0.19 0.28 0.23 0.41 0.42
c1 0.44 0.24 0.32 0.34 0.29 0.25 0.46
c2 0.36 0.26 0.24 0.30 0.23 0.24 0.35
c3 0.46 0.34 0.41 0.40 0.31 0.26 0.36
c4 0.28 0.28 0.38 0.27 0.23 0.20 0.33
d1 0.31 0.29 0.30 0.33 0.20 0.11 0.22
d2 0.26 0.21 0.22 0.21 0.21 0.20 0.19
d3 0.29 0.13 0.24 0.15 0.19 0.20 0.27
d4 0.22 0.22 0.19 0.14 0.18 0.19 0.28
e2 0.31 0.30 0.37 0.32 0.30 0.22 0.20
e3 0.35 0.23 0.26 0.32 0.26 0.24 0.37
e4 0.27 0.25 0.21 0.22 0.23 0.27 0.27
g1 (0.02) (0.07) (0.01) 0.03 (0.08) 0.03 (0.05)
g3 (0.08) (0.08) (0.09) (0.05) (0.08) (0.13) (0.13)
g4 (0.02) (0.04) (0.07) (0.00) (0.04) (0.10) (0.04)
h1 0.21 0.08 0.21 0.17 0.26 0.16 0.12
h2 0.28 0.14 0.21 0.24 0.26 0.22 0.21
h3 0.23 0.10 0.13 0.14 0.16 0.18 0.06
h4 0.22 0.10 0.13 0.12 0.17 0.24 0.04
h5 0.30 0.16 0.18 0.24 0.23 0.21 0.10
i1 0.33 0.22 0.19 0.23 0.27 0.15 0.16
i2 0.27 0.17 0.15 0.21 0.29 0.15 0.16
i3 0.23 0.11 0.12 0.16 0.19 0.13 0.12

 b3 c1 c2 c3 c4 d1 d2

a1 0.29 0.44 0.36 0.46 0.28 0.31 0.26
a2 0.12 0.24 0.26 0.34 0.28 0.29 0.21
a3 0.19 0.32 0.24 0.41 0.38 0.30 0.22
a4 0.28 0.34 0.30 0.40 0.27 0.33 0.21
a5 0.23 0.29 0.23 0.31 0.23 0.20 0.21
b1 0.41 0.25 0.24 0.26 0.20 0.11 0.20
b2 0.42 0.46 0.35 0.36 0.33 0.22 0.19
b3 1.00 0.32 0.19 0.26 0.21 0.22 0.13
c1 0.32 1.00 0.63 0.52 0.53 0.37 0.19
c2 0.19 0.63 1.00 0.41 0.40 0.30 0.26
c3 0.26 0.52 0.41 1.00 0.59 0.43 0.24
c4 0.21 0.53 0.40 0.59 1.00 0.49 0.28
d1 0.22 0.37 0.30 0.43 0.49 1.00 0.51
d2 0.13 0.19 0.26 0.24 0.28 0.51 1.00
d3 0.27 0.36 0.28 0.38 0.39 0.44 0.40
d4 0.32 0.30 0.20 0.28 0.31 0.35 0.31
e2 0.16 0.35 0.37 0.42 0.38 0.40 0.39
e3 0.14 0.32 0.28 0.37 0.36 0.39 0.40
e4 0.19 0.29 0.29 0.44 0.39 0.39 0.32
g1 0.02 (0.02) (0.02) (0.00) (0.02) 0.13 (0.06)
g3 (0.08) (0.04) (0.06) (0.11) (0.08) 0.07 (0.09)
g4 (0.05) 0.01 (0.08) (0.03) (0.08) 0.11 (0.05)
h1 0.03 0.08 (0.05) 0.16 0.05 0.04 0.07
h2 0.03 0.10 0.05 0.23 0.09 0.08 0.09
h3 (0.01) (0.03) (0.04) 0.18 (0.02) 0.03 0.12
h4 0.10 (0.04) (0.04) 0.17 0.00 0.03 0.15
h5 0.05 (0.02) (0.03) 0.21 0.04 0.09 0.12
i1 0.11 0.23 0.05 0.34 0.22 0.17 0.09
i2 0.14 0.14 0.06 0.24 0.12 0.16 (0.02)
i3 0.02 0.21 0.15 0.26 0.14 0.14 0.09

 d3 d4 e2 e3 e4 g1 g3

a1 0.29 0.22 0.31 0.35 0.27 (0.02) (0.08)
a2 0.13 0.22 0.30 0.23 0.25 (0.07) (0.08)
a3 0.24 0.19 0.37 0.26 0.21 (0.01) (0.09)
a4 0.15 0.14 0.32 0.32 0.22 0.03 (0.05)
a5 0.19 0.18 0.30 0.26 0.23 (0.08) (0.08)
b1 0.20 0.19 0.22 0.24 0.27 0.03 (0.13)
b2 0.27 0.28 0.20 0.37 0.27 (0.05) (0.13)
b3 0.27 0.32 0.16 0.14 0.19 0.02 (0.08)
c1 0.36 0.30 0.35 0.32 0.29 (0.02) (0.04)
c2 0.28 0.20 0.37 0.28 0.29 (0.02) (0.06)
c3 0.38 0.28 0.42 0.37 0.44 (0.00) (0.11)
c4 0.39 0.31 0.38 0.36 0.39 (0.02) (0.08)
d1 0.44 0.35 0.40 0.39 0.39 0.13 0.07
d2 0.40 0.31 0.39 0.40 0.32 (0.06) (0.09)
d3 1.00 0.62 0.33 0.34 0.40 (0.00) (0.01)
d4 0.62 1.00 0.31 0.26 0.32 0.08 0.00
e2 0.33 0.31 1.00 0.35 0.47 0.05 0.01
e3 0.34 0.26 0.35 1.00 0.52 (0.05) (0.11)
e4 0.40 0.32 0.47 0.52 1.00 0.05 (0.01)
g1 (0.00) 0.08 0.05 (0.05) 0.05 1.00 0.61
g3 (0.01) 0.00 0.01 (0.11) (0.01) 0.61 1.00
g4 0.03 0.04 (0.01) (0.05) (0.00) 0.58 0.72
h1 0.04 0.03 0.06 0.13 0.07 0.15 0.09
h2 0.03 0.01 0.11 0.22 0.18 0.10 0.02
h3 (0.02) (0.05) 0.03 0.17 0.06 0.12 0.04
h4 0.00 (0.05) 0.02 0.13 0.05 0.17 0.08
h5 0.04 0.08 0.06 0.23 0.06 0.19 0.06
i1 0.13 0.12 0.17 0.19 0.10 0.04 (0.03)
i2 0.08 0.09 0.11 0.10 0.06 0.08 0.06
i3 0.09 0.06 0.17 0.16 0.08 0.04 0.02

 g4 h1 h2 h3 h4 h5 i1

a1 (0.02) 0.21 0.28 0.23 0.22 0.30 0.33
a2 (0.04) 0.08 0.14 0.10 0.10 0.16 0.22
a3 (0.07) 0.21 0.21 0.13 0.13 0.18 0.19
a4 (0.00) 0.17 0.24 0.14 0.12 0.24 0.23
a5 (0.04) 0.26 0.26 0.16 0.17 0.23 0.27
b1 (0.10) 0.16 0.22 0.18 0.24 0.21 0.15
b2 (0.04) 0.12 0.21 0.06 0.04 0.10 0.16
b3 (0.05) 0.03 0.03 (0.01) 0.10 0.05 0.11
c1 0.01 0.08 0.10 (0.03) (0.04) (0.02) 0.23
c2 (0.08) (0.05) 0.05 (0.04) (0.04) (0.03) 0.05
c3 (0.03) 0.16 0.23 0.18 0.17 0.21 0.34
c4 (0.08) 0.05 0.09 (0.02) 0.00 0.04 0.22
d1 0.11 0.04 0.08 0.03 0.03 0.09 0.17
d2 (0.05) 0.07 0.09 0.12 0.15 0.12 0.09
d3 0.03 0.04 0.03 (0.02) 0.00 0.04 0.13
d4 0.04 0.03 0.01 (0.05) (0.05) 0.08 0.12
e2 (0.01) 0.06 0.11 0.03 0.02 0.06 0.17
e3 (0.05) 0.13 0.22 0.17 0.13 0.23 0.19
e4 (0.00) 0.07 0.18 0.06 0.05 0.06 0.10
g1 0.58 0.15 0.10 0.12 0.17 0.19 0.04
g3 0.72 0.09 0.02 0.04 0.08 0.06 (0.03)
g4 1.00 0.17 0.11 0.14 0.15 0.16 0.12
h1 0.17 1.00 0.80 0.66 0.61 0.59 0.42
h2 0.11 0.80 1.00 0.71 0.57 0.60 0.40
h3 0.14 0.66 0.71 1.00 0.74 0.70 0.44
h4 0.15 0.61 0.57 0.74 1.00 0.64 0.44
h5 0.16 0.59 0.60 0.70 0.64 1.00 0.47
i1 0.12 0.42 0.40 0.44 0.44 0.47 1.00
i2 0.18 0.43 0.44 0.39 0.40 0.43 0.72
i3 0.07 0.28 0.24 0.25 0.32 0.32 0.42

 i2 i3

a1 0.27 0.23
a2 0.17 0.11
a3 0.15 0.12
a4 0.21 0.16
a5 0.29 0.19
b1 0.15 0.13
b2 0.16 0.12
b3 0.14 0.02
c1 0.14 0.21
c2 0.06 0.15
c3 0.24 0.26
c4 0.12 0.14
d1 0.16 0.14
d2 (0.02) 0.09
d3 0.08 0.09
d4 0.09 0.06
e2 0.11 0.17
e3 0.10 0.16
e4 0.06 0.08
g1 0.08 0.04
g3 0.06 0.02
g4 0.18 0.07
h1 0.43 0.28
h2 0.44 0.24
h3 0.39 0.25
h4 0.40 0.32
h5 0.43 0.32
i1 0.72 0.42
i2 1.00 0.46
i3 0.46 1.00

Table 4: Inter-Factor Corrections, Reliabilities, and Covariances

Constructs Mean SD COMP CONS FAMI RELE

Comparability 4.08 0.66 (0.76) 0.23 # 0.03 # 0.14 #
Consistency 4.27 0.61 0.58 (0.71) 0.07 # 0.12 #
Familiarity 3.77 0.76 0.07 0.15 (0.91) 0.07 #
Relevance 4.30 0.58 0.36 0.34 0.17 (0.70)
Reliability 4.23 0.67 0.52 0.56 0.07 0.43
Social Pressures 2.49 0.92 0.04 (0.02) 0.16 (0.09)
Understandability 4.28 0.63 0.38 0.46 0.28 0.39
Intentions 3.79 0.83 0.16 0.19 0.54 0.18

Constructs RELI SOCI UNDE INTE

Comparability 0.23 # 0.02 # 0.16 # 0.09 #
Consistency 0.23 # (0.01) # 0.18 # 0.1 #
Familiarity 0.04 # 0.11 # 0.13 # 0.34 #
Relevance 0.17 # (0.05) # 0.14 # 0.09 #
Reliability (0.81) (0.04) # 0.22 # 0.14 #
Social Pressures (0.07) (0.84) (0.04) # 0.07 #
Understandability 0.51 (0.07) (0.83) 0.17 #
Intentions 0.25 0.10 0.32 (0.77)

Cronbach alpaha's in (). Covariances in italics.

Note: Values in italics indicated with #.

Table 6: Parameter Estimates of Structural Equations Model

Parameters Path Standardized t-value p-value
 Estimates

Test of Hypotheses

Understandability H1 0.17 1.12 0.132
 to Intention
Relevance to Intention H2 -0.05 -0.23 0.409
Reliability to H3 0.54 2.38 0.009
 Intention
Comparability to H4 0.03 0.08 0.468
 Intention
Consistency to H5 -0.43 -0.78 0.218
 Intention
Familiarity to H6 0.75 6.93 <.001
 Intention
Social Pressures to H7 0.05 0.72 0.236
 Intention

Global Model Fit Diagnostics

Chi-Square (df) 522.84 (377)
p-value 0
Adjusted Chi-Square 1.39
RMSEA 0.04
GFI 0.87
AGFI 0.84
Bentler and Bonett's 0.93
 NFI
Bentler's CFI 0.97

Table 7: Single Factors Structures using LISREL

Constructs Alpha Chi-Square Df p-value RMSEA ECVI
 Score

Comparability 0.757 - 2 0.99900 -
Consistency 0.709 - - 1.00000 -
Familiarity 0.907 0.65 5 0.98538 - 0.100
Relevance 0.700 - - 1.00000 -
Reliability 0.809 1.26 2 0.53266 - 0.074
Social Pressures 0.842 - - 1.00000 -
Understandability 0.826 0.31 5 0.99754 - 0.100
Intentions 0.774 - - 1.00000 -

Constructs NFI CFI RMR GFI AGFI

Comparability
Consistency
Familiarity 1.000 1.000 0.007 1.000 1.000
Relevance
Reliability 1.000 1.000 0.015 1.000 0.990
Social Pressures
Understandability 1.000 1.000 0.003 1.000 1.000
Intentions

Table : ANOVA Statistics

 Sum of df Mean F Sig.
 Squares Square

Between Groups 2.9950 1 2.9950 4.4067 0.0368
Within Groups 165.1524 243 0.6796
Total 168.1474 244
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Title Annotation:Financial Accounting Standards Board
Author:Pike, Byron; Chui, Lawrence
Publication:Academy of Accounting and Financial Studies Journal
Geographic Code:1USA
Date:Jan 1, 2012
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