A Comparative Analysis of Auditor, Manager and Financial Analyst Interpretaions of SFAS 5 Disclosure Guidelines

Abstract

This study examines empirically whether users of financial statements (proxied by financial analysts), as well as the managers who prepare the financial statements and the external auditors who certify or qualify the managers' disclosure decisions ascribe different interpretations to the SFAS 5 disclosure criteria. We find: (1) financial analysts are, on average, more conservative than managers and auditors in their numerical interpretations of both the remote and probable verbal phrases; (2) managers and auditors share very similar numerical interpretations of these verbal phrases; (3) when the auditors sample is partitioned into audit partners and audit managers subgroups, the audit partners' numerical interpretations of the remote region are between those of managers and users, whereas audit managers align their numerical interpretations with those of managers. Our results imply that auditors, as a group, are more responsive to managers than to users, but audit partners are more objective in their interpretations of the remote region than audit managers. There is also the danger that preparers of financial statements may omit loss contingency information that users consider valuable.