Relevance and reliability in financial statement assessments

Kathryn Kadous, professor of accounting

A significant marker of a leading business school is the creation of new knowledge. Goizueta faculty, using rigorous methodologies, focus on researching important problems that affect the practice of business.The following is a sampler of recently created new knowledge.

Kathryn Kadous, professor of accounting, Lisa Koonce (UT Austin), and Jane M. Thayer 08PhD (UGA) research how financial statement users apply the constructs of relevance and reliability (or “representational faithfulness”) as important qualities of financial information. Conducting experiments set within the fair value context, the researchers test the idea that financial statement users conflate these two constructs when judging the relevance of fair value measurement, and they find that users do not view relevance and reliability as independent constructs.

“The relationship between assessed relevance and assessed reliability is unidirectional,” the authors write, “in that factors underlying reliability influence judgments of relevance, but factors underlying relevance do not influence judgments of reliability.” The findings are important because inappropriate assessments of relevance can influence firm valuation; they are also particularly meaningful in the context of fair value, because such measurements can vary widely in reliability. The Accounting Review (July 2012).

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