The Predictive-Ability Criterion and User Prediction Models.

Abstract This article focuses on various models of auditing. One property of accounting numbers which has received a great deal of attention in the past few years is that of predictive ability. Research conducted to date has tended to view predictive ability as an impersonal criterion for the evaluation of accounting numbers. Behavioral reactions to particular sets of accounting numbers by particular decision-makers have typically not been investigated by predictive-ability researchers. However, a committee of the American Accounting Association recently introduced a model which, according to the committee, provides the potential for evaluating internal accounting numbers by examination of the utilization of those numbers by decision-makers. The purpose of this article is to provide a more complete discussion of the proposed model and, more importantly, to indicate potential hazards and other considerations in the implementation of the committee's proposal. The discussion draws heavily upon certain portions of the psychology literature which deal with the manner in which individuals utilize numerous pieces of data in making complex judgments or predictions.