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The measurement of meaning is an important research area in accounting, since the absence of a shared meaning between producer and user may have damaging decision-relevance consequences. This article focuses on the manner in which the narrative message is presented in accounting and difficulties and differences in its interpretation for users of varying degrees of accounting sophistication. The usefulness of narrative disclosures will depend partly on the complexity of the display (their readability) and also on the capability of users in discerning the appropriate meaning (their understanding). If the message intended by the preparers of accounting disclosures is to be successfully conveyed the receiver must be able both to read and understand it.
The pioneering work of Haried (1972. 1973) and Houghton (1987a, 1987b, 1988) has largely been word-based and restricted to financial statement vocabulary. Haried (1972) used the antecedent-consequent technique to measure the denotative meaning of accounting terminology (i.e. perceptions of an objective definition of events) and used the semantic-differential to measure connotative meaning (i.e. subjective attitudes towards the same events). Houghton (1987a) used the semantic differential technique to measure inter-temporal changes in connotative meaning and Houghton (1987b) demonstrates a lack of shared meaning for the concept "true and fair view" between accountants and shareholders. Oliver (1974) extended the scope of Haried's studies from accounting statement terminology to the concepts underlying their construction, demonstrating a lack of communication between producers and users, and marked differences in interpretation between accounting academics and other groups.
This article builds on this initial work by extending word-based research from accounting concepts and accounting statement terminology to the narrative content of accounting disclosures.
Adelberg and Razek (1984) make no distinction between the terms "readable" and "understandable". Jones (1988) documents the fundamental premise in readability studies in the financial literature, in that readability supposedly reflects understandability. Conventional readability measures used in the analysis of narrative statements may be inappropriate, in that they are not measuring the underlying complexity of the narrative. The understandability or comprehensibility of a narrative passage may be different to its readability and the latter might frequently be used erroneously as a proxy for the former. Here it is suggested that accounting research which treats understandability and readability synonymously is not justified by demonstrating that the difference...