Effect of Principles-Based versus Rules-Based Standards and Auditor Type on Financial Managers’ Reporting Judgments
Accounting Review, Vol. 85, pp. 1325-1346, 2010
University of Alberta School of Business Research Paper No. 2013-687
37 Pages Posted: 5 Jul 2009 Last revised: 12 Jun 2013
Date Written: June 2, 2009
Abstract
Managers sometimes implement accounting standards (such as the lease standard) opportunistically to move debt off balance-sheet. Regulators and standard setters are considering the adoption of principles-based accounting standards to reduce such opportunism. However, there are lingering concerns about whether principles-based standards can be properly implemented and enforced. We report results of an experiment where highly experienced financial managers, with incentives to structure a transaction off balance sheet, take a reporting position on how a lease is to be disclosed. We manipulate the type of GAAP (principles-based, rules-based) and the type of auditor (client-oriented, principles-oriented, or rules-oriented). Our results show that a move towards more principles-based standards is likely to result in improved financial reporting quality only when there is a corresponding shift in auditors’ mindsets towards beings more principles-oriented.
Keywords: principles-based standards, rules-based standards, auditor type, off balance sheet debt, transaction structuring
JEL Classification: M41
Suggested Citation: Suggested Citation