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Principles-based versus rules-based: accounting standards precision and financial restatements in China

Shungen Luo (School of Economics and Management, Southwest Jiaotong University, Chengdu, China)
Fei Song (School of Economics and Management, Southwest Jiaotong University, Chengdu, China)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 13 September 2022

Issue publication date: 20 October 2022

360

Abstract

Purpose

This study tests the effect of accounting standards precision on financial restatements and the influence of accounting standards precision on different types of restatements (including errors and irregularities). What is more, the heterogeneity between accounting standards precision and financial restatements is verified in this paper. In the further analyses, the authors also examine the mediating roles and moderating roles on the correlation between accounting standards precision and financial restatements.

Design/methodology/approach

The focus is placed on an unbalanced panel of 18,766 samples over the period of 2007–2017.

Findings

The authors find that firms' restatements decrease when standards are more principles-based (low accounting standards precision). Especially, irregularities significantly decrease when firms' standards are more principles-based. What's more, the negative relationship between principles-based standards and restatements is more significant in “big four” accounting firms. Moreover, from the mediating effect results, the authors find that low accounting standards precision decreases a firm's financial reporting complexity and increases equity restriction, which in turn can help decreasing its financial misreporting. From the moderating effect results, the authors find that the higher the TOP1 and the more analysts following the firm, the higher the benefit of accounting standards precision to misstatements.

Originality/value

The results of this study provide a theoretical reference for accounting standard setters and are helpful to inform investors and regulators about the influence of Chinese accounting standards on restatements.

Keywords

Acknowledgements

The authors would like to thank the staff of the magazine, the editor-in-chief, the associate editor and anonymous reviewers for their help in this paper. And the authors would like to thank Jianan Zhou for the guidance on this paper.

Citation

Luo, S. and Song, F. (2022), "Principles-based versus rules-based: accounting standards precision and financial restatements in China", Asian Review of Accounting, Vol. 30 No. 4, pp. 581-615. https://doi.org/10.1108/ARA-09-2021-0177

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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