The purpose of this paper is to explore whether principles-based vs rules-based accounting standards have an effect on measures of financial reporting quality and earnings management strategies.
This study uses a firm-year-specific variable that captures the extent to which firms’ accounting and operating behavior is affected by the characteristics of a specific standard in the USA. Measures of absolute accruals, financial misconducts, signed abnormal accruals and abnormal cash flows are used to assess the effects.
The results show that absolute magnitude of accruals and probability of financial misconduct is lower, and accrual earnings management is higher when firms’ standards are more based on principles. The study also suggests that potentially costlier real earnings management is a consequence of rules-based standards.
This study relies heavily on measures from the prior accounting literature, hence, care has been exercised in generalizing the findings.
This study has direct implications for a number of stakeholders, including standard setters, policymakers, securities regulators, researchers, investors, financial statement preparers and auditors. For example, the future development of accounting standards can be supported by the empirical conclusions in this study together with previous standard-setting ambitions, commentaries, experiments and analytical work.
This study extends prior single-country studies on reporting quality and cross-country studies on transition effects of firms switching from local to International Accounting Standards by observing the impact of accounting standard characteristics on additional measures of reporting quality and accrual as well as real earnings management when holding institutional factors constant. The study also offers archival evidence complementing prior commentaries, experiments and analytical work.
The author would like to thank the journal Editor, two anonymous journal referees, Josué Braga, Jesper Haga and Dan Givoly for their insightful comments that have greatly benefitted the paper. The author is also grateful for the financial support from the Foundation for Economic Education (Liikesivistysrahasto), Society of Swedish Literature in Finland and Suomen Arvopaperimarkkinoiden Edistämissäätiö.
Sundvik, D. (2019), "The impact of principles-based vs rules-based accounting standards on reporting quality and earnings management", Journal of Applied Accounting Research, Vol. 20 No. 1, pp. 78-93. https://doi.org/10.1108/JAAR-05-2018-0063Download as .RIS
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