Search results

This paper investigates the factors influencing the future of the IASB, using as the point of departure, a review of its historical progression towards becoming the global accounting standard‐setting authority. It concludes that the IASB is an organisation vulnerable to (1) political lobbying of influential institutions, (2) US accounting authorities decision makers, (3) potential accounting scandals, and (4) cultural differences resulting in the misapplication of its standards around the world. Such factors should be borne in mind when charting the next steps for the IASB and in evaluating the comparability and quality of accounts produced under IFRSs around the world.

The current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion.

The study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables.

The paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors’ risk assessments.

The authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006.

The study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change.

The study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.

According to the SEC, the proposed roadmap for adopting principles-based International Financial Reporting Standards (IFRS) is still a priority. The adoption of IFRS will ultimately demand greater emphasis on practitioner judgment (Mintz, 2010). This chapter focuses on the need for building the judgment skills of the practitioner. Our methodology follows a three-step process. We start with accounting standards, reviewing similarities and differences between “rules-based” and “principles-based” standards and conclude that, while applying any standard requires judgment, applying principles-based standards requires more judgment. We then focus on preparer incentives that can influence this requisite judgment. We use the “fraud triangle” to analyze the influence of incentives on judgment under each standards setting approach. Our third and most important step involves equipping practitioners to make judgments in the presence of incentives. We present and discuss a model that considers economic, social (legal), and ethical dimensions for making principled judgments in the presence of incentives and advocate-improved education for accountants in implementing that model.

This paper addresses the role of principles-based accounting standards as a potential mechanism for reducing firms' time delay of annual reporting disclosure while improving the timeliness of accounting information. The paper also contributes to the existing literature by addressing the mediating effects of the financial reporting complexity and the audit workload on the link between principles-based accounting standards and the time delay of annual reporting disclosure.

The focus is placed on an unbalanced panel of 20,943 samples over the period of 2007–2017.

The results show that the more principles-based the accounting standards are, the lower the time delay of annual reporting disclosure is, and the timelier the disclosure of accounting information is. The relationship between the two is more significant especially in the first two months after the end of the fiscal year. The findings are all robust after controlling for a series of sensitivity checks and endogenous concerns. From the mediating effect results, the authors find that principles-based accounting standards decrease the financial reporting complexity and the audit workload which in turn can help lower time delay of annual reporting disclosure. In addition, the negative effect of principles-based accounting standards on the time delay of annual reporting disclosure is more significant in the case that the company has “good news” including with no losses and receiving the standard auditing opinions. The results confirm the law of “good news announces early, bad news announces late.” Furthermore, the moderating effect results show that the higher the economic policy uncertainty index and the legal environment index, the lower the benefit of principles-based accounting standards to the timeliness of annual reports. The results of the economic consequences of timeliness suggest that the timely disclosure of accounting reporting will bring greater market reaction and contain more information, and the information of companies that disclose annual reports timely are more transparent.

This paper studies the impact of accounting standards on the timeliness of annual report disclosure, which enriches the literature in the field of macro policies and micro-enterprise behaviors.

The purpose of this study is to examine accountants’ application of principles-based accounting standards to a lawsuit contingency recognition scenario and the potential role that accounting work experience plays in mitigating accountants’ aggressive financial reporting.

This study presents a 2 × 2 between-subjects experiment with accounting experience (measured as high vs low) and contingency type (asset vs liability) as independent variables and accountants’ lawsuit contingency conservatism likelihood judgments and US$ recognition recommendations as the dependent variables.

Consistent with expectations, findings indicate that more experienced accountants are more likely to recognize liabilities and items that decrease income and less likely to recognize assets and items that increase income than their less experienced counterparts. Accountants also recommended recognizing lower (higher) mean US$ amounts for assets (liabilities), as expected. Supplemental analyses show a significant moderated-mediated effect whereby the interactive effect of contingency type and accounting experience on individuals’ US$ recognition recommendations is partially mediated through the nature of the conservatism judgment.

The finding that less experienced accountants report more aggressively than more experienced accountants when applying a principles-based standard supports the call for using judgment frameworks in imprecise standard settings and suggests that firms may want to ensure that accountants with adequate work experience are on hand as U.S. generally accepted accounting principles become more principles-based over time.

To the best of the authors’ knowledge, this study is the first to examine the impact of accounting work experience on the application of principles-based accounting standards and the mitigation of aggressive financial reporting. Our supplemental analyses also identify the nature of the conservatism judgment as a mediating mechanism which partially explains more experienced accountants’ US$ asset and liability recognition recommendations.

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.

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.

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

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.

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.

Purpose – The paper presents a content analysis of the 2009 Exposure Draft of Code of Ethics for Professional Accountants in China. It aims to investigate how equivalently the Chinese Institute of Certified Public Accountants (CICPA) adopts the International Federation of Accountants (IFAC) Code with certain adjustments due to specific national circumstances. The investigation is intended to highlight the principles-based conceptual framework approach to settlement of ethical standards and regulation for professional conduct.

Design/Methodology/Approach – Regarding the codes of ethics for professional accountants as a genre of discourse text, this paper applies a content analysis method to the investigation of how the newly revised Code of Ethics for Professional Accountants in China adopts the IFAC Code of the same type. Both semantic content and presentation format are considered in the content analysis.

Findings – This study puts forward the argument that even though CICPA claims to have equivalently adopted the principles-based conceptual framework of the IFAC ethical codification, the rigid legalistic presentation format might, however, deviate from the newly revised codification of CICPA from ethical principles to regulatory rules. Our findings prove a practical and nation-specific form of combining direct import and legal enhancement at a time when the Chinese accounting profession is on its way to converging with the IFAC Code of Ethics.

Research limitations/Implications – One limitation of the current study is the lack of information about the motivation of CICPA in adopting the principles-based conceptual framework approach to ethical codification, besides the pragmatic needs of global economic and business environments. Also, the current study focuses its comparison on IFAC and CICPA, without limited consideration of differences in cultural traits.

Practical implications – Content analysis results and conclusions of the study might render pragmatic the implications for future adoptions of the IFAC Code by various national or regional professional bodies.

Originality/Value – This paper proposes a content analysis, in terms of semantic units and legislative formats in ethical codification documents, to identify the principles-based conceptual framework approach in the IFAC and CICPA codes of ethics.

Government reforms have seen shifts from rules-based to principles-based risk regulatory governance. This paper examines the effects of principles-based risk regulatory reforms on public sector risk management (RM) and management control practices in public sector organizations (PSOs).

The principles-based regulation focuses on providing autonomy to PSOs while maintaining control over their actions without direct intervention. This resonates with Foucault's notion of how modern forms of governments operate. The research is informed by Foucault's concept of governmentality. The authors conducted a qualitative field study of an Australian PSO, gathering and analysing data from interviews, focus groups, and archival documents.

The findings show the capillary modes by which principles-based risk regulatory regime penetrates and works with management control practices in pursuit of regulatory goals within the PSO the authors studied. In addition, the authors find that the principles-based approach (focusing on autonomy) and rules-based approach (focusing on control) are not opposites in kind and effect but rather, autonomy should be understood as a central pillar of control. Furthermore, the findings show how cultural controls and formal controls are not in conflict but are interconnected in RM practices, with cultural controls providing control architecture for RM and formal control translating the control architecture into routines. Finally, the study provides insights into how enterprise risk management (ERM) provides capabilities for and routinizes RM practices in a PSO and the management control systems (MCS) that enabled this to occur.

The paper provides novel insights into how MCS are infiltrated, mobilized and deployed to enact principles-based risk regulatory reforms. These insights are useful for regulators, practitioners and researchers.

This chapter investigates whether jurors, in their attribution of auditor responsibility, may be inappropriately influenced by the client use of a principles-based accounting standard, even if this standard is properly applied. Following prior research on questionable auditor conduct and its subsequent evaluation by juries, which is often subject to hindsight and outcome bias, this chapter examines whether an auditor's legal liability increases when its client uses principles-based accounting standards, by conducting a controlled experiment with 124 qualified jurors serving a county circuit court. Each juror is properly instructed and provided one of four different cases, obtained by manipulating two levels of an accounting standard, one principles-based and one rules-based, and by manipulating two subsequent client-loss outcomes, one moderately negative and one severely negative. This study finds jurors evaluate auditors more negatively if auditors have relied on a principles-based accounting standard. This attribution is influenced by hindsight bias and the perceived risk-taking responsibility of the investor, but independent of the client-loss outcome severity. These results contribute to the discussion of adopting or converting to the principles-based International Financial Reporting Standards (IFRS) by the United States.