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.

This study aims to evaluate whether the Big-4’s commenting efforts influence the characteristics of Financial Accounting Standards Board’s (FASB’s) Final_Standards using the content of their comment letters. Whether auditors lobby standard-setters to help their clients or to help themselves and whether they are successful are questions highly relevant to issues of auditor independence and audit effectiveness.

Based on components of Mergenthaler (2009), this study develops a rules-based continuum change score to measure how much more (less) rules-based a Final_Standard is compared to its exposure draft to evaluate the influence of the Big-4 on the FASB’s standard-setting for 63 accounting standards.

The findings show that extensive comment letters and increased uncertainty language are associated with increases in the rules-based attributes included in Final_Standards. These results suggest the Big-4 prioritize a reduction in their own litigation risk over the possible preferences of their clients for less rigid standards. Moreover, the results are consistent with their comment letters influencing the FASB’s decision to include more rules-based attributes in Final_Standards.

This study develops a potential proxy for audit risk by assessing the changes in the rules-based characteristics of proposed accounting standards and using the content of the comment letters to evaluate whether the Big-4 accounting firms may influence the FASB’s Final_Standards. Overall, this study provides a unique perspective on the influence of constituents on the FASB’s standard-setting.

Multiple stakeholders in the financial reporting process have articulated concerns over the rules-based orientation that U.S. accounting standards have adopted. Many argue that a more principles-based approach to standards setting, typified by international accounting standards, would improve the quality of financial reporting and strengthen the auditor's position when dealing with client pressure, thereby enabling a focus on transparency and fairness of financial reports. In early 2009, the U.S. appeared poised to transition U.S. accounting standards to international accounting standards. The transition decision was made after the recommendations of the SEC Advisory Committee on Improvements to Financial Reporting (i.e., SEC Pozen Committee) publicly expressed strong support in its final report (SEC, 2008a). The SEC in turn issued its “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers on November 14, 2008” (SEC, 2008b) outlining the transition procedures. However, with Shapiro taking over as chairperson of the SEC, this move now appears less likely pending a stronger review of how principles-based international standards may impact the strength of financial regulatory oversight – a potential delay met with disdain by the pro principles-based European regulatory community (Doran, 2009). While transition to international standards continues to progress, little research examining whether principles-based standards affect auditor decision-making has been conducted. The purpose of this study is to explore the impact of principles- vs. rules-based standards on auditors' willingness to allow preparers leeway in reporting practices and to consider how auditors' decision behavior is influenced by potential client pressure and/or opposing pressure from the SEC. Based on a sample of 114 experienced auditors, the results show that auditors are more willing to allow clients to manage earnings under rules-based standards; and, these results are persistent even under external pressure. Results also indicate that more experienced auditors are less willing to allow clients who exert high pressure to report earnings aggressively, while SEC pressure has more affect on less experienced auditors. These results provide important insights to the FASB, SEC, and IASB as they weigh arguments underlying the principles- vs. rules-based debate.

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 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.

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 change of production methods, the industrial revolutions, technological developments, and digital transformation have affected almost all functions in the enterprises. Accounting and auditing areas are also quite affected by this transformation. Another important result of technology and digitalization is the rapid increase in errors, frauds, and irregularities. Enterprises are looking for new solutions and investigations against irregularities and frauds. Audits for errors, frauds, or irregularities are among the interests of forensic accounting. Many methods are used to identify errors and frauds in the forensic accounting. However, it is inevitable that digital technologies should be utilized in forensic accounting applications as a result of the rapid spread of automation and computer programs in enterprises within the framework of digitalized business activities. Hence, enterprises will be able to get more effective results through computer programs and artificial intelligence in terms of fraud audit in forensic accounting. Expert system applications use artificial intelligence to enable computer programs to behave just like people. One of the most widely used, most easily applicable, and most understandable types of expert system is rule-based expert system. The aim of this study is to determine the accounting fraud that may occur in enterprises within the framework of forensic accounting through rule-based expert systems. For this purpose, various applications have been implemented in a large-scale production enterprise through the use of rule-based expert systems for the determination of accounting fraud. Benford’s Law, risk levels, and various other criteria were used in the creation of expert systems. According to the results obtained from the study, it has been seen that by means of rule-based expert system applications, enterprises can better detect existing frauds and prevent further irregularities in the future. The study is important and it is expected that the study will contribute to the literature because it is shown in the study that the rule-based expert systems, applied in many fields under the title of social sciences, can also be applied in the field of forensic accounting and auditing.

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.

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.

The purpose of this paper is to use the framework of rule-based and relation-based governance to examine the evolution of governance environment in the East Asian region including China, South Korea and Taiwan.

Both qualitative and quantitative evidences are presented to demonstrate the paths these East Asian countries take in their transitions from relation-based governance to rule-based governance. Based on the framework, this analysis sheds light on the debate on whether East Asian economies will eventually move away from relation-based governance to rule-based societies.

The authors find that relation-based governance has helped East Asian countries achieve rapid economic growth in the early stages of their development. However, as the scale and scope of East Asian economies expand, continuing to rely on it may hinder their further development and therefore these countries should adopt a rule-based governance system in order to be efficient and competitive in the world market. While South Korea and Taiwan have made substantial progress in this transition, China has just embarked on the process.

This paper is among the first to systematically review the theories and evidence of the transition and the challenges East Asian countries face during the process.