Principles-Based Versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions
Christopher P. Agoglia
University of Massachusetts at Amherst
University of South Carolina - Moore School of Business
George T. Tsakumis
University of Delaware - Alfred Lerner College of Business and Economics
December 6, 2010
The Accounting Review, Forthcoming
Recent accounting scandals have resulted in regulatory initiatives designed to strengthen audit committee oversight of corporate financial reporting and have led to a concern that U.S. GAAP has become too rules-based. We examine issues related to these initiatives using two experiments. CFOs in our experiments exhibit more agreement and are less likely to report aggressively under a less precise (more principles-based) standard than under a more precise (more rules-based) standard. Our results also indicate that CFOs applying a more precise standard are less likely to report aggressively in the presence of a strong audit committee than a weak audit committee. We find no effect of audit committee strength when the standard is less precise. Finally, we find support for a three-path mediating model examining mechanisms driving the effect of standard precision on aggressive reporting decisions. These results should be of interest to U.S. policy makers as they continue to contemplate a shift to more principles-based accounting standards (e.g., IFRS).
Number of Pages in PDF File: 39
Keywords: standard precision, rules-based standards, principles-based standards, audit committee, corporate governance, International Financial Reporting Standards (IFRS)
JEL Classification: M41, M43, M44, M49, G38Accepted Paper Series
Date posted: January 21, 2009 ; Last revised: December 14, 2010
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