Principles-Based Versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions
Agoglia, C.P., T.S. Doupnik, and G.T. Tsakumis. 2011. Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The Accounting Review 86 (3): 747-767.
39 Pages Posted: 21 Jan 2009 Last revised: 14 Feb 2014
Date Written: December 6, 2010
Abstract
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).
Keywords: standard precision, rules-based standards, principles-based standards, audit committee, corporate governance, International Financial Reporting Standards (IFRS)
JEL Classification: M41, M43, M44, M49, G38
Suggested Citation: Suggested Citation