Contrast Effects Under Incomplete Convergence of Financial Accounting Standards

Abstract:     
When applying financial reporting standards, accountants are increasingly aware of standards from other reporting regimes that offer conflicting guidance. This paper reports the results of two experiments which provide evidence that accountants in such circumstances are vulnerable to contrast effects, whereby reporting judgments are systematically influenced away from the alternative accounting treatment supported by standards from another regime. Our results indicate that contrast effects occur for both accounting students and experienced auditors, are more likely when a higher level of cognitive effort is devoted to a judgment task, and are unintentional, consistent with contrast effects resulting from effortful (but error prone) information processing. These results have implications for financial statement preparers and auditors in the current incomplete-convergence environment and for the effectiveness of potential interventions that could be used to reduce contrast effects in practice.

Number of Pages in PDF File: 45

Keywords: Convergence, Contrast effect, Financial accounting standards, Audit Judgment

JEL Classification: M41

working papers series