Effect of Principles-Based Versus Rules-Based Standards and Auditor Type on Financial Managers' Reporting Judgments

Posted: 22 Jul 2008 Last revised: 12 Jun 2013

See all articles by Karim Jamal

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Date Written: July 21, 2008

Abstract

Managers sometimes implement accounting standards (such as the lease standard) opportunistically to move debt off balance-sheet. Regulators are under pressure to adopt principles-based accounting standards to reduce such opportunism. However, there are lingering concerns about whether principles-based standards can be properly implemented and enforced. We report results of an experiment where highly experienced financial managers, with incentives to structure a transaction off balance sheet, take a reporting position on how a lease is to be disclosed. We manipulate the type of GAAP (principles-based, rules-based) and the type of auditor (client-oriented, principles-oriented, or rules-oriented). Our results show that when the auditor is client-oriented, the nature of GAAP does not matter, and that a move towards more principles-based standards is likely to result in improved financial reporting quality only when there is a corresponding shift in auditors' mindsets towards beings more principles-oriented.

Keywords: principles-based standards, rules-based standards, auditor type, off balance sheet debt, transaction structuring

JEL Classification: M41, M44, M49, G32, C91

Suggested Citation

Jamal, Karim and Tan, Hun-Tong, Effect of Principles-Based Versus Rules-Based Standards and Auditor Type on Financial Managers' Reporting Judgments (July 21, 2008). Accounting Review, Vol. 85, No. 4, 2010, University of Alberta School of Business Research Paper No. 2013-1017, Available at SSRN: https://ssrn.com/abstract=1165442

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Hun-Tong Tan (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

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