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

Christopher P. Agoglia

University of Massachusetts at Amherst

Timothy Doupnik

University of South Carolina - Darla Moore School of Business

George T. Tsakumis

University of Delaware - Alfred Lerner College of Business and Economics

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

Agoglia, Christopher P. and Doupnik, Timothy and Tsakumis, George T., Principles-Based Versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions (December 6, 2010). 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.. Available at SSRN: https://ssrn.com/abstract=1275851

Christopher P. Agoglia

University of Massachusetts at Amherst ( email )

Department of Accounting & Information Systems
121 Presidents Drive
Amherst, MA 01003-4910
United States
413 545-5582 (Phone)
413 545-3858 (Fax)

Timothy S. Doupnik (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

George T. Tsakumis

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

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