Joint Effects of Principles-Based Versus Rules-Based Standards and Auditor Type in Constraining Financial Managers’ Aggressive Reporting
Accounting Review, Vol. 85, pp. 1325-1346, 2010
Posted: 3 Feb 2010 Last revised: 12 Jun 2013
Date Written: February 2, 2010
Managers sometimes implement accounting standards (such as the lease standard) opportunistically to move debt off balance-sheet. Regulators and standard setters are considering the adoption of principles-based accounting standards to reduce such opportunism. We report the results of an experiment in which experienced financial managers, with incentives to structure a transaction off balance sheet, take a reporting position on how a lease is to be reported. We manipulate the type of accounting standards (principles-based, rules-based) and the type of auditor (principles-oriented, rules-oriented, or client-oriented). Results show that for a rules-based standard, auditor-type does not influence participants’ propensity to report the transaction off balance-sheet. However, for a principles-based standard, auditor-type matters in that this propensity is lowest when the auditor is principles-oriented as opposed to rules- or client-oriented. Our results suggest 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: M40, M41
Suggested Citation: Suggested Citation