Are Detailed Accounting Standards Sufficient to Ensure Compliance? Evidence from Non-U.S. Firms Adopting Us Gaap

Abstract

One of the underlying questions in the international accounting harmonization debate is whether harmonization of accounting standards will result in comparable application of the standards. We contribute to this debate by investigating the accounting compliance of a group of non-US firms that have voluntarily adopted U.S. Generally Accepted Accounting Principles. Our results suggest that these firms adopted US GAAP based on its perceived ability to facilitate communication with external stakeholders. However, we find that many of the accounting method choices used by these firms do not comply with US GAAP. We compare this level of compliance to a matched sample of US firms and to a matched sample of non-US firms that continue to report under their domestic GAAP. The compliance of our primary sample is lower than that of US firms but higher than that of non-US firms reporting under their domestic GAAP. Time-series tests indicate that the level of compliance increases in the first year a firm adopts US GAAP. Thus, even with a set of firms that self-select a set of detailed accounting standards, adherence to the standards is low. This presents a challenge to the hope that a single set of harmonized accounting standards will be complied with consistently in a diverse global environment.

Keywords: accounting choice, accounting standards, international accounting, international financial reporting, US GAAP

JEL Classification: F00, G15, M41