The Impact of the Type of Accounting Standards on Preparers' Judgments

18 Pages Posted: 2 Jun 2004

See all articles by Jim Psaros

Jim Psaros

University of Newcastle - Faculty of Business and Law

Ken Trotman

UNSW Australia Business School, School of Accounting

Abstract

This article examines preparers' consolidation judgments and how they are impacted by the precision of accounting standards (substance-over-form versus rules-based). The examination is performed via two laboratory experiments in a consolidated accounting setting. In Experiment 1, it was found that when subjects used a substance-over-form accounting standard they justified their consolidation judgments on case specific information rather than on different interpretations of the phrase 'capacity to control'. In Experiment 2, it was found that when subjects used a rules-based standard, incentives were found to impact on accountants' consolidation judgments and more aggressive judgments were made through their assessments of case specific information. Comparison of the judgments made in Experiment 1 with one of the treatment groups in Experiment 2 enabled a comparison to be made of consolidation judgments of subjects under both substance-over-form and rules-based accounting standards. While both groups had the same incentive not to consolidate, marginally, significantly more subjects using the rules-based standard did not consolidate than subjects using the substance-over-form standard. This finding is contrary to anecdotal claims that the imprecision of substance-over-form standards may be less effective in stopping biased financial reporting than rules-based standards.

JEL Classification: M41, M44, C91

Suggested Citation

Psaros, Jim and Trotman, Ken, The Impact of the Type of Accounting Standards on Preparers' Judgments. Abacus, Vol. 40, pp. 76-93, February 2004, Available at SSRN: https://ssrn.com/abstract=534143

Jim Psaros (Contact Author)

University of Newcastle - Faculty of Business and Law ( email )

University Drive
Callaghan 2308, New South Wales
Australia

Ken Trotman

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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