Earnings Quality Under Rules- vs. Principles-Based Accounting Standards: A Test of the Skinner Hypothesis

33 Pages Posted: 25 Jun 2004

See all articles by Erin Webster

Erin Webster

Queen's University - Smith School of Business

Daniel B. Thornton

Smith School of Business at Queen's University

Date Written: June 2004

Abstract

We provide preliminary confirmation of Skinner's (1995) hypothesis that Canada's relatively principles-based GAAP yield higher accrual quality than the US's relatively rules-based GAAP. These results stem from a comparison of the Dechow-Dichev (2002) measure of accrual quality for cross-listed Canadian firms reporting under both Canadian and US GAAP. However, we document lower accrual quality for Canadian firms reporting under US GAAP than for US firms, which are subject to stronger US oversight and greater litigation risk, reporting under US GAAP. The latter results are consistent with stronger US oversight compensating for inferior accrual quality associated with rules-based GAAP. Consistent with the positive effect of Canada's principles-based GAAP and the offsetting negative effect of Canada's weaker oversight, we find no overall difference in accrual quality between Canadian firms reporting under Canadian GAAP and US firms reporting under US GAAP. Consistent with Skinner's writings, the results imply that it fallacious to attribute perceived deficiencies in Canadian financial reporting to the leeway allowed by principles-based GAAP without allowing for Canada's oversight, which is relatively weak due largely to the absence of a national securities regulator. If anything, over our 1990-2002 sample period, principles-based standards and the consequent role of professional judgment enhance the quality Canadian firms' financial reporting.

Keywords: Accounting standards; earnings quality; accrual quality, principles-based GAAP, rules-based GAAP

JEL Classification: M41, M43, M44, M47

Suggested Citation

Webster, Erin and Thornton, Daniel B., Earnings Quality Under Rules- vs. Principles-Based Accounting Standards: A Test of the Skinner Hypothesis (June 2004). Available at SSRN: https://ssrn.com/abstract=557983 or http://dx.doi.org/10.2139/ssrn.557983

Erin Webster

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Daniel B. Thornton (Contact Author)

Smith School of Business at Queen's University ( email )

143 Union Street, #358
Kingston, Ontario K7L 3N6
Canada
613-328-5213 (Phone)
613-533-2321 (Fax)

HOME PAGE: http://smith.queensu.ca

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