The impact of principles-based vs rules-based accounting standards on reporting quality and earnings management

Research output: Contribution to journalArticleScientificpeer-review

2 Citations (Scopus)

Abstract

Purpose

The purpose of this paper is to explore whether principles-based vs rules-based accounting standards have an effect on measures of financial reporting quality and earnings management strategies.

Design/methodology/approach

This study uses a firm-year-specific variable that captures the extent to which firms’ accounting and operating behavior is affected by the characteristics of a specific standard in the USA. Measures of absolute accruals, financial misconducts, signed abnormal accruals and abnormal cash flows are used to assess the effects.

Findings

The results show that absolute magnitude of accruals and probability of financial misconduct is lower, and accrual earnings management is higher when firms’ standards are more based on principles. The study also suggests that potentially costlier real earnings management is a consequence of rules-based standards.

Research limitations/implications

This study relies heavily on measures from the prior accounting literature, hence, care has been exercised in generalizing the findings.

Practical implications

This study has direct implications for a number of stakeholders, including standard setters, policymakers, securities regulators, researchers, investors, financial statement preparers and auditors. For example, the future development of accounting standards can be supported by the empirical conclusions in this study together with previous standard-setting ambitions, commentaries, experiments and analytical work.

Originality/value

This study extends prior single-country studies on reporting quality and cross-country studies on transition effects of firms switching from local to International Accounting Standards by observing the impact of accounting standard characteristics on additional measures of reporting quality and accrual as well as real earnings management when holding institutional factors constant. The study also offers archival evidence complementing prior commentaries, experiments and analytical work.

Original languageEnglish
Peer-reviewed scientific journalJournal of Applied Accounting Research
Volume20
Issue number1
Pages (from-to)78-93
Number of pages16
ISSN0967-5426
DOIs
Publication statusPublished - 07.06.2019
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • Earnings management
  • Accounting standards
  • Accruals
  • Principles-based standards

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