Principles-Based versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions

2011 ◽  
Vol 86 (3) ◽  
pp. 747-767 ◽  
Author(s):  
Christopher P. Agoglia ◽  
Timothy S. Doupnik ◽  
George T. Tsakumis
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Accounting Standards ◽  
Accounting Scandals ◽  
Reporting Decisions ◽  
Standard Precision ◽  
Corporate Financial Reporting

ABSTRACT: Recent accounting scandals have resulted in regulatory initiatives designed to strengthen audit committee oversight of corporate financial reporting and have led to a concern that U.S. GAAP has become too rules-based. We examine issues related to these initiatives using two experiments. CFOs in our experiments exhibit more agreement and are less likely to report aggressively under a less precise (more principles-based) standard than under a more precise (more rules-based) standard. Our results also indicate that CFOs applying a more precise standard are less likely to report aggressively in the presence of a strong audit committee than a weak audit committee. We find no effect of audit committee strength when the standard is less precise. Finally, we find support for a three-path mediating model examining mechanisms driving the effect of standard precision on aggressive reporting decisions. These results should be of interest to U.S. policymakers as they continue to contemplate a shift to more principles-based accounting standards (e.g., IFRS).

Zar, Inc.: A Case in Earnings Quality

2002 ◽  
Vol 17 (4) ◽  
pp. 419-429 ◽  
Author(s):  
Jimmy W. Martin
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Controversial Issue ◽  
High Tech ◽  
Additional Information ◽  
The Future ◽  
The Way

Zar, Inc., a high-tech company, has recently experienced turnover in its CEO and CFO positions. Zar, like other firms in its industry, is undergoing a down year due to the declining economy. Thomas Brown, who has recently been hired as the CFO, quickly realizes that there is little he can do to avoid the firm's first loss in many years. However, Thomas also understands that there are things that he can do to pave the way toward greater profits in the future. You are invited to listen in on three separate conversations that the CFO has with the CEO, the firm's audit committee, and finally with Zar's independent auditor. After hearing each conversation, you will be asked to evaluate the CFO's ideas as well as those of other parties to the dialogue. Some of the questions are rather straightforward and can be answered by recalling or researching specific accounting standards. Other questions are more open-ended and will require your best judgment based on the facts given in the case. Some questions may require you to provide additional information before making a definite decision. All of the scenarios focus on earnings quality and should enhance your understanding of this critical and controversial issue that pervades financial reporting today.

Crisis and the Consolidation of International Accounting Standards: Enron, The IASB, and America

2005 ◽  
Vol 7 (3) ◽  
pp. 1-18 ◽  
Author(s):  
Sarah B. Eaton
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Securities And Exchange Commission ◽  
International Accounting ◽  
International Accounting Standards ◽  
Generally Accepted Accounting Principles ◽  
Corporate Scandals ◽  
Financial Reporting Standards ◽  
Accounting Scandals ◽  
Effective Form

This paper examines the interplay between leading international and American accounting authorities over the span of a critical four-year period, 2001–2005. Historically, US regulators and private-sector accounting institutions have taken a cautious approach to International Financial Reporting Standards (IFRSs), citing the superior rigor and overall quality of their own Generally Accepted Accounting Principles (GAAP). During the past four years, however, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) have each become markedly receptive to the International Accounting Standards Board's (IASB) efforts to harmonize accounting standards worldwide based on IFRSs. Why? This paper offers an explanation that highlights the role of the high-profile American corporate scandals (2001–2002) in precipitating a shift in US accounting authorities' views of the optimal form of accounting rules, an issue that has stood in the way of trans-Atlantic accounting standard convergence. Prior to the accounting scandals, the highly-detailed rules that are characteristic of US GAAP were widely seen to be the most effective form of accounting rule. Since 2002, a normative shift has taken place such that the SEC now endorses objectives-oriented rules that are conceptually aligned with the principles-based standards promulgated by the IASB. The analysis is framed by insights from contemporary International Relations theory which emphasize the influence of scope conditions on patterns of governance.

The Effects of Critical Audit Matter Paragraphs and Accounting Standard Precision on Auditor Liability

2016 ◽  
Vol 91 (6) ◽  
pp. 1629-1646 ◽  
Author(s):  
Christine Gimbar ◽  
Bowe Hansen ◽  
Michael E. Ozlanski
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Securities And Exchange Commission ◽  
Accounting Standard ◽  
Generally Accepted Accounting Principles ◽  
Auditor Liability ◽  
The Public ◽  
Regulatory Changes ◽  
Public Company ◽  
Standard Precision

ABSTRACT The Public Company Accounting Oversight Board recently proposed amendments to the standard audit report that would require the disclosure of critical audit matters (CAMs), and the Securities and Exchange Commission continues to evaluate the use of principles-based (imprecise) accounting standards within U.S. generally accepted accounting principles. We assert that jurors perceive precise accounting standards to constrain auditors' control over financial reporting outcomes, resulting in a lower propensity for negligence verdicts when the accounting treatment conforms to the precise standard. However, we hypothesize that the use of either imprecise standards or CAMs reduces the extent to which jurors perceive this constraint to exist, leading to increased auditor liability. We present experimental evidence supporting this argument. Our results highlight the similarities between the effects of imprecise accounting standards and CAMs on negligence assessments. These results provide insight for regulators and the auditing profession about the potential consequences of the proposed regulatory changes.

scholarly journals Corporate Governance on the Performance of Internal Auditors in Thailand Public Limited Company

2018 ◽  
Vol 6 (2) ◽  
pp. 118
Author(s):  
Sutana Narkchai ◽  
Faudziah Hanim Binti Fadzil ◽  
Sompon Thungwha
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Auditing ◽  
Internal Auditor ◽  
Internal Auditors ◽  
Sarbanes Oxley ◽  
Accounting Scandals ◽  
The Relationship

<em>The issue of performance of internal auditors is important since Thailand was also affected by the accounting scandals. The expanded scope in the definition of internal auditing and new regulatory requirements such as the Sarbanes-Oxley Act 2002 has increased the demands on internal auditing. This study was conducted to examine the relationship between the corporate governance on the performance of internal auditors in Thailand public limited companies. In this study, corporate governance relates to the board of directors size and audit committee size to the performance of the internal auditor. To achieve this objective, two hypotheses were developed based on previous studies and the agency theory. Survey questionnaires were sent to the Chief Audit Executives (CAEs) to determine the effectiveness on their performance based on the professional standards issued by the IPPF (2017) indicators. A total of 520 questionnaires were distributed, but only 146 were usable. Multiple regressions were used to test the relationship between the variables. The result showed that there is insignificant relationship between board of director’s size and internal auditors’ performance. This study however found that audit committee size has a positive relationship on the performance of internal auditors. Therefore, audit committee need to increase higher responsibility with regard to corporate governance by overseeing financial reporting and internal control matters.</em>

scholarly journals Impact of corporate governance mechanisms on financial reporting quality: a study of Indian GAAP and Indian Accounting Standards

2020 ◽  
Vol 18 (4) ◽  
pp. 1-13
Author(s):  
Faozi A. Almaqtari ◽  
Abdulwahid Abdullah Hashed ◽  
Mohd Shamim ◽  
Waleed M. Al-ahdal
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Governance Mechanisms ◽  
Corporate Governance Mechanisms ◽  
The Impact

The present study examines the impact of corporate governance mechanisms on financial reporting quality under Indian GAAP and Indian Accounting Standards (Ind. AS). A sample of 97 companies listed on the Bombay Stock Exchange is selected. Corporate governance mechanisms have been considered as independent variables, and financial reporting quality is the dependent variable. Corporate governance is measured by board effectiveness (board size, independence, diligence, and expertise), audit committee attributes (size, independence, diligence, and expertise), foreign ownership, and audit quality. Descriptive statistics, correlation, and OLS regression are conducted to estimate the results. The study results reveal that board characteristics and audit committee attributes, except for audit committee diligence, have a significant effect on financial reporting quality. However, the impact of board diligence and audit committee attributes is negative. Foreign ownership has no contribution to financial reporting quality, but audit quality has a significant effect. The findings of the study have considerable implications for regulators, policymakers, managers, investors, analysts, and academicians. More emphasis should be given to compliance with Ind. AS, and an oversight body for compliance with Ind. AS should be established. AcknowledgmentThis publication was supported by Deanship of Scientific Research, Prince Sattam Bin Abdulaziz University, Alkharj, Saudi Arabia.

Dynamic Data: Corporate Governance and Auditors' Evaluation of Accounting Estimates

2005 ◽  
Vol 20 (1) ◽  
pp. 119-128 ◽  
Author(s):  
Jeffrey R. Cohen ◽  
Ganesh Krishnamoorthy ◽  
Arnold M. Wright
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
House Of Representatives ◽  
Audit Committee ◽  
High Tech ◽  
Audit Process ◽  
Dynamic Data ◽  
Sarbanes Oxley ◽  
Accounting Scandals ◽  
Reporting Process

Corporate governance issues have grown more salient in light of alleged corporate accounting scandals and the subsequent enactment of the landmark Sarbanes-Oxley Act (U.S. House of Representatives 2002). However, even in cases where no fraud has occurred and management is completely aboveboard, the role of various players in the corporate governance framework in maintaining a high-quality financial reporting process cannot be overlooked. This case presents facts surrounding the valuation of inventory at Dynamic Data, a high-tech firm. You will be asked to consider, from an auditor's perspective, whether inventory should be carried at cost in light of changing market conditions. Further, you will be asked to consider the role, if any, that the Audit Committee and Board of Directors might play in the financial reporting process. Special consideration will also be given to examining the implications of the Sarbanes-Oxley Act in the audit process.

scholarly journals Audit Committee Attributes and Timeliness of Corporate Financial Reporting in Nigeria

2020 ◽  
pp. 114-124
Author(s):  
Hope Osayantin Aifuwa ◽  
◽  
Saidu Musa ◽  
Nusirat Ojuolape Gold ◽  
◽  
...  
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Corporate Financial Reporting

Lucent Loses Its Luster: Accounting for Investments Turned Bad

2005 ◽  
Vol 20 (2) ◽  
pp. 183-193 ◽  
Author(s):  
Teresa P. Gordon ◽  
Marcia S. Niles
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Net Income ◽  
Qualitative And Quantitative ◽  
Technology Firms ◽  
Comprehensive Income ◽  
Reporting Decisions

This case provides a rich environment in which students can explore the challenges of applying Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Investments, and Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. By focusing on the stock performance of two technology firms, Lucent Technologies and Microsoft, the case exposes students to issues of determining when a stock price decline is other than temporary, the effects of timing on accounting reporting decisions, and the role of the auditor in determining fair financial reporting. The case provides a qualitative and quantitative application of the two standards that is more complex and less structured than that provided by an intermediate financial accounting text. The case also demonstrates that comprehensive income, unlike net income, is relatively stable and difficult to manipulate.

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