American Accounting Association

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THE ACCOUNTING REVIEW Vol. 86, No. 3 2011 pp. 747–767 American Accounting Association DOI: 10.2308/accr.00000045 Principles-Based versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions Christopher P. Agoglia University of Massachusetts Amherst Timothy S. Doupnik University of South Carolina George T. Tsakumis Drexel University 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…show more content…
standard-setting and asked interested parties to comment FASB 2002 . Many who responded were supportive of a principles-based model, believing that such an approach would lead to higher quality financial reporting with less opportunity to “exploit the gaps in GAAP” CalPERS or use “financial accounting engineering” to get around detailed, rulesbased standards PricewaterhouseCoopers .3 Conversely, some argued that less specificity in accounting standards would result in an increase in manipulation of financial results e.g., Intel and former FASB member David Mosso . On the separate issue of inter-firm comparability, a number of letter-writers expressed concern that, with an increased reliance on judgment, implementation of principles-based standards could result in a decrease in comparability across firms e.g., IBM, Pfizer, Goldman Sachs, BDO Seidman . The ongoing debate over whether and when to move toward more principles-based accounting standards reflects the uncertainty of both the anticipated desirable and undesirable effects of such a paradigm shift. Although these are empirical questions that can be addressed experimentally to inform policy makers prior to making a move to principles-based standards, the academic literature is limited with respect to research regarding these uncertainties Maines et al. 2003 . As noted, the possible adoption of principles-based financial reporting standards is only one of
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