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Why Consistency of Accounting Standards Matters: A Contribution to the Rules-Versus-Principles Debate in Financial Reporting

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Abstract

A cross-firm consistent application of accounting standards is sought in all major accounting regimes. Since many transactions and events are only vaguely or not explicitly addressed in the standards managers must often use judgment when applying accounting standards to particular transactions or events. This analysis concludes that a consistent application of accounting standards can only be ensured if the accounting standards themselves are internally consistent. By contrast, inconsistent standards - in the absence of clear guidance - permit managers to (more or less arbitrarily) choose between different accounting methods. Moreover, it is found that a consistent application presupposes the existence of specific guidance (‘rules’) in order to frame management's judgment. It is argued that the reliance on principles only - as requested by many in the accounting literature - fails to ensure a consistent application because it allows management to exert judgment differently in identical cases. The assessment includes arguments and propositions from the international discussion in the accounting literature and also refers to other related fields of research, such as legal theory.

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... Por outro lado, a flexibilidade inerente às normas baseadas em princípios poderia permitir oportunidades de gerenciamento de resultados, o que, por sua vez, ocasionaria um efeito negativo na qualidade da informação contábil (Barth et al., 2008). Mesmo com normas mais flexíveis, deve haver medidas para que o julgamento dos gestores não comprometa a qualidade da informação contábil (Wüstemann & Wüstemann, 2010). As normas podem ser baseadas em princípios, mas não devem consistir apenas de princípios (Wüstemann & Wüstemann, 2010). ...
... Mesmo com normas mais flexíveis, deve haver medidas para que o julgamento dos gestores não comprometa a qualidade da informação contábil (Wüstemann & Wüstemann, 2010). As normas podem ser baseadas em princípios, mas não devem consistir apenas de princípios (Wüstemann & Wüstemann, 2010). ...
... Dentro deste contexto, avaliar se um conjunto de normas baseia-se em princípios ou em regras "é um assunto importante" (Bradbury & Schroder, 2012, p. 1), e um fator que poderia representar uma barreira ao processo de convergência contábil é a existência de frases que demandam julgamento (Bradbury & Schroder, 2012), como é o caso das expressões de incerteza. Em muitos casos, a aplicação das IFRS demanda o emprego de julgamento (Wüstemann & Wüstemann, 2010). Com isso, a existência de termos que exigem julgamentos, mesmo que sejam termos equivalentes (Kirk, 2006), pode levar a diferenças nos relatórios contábeis para usuários externos. ...
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This paper examines whether differences in the perception of uncertainty expressions persist over time. The empirical analysis of this question involved two approaches: quantitative (with tests to compare means, medians, regression analysis with ordinary least squares and quantile regression), and qualitative, with interviews. Principal findings are that the differences in the perceptions of participants with respect to uncertainty expressions were not statistically significant, which differs from the findings reported in previous studies. This may be indicative of a tendency toward elimination of potential differences in the interpretation of accounting standards over time.
... In this way, accounting is characterized by a perpetual cycle of ambiguity reduction and ambiguity creation and "conceptual and technical ambiguities merely create and enhance the need for more and more accounting" (ibid., p. 330). The reciprocity between specifications and ambiguities in accounting practice and regulation manifests in the debate of precise accounting rules and vaguely formulated principles (Maines et al., 2003a;Nobes, 2005;Schipper, 2003;Wuestemann & Wuestemann, 2010). Nelson (2003, p. 91) understands rules "to include specific criteria, 'bright line' thresholds, examples, scope restrictions, exceptions, subsequent precedents, implementation guidance, etc.". ...
... Rules-based accounting standards contribute to certainty, order, comparability, and enforceability (cf. Wuestemann & Wuestemann, 2010), thereby reducing vagueness, uncertainties and judgment. Notwithstanding their ambiguity-reducing function (Davie, 2000), rules are particularly prone to regulatory arbitrage. ...
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The revision of the asset and liability definitions is at the core of the International Accounting Standards Board's (IASB) efforts to reflect more truthfully the economic substance of the underlying business transactions. In the IASB's revised Conceptual Framework (CF) from 2018, the board redefined assets and liabilities in terms of rights and obligations, thereby explicitly abstaining from a notion of indivisible balance sheet items. This alteration lays the conceptual foundation for carving out pieces of an item in accounting standards, enabling the removal of arbitrary bright line tests, and, eventually seeks to tackle regulatory arbitrage. Drawing upon 18 expert interviews as well as a document analysis, this study sheds light on the process that led to the anchoring of the rights and obligations model in the IASB's CF. Using literature on ambiguities in accounting as a theoretical frame, this study goes on to show that removing ambiguities in the asset and liability definitions creates new ambiguities and additional discretionary leeway in turn. The paper argues that the perpetual cycle of ambiguity reduction and creation in accounting (Davie, 2000) also includes ambiguity shifting between the conceptual basis of financial reporting and accounting standards. By comparing the previous International Accounting Standard (IAS) 17: Leases, which followed a physicalist, ownership-based notion of assets, with the revised International Financial Reporting Standard (IFRS) 16, the paper demonstrates that the explicit anchoring of the rights and obligations approach does not fully solve the issue of regulatory arbitrage. Instead it shifts the playing field for structuring activities from the evasion of precise rules to the bending of interpretations.
... 277). Similarly, Wüstemann andWüstemann (2010), referring to SEC (2003) and ICAS (2006), present the following definitions of rules and principles: "[R]ules as being highly detailed and unambiguously prescribing specific accounting methods…, principles are typically described as broad guidelines that, instead of providing detailed implementation guidance, require preparers to exercise judgement in applying the principles to specific transactions and events" (pp. 14-15). ...
... This is because "the override gives accountants more professional responsibility for financial statement content, and its disclosure gives sufficient transparency for users to understand and, perhaps, challenge its application" (Benston, Bromwich, and Wagenhofer, 2006, p. 167). In conclusion, Wüstemann and Wüstemann (2010) argue that "when discussing whether rules or principles are favorable, the possibility of a trade-off between relevance on the one hand and comparability, enforceability and objectivity on the other hand must be considered" (p. 21). ...
... Historically, this discussion can be traced back to the long standing principlesbased vs. rule-based debate in the academic literature (Benston et al., 2006b;Bradbury and Schröder, 2012;Wüstemann and Wüstemann, 2010). The principles-based vs. rule-based debate in the U.S. was rediscussed after the Enron and WorldCom accounting scandal 2002 (Nobes, 2005). ...
... The theoretical underpinnings of this rule vs. principles based debate are embedded in the framework of Positive and Normative Accounting (Tinker et al., 1982). Under a dialectic Hegelian classification view (Limnatis, 2011) in academic literature rule-based only accounting is the thesis with the main contributor the FASB (Benston et al., 2006a;Schipper, 2003), for principles-based represented by the IASB (Carmona and Trombetta, 2008;Tweedie, 2007) as the antithesis and the synthesis is a combined view (Verheij et al., 1998;Wüstemann and Wüstemann, 2010). ...
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National standard setters and external accounting observers continue to express concerns over a principles-based developed IFRS taxonomy. Considering the anticipated but unexpected SEC decision on March 3rd 2017 to adopt the IFRS taxonomy for electronic filings for Foreign Private Issuers by 2018 and the announcement of ESMA on December 22nd 2016 to base electronic filings in Europe on the IFRS taxonomy by 2020 signal that national regulators, external accounting observers and international regulators have a dissent. This paper reflects the expressed concerns by national standard setters. Applying a scientific ap-proach, a comprehensive literature review is performed. The research question is if the rules-based IFRS taxonomy implies a conceptual conflict with the principles-based IFRS. This paper concludes considering the academic literature although there is conceptual conflict between a principles-based accounting standard and the template-based taxonomy, from a normative perspective the IFRS taxonomy improves comparability and transparency supporting true and fair view. Our study also contributes to the principles-based vs. rule-based debate in the academic literature. The new aspect is the role of IT with structured electronic reporting, which requires detailed and specific requirements, for which rule-based accounting has advantages over principles-based accounting.
... IFRS, HGB, Corporate Governance etc. In the academic it was assumed that it is impossible from a theoretical point of view (Wüstemann and Wüstemann, 2010), as too many diverging concepts two tier versus one-tier, code versus case law, stakeholder versus shareholder view. ...
... IFRS, HGB, Corporate Governance etc. In the academic it was assumed that it is impossible from a theoretical point of view (Wüstemann and Wüstemann, 2010), as too many diverging concepts two tier versus one-tier, code versus case law, stakeholder versus shareholder view. ...
... In other words, the authors are favouring a more rule-based approach for high-quality disclosures. Much has been written on whether standards should be principle-based or rulebased (Agoglia et al., 2011;Wüstemann and Wüstemann, 2010), and the debate continues. ...
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We examine the association between the disclosure requirements of the International Financial Reporting Standards (IFRS) and the cost of capital for a sample of Australian firms. We find that these disclosure requirements have a negative association with the cost of capital. The interpretation is that firms with a higher level of IFRS disclosure have a lower cost of capital. Further analysis shows that IFRS disclosure requirements are negatively related to the cost of debt and equity capital. Our findings contribute to the debate on the relative costs and benefits of IFRS disclosure requirements and have important implications for standard setters, regulators and users of financial statements.
... The existing body of research papers regarding the subject of accounting harmonization process includes studies that address this issue through a theoretical viewpoint, by analyzing the accounting systems and/ or the accounting regulations, approaching thus the formal accounting harmonization (Standish, 2003;Yüksel et al., 2008;Wüstemann and Wüstemann, 2010), or by making a review of the studies published in this research field (Feleagă et al., 2009). Other studies approach the subject of accounting harmonization by analyzing the factors that have contributed the most to the process of formal accounting harmonization by influencing it' s development (Judge et al., 2011). ...
... However, accountants and auditors can undertake other short-term courses and participate in training activities to improve their skills related to financial instruments. The accounting activities involve technical knowledge, but accounting professionals need to make some judgments, especially when dealing with expressions of uncertainty (Doupnik and Richter, 2003) and principles-based accounting standards (Wüstemann and Wüstemann, 2010), considering the usefulness of the concept "principlesbased" (Dennis, 2008). To develop adequate judgment, education is a fundamental ingredient. ...
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Purpose The purpose of this study is to analyze the perception of accountants in relation to the complexity of accounting for financial instruments and in relation to the disclosure of financial instruments in annual reports. Both aspects are relevant for the external users, and for the firms’ internal management. Design/methodology/approach The database comprises questionnaires answered by accountants from Brazil and Chile. Data were analyzed based on reliability statistics and multivariate regression analysis. Findings The main results indicate that accountants perceive the accounting for derivatives, hedge accounting, fair value measurement of financial instruments and the respective disclosure of these operations as a complex issue. These findings are interesting considering that there are detailed accounting standards relating to financial instruments. Research limitations/implications The results indicate that education and gender affect the perception of complexity about accounting of derivatives. Practical implications Findings from this research show that accountants do perceive derivatives as complex items for accounting, particularly accounting for hedges. Social implications The results can motivate some initiatives for training activities and for teaching academic content about financial instruments in undergraduate courses. Originality/value To the best of the authors’ knowledge, this is the first study that tests some personal characteristics of accountants (namely, professional experience, education and gender), in contrast to their perceptions about complexity of accounting for derivatives.
... The inconsistency of using accounting methods or principles is acceptable only when new problems or critical issues have arisen. If this inconsistency occurs or effects changes in financial statements, disclosure note must require validating the inconsistency (Wüstemann and Wüstemann, 2010). Besides, consistency helps period-to-period results in comparison and reports accurate revenue or profit (Van Beest et al., 2009). ...
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Compared to the past few decades, traditional companies are implementing more and more green strategies, because companies must respond to environmental impacts immediately. This study has economic, social, and commercial implications to implement environmental protective measures, establish social security and improve business stability. With these considerations in mind, the purpose of this study was specified to explore the implications of green strategies in each business process through considering green business practices in various functions of the business value chain. In methodology, a systematic literature review analysis through qualitative sampling study was conducted to address the findings. This review includes the impacts, relationships, characteristics, practices, and benefits of executing green strategies in business value chain. A number of examples of how green business can improve the environment and increase the cost-effectiveness have been discussed in the literature. Also, the study shows that the practices of green business are essential for today’s world in the context of green capital. Different frameworks for green strategy implementation or business process have been developed and presented in findings to achieve the purposes of this study. In addition, the relationship between green strategies and business functions are revealed through the systematic review study. In conclusion, the practical significance and future research directions are specified.
... Similarly, concerns with IFRS include uncertainty, over-flexibility and vagueness in the principles-based standards (Doupnik & Richter, 2003;Wüstemann & Wüstemann, 2010). However, supporters of IFRS vouch for the principles-based nature of the standards in that they direct report preparers and auditors to the substance of a transaction and its true economic reflection (Carmona & Trombetta, 2008;Maines et al., 2003). ...
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We examine whether tertiary accounting education enables students to develop relevant expertise to tolerate ambiguity in International Financial Reporting Standards (IFRS) and exercise appropriate professional judgment. The results show that third-year accounting students are more tolerant of ambiguity than first-year students, though the difference is insignificant. A significant difference exists between first-year and third-year students in their preference for using IFRS across ten financial reporting contexts. The findings reveal that IFRS-based tertiary accounting education programs have a positive impact on preparing accounting students to practice under IFRS regime, hence accounting standard setters and educators should focus on enhancing such programs.
... If these principles are adhered to, common sense tells us that disclosures will improve; however, the preparer might acknowledge that the somewhat vague concept of 'communicating effectively' is explained by a number of other, mostly positively loaded, but rather vague terms that will require much judgement; for example, the trade-off between being entity-specific (1) and optimising comparability (6). This might still work if managers' judgements are made 'in good faith' using a concept from Wüstemann and Wüstemann (2010), but investors and lenders need to be protected from those who do not make judgements in good faith. In line with this, some Board members ' … observe that the principles would be difficult to enforce and audit, and therefore it would not be appropriate to include them in a Standard' (IASB, 2017a, 2.13, p. 22). ...
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The current paper was prepared for the International Accounting Standards Board (IASB) Research Forum 2017 and evaluates the effects of introducing more principles of disclosure as part of the IASB Disclosure Initiative. We perform a literature review of academic research on how entities have complied with disclosure requirements in the past. The review shows high levels of non-compliance and high volatility across entities, including poor disclosers being far below the average. We find no clear pattern of higher compliance for International Financial Reporting Standards (IFRS) with more reliance on disclosure principles as compared to specific requirements (i.e. IFRS 7, IFRS 8), but note the methodological problem of measuring compliance with disclosure principles. Academic research suggests that the degree of compliance depends on entities’ incentives for providing or withholding information in combination with local conditions for primary users, auditors and regulators. Based on our review, we argue that increased reliance on entities to act in ‘good faith’ when complying with disclosure requirements, in capital-market contexts where entities may be in high-incentive situations and have low costs of non-compliance, is potentially risky in terms of how well the Standards protect primary users from poor disclosers. More emphasis is needed on ensuring that the disclosure requirements are enforceable and auditable in order to secure a certain minimum level of disclosure.
... Largely driven by the forces of globalization, more than 130 jurisdictions have adopted International Financial Reporting Standards (IFRS) 1 (IASB, 2015). Accountants are required to extensively exercise their professional judgment in interpreting and applying the principles-based IFRS, which contain a significant number of vague and indeterminate concepts and 'uncertainty expressions' such as 'control', 'probable', 'substantial', 'reliably', 'reasonably certain', and 'absolute certainty' (Wustemann and Wustemann, 2010;Doupnik and Richter, 2004;Doupnik and Riccio, 2006;Tsakumis, 2007;Doupnik and Perera, 2009;Nobes, 2009;Alali and Cao, 2010;Wehrfritz and Haller, 2014). Prior studies have shown that accountants may often use the flexibility allowed in the principles-based IFRS to make aggressive reporting, which refers to accountants' preference for reporting disclosure that portrays events favourably when accounting treatments are not clearly indicated by the facts, accounting standards, and relevant literature (Cuccia et al., 1995;Psaros and Trotman, 2004;Psaros, 2007;Fiske and Berdahl, 2007;Bhimani, 2008;Jamal and Tan, 2010;Pan and Patel, 2016). ...
Purpose The purpose of this paper is to respond to calls in the literature to examine personality variables which may provide sharper insights into accountants’ judgments in applying principles-based International Financial Reporting Standards (IFRS). This paper contributes to the literature on the global convergence of financial reporting by examining the influence of an important personality variable, construal of self, on Chinese accountants’ aggressive financial reporting judgments. Design/methodology/approach A between-subjects quasi-experiment was applied. In total, 122 Chinese professional accountants were categorized as either independents or interdependents, on the basis of their scores on construal of self scales. Subjects made their consolidation reporting judgments in the manipulated situations based on the financial performance of the investee entity, which refers to the situation where the investee entity makes a significant profit or a significant loss in the reporting period. Findings Compared to interdependent accountants, independent accountants used the flexibility allowed in the principles-based standards to make more aggressive consolidation reporting judgments. Also, adoption of IFRS may not necessarily ensure consistent judgments even within China. Originality/value This paper provides empirical evidence of the importance of construal of self in examining accountants’ aggressive judgments. The authors suggest that it may be premature to assume that adoption of IFRS will lead to comparable financial reporting. The findings are relevant to researchers who are interested in examining personality and cultural influences on accountants’ judgments both within and across countries. Companies and organizations may incorporate appropriate strategies to recruit and train independent and interdependent accountants, particularly by addressing the influence of construal of self on aggressive financial reporting judgments.
... A clear, consistent and unambiguous world is not the reality which accountants encounter when they compile financial statements or reports governed by financial accounting standards (Bhimani, 2008;Schipper, 2003;Tweedie, 2007;Wüstemann & Wüstemann, 2010). The history, some of the mechanisms used to develop these standards as well as the concomitant interpretations of both US GAAP and IFRS standards, often resulted in vagueness, inconsist-encies and ambiguities in the Conceptual Framework and financial accounting standards (FASB, 2009). ...
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... The implicit assumption in accounting convergence is that this will lead to high quality and comparable financial reporting. However, even though the adoption of IFRS is widely promoted, there are still many inherent challenges in implementing and applying IFRS within and across countries (see Doupnik & Richter, 2003;Verschoor, 2010;Wustemann & Wustemann, 2010;Hodgdon et al., 2011). Owing to the significance of the role played by judgment in the application of IFRS, it is extremely important to examine how accountants' choice of accounting treatments could be enhanced when judgments are made that reflect the economic substance of a transaction, because an inappropriate judgment can lead to serious economic consequences for users of accounting information, as well as for firms. ...
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Research on how accountants could increase their confidence in interpreting and applying International Financial Reporting Standards (IFRS) is lacking. This study examines whether the accuracy of judgments made by accountants varies as a consequence of their level of confidence, and whether their confidence in exercising judgments could be enhanced by greater familiarity with IFRS. The results of the study support that accountants who are more confident make judgments that better reflect the economic substance of a transaction than accountants who are less confident. The results further indicate that familiarity with IFRS enhances the confidence of accountants and the most accurate judgments are made by those accountants who are not only familiar with IFRS but also have confidence in their judgments.
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We investigate the impact of policy consistency on frontline workers’ perceptions of policy meaningfulness and legitimacy. The results from an experiment involving 779 teachers indicate that policy consistency does have a positive effect on legitimacy and to a lesser extent on meaningfulness. However, the extent depends on policy content and the degree of autonomy. Overall, our findings emphasize the potential positive impact of policy consistency. Although this, to some extent, conflicts with the nature of political decision‐ and policy‐making (i.e., democratically elected governments have been mandated to change policy), our study suggests that policy consistency could be a valuable strategy for governments to strengthen successful policy implementation. This adds a new perspective to the continuing debate within policy implementation and street‐level bureaucracy research on how to account for the complex, messy and sometimes contradictory implementation of public policies.
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This research aimed to gets empirical evidence of the influence of human resource capacity with relation accrual-based government accounting standards on the reliability of financial reporting. This Research is a population research with the number of respondents 52 State Civil Apparatus who officiate as treasurer in each SKPD and employees in the accounting field in BPPKAD Kudus. Analysis method for hypothesis in this research used path analysis. The results of this research indicate that accrual basis government accounting standards and the capacity of human resources has a positive influence to the reliability of financial reporting, while accrual based government accounting standards have a positive effect on the capacity of human resource, but the capacity of human resources is not mediate the influence between accrual based government accounting standards to reliability of financial reporting. Conclusion of this study says that implementation of accrual based in Kudus District can support reliability of financial reporting and the capacity of State Civil Apparatus who officiate as treasurer in each SKPD and employees in the accounting field in BPPKAD Kudus also supports the created of financial reporting reliability.
Article
There are many choices when reporting and disclosing financial instruments under IFRS 7. Behavioral theory suggests that the label used to present a financial instrument affects investors’ risk perception. We use an experimental setting to analyze how and why the European practice of reporting financial instruments by measurement categories affects the risk perception of nonprofessional investors. We find that risk perception is associated with management’s choice of a measurement category. Our results imply that there should be a wider debate about possible presentation formats for financial instruments, as the current format does not necessarily ensure a neutral presentation.
Thesis
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The financial information included as one of the sources of information to external users, allowing them, among others, to estimate the future value of the firm. To this end, they must have intrinsic qualitative characteristics that enhance or undermine its quality (MACKENZIE et al., 2013). In the last years there was a global effort to improve the quality of financial information culminating in Brazil, the adoption of the Standard IFRS - International Financial Reporting Standards (DECHOW and Schrand, 2004). It is that accounting serves as a mechanism of control and governance, but it could be used as a tool of manipulation of information (and MECKLING JENSEN, 1976; Watts, 1992). In addition, several cases, such as Enron, have put in evidence the practical effects of the nature of individuals and fragility of mitigation mechanisms of agency conflicts (DI PIETRA, McLeay and Ronen, 2014). Finally, the adoption of IFRS has puzzled researchers, the accounting profession, users and standard-setters in accounting as to its real effects, as there are doubts about the effective improvement of the quality of financial information after the adoption of this standard (Ball, 2006). In this context, this thesis was to examine the effect of the regulatory environment on the quality of financial information as from five major proxies quality of accounting information, namely (DECHOW, GE and Schrand, 2010): (1) Republication (2) Conservatism (3) Persistence (4) Value Relevance and (5) Earnings Management. Specifically he studied how the adoption of SOX - Sarbanes-Oxley and IFRS affected the quality of proxies of accounting information mentioned above. a quality index information (IQIF) calculated from the quality of accounting information proxies addition was proposed. The descriptive, documental and quantitative approach study analyzed data from 344 companies traded on the BM e FBovespa from 1998 to 2013. Data were collected on the websites of the CVM - Brazilian Securities Commission and BM e FBovespa. As a data analysis strategy used the regression analysis with panel data, difference test between the average (median) and Cluster Analysis. The results showed that there was a substantial improvement on the quality of accounting information between the studied proxies, except for the restatements that showed an average growth over the period, but with a tendency of improvement after the adoption of full IFRS. The relevance and Earnings Persistence there was improvement in both the explanatory power (R²) and the significance of the do 〖LPA〗_ite do 〖EBIT〗_(i_(t-1) ). With regard to Conservatism, there was an increase of Conservatism, except in the convergence period (2005-2007), however, a trend reversal loss was found in subsequent periods which was confirmed in the results management measure ( GR). The Accruals Discretionary (AD) showed greater homogeneity, suggesting less variability in GR level, this homogeneity was verified by analysis of variance comparing the pre- and post-IFRS periods, but comparing the average between periods there was no difference statistically significant. also it has been found that the SOX adoption year had a positive effect on the IQIF suggesting deterioration in the quality of financial information. On the other hand, the adoption of IFRS has reduced the IQIF showing improvement in the quality of financial information.
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As the financial crisis of 2008 demonstrates, wide discretion is provided by accounting rules for determining the reporting entity, especially with respect to special purpose entities (SPEs). In this paper, it is shown that the newly issued regulations of International Financial Reporting Standards (IFRS) 10 may not entirely solve the off-balance-sheet problem. As a result, consolidated financial statements may not provide useful information on the financial situation of the reporting entity with respect to the conceptual framework of IFRS. This paper presents an alternative concept in the light of neoinstitutional theories for determining the reporting entity with respect to proactive subsidiaries as well as to SPEs with and without autopilots. Specifically, the economic activities of the reporting entity are characterized based on property rights theory in a first step. Second, for SPEs, this paper tests whether these economic activities should be integrated into the efficient boundaries of the reporting entity based on transaction cost theory. The concept developed is evaluated by (1) analyzing it against the background of the conceptual framework of IFRS and the Exposure Draft ED/2010/2 “Conceptual Framework for Financial Reporting—The Reporting Entity”, (2) applying it to typical structures within the reporting entity, and (3) comparing its effectiveness to the effectiveness of the rules of IFRS 10.
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This paper documents the results of a study exploring the transitionary and ongoing costs incurred by Australian companies from their use of IFRS. A longitudinal survey approach was adopted. Challenging the underlying logic of convergence, survey results highlighted that IFRS is costly for firms both in the lead up to adoption and thereafter. Specifically, the transition to IFRS imposed significant AIS, staff training and development, financial statement user education, and financial statement adjustment costs on many firms. Furthermore, many firms perceived that IFRS adoption has resulted in an ongoing increase of 20% or more on annual accounting and compliance costs.
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A Lei Sarbanes-Oxley gerou muitas mudanças para a governança corporativa e o mercado de capitais, bem como para a Contabilidade, trazendo à tona a necessidade de substituição do sistema contábil baseado em regras para o baseado em princípios. Entretanto, a Securities and Exchange Commission (SEC) recomendou outro sistema, baseado em objetivos, que apresenta características diferentes em relação à abordagem contábil corrente naquela época, sendo as características e discussões levantadas atuais ainda hoje. Este artigo tem como objetivo analisar as possíveis dificuldades a serem enfrentadas quando da adoção do sistema baseado em objetivos, que impactam diretamente o exercício profissional dos contadores, administradores, membros dos Boards e auditores. Verificou-se que alguns dos principais desafios a serem enfrentados estão em torno da ampliação da necessidade do julgamento profissional, da compreensão da reestruturação do sistema contábil e da mudança na educação profissional. Em um campo mais amplo, observa-se que algumas mudanças propostas são diretamente afetadas por aspectos culturais e comportamentais. O artigo finaliza com algumas questões ainda em aberto, porém relevantes para o futuro da normatização contábil mundial.
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We use a panel data set of UK-listed companies over the period 2005–2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation and mortality/life expectancy of plan members/beneficiaries. We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and company-specific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective ‘management’ of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.
Chapter
At a first glance the IFRS can be described as an accounting system which favors the asset-liability perspective, using a fair value measurement model. This view conflicts with the German cost-orientated tradition. Nevertheless, in the last years there had been some changes in the accounting system in Germany. One of the most important changes is the German Accounting Law Modernization Act which was enacted in 2009. This article takes the chance to have a closer look into the German accounting rules in force and to analyze whether they changed essentially—and if so in which way the changes were influenced by the international accounting standards. Thus, the authors analyze similarities and differences in the revenue recognition, the recognition of assets and liabilities in IFRS and the German principles of proper bookkeeping and whether a movement of the principles of proper bookkeeping towards the IFRS took place.
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The European Commission aims to harmonise public sector accounting in the EU on the basis of international standards. According to the Commission, the IPSAS standards represent an indisputable reference for development of so-called European Public Sector Accounting Standards (EPSAS). Even though first consultations and studies have shown that IPSAS cannot be implemented without alterations, the idea of a purpose-driven accounting concept has not yet been addressed on EU level. Against this background, the article on hand stresses the importance of developing an EPSAS framework that serves as a basis (1) for the assessment of alterations and deviations from IPSAS, and (2) for the development of future EPSAS. The article further argues that due to the purposes of public sector accounting, an EPSAS-framework should predominately be build on the principles of reliability and conservatism.
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The article claims that the current IASB's standard setting process could not assure legal certainty with regard to IFRS. It is argued that the reason for that lacking justiciability of IFRS is the absence of a consistent basis for the interpretation of the standards. It is shown that the IASB only has scarce incentives to compile such a basis for the deduction of justiciable standards. The article analyses the consequences from an economic perspective and suggests a possible way to enhance the incentives for the IASB to establish justiciable rules.
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Privacy audits are an area of auditing practice that are becoming increasingly relevant to audit firms as well as to regulators such as privacy commissioners. Privacy audit reports can be a resource for consumers and groups representing them. However, there is limited consistency between the standards applied in privacy audits when compared across different auditors and across different jurisdictions. Inconsistency of standards reduces international comparability of privacy audits, thereby lowering their potential value to the entities subject to audit, and to users of the reports. We suggest a set of fundamental principles for privacy audits drawn from recent proposals for legislative and/or policy reform by leading official bodies in the U.S. and the European Union. We apply this framework to 30 privacy audit reports issued in five countries. The results show that few conform to the proposed fundamental principles. This inconsistency limits their value and effectiveness.
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This study explores the challenges of implementing International Financial Reporting Standards (IFRS) at the organisational level. Based on interviews with experts with aggregated experience relating to the transition projects of over 170 reporting entities, this paper highlights the main challenges in delivering a successful implementation of IFRS. The findings show that the problems faced in implementation include lack of education and training, securing executive-level support, identifying and responding to the wider business-related implications of the transition, and issues with capturing the necessary information for reporting under IFRS.This paper complements the existing literature and offers a qualitative alternative to considering the transition to IFRS, offering insight into the organisational context of IFRS implementation. These insights are useful not only from a historic perspective, but also for organisations and regulators in the many jurisdictions where IFRS is permitted but not required, where more reporting entities will voluntarily move to IFRS-based reporting in the future. More broadly, they are also applicable to the challenges faced in implementing new and significantly revised IFRSs.
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The Sarbanes-Oxley has generated many changes to corporate governance and capital market, as well as Accounting, bringing to the surface the need to replace the accounting system based on rules for principles. However, the Securities and Exchange Commission (SEC) recommended another system based on objectives, which has different characteristics compared to the current accounting approach at that time, with their characteristics and current discussions brought today. This article aims to analyze the possible difficulties in the adoption of objective-based system, and that directly influence the exercise of professional accountants, administrators, members of Boards and auditors. We indicate that some of the main challenges refer the expanding need for professional judgment, understanding the restructuring of the accounting system and change in professional education. In a broader field, we observed that cultural and behavioral aspects directly affect some proposed changes. The article concludes with some questions still open, but relevant to the future of global accounting standard setting
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This study examines if there has a major change in the value relevance of revenue recognition components since the adoption of International Financial Reporting Standards 15 in the United States. Our results show that the public firms revenue recognition are value relevant under United States of Generally Accepted Accounting Principles (US GAAP) and remain so after the adoption of IFRS. Also, for revenue recognition after IFRS, along with an increase in the value relevance in the future. These results are consistent with the proportion that revenue recognition plays a reinforcing role that complements the more complex IFRS accounts. Consequently, if the International Accounting Standards (IASB) were to mandate revenue recognition, it would, in all likelihood, provide users of accounts with a valuable incremental source of hard international transaction information.
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Those who are not experts in the field of accounting will most probably be of the opinion that interest should be expensed and therefore reduce profits. However, for financial periods beginning on or after 1 January 2009, the capitalisation of borrowing costs (interest) incurred on certain qualifying assets became mandatory for companies applying International Financial Reporting Standards (IFRS). Apart from the practical implications of this change, some technical questions remain unanswered by IAS 23 Borrowing Costs, and since it is now mandatory to capitalise borrowing costs, it might be worthwhile to take a deeper look at the requirements of this standard. The study reveals that knowledgeable Financial Accounting academics were quite divided in their opinions regarding the finer technical details of the revised standard, for example the period that constitutes a “substantial period of time” as mentioned in the standard when defining qualifying assets. These differences in opinion might prove that accountants with equal knowledge may interpret the standard differently, which might lead to confusion and inconsistency in external reporting; to at least some degree a possible infringement of the modern plea towards accounting harmonisation. The findings of this research could prompt standard-setters to provide clearer guidance in the revision of future standards on borrowing costs in various different accounting frameworks, or even of other standards with similar uncertainties. In the instances where participants did agree on the correct accounting treatment, the findings in this research could also be used as guidance for what the correct accounting treatment should be for various scenarios. This could be useful, amongst others, to accountants in practice, auditors, textbook and guidance document authors, university lecturers and providers of continuing professional development (CPD) training.
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Do international accounting standards require conservative accounting? The IASB's conceptual framework suggests that they should not, while the research literature is largely silent on the matter, typically presuming conservatism to be an outcome of private contracting rather than standardized, public, general purpose financial reporting. In this paper, we analyze the actual requirements of IFRS. We find multiple examples of recognition requirements that lead to unconditional conservatism, measurement requirements that lead to conditional conservatism, and also presentation/disclosure requirements that further support a conservative reporting environment. These findings complement, support and deepen existing evidence in the empirical literature that accounting is in practice conservative. We show, however, that the requirements for conservatism in IFRS conflict with, first, the IASB's stated position in its conceptual framework that accounting should not be conservative and, second, the private contracting explanation for conservatism that is generally accepted in the literature. What is missing, and lies behind both conflicts, is an acknowledgement and understanding of the role of an agency/contracting perspective in enhancing the decision-usefulness of general purpose accounting standards, given the information/incentive asymmetry and uncertainty that characterizes the real-world context in which those standards operate. From a policy perspective, such an understanding would reconcile the IASB's conceptual framework with the actual requirements of IFRS. From a research literature perspective, such an understanding would re-position accounting standards as central to the practice of accounting conservatism, which would in turn require revision to the generally accepted theory of a private contracting explanation for the empirical evidence of conservative accounting practice.
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In this paper we highlight key challenges which arise due to a transition of doctoral education in accounting towards the US model in the German-speaking area. We identify two main changes in PhD education, firstly the introduction of graduate schools and/or mandatory course programmes and secondly a focus on highly ranked academic journals as outlets for research. We reflect on how these changes affect the attitude of doctoral students towards the research and publication process. In particular we show how and why this setting fosters a focus on a common, narrow notion of knowledge leading to short-term tangible outcomes (e.g. a ‘hit’ in a ‘top’ journal), and elucidate what may be gained and lost by the changes with respect to the longer-term sustainability of the academy.
Book
This book offers a comprehensive overview of the structure, strategy and methods of assessment of orthodox theoretical economics. In Part I Professor Hausman explains how economists theorise, emphasising the essential underlying commitment of economists to a vision of economics as a separate science. In Part II he defends the view that the basic axioms of economics are 'inexact' since they deal only with the 'major' causes; unlike most writers on economic methodology, the author argues that it is the rules that economists espouse rather than their practice that is at fault. Part III links the conception of economics as a separate science to the fact that economic theories offer reasons and justifications for human actions, not just their causes. With its lengthy appendix introducing relevant issues in philosophy of science, this book is a major addition to philosophy of economics and of social science.
Book
This book is an examination of the nature of economic explanation. The opening chapters introduce current thinking in the philosophy of science and review the literature on methodology. Professor Blaug then turns to the troublesome question of the logical status of welfare economics, giving the reader an understanding of the outstanding issues in the methodology of economics. This is followed by a series of case studies of leading economic controversies, which shows how controversies in economics may be illuminated by paying attention to questions of methodology. A final chapter draws the strands together and gives the author's view of what is wrong with modern economics. This book is a revised and updated edition of a classic work on the methodology of economics, in which Professor Blaug develops his discussion of the latest developments in macroeconomics, general equilibrium theory and international trade theory. A new section on the rationality postulate is also added.
Chapter
This chapter examines mandatory disclosure as a form of corporate information. We show that, both from a theoretical and an empirical perspective, prior research documents mandatory disclosure’s usefulness for mitigating the information asymmetry between insiders and outsiders. Nonetheless, the current accounting system presents substantial limitations with regard to the production and use of corporate disclosure. We document that mandatory corporate disclosure is investor focused and may privilege either its information role, i.e. the relevant disclosure to investors, or its contracting role, i.e. monitoring and evaluating managers’ performance. We observe substantial variability in the quality of corporate information produced and discuss the main patterns for opportunistic reporting. We also show a decreasing value relevance of corporate information, in particular for the New Economy firms. The analysis of the accounting standards regulatory process and the assurance process shows the limits of the ongoing one size fits all approach. We, therefore, urge the need for a more dynamic and holistic approach to corporate regulation and assurance. We conclude this chapter by suggesting numerous future avenues for research, particularly in terms of empirical questions and research design.
Thesis
Die Grundlagen der externen Rechnungslegung in den USA : unter bes. Berücks. d. rechtl., institutionellen u. theoret. Rahmenbedingungen. - Stuttgart : Poeschel, 1989. - XVIII, 445 S. - Zugl.: Augsburg, Univ., Diss. - (Betriebswirtschaftliche Abhandlungen ; N.F., 77)
Article
This paper explains why the question is how, not if, today's financial statements should include estimates of the future. Including such estimates Is not new, but their use is Increasing. This increase results primarily because standard-setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful Information for making economic decisions, which is the objective of financial reporting. This Is why standard-setters seem focused on fair value accounting. How estimates of the future are incorporated In financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for Inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits are recognized. Disclosures in the notes can help users understand recognized estimates and can provide information about unrecognized estimates. Including more estimates of the future in today's financial statements would result in an income measure that differs from today's Income, but such a measure arguably provides better information for making economic decisions.
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Many accounting research studies address the importance of financial statement numbers in debt contracts. Because corporate lending contracts often contain covenants that use numbers from the borrowers' financial statements, researchers concluded that voluntary and mandatory accounting method changes have economic consequences for borrowing firms and lenders. This article describes the risks involved for both lenders and borrowers when they negotiate lending contracts containing covenants based on financial statement numbers. Lending contracts that specify accounting methods (fixed GAAP contracts) can minimize such risk. A sample of 228 lending agreements contained 174 covenants using financial statement numbers. Contrary to results presented in prior studies, 90 of the 174 sample contracts containing financial statement covenants specify accounting methods. Only 84 of the contracts contain accounting-based covenants for which the accounting methods are not specified. Further, contracts with more financial statement covenants are more likely to contain provisions specifying accounting methods, and that the use of such provisions is increasing over time.
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In this paper, we focus on the relationships between international accounting harmonization (IAH) and the paradigm of Fair Value Accounting (FVA). Accountants rely on the accounting concept of comparability in defining IAH and are in agreement that a set of internationally implemented Generally Accepted Accounting Principles (GAAP) is required for a “complete harmonization.” We argue, however, that a second requirement—a common denominator for measuring, recording, and reporting business transactions, assets, liabilities, and equities—is necessary to reach a state of a “complete IAH.” We explain the logic behind the requirement of a common denominator and assert that IAH is feasible under the paradigm of FVA, but not under that of Historical Cost Accounting (HCA). This is true because the concept of fair value, but not historical cost, provides the common denominator necessary for a meaningful comparison of accounting data. We then argue that the paradigm of FVA acts as a catalyst in a harmonization cycle: FVA propels IAH and IAH provides more relevant information that may foster the efficiency of global markets, which improves the quality of the FVA figures.
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This book reviews the theory and methodology underlying the economics-based empirical literature in accounting. An accounting theory theory is an explanation for observed accounting and auditing practices. Such an explanation is necessary for interpretation of empirical associations between variables. The book discusses the role of theory in empirical work. It then reviews accounting theories involved in empirical studies of the use of accounting in capital markets, contracting and the political process and the extent to which the theories are consistent with those studies' evidence. Empirical studies in auditing are also reviewed. The book finishes with a discussion of the role of accounting research and a summary and evaluation of the research up until the mid-1980s.
Article
The FASB adopted a balance sheet-based model of financial reporting about 30 years ago, and this model has been gradually expanded and solidified to become the required norm around the world today. This article argues that the balance sheet orientation of accounting standard-setting is flawed for the following reasons. First, accounting is supposed to reflect business reality, and thus the essential features of the financial reporting model need to reflect the essential features of the underlying business model. However, the balance sheet orientation of financial reporting is at odds with the economic process of advancing expenses to earn revenues, which governs how most businesses create value, and which represents how managers and investors view most firms. Second, the adoption of the balance sheet approach was driven by conceptual considerations; standard setters argued that the concept of assets is more fundamental and logically prior to the concept of income. However, this article argues that the concept of income is clearer and practically more useful than the concept of assets, especially with the recent proliferation of intangible assets. Third, earnings is the single most important output of the accounting system. Thus, intuitively, improved financial reporting should lead to improved usefulness of earnings. However, the continual expansion of the balance sheet approach is gradually destroying the forward-looking usefulness of earnings, mainly through the effect of various asset re-valuations, which manifest as noise in the process of generating normal operating earnings. During the last 40 years, the volatility of reported earnings has doubled and the persistence of earnings is down by about a third, while there is little change in the properties of the underlying business fundamentals.
Article
Rules are fundamental to financial reporting, tax regulation, and auditing processes, and therefore the limitations of rule-based structures are of primary interest to accountants. All rule systems are plagued by the problem of vagueness, which implies that some very important decisions cannot be objectively described as "right" or "wrong," and must be based on an authority's judgment. This problem becomes most acute when accounting faces rapid technological changes, financial engineering, creative tax planning, or changes in the way that business is done. If the environment were static, explicit rules could eventually be developed for each category and consulted when making classifications. In contrast, dynamic environments present new problems characterized by vagueness. In this paper, I will review several definitions of vagueness, and show how they are tied to a conceptual framework. In particular, I will discuss the potential roles of verifiability, relevance, and consistency under any feasible (vague) conceptual accounting framework.
Article
This commentary considers the issue of judgment in the application of accounting standards. The rules-versus-principles argument is discussed, with particular attention to the relationship between accounting standards, accounting objectives, and the exercise of judgment. Both the types of judgment and the locus of judgment are examined: What types of accounting estimates are needed, and who makes those estimates? In particular, the problematic use of probability estimates and expected values is discussed. The paper concludes with proposals for improving the quality of accounting standards.
Article
This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in that debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.
Article
Lawyers lean heavily on the connected concepts of legal right and legal obligation. We say that someone has a legal right or duty, and we take that statement as a sound basis for making claims and demands, and for criticizing the acts of public officials. But our understanding of these concepts is remarkably fragile, and we fall into trouble when we try to say what legal rights and obligations are. We say glibly that whether someone has a legal obligation is determined by applying "the law" to the particular facts of his case, but this is not a helpful answer, because we have the same difficulties with the concept of law.
Article
This is the first of a pair of papers which examine some important questions raised by the ‘conceptual framework’ (CF) project carried out by the FASB in the late 1970s and early 1980s. This project has not generally been considered a success, in spite of the magnitude of the resources at the FASB's disposal. The present paper provides a critique of the approach used by the FASB, by analysing the Board's methodology as it appears from key documents published by the Board in the course of the project, against a background of methodological insights available from studies of policy formulation (Lindblom, 1959) and of legal validity (Raz, 1979) - insights of which the FASB was apparently quite unaware. This analysis shows why the CF, insofar as it was intended to achieve its ostensible aim of conferring powers of standard setting on the FASB independent of those delegated to it by the SEC, was unsuccessful. The second paper extends the analysis based on jurisprudence into the field of ‘soft systems’ analysis, against a historical background of developments in systems methodology during the 1970s - developments of which the FASB was again apparently quite unaware. It concludes with some implications for accounting as an applied social and behavioural science.
Article
This paper examines the question of whether the objective of financial reporting should be based solely on ‘decision-usefulness’ or whether stewardship should be recognised as a separate objective. This question is not new, but has recently come to the fore through the publication by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) of their ‘Preliminary Views’ (PV) paper setting out a draft of the first chapters of their proposed improved conceptual framework. The PV paper proposes a decision-useful objective, and argues that information relevant to assessing stewardship will be encompassed in that objective. However, two IASB members have set out an ‘Alternative View’ which argues that stewardship and decision-usefulness are parallel objectives with different emphases that should therefore be defined as separate objectives. The present paper argues that, as suggested by the Alternative View, stewardship contributes an important dimension to financial reporting, which should be reflected by specific acknowledgement in the objectives of financial reporting. However, it suggests that stewardship should not be characterised simply as information to assist an assessment of the competence and integrity of ‘stewards’ (i.e. management, directors) but as the provision of information that provides a foundation for a constructive dialogue between management and shareholders. Seen in this way, stewardship provides a direct support for many of the propositions advanced in the PV paper. For example, it highlights the importance of historical information and that information should be complete. It would, however, be easier to make a compelling case for this information if a major role for stewardship were identified in the framework, rather than being placed merely in a supporting role. But other consequences would also follow. Exclusive focus on a decision-usefulness objective has led to an excessive emphasis on the forecasting of future cash flows, and insufficient emphasis on reliability, which seems to be an essential qualitative characteristic of financial statements. The substitution of ‘verifiability’, as proposed by the PV paper, is not adequate. There is no conflict between decision-useful and stewardship objectives, since the information required to meet the objective of stewardship is required by decision-usefulness: however, the exclusion of stewardship incurs the risk that those who argue for the inclusion of information required for an assessment of stewardship will be placed at a disadvantage. They will have to frame their arguments in an indirect and convoluted way, and it is accordingly unlikely that they will always succeed. So accounting standards might permit the exclusion of information, or the presentation of information in a suboptimal way, whilst superior alternatives could be compellingly supported by appeal to an explicit objective of stewardship.
Article
Managers have sufficient discretion under generally accepted accounting principles (GAAP) to adopt more or less conservative financial reporting policies. In this paper, we develop a signaling model to provide insight into managers’ decisions to be conservative in their accounting. We provide conditions under which the market can use the manager’s exercise of discretion to infer her private information about the future prospects of the firm and thus firm value. Under these conditions, we also show that there are meaningful differences between earnings response coefficients for firms whose managers choose a conservative reporting policy and those whose managers do not. Finally, we use our theoretical model to provide intuition for some established empirical results on earnings response coefficients.
Article
Frameworks for thinking about experiences and occurrences have long been the basis of organized knowledge and technology. They consist of sets of descriptive statements of what commonly occurs, and what is therefore possible. The term ‘conceptual framework’ has been given an entirely different interpretation in accounting -a ‘constitution’ prescribing the nature of accounting and its products. In spite of the conceptual framework projects of recent years. the diversity of rules and practices which have prompted attempts to reform accounting persists. These projects have failed through disregard of the role of systematic knowledge in the design of serviceable practical devices.
Article
This paper examines the usual claim that tighter accounting standards reduce earnings management and provide more relevant information to the capital market. We distinguish between accounting and real earnings management and assume that a standard setter can only influence accounting earnings management by the tightness of standards. In a rational expectations equilibrium model, we find that earnings quality increases with tighter standards, but we identify several consequences that may outweigh this benefit. First, managers increase costly real earnings management because the higher earnings quality increases the marginal benefit of real earnings management. Second, tighter standards can increase rather than decrease expected accounting and total earnings management. Third, the expected total costs of earnings management can also increase. We provide conditions for the occurrence of each of these effects.
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We present a first-time comparison of the principles-based corporate governance regime in Canada and the rules-based corporate governance regime in the United States from a theoretical, legal and empirical perspective. This comparison is of value to both firms considering a listing in Canada and/or the United States and institutional investors who hold equity stakes in either of these two countries. Under the Canadian principles-based approach, with the exception of mandatory rules relating to audit committees, companies are required to publicly disclose the extent of their compliance with the suggested best practices and, where a firm's practices depart from such guidelines, to describe the procedures implemented to meet the same corporate governance objective. Hence, the Canadian approach is in the form of comply or disclose. In contrast, the U.S. rules-based approach is oriented toward mandatory compliance with legislation and stock exchange requirements, with a much greater emphasis on regulatory enforcement rather than voluntary compliance. Our empirical evidence illustrates that the different regulatory regimes in Canada and the United States has to a certain extent resulted in considerably different corporate governance practices. Our research shows that Canadian firms, in comparison to U.S. firms: have smaller boards with fewer independent directors; have boards that hold more meetings; have directors that sit on a greater number of boards than directors of Nasdaq-listed firms, and sit on a fewer number of boards than directors of NYSE firms; are less likely to have CEOs also serving as the chairman of the board; and are less likely to have compensation, nominating and corporate governance committees, and the fraction of independent directors sitting on these committees is significantly lower. We conclude that there are pros and cons associated with both the principles-based and rules-based regimes. The extent to which the made-in-Canada approach to governance is found to be effective largely depends upon whether investors remain confident in regulation of the Canadian capital markets.
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The theory advanced is that precise rules more consistently regulate simple phenomena than principles. However, as the regulated phenomena become more complex, principles deliver more consistency than rules. A central reason is that the iterative pursuit of precision in single rules increases the imprecision of a complex system of rules. By increasing the reliance we can place on a part of the law we reduce the reliability of the law as a whole. Then it is argued that consistency in complex domains can be even better realised by an appropriate mix of rules and principles than by principles alone. A key choice here is between binding rules interpreted by non-binding principles and non-binding rules backed by binding principles. The more complex the domain, the more likely it is the latter that will deliver greater consistency. Robert Baldwin argues that the reason "Why Rules Don't Work" is that they are typically evaluated without reference to the context of their implementation. Hence we cannot understand when law is and is not consistently implemented by the police without confronting the fact that police culture is not a rulebook, but a storybook. In complex domains, when police, regulatory inspectors and judges enforce rules consistently, they do so as a result of shared sensibilities. Regulatory conversations that foreground obligatory principles buttressed by non-binding background rules is hypothesised to be the stuff of legal certainty on such complex terrain.
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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. policy makers as they continue to contemplate a shift to more principles-based accounting standards (e.g., IFRS).
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This paper examines issues pertaining to standard setting in an increasingly interconnected world. It is argued that many present day accounting standards are flawed, generally because of inherent compromises welded into their structure, yielding needless complexity and sometimes absurd results. Using examples drawn from contemporary practice, including pension accounting, financial instruments and lease accounting, an argument for a move towards more simplified, principles based accounting is made. Some of the potential gains from such a project are discussed, as well as potential barriers and how these might be avoided in the quest for better accounting.