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The Impact of the Type of Accounting Standards on Preparers’ Judgments

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  • Jim Psaros
  • Ken T. Trotman

Abstract

This article examines preparers’ consolidation judgments and how they are impacted by the precision of accounting standards (substance‐over‐form versus rules‐based). The examination is performed via two laboratory experiments in a consolidated accounting setting. In Experiment 1 it was found that when subjects used a substance‐over‐form accounting standard they justified their consolidation judgments on case specific information rather than on different interpretations of the phrase ‘capacity to control’. In Experiment 2 it was found that when subjects used a rules‐based standard, incentives were found to impact on accountants’ consolidation judgments and more aggressive judgments were made through their assessments of case specific information. Comparison of the judgments made in Experiment 1 with one of the treatment groups in Experiment 2 enabled a comparison to be made of consolidation judgments of subjects under both substance‐over‐form and rules‐based accounting standards. While both groups had the same incentive not to consolidate, marginally significantly more subjects using the rules‐based standard did not consolidate than subjects using the substance‐over‐form standard. This finding is contrary to anecdotal claims that the imprecision of substance‐over‐form standards may be less effective in stopping biased financial reporting than rules‐based standards.

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  • Jim Psaros & Ken T. Trotman, 2004. "The Impact of the Type of Accounting Standards on Preparers’ Judgments," Abacus, Accounting Foundation, University of Sydney, vol. 40(1), pages 76-93, February.
    • Handle: RePEc:bla:abacus:v:40:y:2004:i:1:p:76-93
    DOI: 10.1111/j.1467-6281.2004.00144.x
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    References listed on IDEAS

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    1. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November.
    2. Gibbins, M & Newton, Jd, 1994. "An Empirical Exploration Of Complex Accountability In Public Accounting," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 165-186.
    3. Hirst, DE & Hopkins, PE, 1998. "Comprehensive income reporting and analysts' valuation judgments," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 47-75.
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    1. Hazianti Abdul Halim & Hartini Jaafar & Sharul Effendy Janudin, 2018. "Factors Influencing Professional Judgment of Auditors in Malaysia," International Business Research, Canadian Center of Science and Education, vol. 11(11), pages 119-127, November.
    2. Tanja Lakovic & Jayne Fuglister, 2013. "The International Accounting Standards Board’s Progress in Promoting Judgement Through Objectives-Oriented Accounting Standards," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 3(7), pages 28-42, July.
    3. Roberto Carlos Klann & Ilse Maria Beuren, 2018. "Earnings management IFRS adoption in Brazilian and British companies," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 15(1), pages 13-28, February.
    4. Wei Zhou & Liansheng Wu & Hong Wang, 2016. "The Consequences of Increasing the Scope of Managerial Judgement in Accounting Standards," Abacus, Accounting Foundation, University of Sydney, vol. 52(3), pages 404-440, September.
    5. Braun, Gary P. & Haynes, Christine M. & Lewis, Tom D. & Taylor, Mark H., 2015. "Principles-based vs. rules-based accounting standards: The effects of auditee proposed accounting treatment and regulatory enforcement on auditor judgments and confidence," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 45-50.
    6. Tanja Lakovic & Jayne Fuglister, 2013. "The International Accounting Standards Board’s Progress in Promoting Judgement Through Objectives-Oriented Accounting Standards," International Journal of Business and Social Research, LAR Center Press, vol. 3(7), pages 28-42, July.
    7. Peipei Pan & Chris Patel, 2018. "The Influence of Native Versus Foreign Language on Chinese Subjects’ Aggressive Financial Reporting Judgments," Journal of Business Ethics, Springer, vol. 150(3), pages 863-878, July.
    8. Peter Carey & Brad Potter & George Tanewski, 2014. "Application of the Reporting Entity Concept in Australia," Abacus, Accounting Foundation, University of Sydney, vol. 50(4), pages 460-489, December.
    9. Anna Bedford & Martin Bugeja & Nelson Ma, 2022. "The impact of IFRS 10 on consolidated financial reporting," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 101-141, March.

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