How Rules-Oriented Are Accounting Standards?

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 5: Accounting and Auditing Standards

Abstract

Recent accounting scandals have prompted an effort to identify features of accounting that may have contributed. One prominent candidate has been the “rules-based,” as opposed to “principles-based,” system of financial reporting standards. But on what basis can the accounting community judge the extent to which its standards are indeed rules-based? In this study, we model the rules-orientation of occupational standards in a large cross-section of U.S. occupations as a means of putting the rules-orientation of accounting standards in context. We find that the standards used by professional auditors are extremely rules-oriented even after controlling for a number of occupational features that theory suggests influence the costs and benefits of constraining worker choices through standardization, especially when it is rules-based. We then examine how the rules-orientation of standards governing specific financial reporting practices changes the dialogue among accounting professionals with respect to that practice. A lower quality dialogue is one of the theorized consequences of increasing rule-boundedness. We find evidence consistent with standard-setters “crowding out” other groups that had previously participated in accounting debates which is especially pronounced when the topic under discussion shifts from a principles-based to a rules-based standard.

Authors

• Paul E. Madsen, University of Florida

• Devin Williams, University of Florida