The Effect of Accounting Standard Precision and Professional Judgment Guidance on Auditors’ Decision under Chinese Regulatory Environment

• In Event: Financial Accounting and Auditing

Abstract

Chinese auditors are concerned with the audit liability associated with the professional judgment under the less precise accounting standards. Chinese Institute of Certified Public Accountants (CICPA) published the professional judgment guidelines in order to help auditors making better judgments. We experimentally investigate the joint effects of different accounting standards in different level of precision and the guidance on professional judgment on auditors’ judgment and decision-making under different regulatory environment. The evidence suggests that auditors have a tendency to agree with management aggressive financial reporting under less precise standards. However, the professional judgment guidance could significantly constrain their decision. As expected, these findings are all more significant under weak regulatory regime. The results imply that the judgment guideline framework could reduce the possible negative effect of less precision accounting standards under weak regulatory regime. These results should be of interest to researchers, audit practitioners, national regulators and standard setters.

Keywords: Accounting standard precision; Principle-based standards; Judgment guidance; Audit judgment; Financial regulatory environment

Author

• Xia Zhang, Alabama A&M University