AAA Spark Meeting of Regions

The Influence of Rules vs. Principles Based Accounting Standards on Audit Fees

• In Event: Audit Committees Attributes' and Characteristics of the Audit, including pricing

Abstract

This study examines the association between the principles-based accounting standards and audit pricing. Our results suggest that auditors perceive firms relying more on principles-based standards to be less risky, which results in lower audit fees. Furthermore, we investigate the relationship between a firm’s reliance on principles-based accounting standards and likelihood of the firm receiving going concern opinion. We determine that probability of receiving going concern opinion reduces as firms rely more on principles-based standards because these firms are less likely to structure transaction to achieve certain earnings targets (i.e., earnings management) and more likely to structure transactions to achieve certain economic outcomes that benefit the firms. This research contributes to the debate about the nature of accounting standards. Our study is also relevant for investors and regulators as the results suggest that financial statements prepared using more principles-based standards better reflect the economic performance of the firm.

Author

• Meena Subedi, University of Wisconsin Whitewater