The Impact of Principles versus Rules Accounting Standards and Task Subjectivity On Auditor Reporting Judgments and Negotiation Tactics

• In Event: Auditor-Client Interactions and Negotiations

Abstract

In this study we examine how auditors approach resolving accounting issues of varying subjectivity in a principles vs. a rules accounting regime. With a highly subjective issue there is substantial variance (range) in potential positions and the auditor faces a difficult task in taking a firm stance. Thus, rules provide guidelines to assist the auditor in constraining aggressive reporting. However, when the issue is moderately subjective, the auditor is more likely to take a firm stance under a principles regime where professional judgment can be adopted with a focus on economic substance. This experimental study, involving 80 experienced audit partners and managers, compares auditor judgments when preparing to resolve accounting issues of varying subjectivity (high or moderate) in a rules versus principles-based environment where the client has incentives to report aggressively. We find that as the subjectivity of an accounting issue increases, rules lead to more conservative auditor reporting judgments. We also examine auditors’ negotiation tactics and find that they employ more problem-solving, integrative strategies in a principles-based environment, especially for highly subjective tasks, than a rules-based environment. However, additional analysis suggests that there are differences across issue subjectivity and reporting regimes. Auditors are more likely to use distributive tactics when the issue is highly subjective, but only in the rules reporting regime.

Authors

• Helen L Brown-Liburd, Rutgers Business School

• Danielle Rose Lombardi, Villanova University

• Arnold Wright, Northeastern University

• Sally Wright, University of Massachusetts-Boston