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

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 15: Professional Skepticism

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, we posit that 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 the standards direct the auditor to focus on economic substance. To examine this issue we conduct an experiment involving 80 experienced audit partners and managers, who are asked to resolve accounting issues of varying subjectivity (high or moderate) in either a rules or principles-based environment where the client has incentives to report aggressively. We find, as predicted, 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 integrative tactics in a principles-based environment, especially for highly subjective tasks, than a rules-based environment.

Authors

• Helen L Brown-Liburd, Rutgers Business School

• Danielle Rose Lombardi, Villanova University

• Arnold Wright, Northeastern University

• Sally Wright, University of Massachusetts-Boston