Effects of Principles versus Rules Based Accounting Standards and Expanded Auditor Reporting on Investors’ Perceptions of Management’s Reporting Credibility

• In Event: Concurrent Session 3.1: Auditing and Financial Reporting Quality

Abstract

The purpose of this study is to investigate how the effects of principles vs. rules based accounting standards and a potential change in the audit reporting model will affect investors’ perceptions of management’s reporting credibility. The SEC is currently considering the adoption of IFRS, which is considered to be principles based accounting standards, and existing GAAP is consider rules based. Additionally, the PCAOB and IAASB are individually considering a possible change to their respective audit reporting models. The proposed audit reporting change, currently under consideration, would require the use of additional emphasis of matter paragraphs within the audit report to discuss areas of higher risk of misstatement in the financial statements. A sample of 84 non-professional investors completed an on-line 2 X 2 between subjects experiment that manipulated accounting standard type and level of auditor reporting. Participants assessed reporting credibility, obtained the experimental manipulations, and provided revised credibility assessments. The change in credibility serves as the dependent variable. The results suggest that the principles based accounting standards and increased auditor reporting resulted in lower perceptions of management’s reporting credibility. The results, however, do not suggest an interactive effect of accounting standard and auditor reporting on perceived reporting credibility. These conclusions extend existing literature on accounting standard type, the information content of audit reports, and managements’ reporting credibility. The inferences also are informative to policy makers who are considering possible revisions to accounting and auditing standards.

Author

• Michael Ozlanski, Virginia Polytechnic Institute and State University