Examining the Impact of Justification Methods on Clients’ Agreement with Audit Adjustments under Rules-Based and Principles-Based Accounting Frameworks

• In Event: DSFI Session 4

Abstract

When auditors propose adjustments for transactions that refer to accounting standards that contain some degree of ambiguity, they are likely to use a justification method that supports their interpretation of the standard. Using an experiment with management accountants, I investigate the impact of justifying a proposed adjustment using professional judgment, firm specific guidance, or industry norms. I also manipulate whether the auditor’s client operates under a rules-based or principles-based framework. Participants act in the role of controller for their company and are asked to evaluate the likelihood of agreeing with an auditor’s proposed adjustment that concerns the classification of a significant lease transaction. Using the Elaboration Likelihood Model to guide my predictions, I expect that industry norms will increase clients’ agreement with the auditors in situations of low elaboration. In situations of high elaboration, however, the justification method will have an insignificant impact. Also, I expect that the benefit for using industry norms will be relatively greater under principles-based standards than under rules-based standards.

Author

• Erik S. Boyle, University of Utah