Principles-Based Versus Rules-Based Accounting Standards: the Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decision

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PRINCIPLES-BASED VERSUS RULES-BASED ACCOUNTING STANDARDS: THE INFLUENCE OF STANDARD PRECISION AND AUDIT COMMITTEE STRENGTH ON FINANCIAL REPORTING DECISION

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BUS 421 ACCOUNTING THEORY E100
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Presented To: Karel Hrazdil
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Presented by: Shirley Mi Chen (301069071)

ABSTRACT
Agoglia, Doupnik, and Tsakumis (2011) examined two hypothesis in their paper and concluded that preparers of financial statement are more likely to report aggressively under a more precise accounting standard; and the role of audit committee is greatly weakened in a less precise standard setting. With the principles-based accounting standards, prepares fear uncertainties brought by the flexibility of judgment and are more likely to report using a method that best reflect the value of the firm. This article and its findings also relates to the positive accounting theory seeking to explain and predict management's choice of decision in accounting reporting.

PAPER
Accounting scandals back in the early 2000, including that of Enron and WorldCom, led to the passing of the Sarbanes-Oxley Act (SOX). SOX aims to reduce corporate governance concern and ultimately seek to increase the credibility of the financial reporting. Agoglia, Doupnik, and Tsakumis (2011) looked at two aspects related to the strength of the financial reporting: the influence of standard precision and the role of audit committee. This article had and referred to with particularly focus on the circumstance in US with regards to their rules-based approach of accounting. The more precision based accounting standards in US is suppose to dampen the executives' ability to manipulate financial results as well as increase comparability across all firms. However, all the accounting scandals brought to the attention of the public has began to question whether the rules-based standards...
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