Preview

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

Better Essays
Open Document
Open Document
1339 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Principles-Based Versus Rules-Based Accounting Standards: the Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decision
PRINCIPLES-BASED VERSUS RULES-BASED ACCOUNTING STANDARDS: THE INFLUENCE OF STANDARD PRECISION AND AUDIT COMMITTEE STRENGTH ON FINANCIAL REPORTING DECISION

-------------------------------------------------
BUS 421 ACCOUNTING THEORY E100
-------------------------------------------------
Presented To: Karel Hrazdil
-------------------------------------------------
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
Continue Reading
View Writing Issues

You May Also Find These Documents Helpful

  • Good Essays

    Sarbanes-Oxley Act of 2002 Acc 290
    • 433 Words
    • 2 Pages

    Sarbanes-Oxley Act of 2002 Acc 290

    The Sarbanes-Oxley Act (SOX) originated on July 29, 2002 due to fraudulent bookkeeping practices and misleading financial reports from large corporations. These practices created a number of accounting scandals, which resulted in this in the government creating such an act. The purpose was to prevent and punish corporate corruption and, along the way, try to repair investor confidence. The law was passed by congress after well-known companies (Enron, Peregrine Systems and Tyco International, to name a few) caused great humiliations to its investors, which in result cost them billions of dollars. The share prices of the affected companies collapsed, which shook public confidence in the nation’s securities markets.…

    • 433 Words
    • 2 Pages
    Good Essays
    Read More
  • Powerful Essays

    Sarbanes Oxley Memo
    • 1426 Words
    • 6 Pages

    Sarbanes Oxley Memo

    History of SOX - the Sarbanes-Oxley Act of 2002 is legislation in response to the high profile financial scandals, such as seen with Enron and WorldCom. The purpose of this act is to protect shareholders and the general public from accounting errors and fraudulent business practices. The Sarbanes-Oxley Act introduced stringent new rules to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. Sarbanes-Oxley is not a set of business practices and does not specify how a business should store records; rather, Sarbanes-Oxley defines which records are to be stored and for how long.…

    • 1426 Words
    • 6 Pages
    Powerful Essays
    Read More
  • Satisfactory Essays

    Sarbanes-Oxley Act
    • 534 Words
    • 2 Pages

    Sarbanes-Oxley Act

    Senator Paul Sarbanes and Represenatative Michael Oxley partnered to draft the act prior to 2002. Their goal was to develop legislation that would protect consumers, mainly investors, from companies who would fraudulently report accounting numbers to avoid taxes, regulations, or other barriers that kept the company from maximizing it’s profits. The SOX Act holds company CEO's and CFO's responsible for the information presented by their company in financial statements. It created new standards of accountability for corporations as well as penalties of those standards of accountability are not met. SOX established new financial reporting…

    • 534 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Better Essays

    ESSAY ON THE LEGAL ETHICAL AND TECHNOLOGICAL CONCERNS OF THE ACCOUNTING AND FINANCIAL REPORTING OF BUSINESSES
    • 1574 Words
    • 7 Pages

    ESSAY ON THE LEGAL ETHICAL AND TECHNOLOGICAL CONCERNS OF THE ACCOUNTING AND FINANCIAL REPORTING OF BUSINESSES

    The extent and expanse of the finance and accounting branches have been expanding at a considerable step which has also put load on this ground field. Companies and businesses interface their financial rank by producing few outlines to the exterior world so as to retain the interest of employees, shareholders, investors, customers, etc. This statistics is shared in the outline of financial declarations, annual reports, etc which makes it easier on the decision making procedure as well. Besides, showing misleading and untrustworthy reports to the clientele may dare the likeness of the firm which may tremble the interest of the outer parties inside the company. Few of the businesses which have demonstrated the interpreted financial statistics are WorldCom and Enron have drove to disasters, as a result of which investors, shareholders and others have to cause enormous quantity of losses, when these businesses proclaim bankruptcy, years after a healthy financial reports. The principal point of such type of financial announcement is to make it easier when it comes tho decision making process in the field of investment, credit, etc. The environment in which a business functions has an extreme impact on the accounting of that particular business. Countries possess all different past histories, cultures, values, political and economical structures, and they are also in diverse phases of economic development, these are the elements that highly influence the development as well as the operation of the financial accounting operations of the country. With these dissimilarities the financial accounting qualities that are being embraced by different countries differ significantly. There are so many different legal, ethical and technical matter that influence the financial announce as well as accounting. There have been few legal, ethical and technological responsibilities of this reporting of business, that are as follow:…

    • 1574 Words
    • 7 Pages
    Better Essays
    Read More
  • Powerful Essays

    Rsm220-Week 01 Slides
    • 2259 Words
    • 10 Pages

    Rsm220-Week 01 Slides

    Role of Financial Reporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective of Financial Reporting •Management bias •Users’ needs Standard Setting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAP • GAAP hierarchy •Professional judgement • Role of ethics Challenges Facing Financial Reporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability…

    • 2259 Words
    • 10 Pages
    Powerful Essays
    Read More
  • Better Essays

    Navirn
    • 1265 Words
    • 6 Pages

    Navirn

    This then makes the method of setting accounting standards a political activity. This can be termed to as a one dimensional view of power because it focuses on the behavior in decision making on issues which have notable conflict of interest as revealed by political participation (Hopwood et.al 2005). This activity has a high consequence which involves…

    • 1265 Words
    • 6 Pages
    Better Essays
    Read More
  • Best Essays

    The Pros and Cons of Setting Separate Private Company Accounting Standards
    • 956 Words
    • 4 Pages

    The Pros and Cons of Setting Separate Private Company Accounting Standards

    With the development of world economy, U.S.GAAP becomes more and more complex to meet public companies’ needs. Private companies cost a great fortune to compliance with U.S.GAAP. So, setting public-private accounting standards is a different issue debated for decades. it goes without saying that setting new separate accounting standards have its advantages and disadvantages.…

    • 956 Words
    • 4 Pages
    Best Essays
    Read More
  • Better Essays

    Opposition to Global Accounting convergence
    • 1224 Words
    • 4 Pages

    Opposition to Global Accounting convergence

    In the United States, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) have worked tirelessly to create a system that works; our Generally Accepted Accounting Principles (GAAP) provide guidelines that we can trust. The International Accounting Standards Board (IASB) seeks to accomplish the same mission on a global scale through the International Financial Reporting Standards (IFRS). The goal of IFRS and US GAAP convergence is “to create a common set of high quality standards” that will “improve the quality, consistency, and comparability of financial information for investors” all over the world (Fischer, 2012, p. 1). However, major differences between US GAAP and IFRS, and in culture and ethics justifiably hinder hopes of convergence…

    • 1224 Words
    • 4 Pages
    Better Essays
    Read More
  • Better Essays

    Accounting Estimates and Policy
    • 2361 Words
    • 10 Pages

    Accounting Estimates and Policy

    This paper compares our company 's current accounting practice with the requirements in respective accounting standards in relation to disclosure of sources of estimation uncertainty and judgments in applying accounting policies with the aim the identify any gaps between these two which may trigger ASIC ' reviewers attention. It takes a look first at the requirements in respective accounting standards (Chapter 2). It then examine the current accounting practices in our company (Chapter 3 and 4) and identify the gaps between company 's practice and accounting standard (Chapter 5). At the end recommendations are made for a better-compliant report (Chapter 6).…

    • 2361 Words
    • 10 Pages
    Better Essays
    Read More
  • Good Essays

    ACCTNG5000 CH3 HW Q
    • 710 Words
    • 3 Pages

    ACCTNG5000 CH3 HW Q

    Uniform accounting standards reduce managers’ ability to record similar economic transactions in dissimilar ways, ultimately creating a uniform accounting language and increasing the credibility of the financial statements by limiting a firm’s ability to distort them. The potential threat of lawsuits and penalties generally improves the accuracy of disclose. Significant legal liability enforced by the SEC tends to also discourage management and auditors from supporting accounting proposals where management and auditor judgment, as well as increased complexity come into play. Ultimately, without the SEC or FASB, managers would not have to disclose any information and the quality of accounting would significantly decrease.…

    • 710 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Ijiri And Jaedicke Reliability And Objectivity Of Accounting Measurement
    • 1170 Words
    • 3 Pages

    Ijiri And Jaedicke Reliability And Objectivity Of Accounting Measurement

    Accounting is a measurement system in which number of alternative measurement methods are available. Criteria for choosing best measurement alternative is an issue over the life of accounting. The user groups and the purpose for which data will be used are important, however, the use or purpose of the data is simply too broad and general a criterion to be of much help. Usefulness is made up of many factors. Data must be timely, reliable, accurate, relevant, material, etc., to be useful. Objective of this study is to analyze one important aspect of usefulness that is reliability and its linkage with objectivity.…

    • 1170 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Summary for The FASB’s Conceptual Framework for Financial Reporting: A Critical Analysis
    • 380 Words
    • 2 Pages

    Summary for The FASB’s Conceptual Framework for Financial Reporting: A Critical Analysis

    Author: American Accounting Association’s Financial Accounting Standards Committee George J. Benston (Primary author); Douglas R. Carmichael; Joel S. Demski; Bala G. Dharan; Karim Jamal; Robert Laux; Shiva Rajgopal; George Vrana.…

    • 380 Words
    • 2 Pages
    Good Essays
    Read More
  • Powerful Essays

    Harmonization of International Accounting Standards: Advantages & Disadvantages, Obstacles & Solutions
    • 3944 Words
    • 16 Pages

    Harmonization of International Accounting Standards: Advantages & Disadvantages, Obstacles & Solutions

    As the trend for globalization in business becomes increasingly important for economic success, many issues arise through international business practices for corporations, governments, and investors. Due to the many conflicting codes and practices that exist between various national financial accounting standards throughout the world, international business becomes harder to analyze as information is not easily comparable between competitive industries. (Diaconu 2007) Because there is no standard international code for financial reporting around the world, many multi-national corporations are forced to reconcile their financial information to conform to multiple financial reporting standards. This process of reconciling financial information for conformity with different accounting systems can be expensive, and also make information misleading. As a result of the massive increase in international business and the difficulty of reporting accurate universal financial information, initiative has been taken to create a harmonization of accounting standards between nations. Harmonization of accounting standards between nations is a very important current issue which has many possible benefits or consequences, as well as many obstacles to overcome for success. This paper will examine potential advantages and disadvantages of a harmonized international accounting standard; discuss various obstacles associated with the creation and implementation of these standards, and provide possible solutions to overcome these obstacles.…

    • 3944 Words
    • 16 Pages
    Powerful Essays
    Read More
  • Good Essays

    Advantages and Disadvantages of Principles-Based Accounting
    • 468 Words
    • 2 Pages

    Advantages and Disadvantages of Principles-Based Accounting

    Finally, the use of principles-based accounting standards may provide accounting statements that more accurately reflect a company’s actual performance because, as Australian Securities and Investments Commission Chair David Knott has stated, an increase in…

    • 468 Words
    • 2 Pages
    Good Essays
    Read More
  • Good Essays

    Accounting Diversity
    • 375 Words
    • 2 Pages

    Accounting Diversity

    Although accounting standards and practices are the same across the board in their orgin, the Accounting and taxation structures of different countries around the world make them vary between countries. Different countries apply different accounting practices. This accounting diversity is the reason that one company may seem profitable while another seemstobe operating at a loss. This difference between global accounting practices can head to poor business decision-making difficulties in raising capital in different or foreign markets, and difficulty in monitoring competitive factors across firms, industries and nations. These accounting practices are linked to the objectives of the parties who will use the financial information, including investors, lender and governments. While International AccountingStandard Committee, is trying to make a single set of high quality understandable, enforceable accounting standards worldwide. The USA is resisting, insisting that no standard are good as ours. We use the GAAP, or the Generally Accepted Accounting Principles. However because of the Enron situation, the US standards dropped and support for the international standards increased.…

    • 375 Words
    • 2 Pages
    Good Essays
    Read More

Related Topics