American Accounting Association

AUGUST 6-10, 2011  •  DENVER, COLORADO

Session Title: Auditor Monitoring
Presentation Date: Monday August 8, 2011
Presentation Time: 4:00 pm-5:30 pm

The Impact of Regulatory Enforcement and the Adoption of Principles-based Accounting on Financial Reporting Quality: Evidence from Auditors’ Judgments

Jeff Cohen, Boston College
Ganesh Krishnamoorthy, Northeastern University
Marietta Peytcheva, Lehigh University
Arnold Wright, Northeastern University

ABSTRACT: With the movement towards International Financial Reporting Standards (IFRS) in the U.S., a question arises as to whether the worldwide adoption of a principles-based approach such as the IFRS will result in higher quality financial reporting. One widely cited factor that could potentially affect the implementation of a principles-based approach is the type of regulatory environment that is in place in a given country. Accordingly, the objective of this paper is to examine the impact of the strength of the regulatory regime on the quality of financial reporting under rules-based versus principles-based accounting standards. We posit that a principles-based standard will lead auditors to become more focused on economic substance than a rules-based standard irrespective of the regulatory regime and will, thus, lead to higher quality reporting. To examine this issue, we employ an experimental approach with experienced auditors as participants. Using a case setting involving the classifica

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