The Influence of Accounting Standard Precision on Auditors Decisions

Abstract

Accounting standards such as lease standard can be applied opportunistically by managers to manipulate the economic substance of transaction. This phenomenon is reduced by using the principles-based accounting standard. The purpose of this paper is to investigate the effect of principles-based versus rules-based accounting standard and audit committee on constraining aggressive financial reporting. This research manipulated with the type of accounting standards (principles-based and rules-based) and the type of audit committee (strong and weak) in the auditors group. Our results indicate that auditors are less likely to report aggressively under a less precise (principles-based) standard than under a more precise (rules-based) standard. Also, we find no effect of audit committee on the aggressively financial reporting. This result suggests that accounting standard setters can move in direction of the less precise standards to improve the financial reporting quality.