The Impact of Principles-Based versus Rules-Based Accounting Standards on Auditors' Motivations and Evidence Demands

Abstract

Auditing research has investigated the effects of different accounting standards on auditors' decisions to constrain aggressive reporting by clients. Missing from this literature is evidence on how the type of accounting standard influences auditors' cognitive motivations and demand for audit evidence. This study addresses this gap in the literature, which is important since the financial statements are the joint product of management's and the auditor's actions. An experiment was conducted with U.S. and Dutch auditors to examine the manner in which principles-based versus rules-based accounting standards influence auditors' process accountability, epistemic motivation, and demands for audit evidence. The study proposes and supports a theoretical model in which principles-based accounting standards increase auditors' process accountability—the expectation of having to justify to others the decision process used, regardless of the outcome of the decision (Markman and Tetlock 2000; Libby, Salterio, and Webb 2004). Greater process accountability in turn increases auditors' epistemic motivation—the desire to develop and maintain a rich and accurate understanding of the problem at hand (Kruglanski 1989). The heightened epistemic motivation induced by principles-based accounting standards then ultimately increases auditors' demands for audit evidence. Thus, the results suggest the important influence of accounting standards on auditors' motivations and consequent program planning decisions.

Auditors' Response to Different Reporting Environments: Experimental Evidence From the Quantity and Quality of Auditors' Evidence Demands in China

“…Taken together, our research provides a contribution to the related work in this area by Cohen et al (2013) and Peytcheva et al (2014) in several important areas. First, our research scope is different and very appropriate to look at the effect of IFRS.…”

“…Recent studies on this topic have found that under principlesbased accounting standards, auditors are more likely to constrain aggressive reporting (Cohen, Krishnamoorthy, Peytcheva, & Wright, 2013) and increase process accountability, epistemic motivation, and demand for evidence (Peytcheva, Wright, & Majoor, 2014). Our study adds to prior research by investigating how auditors play their role in the implementation of principles-based versus rules-based accounting standards in China, which is an environment where auditors have experienced recent changes to accounting standards.…”

“…Peytcheva et al (2014) examined the effect of the types of accounting standards on US and Dutch auditors' evidence collection decisions and found that auditors collected both a greater amount of both diagnostic and nondiagnostic evidence under principles-based accounting standards. Peytcheva et al (2014) examined the effect of the types of accounting standards on US and Dutch auditors' evidence collection decisions and found that auditors collected both a greater amount of both diagnostic and nondiagnostic evidence under principles-based accounting standards.…”

“…This was not done in Cohen et al (2013), although Peytcheva et al (2014) included a subset of Dutch auditors who would have been experienced with IFRS. This was not done in Cohen et al (2013), although Peytcheva et al (2014) included a subset of Dutch auditors who would have been experienced with IFRS.…”

“…Peytcheva et al (2014) suggested further research with auditors who had more experience with principles-based standards would be useful. Peytcheva et al (2014) suggested further research with auditors who had more experience with principles-based standards would be useful.…”