۱- Introduction

۲- Theory

۳- Method

۴- Results

۵- Conclusion

۶- Discussion

۷- Limitations and future research

۸- Conclusion

References

Abstract

In the wake of numerous accounting scandals in the early 2000s, the U.S. began considering a move away from a more rule-based approach to accounting standard setting and toward a more principle-based approach to accounting standard setting. Although it is often assumed that this move toward a more principle-based approach is driven by stakeholder preferences, we examine whether this move is driven by demands for procedural justice. Specifically, we analyze one hundred and two comment letters submitted in response to the Financial Accounting Standard Board (FASB) proposal for principle-based standards. We find respondents from different stakeholder groups (preparers, accounting professionals, regulators, users, and academia) do not express a unified preference for rule-based or principle-based standards. We do, however, find that respondents identify benefits and costs of principle-based standards that map into the six elements of fair procedures (representativeness, accuracy, bias suppression, consistency ethicality, correctability). These elements are significantly associated with both the respondent’s degree of support for the FASB proposal and the perceived quality of principle-based standards.

Introduction

In the U.S., the FASB establishes the accounting standards that are used to report economic activity in a company’s financial statements. In the wake of the Enron and WorldCom accounting scandals, critics began to question the process by which these accounting standards were written. Accounting standards, meant to ensure that financial reports fairly present the financial position of a corporation, were perceived as failing to prevent corporations from misleading stakeholders and causing significant losses by investors, creditors, employees, and pension plans (Berkowitz & Rampell, 2002a; Berkowitz & Rampell, 2002b; Burns, 2002). Many critics subsequently argued that the FASB standard setting process was too ‘rule-based’ resulting in accounting standards that simply provided a means for preparers to structure transactions around bright-line thresholds. In an effort to restore trust in the U.S. accounting standard setting process, FASB issued an exposure draft entitled “Proposal for a Principle-based Approach to U.S. Standard Setting” (FASB, 2002).1 This renewed examination of how accounting standards are written spawned a ‘rules versus principles’ debate which centered on the level of specificity versus the degree of judgment allowed by a standard. The debate often presupposed that different stakeholder groups (preparers, accounting professionals, regulators, users) had incentives to prefer either rule-based or principle-based accounting standards. Preparers, for example, are assumed to prefer principle-based standards so that they can use the latitude in such standards to manage earnings (Berkowitz & Rampell, 2002a; Berkowitz & Rampell, 2002b; Burns, 2002).