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Accountability and Accounting Standards: The Effect of Providing Indicative but Incomplete Guidance Rules
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Accountability and Accounting Standards: The Effect of Providing Indicative but Incomplete Guidance Rules

Peter Baxter, Gregory Laing and Monte Wynder
Accounting & Finance Association of Australia and New Zealand (AFAANZ) Conference, 2010 (Christchurch, New Zealand, 04-Jul-2010–06-Jul-2010)
Accounting and Finance Association of Australia and New Zealand
2010
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Abstract

Accounting, Auditing and Accountability leases accounting standards judgement accountability
An important development in the international harmonisation of accounting regulation has been a move towards principle-based standards. The goals of the International Accounting Standards Board (IASB) include a commitment to increasing the understandability and transparency of financial reporting. It is argued that principle-based standards will improve financial disclosure as accountants exercise their professional judgement to faithfully represent the substance of transactions. Concern exists, however, that the lack of comprehensive prescriptive rules will increase opportunity for the manipulation of the financial statements, particularly in the face of pressure from individuals to whom the accountant feels responsible. Furthermore, principle-based standards rely on professional judgement and so their appropriate application is expected to be influenced by level of education. This paper reports on an experimental study that examines the effects of providing indicative, but incomplete, rules on the exercise of professional judgement in a task where there is pressure to conform to an inappropriate accounting treatment. We also examine the potential problems associated with the provision of incomplete rules and whether those problems are overcome through a university education. This research is important in providing guidance to the regulatory bodies as they determine the extent to which guidance rules should be included in new and revised accounting standards. Our results indicate that the inclusion of indicative, but incomplete rules does lead to increased conformance to pressure. Education does improve the application of principles but incomplete rules continue to have a detrimental effect, even for students who have effectively completed their university studies.

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