Accounting standards and earnings management: The effect of rules-based and principles-based accounting standards on accounting and transaction decisions

This book examines the effect that rules-based and principles-based accounting standards have on the level and nature of earnings management decisions. A cherry picking experiment is conducted to test the hypothesis that a substitution effect is expected from accounting decisions to transaction decisions after a reduction of accounting discretion. Moreover, no earnings management is expected without sufficient incentive to engage in earnings management and no differences are expected in the total level of earnings management between accounting standards. In addition, the study holds an elaborate post experimental survey and in depth interviews to triangulate this entire topic. Results show a substitution effect in which more transaction decisions take place in a rules-based environment and more accounting decisions in a principles-based setting. Managers only engage in earnings management when sufficient incentives are involved. The level of earnings management does not depend on the accounting standards. These results suggest that changing from rules-based to principles-based accounting standards will only affect the nature of earnings management.