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Earnings Quality under Rules‐ versus Principles‐based Accounting Standards: A Test of the Skinner Hypothesis / LA QUALITÉ DES RÉSULTATS SELON QUE LES NORMES COMPTABLES SONT AXÉES SUR LES RÈGLES OU SUR LES PRINCIPES: VÉRIFICATION DE L'HYPOTHÈSE DE SKINNER *
Author(s) -
WEBSTER ERIN,
THORNTON DANIEL B.
Publication year - 2005
Publication title -
canadian accounting perspectives
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.238
H-Index - 17
eISSN - 1911-3838
pISSN - 1499-8653
DOI - 10.1506/6tpa-d5hh-gkmb-9gjv
Subject(s) - accrual , accounting , quality (philosophy) , accounting standard , business , control (management) , earnings quality , earnings , earnings management , accounting information system , economics , financial accounting , management , philosophy , epistemology
We provide preliminary evidence, consistent with Skinner (1995), that Canada's relatively principles‐based GAAP yield higher accrual quality than the United States' relatively rules‐based GAAP. These results stem from a comparison of the Dechow‐Dichev (2002) measure of accrual quality for cross‐listed Canadian firms reporting under both Canadian and U.S. GAAP. However, we document lower accrual quality for Canadian firms reporting under U.S. GAAP than for U.S. firms, which are subject to stronger U.S. oversight, reporting under U.S. GAAP. The latter results suggest that stronger U.S. oversight compensates for inferior accrual quality associated with rules‐based GAAP. Consistent with the positive effect of Canada's principles‐based GAAP and the offsetting negative effect of Canada's weaker oversight, we find no overall difference in accrual quality between Canadian firms reporting under Canadian GAAP and U.S. firms reporting under U.S. GAAP. Our results imply that (1) policymakers who wish to compare the effectiveness of oversight across jurisdictions must control for the GAAP effect; and (2) accounting standard‐setters who wish to compare the effectiveness of principles‐ versus rules‐based GAAP must control for oversight strength.