Empirical Investigations of the Impact of the Structure of a Standard on Accounting Quality: Comparison between United States GAAP and IFRS
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AbstractFollowing the wave of high-profile accounting scandals at the beginning of this century, the United States of America has witnessed increasing calls to move toward more principles-based accounting standards. As a result, the US announced a convergence project with the IASB (widely known as a provider of principles-based accounting standards) on September 18th, 2002. Therefore, the objective of this study is three-fold. First, the study investigates if there is a significant difference in rules-based characteristics between US GAAP and IFRS. Second, it attempts to test if the rules-based characteristics are a significant determinant of accounting irregularities. Third, the study seeks to examine if there is a significant difference in the quality of financial reporting between firms that report under US GAAP and those that report under IFRS. The empirical results document the following: US GAAP are less rules-based than IFRS. The structure of standards is not a significant determinant of accounting irregularities. Firms that report in accordance with US GAAP significantly outperform those that report according to IFRS with regard to analysts forecast errors and cost of capital. Firms that report under IFRS outperform those that report under US GAAP with regard to earnings predictability. US GAAP and IFRS are significantly indistinguishable with regard to earnings persistence and conservatism. Finally, the study failed to reach conclusive evidence with regard to accrual quality, earnings smoothness, earnings informativeness, and timely loss recognition. The study concludes that more caution is required by the US before taking further steps in the convergence project with the IASB.
Haskayne School of Business