Characteristics of Accounting Standards and SEC Review Comments

Jeff P. Boone · Cheryl L. Linthicum · April Poe

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

Abstract

SYNOPSIS As mandated by Sarbanes-Oxley, the SEC reviews the financial reports of public companies and challenges the appropriateness of accounting that seems questionable or unclear. We investigate whether the likelihood of an SEC comment (challenge), and the time needed to resolve such comments, depends upon either of two characteristics of the underlying accounting standard—rules and accounting estimates. We find that the probability of an SEC comment increases with the rules-based characteristics in the standard, but find little evidence that time to resolution is related to such characteristics. We also find that the extent of estimates required to implement the standard is positively associated with both the probability of an SEC comment and the time to resolve the comment. Our findings should help inform the debate over the appropriate level of rules and estimates in GAAP, and are especially timely in light of the potential convergence between more rules-based U.S. GAAP and more principles-based IFRS GAAP. Data Availability: Data are available from public sources.

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References

2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 2010Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research 2008Financial Accounting Standards Board (FASB)2002Evidence from Auditors about Managers' and Auditors' Earnings Management Decisions 2003Principles-Based Accounting Standards 2009Market and Political/Regulatory Perspectives on the Recent Accounting Scandals 1974An Economic Analysis of Legal Rulemaking 2010Principles-Based versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions

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