Judgments of auditors on “principles” versus “guidance” in lease accounting standard

Abstract

PurposeThe purpose of this paper is to examine the effects of a principles-based accounting standard with guidance (principles-with-guidance approach), stringency (conservativeness) of numerical thresholds, and incentives (high or low debt-equity ratio environment) on the judgments of Japanese auditors in a lease accounting setting.Design/methodology/approachTo reflect Japanese auditors’ judgmental features, this study adopts a quasi-experiment that uses both manipulation for different environments (i.e. stable or critical financial condition) and perceptions about the importance of “principles” and “guidance” in different types of lease accounting standards (i.e. substantially all, approximately 90 and 88 percent).Findings“Principle” (substantially all) has a positive effect, while “guidance” (approximately 90 percent) has a negative effect on encouraging Japanese auditors to capitalize lease transactions. “More stringent guidance” (approximately 88 percent) has a positive effect only when clients are in critical financial conditions. Other findings indicate that judgments of Japanese auditors are strongly influenced by their colleagues’ perceived judgments.Originality/valueThis is the first quasi-experiment to examine Japanese auditors’ professional judgments using a lease accounting setting. To find out whether Japanese auditors interpret and apply International Financial Reporting Standards (IFRS) in the similar manner as their counterparts in other countries will be important when Japanese policymakers make their final decision regarding the adoption of IFRS. The discussion and findings also contribute to the International Accounting Standards Board (IASB) with regard to enhancing global convergence of financial reporting.