Principles-Based Accounting Standards and Audit Outcomes: Empirical Evidence

Abstract

The purpose of this study is to empirically examine the relations between audit outcomes and accounting standard design (principles-based vs. rules-based) for U.S. firms. Considering that audit outcomes may vary with audit risk which may differ under different accounting standards, we examine and find that audit risk and audit fees are lower when client firms rely more on principles-based standards. Next, we find that principles-based standards are associated with lower likelihood of receiving a going concern opinion and shorter audit report lag. However, for firms that rely more on principles-based standards and, have greater incentives to engage in earnings management, audit fees are higher. Collectively, our results inform the FASB, the SEC, and the PCAOB of the potential benefits of using principles-based standards with respect to audit outcomes and more broadly, provide evidence on the role that accounting standard design plays in auditing.