The meaning of a defined accounting concept: regulatory changes and the effect on auditor decision making

Accounting standards exist in an attempt to “standardize” accounting practice. These standards contain definitions of accounting concepts whose function is to guide judgments made in practice. However, such judgments can have a major impact on a firm's externally reported accounting numbers, as...

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Bibliographic Details
Published in:Accounting, organizations and society organizations and society, 2001-03, Vol.26 (2), p.123-139
Main Authors: Hronsky, Jane J.F., Houghton, Keith A.
Format: Article
Language:English
Subjects:
Accounting
Accounting standards
Auditing
Auditors
Changes
Decision making
Effects
Extraordinary items
Financial reporting
Regulation
Studies
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Summary:Accounting standards exist in an attempt to “standardize” accounting practice. These standards contain definitions of accounting concepts whose function is to guide judgments made in practice. However, such judgments can have a major impact on a firm's externally reported accounting numbers, as their inherent subjectivity and discretion may be lent to the manipulation of earnings. This study provides empirical evidence of the effect of measured meaning on an accounting judgment, in the context of regulated changes to the definition of one key accounting concept used in measuring operating income. The extraordinary items classification decisions made by auditors were found to be systematically associated with differences in measured meaning of the extraordinary items definition. The study has important policy implications for accounting standard-setting.
ISSN:0361-3682
1873-6289
DOI:10.1016/S0361-3682(00)00020-9