Scholarly Applied Accounting Research
Paper on “Judgment in Jeopardy”
Communication sur la recherche comptable
universitaire appliquée, dans la foulée de
« Pierre angulaire »
CAP
Vol. 4 No. 2 —
PCC
vol. 4, n
o
2 (2005) pages 167–92 © CAAA/ACPC
Earnings Quality under Rules- versus
Principles-based Accounting Standards:
A Test of the Skinner Hypothesis
*
ERIN WEBSTER,
Queen’s University
DANIEL B. THORNTON,
Queen’s University
ABSTRACT
We provide preliminary evidence, consistent with Skinner (1995), that Canada’s relatively
principles-based GAAP yield higher accrual quality than the United States’ relatively rulesbased
GAAP. These results stem from a comparison of the Dechow-Dichev (2002) measure
of accrual quality for cross-listed Canadian firms reporting under both Canadian and U.S.
GAAP. However, we document lower accrual quality for Canadian firms reporting under
U.S. GAAP than for U.S. firms, which are subject to stronger U.S. oversight, reporting
under U.S. GAAP. The latter results suggest that stronger U.S. oversight compensates for
inferior accrual quality associated with rules-based GAAP. Consistent with the positive
effect of Canada’s principles-based GAAP and the offsetting negative effect of Canada’s
weaker oversight, we find no overall difference in accrual quality between Canadian firms
reporting under Canadian GAAP and U.S. firms reporting under U.S. GAAP. Our results
imply that (1) policymakers who wish to compare the effectiveness of oversight across
jurisdictions must control for the GAAP effect; and (2) accounting standard-setters who
wish to compare the effectiveness of principles- versus rules-based GAAP must control
for oversight strength.
Keywo ...