The Impact of Principles-Based versus Rules-Based Accounting Standards on Auditors' Motivations and Evidence Demands

Auditing research has investigated the effects of different accounting standards on auditors' decisions to constrain aggressive reporting by clients. Missing from this literature is evidence on how the type of accounting standard influences auditors' cognitive motivations and demand for audit evidence. This study addresses this gap in the literature, which is important since the financial statements are the joint product of management's and the auditor's actions. An experiment was conducted with U.S. and Dutch auditors to examine the manner in which principles-based versus rules-based accounting standards influence auditors' process accountability, epistemic motivation, and demands for audit evidence. The study proposes and supports a theoretical model in which principles-based accounting standards increase auditors' process accountability-the expectation of having to justify to others the decision process used, regardless of the outcome of the decision (Markman and Tetlock 2000; Libby, Salterio, and Webb 2004). Greater process accountability in turn increases auditors' epistemic motivation-the desire to develop and maintain a rich and accurate understanding of the problem at hand (Kruglanski 1989). The heightened epistemic motivation induced by principles-based accounting standards then ultimately increases auditors' demands for audit evidence. Thus, the results suggest the important influence of accounting standards on auditors' motivations and consequent program planning decisions.