Rules-Based Accounting Standards and SEC Enforcement

  • Devon Baranek Rider University, New Jersey, USA

Abstract

This archival study investigates the association between rules-based violations and the likelihood of SEC enforcement.  I utilize two samples of firms subject to SEC investigations: 1) firms with investigations that end in an enforcement action and 2) firms with investigations that are dropped, and examine the impact of rules-based accounting violations on enforcement.  Each enforcement action in the sample specifically cites the GAAP standard violated, and the degree to which the standards contain rules-based characteristics is quantified.  The violations are classified as either rules-based or principles-based and a multivariate analysis is performed.  The “roadmap” theory suggests that firms who commit rules-based violations are more likely to be subject to SEC enforcement, while the “roadblock” theory predicts the opposite effect.   


Overall, the results suggest the SEC is less likely to litigate cases that involve rules-based accounting violations, or more likely to drop/dismiss investigations centered on rules-based violations, consistent with the “roadblock” theory.  No evidence is found of a relation between rules-based accounting violations and the dollar magnitude of penalties assessed.  These results are relevant for financial statement preparers, auditors, and regulators. 

Downloads

Download data is not yet available.

References

Agoglia, C., Doupnik, T., & Tsakumis, G. (2011). Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The Accounting Review, 86(3), 747-767.
Benston, G. J., Bromwich, M., & Wagenhofer, A. (2006). Principles-versus rules-based accounting standards: The FASB’s standard setting strategy. ABACUS, 42(2), 165-188.
Brown, S., Hillegeist, S., & Orpurt, S. (2013). Principles vs. rules and the information environment: The case of SFAS 95. SSRN Working Paper Series. Retrieved December 15, 2014, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2320070
Donelson, D. C., McInnis, J. M., & Mergenthaler, R. D. (2012, July). Rules-based accounting standards and litigation. The Accounting Review, 87(4), 1247-1279.
Financial Accounting Standard Board (FASB). (2002, October 21). Proposal for a principles-based approach to U. S. standards setting. Retrieved December 5, 2015 from https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176157522715&d=Touch&pagename=FASB%2FDocument_C%2FDocumentPage
Financial Accounting Standards Board (FASB). (2012, April 5). IASB-FASB Update Report to the FSB Plenary on Accounting Convergence. Retrieved December 1, 2015, from http://www.fsb.org/wp-content/uploads/r_120420d.pdf?page_moved=1
Folsom, D., Hribar, P., Mergenthaler, R., & Peterson, K. (2011). Principles-based standards and the informativeness of earnings. Working paper. Retrieved December 1, 2015, from https://care-mendoza.nd.edu/assets/151940/mergenthaler.pdf
Francis, J., Philbrick, D., & Schipper, K. (1994). Shareholder litigation and corporate disclosures. Journal of Accounting Research, 32(2), 137-164.
Gipper, B., Lombardi, B., & Skinner, D. (2013). The politics of accounting standard-setting: A review of empirical research. Working paper. Retrieved December 15, 2015, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2342001
Gradison, B. (2006, March 29). Testimony concerning the PCAOB. U.S. House of Representatives, Committee on Financial Services, Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
Herz, R. (2003). A year of challenge and change for the FASB. Accounting Horizons, 17(17), 247-255.
Jennings, J., Kedia, S., & Rajgopal, S. (2011). The deterrence effects of SEC enforcement and class action litigation. Working paper. Retrieved December 15, 2015, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1868578
Kedia, S., & Rajgopal, S. (2011). Do the SEC’s enforcement preferences affect corporate misconduct? Journal of Accounting & Economics, 51(3), 259-278.
Mergenthaler, R. (2010). Principles-based versus rules-based standards and earnings management. Working paper. Retrieved December 1, 2015, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1528524
Nelson, C., Gilley, S., & Trombly, G. (2009). Disclosures of SEC investigations resulting in wells notices. Securities Litigation Journal, 19(4), 19-21.
Nelson, M. W. (2003, March). Behavioral evidence on the effects of principles-and rules-based standards. Accounting Horizons, 17(1), 91-104.
Schipper, K. (2003). Principles-based accounting standards. Accounting Horizons, 17(1), 61-72.
Securities and Exchange Commission (SEC). (2003, July). Study pursuant to section 108(d) of the Sarbanes-Oxley act of 2002 on the adoption by the United States financial reporting system of a principles-based accounting system. Retrieved January 10, 2016, from https://www.sec.gov/news/studies/principlesbasedstand.htm
Stanford Securities Class Action Clearinghouse. (2014). Retrieved December 1, 2014, from http://securities.stanford.edu/
UCLA-LoPucki Bankruptcy Research Database. (2014). Retrieved December 15, 2014, from http://lopucki.law.ucla.edu/contents_of_the_webbrd.htm
Published
2020-05-01
How to Cite
BARANEK, Devon. Rules-Based Accounting Standards and SEC Enforcement. Journal of Accounting, Business and Management (JABM), [S.l.], v. 27, n. 1, p. 101-118, may 2020. ISSN 2622-2167. Available at: <http://jabm.stie-mce.ac.id/index.php/jabminternational/article/view/566>. Date accessed: 10 aug. 2020. doi: https://doi.org/10.31966/jabminternational.v27i1.566.
Section
Articles

Keywords

accounting standards, rules-based, principles-based, SEC enforcement actions, dropped enforcement actions, SEC monetary penalties