Principles-based versus rules-based: accounting standards precision and financial restatements in China

Abstract

PurposeThis study tests the effect of accounting standards precision on financial restatements and the influence of accounting standards precision on different types of restatements (including errors and irregularities). What is more, the heterogeneity between accounting standards precision and financial restatements is verified in this paper. In the further analyses, the authors also examine the mediating roles and moderating roles on the correlation between accounting standards precision and financial restatements.Design/methodology/approachThe focus is placed on an unbalanced panel of 18,766 samples over the period of 2007–2017.FindingsThe authors find that firms' restatements decrease when standards are more principles-based (low accounting standards precision). Especially, irregularities significantly decrease when firms' standards are more principles-based. What's more, the negative relationship between principles-based standards and restatements is more significant in “big four” accounting firms. Moreover, from the mediating effect results, the authors find that low accounting standards precision decreases a firm's financial reporting complexity and increases equity restriction, which in turn can help decreasing its financial misreporting. From the moderating effect results, the authors find that the higher the TOP1 and the more analysts following the firm, the higher the benefit of accounting standards precision to misstatements.Originality/valueThe results of this study provide a theoretical reference for accounting standard setters and are helpful to inform investors and regulators about the influence of Chinese accounting standards on restatements.