Earnings Quality: Does ‘Principles Standards versus Rules Standards’ Matter?
Earnings Quality: Does ‘Principles Standards versus Rules Standards’ Matter?

Summary/Abstract: This study examines the effect of adopting different accounting standards on earnings quality. Specifically, this study determines whether principles-based accounting standards provides different effect on earnings quality compared to rules based accounting standards in terms of conservatism. This study uses content analysis on the annual reports of firms listed on the LQ-45 index at Indonesian Stock Exchange (IDX) in Indonesia to represent the principles-based accounting standards and the S&P 500 Dow Jones indices in the US to represent the rules-based accounting standards. The results of this study show a positive correlation between unconditional conservatism and earnings quality regardless whether the firms are adopting the principles-based accounting standards or the rules-based accounting standards. The results also show that principles-based accounting standards do not necessarily elevate earnings quality and are not necessarily better than the rules-based accounting standards. The findings in this study implicate that firms would have more opportunities and flexibilities to imply judgment in presenting their financial statements when adopting the principles-based accounting standards. This study provides evidence that earnings quality of principles-based accounting standards is not necessarily higher than the rules-based accounting standards.

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