Review of Quantitative Finance and Accounting, 10 (1998): 173–191
© 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Acceptance of Accounting Standards
PAUL V DUNMORE
Victoria University of Wellington, New Zealand
Rutgers University, Camden, NJ
Abstract. When ﬁnancial statements are audited, a client and auditor may disagree about an accounting
disclosure. While the disclosure of such a disagreement may increase the information content of a statement it
may also be socially undesirable in that it signals a difference in views about the state of the reporting enterprise.
This in turn may increase agency costs and introduce uncertainty about the state of the ﬁrm. In this paper we
focus on public policy implications concerning auditor-client disagreements and examine the ex ante probability
that such cases will occur. We ﬁnd that accounting standards that allow two accounting options may be optimal
in reducing frequency of disagreements among auditors and between standard-setters and their constituencies,
and possibly also between clients and their auditors. The New Zealand model of compliance with accounting
standards may be preferable to that practiced in the US.
Key words: Accounting standards, auditing, client-auditor disagreement
1. Disagreement about an accounting treatment
This study is motivated by Beresford’s (1995) assessment that accounting standard-setting
by the private sector is characterized by periodic crises stemming from promulgations that
are not perceived as being generally accepted by the standard-setter’s constituencies. “The
FASB is the third incarnation of the private sector’s approach to setting accounting
standards over the past six decades” (p. 58).
Its predecessors were dissolved because of
discontent on the part of their constituencies. Beresford (1995) notes that the FASB in turn
has been periodically criticized by the Business Roundtable, by the public accounting
profession, and in reports by several Congressional subcommittees. “Although none of the
Congressional inquiries led to an SEC takeover of the FASB, the issues they raised have
not gone away” (p. 58). Beresford notes (p. 61) that one way to resolve the FASB’s new
crisis is “to build a consensus for proposed solutions among [the FASB’s] constituents”
(Beresford 1995, p. 61). Our study is a step in this direction.
We focus on accounting treatments which are prescribed in a mandatory standard.
study examines types of potential agreement and disagreement about the choice of ac-
counting treatment between a client and auditor, among auditors, and between the
standard-setter and its constituencies. For each type of potential disagreement we examine
the ex ante probability that it will occur. With respect to the structure of accounting
standards, our ﬁndings suggest that standards that prescribe two alternative accounting
treatments may be more desirable than standards that allow only one treatment, while
@ats-ss3/data11/kluwer/journals/requ/v10n2art3 COMPOSED: 01/13/98 2:42 pm. PG.POS. 1 SESSION: 9