Rules-Based Accounting Standards and Litigation

ABSTRACT

Some claim that rules-based accounting standards shield firms from litigation, while others argue that violations of detailed rules give plaintiffs a “roadmap” to successful litigation. We inform this debate by investigating whether rules-based standards are associated with the incidence and outcome of securities class action litigation. Overall, our results suggest that rules-based standards are associated with a lower incidence of litigation but are not associated with litigation outcomes. These results are of interest in the debate regarding the switch from a more rules-based U.S. GAAP to a more principles-based IFRS.

Keywords:  securities litigation, safe harbor, rules-based standards, principles-based standards

Source : Dain C. Donelson, John M. McInnis, and Richard D. Mergenthaler (2012) Rules-Based Accounting Standards and Litigation. The Accounting Review: July 2012, Vol. 87, No. 4, pp. 1247-1279.