Should standard setters care about potential judgment biases introduced by implementation guidance? I was recently reading through a paper by Shana Clor-Proell and Mark Nelson (Journal of Accounting Research, Vol. 45, Iss. 4, September 2006) entitled, “Accounting Standards, Implementation Guidance, and Example-Based Reasoning.”  In this paper, Shana and Mark examine how the type of example (affirmative or counter) used in the implementation guidance of accounting standards can affect the likelihood that a practitioner will consider the standard’s accounting treatment appropriate for their particular situation. In their own words:

…[P]ractitioners believe the treatment used in an example is more appropriate for their situation than is actually the case, because they overstate the similarity between their case and the example and/or because the example primes them to focus on the outcome indicated in the example. If a case is being compared with an affirmative example, practitioners are more likely to conclude that the accounting treatment used in the example is allowable for the case. In contrast, if the case is being compared
with a counter example, practitioners are more likely to conclude that the accounting treatment is not allowable for the case (704).

Reading this paper got me thinking about my experience working with the FASB/IASB. Although we as a project team have not written any implementation guidance for the proposed revenue recognition model, I can honestly say that the ideas in Shana and Mark’s paper probably never would have crossed our minds. I know, this sounds terrible — an academic working in standard setting but being completely unaware of the research that is potentially relevant to my project. But then I started to wonder whether standard setters (consciously or unconsciously) choose the type of example based on their sense that the principle or guidance in the standard is too strong or too weak. In other words, do standard setters choose example types because they want to strengthen or water down the effect of the guidance in the standard. Thinking about these issues led me to ask a few questions that might be of interest to researchers and standard setters.

  • Do standards typically utilize affirmative examples or counter examples (or perhaps both)?
  • Does the choice of example type depend on the accounting element (revenue vs. expense)?
  • Are examples within FASB statements more often affirmative than the examples provided in EITF issues?  (Because the EITF often focuses on decreasing diversity in practice, do they tend to use counter examples?)
  • Do auditors tend to find it more difficult to negotiate with clients when an example is affirmative than when an example is counter to the appropriate treatment outlined in a standard?

These are just a few ideas that occurred to me. My thought here is that perhaps standard setters (and other decision makers) consciously or unconsciously choose the type of example based on their desire to see more or fewer applications of the standard’s proposed treatment. What are your thoughts? How important do you think this issue is for standard setters? and one final question, is earnings management more prevalent for standards that use affirmative examples than for those that use counter examples?