Ambiguity in international financial reporting standards (IFRS) and its impact on judgments of auditors

Abstract

Purpose This paper aims to conduct an experiment that investigates the effect of the ambiguity present in international financial reporting standards (IFRS) on the judgments of auditors. This paper also examine the effects of the personality trait of ambiguity tolerance on judgments of auditors. Design/methodology/approach This paper conduct an experiment in which experienced Australian-based auditors are placed in hypothetical revenue recognition and lease classification decision contexts. The participants are members of the Australian accounting profession who are familiar with applying IFRS. Findings This paper find support for the perception that when the relevant IFRS are more ambiguous, auditors make less aggressive reporting judgments compared to when the IFRS are less ambiguous. The results also unveil a novel finding that auditors who are more tolerant of ambiguity are likely to choose the accounting treatment that best reflects the economic substance of a transaction when interpreting IFRS compared to those who are less tolerant of ambiguity. Practical implications These results would be of interest to policymakers and accounting researchers as they continue to contemplate a shift to more principles-based IFRS. Originality/value To the best of the authors’ knowledge, this study is the first to examine the influence of an individual’s ambiguity tolerance on financial reporting quality in jurisdictions that have adopted IFRS.