Navigating new accounting standards: Implications for firms and their auditors

Abstract

I examine the consequences of implementing new accounting standards on financial reporting quality. While prior research suggests that standards generally achieve their regulatory objectives, recent literature identifies firms’ significant technical accounting capacity constraints, motivating the need to explore the broader consequences of accounting standards adoption on financial reporting quality. Using a novel AI-based approach to identify firms affected by new accounting standards, I find a decrease in financial reporting quality when firms implement new standards. Evidence suggests the impaired financial reporting quality is in accounting areas unrelated to the new standards, consistent with a distraction effect. Results are more pronounced when firms face other concurrent accounting-related challenges, when accounting standards are more complex, and when auditors have resource constraints. These findings provide evidence of the unintended consequences of new accounting standards and shed light on potential ways to mitigate these costs.