Reporting Accounting Changes: Are Stricter Guidelines Needed?

A study was conducted to determine whether practices relating to accounting changes have improved since Cushing's (1974) study on the early impact of Accounting Principles Board 20, "Accounting Changes." Using the LEXIS/NAARS database, all available annual reports for the fiscal years ending July 1, 1980, to June 30, 1985, were reviewed, and a pool of 156 reports with current consistency exceptions was established. Results show much improvement in the inclusion of the required auditor approval of or exception to an accounting change. Also, there was greater compliance with the requirement to provide justification for the change. The effect of most changes was to increase reported earnings, suggesting that Fortune 500 firms in general are more likely to make accounting changes having material positive earnings effects than accounting changes having material negative earnings effects. Conformance to industry practice has become a major justification for making accounting changes; in practice, the way in which such justification is given does not foster credibility.