BEHAVIORAL RESEARCH IN ACCOUNTING

Vol. 26, No. 2

2014
pp. 5172

American Accounting Association

DOI: 10.2308/bria-50707

The Impact of Principles-Based versus RulesBased Accounting Standards on Auditors

Motivations and Evidence Demands
Marietta Peytcheva
Lehigh University
Arnold M. Wright
Northeastern University
Barbara Majoor
Nyenrode Business Universiteit
ABSTRACT: Auditing research has investigated the effects of different accounting
standards on auditors decisions to constrain aggressive reporting by clients. Missing
from this literature is evidence on how the type of accounting standard influences
auditors cognitive motivations and demand for audit evidence. This study addresses this
gap in the literature, which is important since the financial statements are the joint product
of managements and the auditors actions. An experiment was conducted with U.S. and
Dutch auditors to examine the manner in which principles-based versus rules-based
accounting standards influence auditors process accountability, epistemic motivation,
and demands for audit evidence. The study proposes and supports a theoretical model in
which principles-based accounting standards increase auditors process accountability
the expectation of having to justify to others the decision process used, regardless of the
outcome of the decision (Markman and Tetlock 2000; Libby, Salterio, and Webb 2004).
Greater process accountability in turn increases auditors epistemic motivationthe
desire to develop and maintain a rich and accurate understanding of the problem at hand
(Kruglanski 1989). The heightened epistemic motivation induced by principles-based
accounting standards then ultimately increases auditors demands for audit evidence.
Thus, the results suggest the important influence of accounting standards on auditors
motivations and consequent program planning decisions.
Keywords: auditing; principles-based standards; rules-based standards; process
accountability; epistemic motivation.

We thank Chris Agoglia, Peter Gillett, Jonathan Grenier, Ganesh Krishnamoorthy, Justin Leiby, Christine Nolder, Linda
Quick, Kimberly Sawers, Ken Trotman, and the participants at the 2012 AAA Annual Meeting, the 2010 Auditing
Midyear Meeting, the 2010 Deloitte/University of Kansas Auditing Symposium, and workshop participants at Bentley
University and Lehigh University for their valuable comments. This research was supported by a grant from the College
of Business and Economics and the Martindale Center for the Development of Private Enterprise at Lehigh University.
Vicky Arnold, Accepting Editor.

Published Online: January 2014

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INTRODUCTION

here has been considerable discussion about the effects of principles-based versus
rules-based accounting standards on financial reporting quality, particularly given the
debate concerning the adoption of, or convergence with, International Financial Reporting
Standards (IFRS) in the United States. This study examines the differential effects on auditors
cognitive motivations and demands for evidence of accounting standards that include detailed rules
as opposed to general guidance and broad principles (Nelson 2003). One side of the ongoing debate
proposes that the lack of precise guidance that is inherent in principles-based accounting standards
will provide increased opportunities for aggressive client reporting, and will therefore lower
financial reporting quality. However, although rules-based accounting standards can increase
precision, they can also lead to financial engineering (SEC 2008). Rules-based standards have thus
been alleged to promote a check-the-box mentality and to decrease the quality of financial
reporting by not accurately representing the economic substance of events (Schipper 2003).
As independent external monitors of financial reporting, auditors play a vital role as the
gatekeepers of financial information (Kadous and Mercer 2012). Using accounting standards as the
guideline, they make judgments about the fairness of financial statements that are critical to the
quality of financial information disseminated to the capital markets (Asare and Wright 1995; Blay,
Kadous, and Sawers 2012; Piercey 2009). Therefore, understanding how accounting standards
influence auditors cognitive motivations and program planning for audit evidence is an important
issue. Accounting research has recognized the importance of the influence of accounting standards
on the judgments of auditors (Segovia, Arnold, and Sutton 2009; Cohen, Krishnamoorthy,
Peytcheva, and Wright 2013; Backof, Bamber, and Carpenter 2012). Auditors must be able to
justify their judgments to evaluative audiences (such as regulators, investors, or juries) about
whether transactions comply with specific accounting standards; however, standards may differ in
their precision and complexity. Understanding auditors cognitive processes and motivations under
different types of accounting standards is especially important, given the conflicting results
provided by prior research on how accounting standards influence auditors judgments. Some
studies have provided evidence that broader, less precise standards give auditors an opportunity to
cater to their clients demands, and therefore auditors allow more aggressive reporting by their
clients, since there is no bright-line rule to constrain aggressive reporting (Trompeter 1994;
Hackenbrack and Nelson 1996; Ng and Tan 2003). In contrast, recent studies have found that
auditors constrain aggressive reporting by their clients to a greater extent under principles-based
standards than under rules-based standards (e.g., Segovia et al. 2009; Cohen et al. 2013). Backof et
al. (2012) find that auditors ability to constrain aggressive reporting under principles-based
standards is conditional on the clarity of the economic substance of the transaction (i.e., greater
ability when the substance is clear versus ambiguous) and the type of judgment framework used by
the auditor.
Ours is the first study to examine the effects of the type of accounting standard on auditors
cognitive motivations and information search patterns. While prior research has studied the
relationship between process accountability and epistemic motivation, studies have not examined
the effect of judgment guidance (accounting standard, legal guidance, or ethical codes) on these
constructs. We thus address an important, and missing, piece of the puzzle: are there fundamental
differences in the psychological processes employed by auditors who face principles versus rules
accounting guidance? If there are differences, are auditors motivations under principles-based
accounting standards driven by simple self-interest as opposed to a desire to understand the
economic substance of the transaction at hand? For instance, are auditors simply more defensive
under principles-based standards to appease regulators or potential jurors, or do they strive to obtain
a thorough and accurate understanding of the problems they examine? The purpose of the present
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study is to address this existing gap in the literature on principles-based and rules-based accounting
standards, by providing evidence on the effect of type of accounting standard on the motivations
and evidence demands of audit professionals.
This study develops and tests a theoretical process model for the effects of principles versus
rules-based accounting standards on auditors process accountability, epistemic motivation, and
demands for audit evidence. Process accountability is the expectation of having to justify to others the
decision process used, regardless of the outcome of the decisions (Markman and Tetlock 2000; Libby,
Salterio, and Webb 2004).1 The theoretical model proposes that working with principles-based
accounting standards will lead auditors to experience greater process accountability relative to working
with rules-based standards because of the need to justify their judgment in light of broad guidance.
Further, increased process accountability is expected to affect auditors cognition by enhancing
epistemic motivationthe motivation to think deeply about the problem at hand, to understand all
possible perspectives of the issue, and to evaluate information thoroughly (De Dreu, Koole, and
Oldersma 1999; Kruglanski 1989; Hammersley 2011). Cognitive motivation is particularly important
in complex decision settings, such as the ones commonly encountered by auditors.
Finally, the heightened epistemic motivation induced by principles-based accounting standards
is expected to increase auditors demand for audit evidence. Audit decisions are driven by the
evidence obtained; thus, auditing standards require the auditor to gather sufficient, appropriate
evidence to support his or her conclusion (Auditing Standard 15). Examining auditors evidence
demands is important for both the effectiveness and efficiency of the audit. On the one hand, a
broader set of evidence may better inform the auditors judgment process, and may thereby improve
the quality of the audit. On the other hand, prior studies have suggested that greater process
accountability can also lead decision makers to examine nondiagnostic evidence (Tetlock and
Boettger 1989; Tetlock, Lerner, and Boettger 1996; Nisbett, Zukier, and Lemley 1981). This
evidence may increase the likelihood that auditors fall prey to the dilution effect, and thereby
decrease audit effectiveness (Nisbett et al. 1981; Hackenbrack 1992; Glover 1997). Further, the
time and effort spent gathering and evaluating nondiagnostic evidence can decrease audit
efficiency. In summary, the amount and the diagnosticity of audit evidence gathered by the auditor
has a direct impact on audit quality.
The theoretical model is tested using an experiment with 104 auditors from the U.S. and 48
auditors from The Netherlands. The experiment manipulates the type of accounting standard
between participants at two levels: rules-based or principles-based. We include nationality as a
factor in the analyses to control for the extent of exposure to principles versus rules accounting. As
predicted, the results show that principles-based standards increase auditors process accountability.
Consistent with prior studies in the psychology domain (De Dreu, Beersma, Stroebe, and Euwema
2006; Scholten, van Knippenberg, Nijstad, and De Dreu 2007; Van der Schalk, Beersma, Van
Kleef, and De Dreu 2010), the findings also indicate that process accountability increases auditors
epistemic motivation. In turn, the higher epistemic motivation induced by principles-based
standards increases auditors evidence demands. The findings provide valuable information to
regulators in their evaluation of how or whether to move forward with potential IFRS adoption or
convergence of U.S. GAAP with IFRS. Additional analyses on the types of evidence demanded by
auditors indicate that they request a greater amount of diagnostic evidence under principles-based
standards than under rules-based standards. However, auditors also request a greater number of
nondiagnostic evidence items under principles-based standards. This finding is consistent with
1

As recently discussed by Peecher, Solomon, and Trotman (2013), the difference between process accountability
and outcome accountability in auditing is in the degree to which auditors are accountable for audit outcomes
and/or financial-statement outcomes versus accountable for the quality of their professional judgment
processes.

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findings from psychology studies that increased process accountability may lead to a dilution effect
(Tetlock and Lerner 1999; Tetlock and Boettger 1989; Tetlock et al. 1996; Nisbett et al. 1981).
Thus, in a principles environment, audit firms must take measures to guard against this potential
bias, e.g., review of proposed audit programs and results of tests.
The paper is divided into four remaining sections. The theory and hypotheses are developed in
the next section, followed by a description of the method. The final two sections provide the results
and a discussion of the primary findings and their implications for auditing practice and future
research.
THEORY AND HYPOTHESES
Principles-Based Versus Rules-Based Accounting Standards
Prior research finds that when financial statement preparers use a rules-based standard,
incentives affect their judgments and they make more aggressive accounting decisions (Psaros and
Trotman 2004). In recent studies, Agoglia, Doupnik, and Tsakumis (2011) show that preparers are
less likely to report aggressively under less precise, principles-based standards, while Jamal and
Tan (2010) find that the positive effect of principles-based standards on preparer behavior is
conditional on whether the auditor is principles-oriented, rules-oriented, or client-oriented.
However, prior research on the impact of principles-based versus rules-based accounting
standards on auditors behavior has provided somewhat conflicting findings. On the one hand,
auditors can exploit the ambiguity in some standards to reach their incentive-consistent conclusions,
often driven by client preferences (Hackenbrack and Nelson 1996). The precision provided by more
precise accounting guidance can be used by auditors to constrain aggressive reporting by their
clients (Trompeter 1994; Ng and Tan 2003). Critics contend that principles-based standards will
allow greater flexibility and room for interpretation, thereby leading to lower auditor consensus,
ultimately impairing audit quality, and resulting in inferior financial reporting outcomes. One view
is that the tell me where it says I cant do what I want line of reasoning in the interaction between
managers and auditors will only get louder under IFRS (Niemeier 2008, 5). Because principlesbased standards require significant judgment, auditors may find that resisting manipulation and
pressure from management and rendering an objective judgment is difficult.
In contrast, recent studies have found that auditors are better able to constrain aggressive
reporting by clients when the accounting standard is principles-based than when it is rules-based.
Segovia et al. (2009) find that auditors are more likely to allow the client to manage earnings under
a more rules-based standard (SFAS 121) than under a more principles-based standard (ARB 43).
Cohen et al. (2013) examine the effect of the strength of the regulatory enforcement regime in
different countries on the auditors ability to curb aggressive reporting by their clients, and find that
auditors are more likely to constrain aggressive reporting in a principles-based regime than in a
rules-based accounting regime, irrespective of the strength of regulatory enforcement.
As emphasized by Nelson (2003), behavior can be influenced not only by economic incentives,
but by incentives that induce accurate judgment such as requiring auditors to justify their decisions.
Therefore, an important question is whether principles-based standards induce such incentives.
Maines (2007) discusses that, relative to a rules-based regime, a principles-based regime is likely to
increase the need for justification of a financial reporting treatment and the related uncertainty about
the appropriateness of the choice. Importantly, none of the prior studies go inside the black box
and examine elements within the decision process such as auditor cognitive motivations and their
demands for audit evidence. The present study addresses this gap. The study proposes and tests a
theoretical process model for the effect of principles-based standards on auditor process
accountability, epistemic motivation, and demand for audit evidence.
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FIGURE 1
Theoretical Model

Process Model for the Effect of Principles-Based and Rules-Based Accounting Standards on
Auditors Cognitive Motivations and Evidence Demands
Figure 1 presents the theoretical model regarding the effect of principles-based accounting
standards on auditors motivations and evidence demands. As will be discussed more fully,
principles-based accounting standards are hypothesized to increase auditors process accountability,
and greater process accountability in turn leads decision makers to experience higher epistemic
motivation (Kruglanski 1989). By inducing higher epistemic motivation, principles-based
accounting standards are then ultimately expected to increase auditors demands for audit evidence.
Principles-Based Accounting Standards and Process Accountability
Process-accountable individuals expect that they will be judged by evaluators based on the
quality of the process they used to arrive at a decision (Siegel-Jacobs and Yates 1996). Process
accountability increases cognitive effort, decreases overconfidence, and improves decision accuracy
and calibration (Simonson and Staw 1992; Tetlock, Skitka, and Boettger 1989; Tetlock and Kim
1987; Siegel-Jacobs and Yates 1996). Accounting research has shown that process accountability
decreases audit judgment biases and increases audit effort (Kennedy 1993, 1995; Ashton 1992).
While the rich existing literature has primarily examined the effects of process accountability
on judgments, theoretical research has also considered the antecedents of process accountability.
Tetlocks (1983, 1985) work suggests that when the views of the evaluative audience are
ambiguous, individuals are more likely to perceive themselves accountable for the quality of their
decision process and to expect to have to justify their judgment. In contrast, when the evaluators
views are known, decision makers are expected to act as cognitive misers and resort to the
acceptability heuristicthat is, they align their views with the known views of the evaluative
audience. Siegel-Jacobs and Yates (1996) state that when individuals know what decision the
evaluator would find acceptable, they can simply conform to the unambiguous views of the
evaluator; however, when there is greater ambiguity about the acceptable response, simple
conformity is no longer an option, and individuals concern themselves with being able to justify
their decision making.
The present study is the first one to extend this process accountability framework to the context
of professional guidance, and apply it to accounting standards. With respect to accounting standards,
principles-based standards, which are relatively general and ambiguous in nature, should induce in
auditors an expectation of having to justify their decision process. In contrast, accounting standards
based on unambiguous and detailed bright-line rules leave less incentive for justification of ones
decisions. For example, SFAS 13the accounting standard on lease reportingspecifies that four
specific bright-line criteria should be applied, and thus leaves little room or need for justification of
ones decision. Principles-based standards, however, do not contain bright-line criteria, and leave
greater room for judgment in deciding how to reach a decision. Auditors must determine the decision
criteria they will use to arrive at a conclusion, and are thereby less constrained with respect to their
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decision process. Therefore, when professional accounting standards are less specific and prescriptive,
auditors are expected to experience greater process accountability.
H1: Principles-based accounting standards lead to a higher level of auditors process
accountability than rules-based standards.
Process Accountability and Epistemic Motivation
Kruglanskis (1989) work on lay epistemic theory introduced the integrated concept of
motivation for cognition, and examined mechanisms through which epistemic motivation affects
judgment and decision making (see Kruglanski, Dechesne, and Orehek [2009] and Kruglanski,
Orehek, Dechesne, and Pierro [2010] for recent reviews). When epistemic motivation is high,
perceivers are likely to engage in more sustained, effortful, and detail-oriented analysis . . .; when
epistemic motivation is low, perceivers are likely to rely on their immediate reactions, which often
arise via the operation of automatic processes, the exercise of relatively simple judgmental
heuristics, or both (Bodenhausen, Macrae, and Hugenberg 2003, 273). High levels of epistemic
motivation correspond to a low need for cognitive closure (Kruglanski 2004) and an increased need
for cognition (Petty and Cacioppo 1986; Kruglanski 1999; Kruglanski and Webster 1996).
Epistemic motivation is affected by situational variables, such as accountability (Kruglanski 1989).
Accountability is expected to heighten concerns regarding possible invalidity of ones judgment
and thereby increase the thoroughness with which subjects attend to contextually available
information (Kruglanski 1989, 75).
In a group decision-making setting, Scholten et al. (2007) find that process accountability
increases the level of individuals epistemic motivation. De Dreu et al. (2006) show that process
accountability induces high levels of epistemic motivation in a negotiation setting (De Dreu et al.
2006). In a study examining the effect of epistemic motivation on the quality of negotiated
agreements, Van der Schalk et al. (2010) manipulate the level of epistemic motivation by making
participants process-accountable or not, and find that process accountability increases the level of
individual participants epistemic motivation. In line with prior research, it is expected that
increased process accountability will in turn induce high levels of epistemic motivation in auditors.
H2: Auditors process accountability positively influences epistemic motivation.
Epistemic Motivation and Auditors Demand for Evidence
Kruglanskis (1989) work suggests the existence of important relationships between decision
makers epistemic motivation and evidence demands. Individuals who experience high epistemic
motivation are likely to actively incorporate new information in the decision-making process,
whereas low epistemic motivation can induce the need for premature cognitive closure, bringing
about epistemic freezing or closing of the mind to new information (Kruglanski 1989).
Mayseless and Kruglanski (1987) find that high epistemic motivation increases hypothesis
generation and heightens sensitivity to alternative hypotheses. High levels of epistemic motivation
are also expected to stimulate a need for avoidance of a commitment to erroneous hypotheses
(Kruglanski 1989). This opening of the mind to alternative explanations and new information is
expected to increase individuals demand for evidence. In this vein, Freund, Kruglanski, and
Schpitzajzen (1985) show that high epistemic motivation leads individuals to assess all evidence
available to them.
Research in psychology indicates that epistemic motivation leads decision makers to engage in
sustained, detail-oriented analyses of the relevant issues, and increases the depth of information
processing (Bodenhausen et al. 2003; De Dreu et al. 2006). High epistemic motivation is thus likely
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to increase information search and individuals openness to processing new information (see De
Dreu and Carnevale [2003] for a review). Because epistemic motivation generates a need for
developing a rich, multifaceted understanding of decision problems (Kruglanski 1989; De Dreu et
al. 1999; De Dreu 2007), and stimulates engaging in detail-oriented analyses (Bodenhausen et al.
2003), epistemic motivation should increase auditors demand for audit evidence.
H3: Auditors epistemic motivation positively influences the demand for audit evidence.
METHOD
Participants and Task
To examine the hypotheses, an experiment was conducted with a sample of professional
auditors from the U.S. and from The Netherlands. U.S. auditors predominantly work with U.S.
accounting standards, which are considered to be relatively rules-based (Agoglia et al. 2011; Jamal
and Tan 2010; Kadous and Mercer 2012). In contrast, Dutch auditors work predominantly with
standards that are considered to be highly principles-based and to leave considerable room for
professional judgment. Thus, auditor exposure to principles-based versus rules-based standards is
introduced as a control variable in the model.2
In this study, auditors examined a case involving the classification of a lease transaction,
selected additional evidence to examine, and completed measures of their demand for evidence,
process accountability, and epistemic motivation. The relevant accounting standard was
manipulated at two levels: principles-based versus rules-based.3
A total of 152 professional auditors participated in the experiment: 104 U.S. auditors (38
female and 66 male) and 48 auditors from The Netherlands (10 female and 38 male). There were no
significant differences in the mean level of auditing experience of U.S. auditors (7.26 years [SD
7.98]) and Dutch auditors (5.81 years [SD 2.42]). There were also no significant demographic
differences across experimental conditions (all p . 0.27), and none of the demographic variables
were significant as covariates in tests of hypotheses (all p . 0.17).4
Participants were asked to use their professional judgment as they would on an actual audit
engagement. The task consisted of analyzing an audit situation in which the classification of a lease
was in question (operating lease or capital lease).5 The classification of a lease can have important
implications for a companys financial statements, influencing financial statement users
assessments of both the companys risk and profitability.
2

A model including the interaction between accounting standard type and the indicator variable IFRS auditor was
also tested, and all hypotheses were supported.
In the U.S. auditor sample, the ambiguity of the lease setting was also manipulated between participants (less
ambiguous versus more ambiguous), in order to explore potential differences in the effect of accounting
standards that may occur in varying transaction settings. For instance, critics have argued that rules are necessary
even in a less ambiguous setting to provide guidance to auditors in confronting management preferences.
Participants levels of process accountability, epistemic motivation, and evidence demands in the lowerambiguity condition were similar to those in the higher-ambiguity condition, and there were no statistically
significant differences. Also, in a model including all main effects and interactions of accounting standard, lease
setting ambiguity, and the indicator variable IFRS auditor, neither the main effect of lease setting ambiguity nor
its interaction with accounting standard were significant. For these reasons, the full sample is included in all of
the remaining analyses.
Both the U.S. and Dutch samples completed the experiment under controlled conditions: on the premises of their
audit firm during training sessions for U.S. auditors, and during a professional education class for Dutch
auditors. Materials were identical across the two samples, except that the Dutch auditors completed only the
more ambiguous lease setting case.
The experimental materials were pilot-tested with four audit partners who had expertise in lease accounting and
whose suggestions were incorporated in the final instrument.

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Participants read background information about a company located in country X, which had
entered into a significant lease transaction. To mitigate the possibility that participants would
automatically revert to the respective standard with which they are most familiar, instructions
emphasized that participants should determine the treatment of the companys accounting
transactions in accordance with the accounting standards promulgated in the country in which the
client operates, and that participants should ignore both the standards used in their own country and
any previous accounting guidance they may have received on lease reporting. After reading the
applicable lease accounting standard (either rules-based or principles-based), participants were
provided with information on the lease contract as well as background information on the
companys historical treatment of leases. Participants read that management had classified the lease
as an operating lease.
Participants were then asked to determine the proper classification of the lease6 and were given
an opportunity to request additional audit evidence from a menu of evidence items. Finally,
participants completed the process accountability and epistemic motivation measures, and filled out
a post-experimental questionnaire providing demographic information and manipulation checks.
Manipulation of Accounting Standard
Accounting standard was manipulated at two levels: principles-based or rules-based. The
wording of the accounting standard manipulation is shown in Appendix A. Participants in the
principles-based condition read a standard stipulating that a transaction should be classified as a
capital lease if it transferred substantially all the risks and rewards incidental to ownership, and as
an operating lease otherwise, which is consistent with principle-based standards such as used in The
Netherlands (IAS 17.8 and DAS 292.118). Participants in the rules-based condition read that if a
transaction meets one of three specific criteria, it should be recorded as a capital lease; otherwise, it
should be recorded as an operating lease. This wording was meant to capture the essence of a rulesbased accounting standard, mirroring the nature of the current U.S. accounting standard on leases.7
Both the principles-based standard and the rules-based standard involved some judgment about the
amount and type of evidence to be gathered by the auditor; for example, the lease classification
under the rules-based standard could be affected by the presence of additional incentives related to
the lease, or options and penalties related to the renewal of the lease. However, the principles-based
standard involved a considerably greater degree of judgment to assess the amount and type of
evidence to be gathered by the auditor.
Dependent Variables
Process Accountability
In contrast to prior studies, process accountability is not manipulated, but measured as a
dependent variable. Process accountability was measured with a five-question scale, developed for
this study. The questions are the most common ways in which prior studies in psychology and
accounting have manipulated process accountability (e.g., Kennedy 1993; Tetlock and Boettger
6

A preliminary classification judgment was introduced for task realism. We do not report the findings for this
task, since it is outside of the primary focus of the study (i.e., auditor motivations and demand for evidence) and
auditors were not provided the results of tests (evidence) they desired and would have in practice to reach a final
lease classification judgment.
SFAS 13 states: If at its inception (as defined in paragraph 5(b)) a lease meets one or more of the following four
criteria, the lease shall be classified as a capital lease by the lessee. Otherwise, it shall be classified as an
operating lease. The numeric thresholds for the rules-based condition were purposefully different from the
numeric thresholds in SFAS 13 in order to discourage the U.S. participants from automatically reverting to a
U.S.-GAAP mode of thinking.

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1989; Tetlock and Kim 1987; Markman and Tetlock 2000; Siegel-Jacobs and Yates 1996; Brtek
and Motowidlo 2002; Tetlock et al. 1989). Participants were asked: (1) to what extent will an
auditor have to defend to others his application of this accounting standard (1 very little, 7 very
much); (2) to what extent are you free to determine the types of information relevant to your
decision (1 very little, 7 very much); (3) how difficult will it be to determine whether a piece of
information is relevant to the lease decision (1 very difficult, 7 very easy; this question was
reverse-scored); (4) every auditor will be examining the same types of information in making a
decision regarding the lease (1 strongly disagree, 7 strongly agree; this question was reversescored); and (5) I have discretion in deciding how much I want to weight various facts in reaching a
decision (1 strongly disagree, 7 strongly agree). The Cronbachs alpha coefficient for the scale
was 0.79. Factor analysis revealed that all five questions load on a single factor with an eigenvalue
of 2.71, which explained 54 percent of the variance. The factor score was used as the measure of
process accountability.8
Epistemic Motivation
Epistemic motivation was measured with a three-question scale developed and used by De
Dreu et al. (1999) and De Dreu et al. (2006). Participants rated the following items on seven-point
Likert scales (1 strongly disagree, 7 strongly agree): To apply this accounting standard, (1) I
had to think deeply before making a decision, (2) I was required to consider a large number of
possible perspectives, and (3) I had to make judgments and decisions as thoroughly as possible. The
Cronbachs alpha for the scale was 0.88. Factor analysis revealed that all three questions load on a
single factor with an eigenvalue of 2.41, which explained 80 percent of the variance. The factor
score was used as the measure of epistemic motivation.
Demand for Evidence
Demand for audit evidence was measured by the number of evidence items requested by
participants. Participants were presented with the menu of 32 audit evidence items shown in
Appendix B and were asked to mark any evidence items that they would want to examine in
deciding how to record the lease. The menu included evidence items diagnostic to the lease
classification decision, such as penalties for failing to continue the lease or options to cancel the
lease, as well as items that were nondiagnostic with respect to the lease classification, such as aging
schedules of receivables or depreciation schedules. The items respective diagnosticity or
nondiagnosticity was confirmed by our panel of four experienced audit partners with expertise
on leases. The experimental materials were pilot-tested with this panel of experts, and their
feedback was incorporated in the final menu of items.9 The menu contained eight items diagnostic
8

Robustness tests that estimated the models using only the first of the five items as a measure of process
accountability (i.e., to what extent will an auditor have to defend to others his application of this accounting
standard) yield results similar to our main results, and do not change our inferences.
Items such as additional incentives related to the lease, penalties for failing to continue the lease, and options to
cancel the lease are treated as diagnostic because these items indicate potential changes to the life of the lease or
to the present value of the lease-related outflows. The companys debt covenants and its solvency ratios were
deemed diagnostic because they can indicate incentives for transaction structuring. Lease-related attorney
representations and board meeting minutes could also provide important information about the nature and
purpose of the lease transactionfinancing a purchase versus simply renting. One of the panel members also
highlighted the importance of determining whether the building is unique, custom-designed to fit the client
companys specific needs, or a generic one; he related a real-life situation in which the auditors pressed for a
custom-designed building lease to be capitalized. Touring and physical examination of the building could also
provide diagnostic information about this issue. As noted previously, our panel confirmed the relevancy of these
evidence items.

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to the lease classification decision (items 7, 10, 11, 14, 16, 24, 25, and 29 in Appendix B) and 24
nondiagnostic items.10
RESULTS
Manipulation Checks
The effectiveness of the accounting standard manipulation was tested by comparing
participants ratings of two items on seven-point Likert scales: (1) the accounting standard was
based on (1 detailed rules, 7 broad principles), (2) the accounting standard provided (1
specific guidance, 7 general guidance). Participants in the principles-based condition assessed
the standard to be based on broad principles (M 5.81, SD 1.60) and to provide general
guidance (M 5.80, SD 1.53) to a significantly greater extent than participants in the rulesbased condition (M 2.68, SD 1.83; M 2.83, SD 1.94), t(150) 11.20 and t(150) 10.48,
respectively; both p , 0.001), providing evidence that the manipulation of type of accounting
standard was successful.
Model Tests
The model includes the indicator variable IFRS auditor, in order to control for any potential
differences between U.S. and Dutch auditors due to differences in exposure to type of accounting
standards. That is, does extended use and familiarity with a particular type of accounting standard
differentially affect its impact on auditor motivations and evidence search? A path analysis, which
simultaneously regresses each endogenous variable on all variables preceding it in the model, was
conducted in order to control for all relationships between exogenous and endogenous variables in
testing the hypotheses.11 Figure 2 presents the unstandardized path coefficients and related p-values
(in parentheses). Each path coefficient represents the effect of a unit change in the independent
variable on the dependent variable, after controlling for the effect of all other paths. All p-values
related to hypotheses are one-tailed if the findings are in the expected direction; remaining p-values
are two-tailed. Bold arrows represent paths significant at the 0.05 level.
The model fits the data well. The Chi-squared statistic is insignificant and the Comparative Fit
Index (CFI) is 1.00 (values of 0.90 or higher are considered acceptable). The Tucker-Lewis index
(TLI) is 1.03 and is above the accepted cutoff of 0.90 (Kline 1998). The root mean square error of
approximation (RMSEA) is ,0.01 for this model; values below 0.08 indicate good model fit (Hair,
Anderson, Tatham, and Black 1998; Steiger 1990; Browne and Cudeck 1993). Finally, the
standardized root mean square residual (SRMR) is 0.012; values below 0.08 indicate good model fit
(Hancock and Mueller 2006; Muthen, duToit, and Spisic 1997).
Accounting Standard and Process Accountability (H1)
H1 proposed that auditors exhibit a higher level of process accountability under principlesbased accounting standards than under rules-based standards. Descriptive statistics for the five items
measuring process accountability are displayed in Table 1 and show that the values for all five items
that form the process accountability measure are significantly greater under principles-based
accounting standards than under rules-based accounting standards. Figure 2 shows that the path
between the principles-based accounting standard and process accountability is positive and
10

11

Due to the primary focus of the study and limitations on participant time, auditors in this study did not receive the
actual audit evidence.
The Mplus software was used for the path analysis (Muthe n et al. 1997).

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Principles-Based Accounting Standards and Auditors Motivations

61

FIGURE 2
Model Results

Accounting standard was manipulated at two levels: principles-based versus rules-based. The manipulation is
shown in Appendix A.
IFRS Auditors was an indicator variable equal to 1 for auditors from The Netherlands, and 0 otherwise.
Process accountability was measured with a factor score based on the following items, reported on seven-point
Likert scales: (1) to what extent will an auditor have to defend to others his application of this accounting
standard (1 very little, 7 very much); (2) to what extent are you free to determine the types of information
relevant to your decision (1 very little, 7 very much); (3) how difficult will it be to determine whether a
piece of information is relevant to the lease decision (1 very difficult, 7 very easy; this question was
reverse-scored); (4) every auditor will be examining the same types of information in making a decision
regarding the lease (1 strongly disagree, 7 strongly agree; this question was reverse-scored); and (5) I have
discretion in deciding how much I want to weight various facts in reaching a decision (1 strongly disagree, 7
strongly agree).
Epistemic motivation was measured with a factor score based on the following three items, reported on sevenpoint Likert scales: To apply this accounting standard, (1) I had to think deeply before making a decision, (2) I
was required to consider a large number of possible perspectives, (3) I had to make judgments and decisions as
thoroughly as possible.
Demand for evidence was measured with the number of each participants requests for any of the evidence
items shown in Appendix B.

significant (path coefficient of 1.13, p , 0.01), supporting H1. Further, the indicator variable IFRS
auditors has a significant negative effect on process accountability (path coefficient of 0.30, p
0.04), indicating that on average Dutch auditors experience lower process accountability than U.S.
auditors.12
12

In a robustness test, ANCOVA including IFRS auditors as a covariate indicates that principles-based standards
induce greater process accountability than rules-based standards (F(1,149) 71.68, p , 0.01). Furthermore, a
path model including the interaction between accounting standard and the indicator variable IFRS auditor
yielded results similar to our main path model results.

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Demand for Nondiagnostic Evidencee

Demand for Diagnostic Evidenced

Demand for Evidencec

3: I had to make judgments and decisions as thoroughly as possible

2: I was required to consider a large number of possible perspectives

Process Accountability
1: To what extent will an auditor have to defend to others his application of this
accounting standard
2: To what extent are you free to determine the types of information relevant to your
decision
3: How difficult will it be to determine whether a piece of information is relevant to the
lease decision [reverse-scored]
4: Every auditor will be examining the same types of information in making a decision
regarding the lease [reverse-scored]
5: I have discretion in deciding how much I want to weight various facts in reaching a
decision
Epistemic Motivation
1: I had to think deeply before making a decision
3.44
(1.82)
3.68
(1.83)
2.74
(1.35)
2.92
(1.69)
3.20
(1.72)
3.00
(1.62)
3.03
(1.45)
3.68
(1.75)
3.55
(3.78)
2.22
(2.06)
1.37
(2.18)

4.75
(1.48)
4.29
(1.53)
4.79
(1.45)
6.37
(4.22)
3.84
(1.91)
2.54
(3.38)

Rules-Based
Standard
(n 76)
Mean
(Std. Dev.)

5.04
(1.67)
4.77
(1.38)
4.15
(1.27)
4.32
(1.62)
4.88
(1.50)

Principles-Based
Standard
(n 76)
Mean
(Std. Dev.)

150
150
150

6.37
5.19
6.48

150

150

150

150

150

0.012

0.001

0.001

0.001

0.001

0.001

0.001

0.001

0.001

0.001

0.001

p-valueb

(continued on next page)

2.54

5.03

4.34

4.23

5.24

150

150

4.15

6.95

150

df

5.61

Descriptive Statistics for Dependent Measures under Principles-Based and Rules-Based Accounting Standardsa

TABLE 1

62
Peytcheva, Wright, and Majoor

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Volume 26, Number 2, 2014

Accounting standard was manipulated at two levels: principles-based versus rules-based. The manipulation is shown in Appendix A.
Tests are one-tailed if the results are directionally consistent with the hypotheses.
c
Demand for evidence was measured with the number of each participants requests for any of the evidence items shown in Appendix B.
d
Demand for diagnostic evidence was measured with the number of participants requests for any of the following items shown in Appendix B: item 7, 10, 11, 14, 16, 24, 25, or 29.
e
Demand for nondiagnostic evidence was measured with the number of participants requests for the evidence items shown in Appendix B, excluding items 7, 10, 11, 14, 16, 24,
25, or 29.

TABLE 1 (continued)

Principles-Based Accounting Standards and Auditors Motivations

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Peytcheva, Wright, and Majoor

64

Process Accountability and Epistemic Motivation (H2)

Descriptive statistics for the three items measuring epistemic motivation are displayed in Table
1. As shown, the values for all three items that form the epistemic motivation measure are higher
under principles-based accounting standards than under rules-based standards. The path coefficient
between process accountability and epistemic motivation, displayed in Figure 2, is positive and
significant (path coefficient of 0.39, p , 0.01), supporting H2. In addition to the hypothesized path
for the effect of accounting standards on auditors epistemic motivation (accounting standard !
process accountability ! epistemic motivation), the model indicates a direct path between
accounting standard and epistemic motivation (path coefficient of 0.46, p , 0.01), suggesting that
principles-based accounting standards directly increase auditors epistemic motivation.13 The
indicator variable IFRS auditors has a significant negative effect on epistemic motivation (path
coefficient of 0.34, p 0.02).14
Epistemic Motivation and Demand for Evidence (H3)
Table 1 shows that auditors demand for evidence is significantly higher under principles-based
accounting standards (M 6.37, SD 4.22) than under rules-based standards (M 3.55, SD
3.78), t(150) 4.34, p , 0.01. As posited by H3, the path coefficient between epistemic motivation
and auditors demand for evidence, displayed in Figure 2, is positive and significant (path
coefficient of 0.96, p , 0.01). In addition to the hypothesized path for the effect of accounting
standards on auditors demand for evidence (accounting standard ! process accountability !
epistemic motivation ! demand for evidence), the results indicate a direct path between process
accountability and demand for evidence (path coefficient of 0.69, p , 0.05).15 The indicator
variable IFRS auditors has no significant direct effect on the demand for evidence (path coefficient
of 0.51, p 0.46).
Importantly, the path analysis model reports that the indirect effect of accounting standard on
auditors demand for evidence obtained through process accountability and epistemic motivation is
positive and significant (path coefficient of 1.64, p , 0.01). This result provides support for the
proposition that principles-based standards increase auditors demand for evidence by inducing
higher process accountability and higher epistemic motivation. Finally, the total effect of the
indicator variable IFRS auditors on the demand for evidence is not significant (coefficient of 0.13,
p 0.86).

13

14

15

The total effect of accounting standard on epistemic motivation (i.e., the sum of the direct and indirect effects) is
0.90, p , 0.01. In robustness tests including the indicator variable IFRS auditors, ANCOVA indicates that
principles-based standards induce greater epistemic motivation than rules-based standards (F(1,149) 40.58, p
, 0.01), and regression analysis indicates that process accountability increases epistemic motivation (b 0.54, p
, 0.01).
In a robustness test, 50 accounting students examined an identical case and reported process accountability and
epistemic motivation, but did not examine any evidence items. Consistent with our primary results, participants
perceived greater process accountability under principles-based standards (mean of 4.92) than under the rulesbased standards (mean of 2.96; F(1,48) 23.40, p , 0.01). Epistemic motivation was also significantly greater
under principles-based standards (mean of 5.26) than under rules-based standards (mean of 3.31; F(1,48)
34.06, p , 0.01).
The total effect of accounting standard on auditors demand for evidence is 2.82, p , 0.01. In robustness tests
including the indicator variable IFRS auditors, ANCOVA indicates that principles-based standards induce
greater demand for evidence than rules-based standards (F(1,149) 18.67, p , 0.01), and regression analysis
indicates that epistemic motivation increases demand for evidence (b 1.55, p 0.01).

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Principles-Based Accounting Standards and Auditors Motivations

65

Auditors Demand for Diagnostic Evidence

This study also examines how the type of accounting standard affects auditors demand for
diagnostic evidence, since such evidence is likely to enhance the auditors decision-making. As
shown in Table 1, auditors demand for diagnostic audit evidence is significantly higher under
principles-based accounting standards (M 3.84, SD 1.91) than under rules-based standards (M
2.22, SD 2.06), t(150) 5.03, p , 0.01. Results from a model in which the final dependent
variable in the path analysis is auditors demand for diagnostic evidence are shown in Figure 3.16
The links from accounting standard and the indicator variable IFRS auditors to the variables process
accountability and epistemic motivation remain the same as in the main model previously reported.
Further, epistemic motivation significantly increases auditors demand for diagnostic evidence
items (path coefficient of 0.54, p , 0.01). The results also indicate a direct effect of accounting
standard on demand for diagnostic evidence (path coefficient of 0.69, p 0.03).17 Importantly, the
model statistics indicate that the indirect effect of accounting standard on auditors demand for
diagnostic evidence, obtained through process accountability and epistemic motivation, is positive
and significant (coefficient of 0.93, p , 0.01) (untabulated).18
Auditors Demand for Nondiagnostic Evidence
The manner in which type of accounting standard affects auditors demand for nondiagnostic
evidence was also examined. This analysis provides some evidence on the potential for dilution
effects under principles-based standards as a result of increased process accountability and
epistemic motivation (Tetlock and Lerner 1999; Tetlock and Boettger 1989; Tetlock et al. 1996;
Nisbett et al. 1981). As shown in Table 1, participants requested a greater number of nondiagnostic
items under principles-based standards than in rules-based standards (M 2.54, SD 3.38) than
under rules-based standards (M 1.37, SD 2.18), t(150) 2.54, p 0.01). Results from a model
with the number of nondiagnostic items as a dependent variable indicate that epistemic motivation
has a marginally significant effect on demand for nondiagnostic evidence requested by participants
(path coefficient of 0.44, p 0.06).
These results suggest there is potential for a dilution effect under principles-based standards,
since the quality of auditor judgments may be influenced by their examination of nondiagnostic
evidence. Although results from a paired-samples t-test indicate that participants request more
diagnostic items than nondiagnostic items under principles-based standards (t(75) 3.23, p ,
0.01), future research should explore how the actual examination of diagnostic and nondiagnostic
items influences auditors decision processes and, ultimately, the quality of final audit judgments.
DISCUSSION
An important issue in financial reporting is whether to use principles or rules-based accounting
standards, which is likely to have a pervasive effect on the behavior of financial statement preparers.
16
17

18

Chi-square (1) 2.72, p 0.10; CFI 0.99; TLI 0.91; RMSEA 0.106; SRMR 0.025.
The total effect of accounting standard on auditors demand for diagnostic evidence is 1.62, p , 0.01. In
robustness tests including the indicator variable IFRS auditors, ANCOVA indicates that principles-based
standards induce greater demand for diagnostic evidence than rules-based standards (F(1,149) 26.26, p ,
0.01), and regression analysis indicates that epistemic motivation increases demand for diagnostic evidence (b
0.96, p 0.01).
The results for demand for diagnostic evidence are robust to using the following alternative dependent measures
of demand for diagnostic evidence: (1) additional incentives related to the lease; (2) the sum of additional
incentives related to the lease, penalties for failing to continue the lease, and options to cancel the lease. Any of
these three items could indicate potential changes to the life of the lease or to the present value of the leaserelated outflows.

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66

Peytcheva, Wright, and Majoor

FIGURE 3
Model Results for Demand for Diagnostic Evidence

Accounting standard was manipulated at two levels: principles-based versus rules-based. The manipulation is
shown in Appendix A.
IFRS Auditors was an indicator variable equal to 1 for auditors from The Netherlands, and zero otherwise.
Process accountability was measured with a factor score based on the following items, reported on seven-point
Likert scales: (1) to what extent will an auditor have to defend to others his application of this accounting
standard (1 very little, 7 very much); (2) to what extent are you free to determine the types of information
relevant to your decision (1 very little, 7 very much); (3) how difficult will it be to determine whether a
piece of information is relevant to the lease decision (1 very difficult, 7 very easy; this question was
reverse-scored); (4) every auditor will be examining the same types of information in making a decision
regarding the lease (1 strongly disagree, 7 strongly agree; this question was reverse-scored); and (5) I have
discretion in deciding how much I want to weight various facts in reaching a decision (1 strongly disagree, 7
strongly agree).
Epistemic motivation was measured with a factor score based on the following three items, reported on sevenpoint Likert scales: To apply this accounting standard, (1) I had to think deeply before making a decision, (2) I
was required to consider a large number of possible perspectives, (3) I had to make judgments and decisions as
thoroughly as possible.
Demand for evidence was measured with the number of each participants requests for any of the evidence
items shown in Appendix B.

Since the reliability and credibility of financial information is significantly affected by the assurance
provided by external auditors, examining the impact of principles-based or rules-based standards on
auditors is also important. Auditors are required to opine on whether or not managements financial
reports are in compliance with applicable accounting standards, and the type of standard affects the
nature of the guidance provided from highly prescribed (rules-based) to broad principles, which in
turn is likely to impact the auditors judgment process and desired evidence. Specifically, the broad
guidance from principles-based standards is hypothesized to lead to higher levels of auditor
perceived process accountability than rules-based standards, which in turn will lead to both greater
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Principles-Based Accounting Standards and Auditors Motivations

67

epistemic motivation (a desire to have a thorough understanding of the issues), and search for audit
evidence.
This is the first study to examine the impact of the type of accounting standards on auditors
motivations and program planning judgments. Findings from this experiment suggest that
principles-based versus rules-based standards lead to significant differences in the judgment
processes of professional auditors. The results provide support for our theoretical model in which
principles-based accounting standards influence auditors cognitive motivations by increasing
auditors process accountability and epistemic motivation. Specifically, principles-based standards
increase individual auditors perceptions of being accountable for the quality of the process used to
reach a decision (Markman and Tetlock 2000; Libby et al. 2004). In turn, greater process
accountability induces higher epistemic motivation in auditorsa desire to obtain a rich and
thorough understanding of the problem at hand. High levels of epistemic motivation stimulated by
principles-based accounting standards then induce a greater demand for both total desired evidence
and diagnostic audit evidence. These findings suggest that, while bright-line rules and thresholds
can limit cognitive effort, accounting standards based on broad principles are likely to evoke
systematic and thorough information processing, thereby leading auditors to strive for a rich and
accurate understanding of the issues under consideration.
A potential reason for our finding that principles-based standards increase auditors process
accountability is that principles-based standards may increase auditors concerns about appeasing
regulators or the courts (Lerner and Tetlock 1999). Thus, self-justification may be responsible for
the observed increase in auditors perceived process accountability. Importantly, however, the
findings indicate that principles-based standards have a direct effect on auditors epistemic
motivation, regardless of concerns to justify the decision process. This result suggests that
principles-based standards stimulate in auditors a desire to obtain a rich and multifaceted
understanding of the issues they examine. This finding is especially informative to regulators in
their consideration of IFRS adoption or convergence, given the numerous positive decision-making
effects of high epistemic motivation as revealed by prior research (increased thoroughness in
attending to relevant information [Kruglanski 1989], greater depth of information processing [De
Dreu et al. 2006], detail-oriented analysis [Bodenhausen et al. 2003], and increased hypotheses
generation and sensitivity to alternative hypotheses [Mayseless and Kruglanski 1987]).
The results also indicate that, although auditors exposed to IFRS over a prolonged period (e.g.,
Dutch auditors) may experience lower process accountability and epistemic motivation when
working with principles-based standards than U.S. auditors, principles-based accounting standards
still induce greater epistemic motivation than rules-based accounting standards in these auditors,
suggesting a greater desire to obtain a rich understanding of the matter at hand. Future research may
confirm our expectations that auditors experiencing prolonged exposure to principles-based
standards display higher levels of motivations (process accountability and epistemic motivation)
than when applying rules-based standards.
In interpreting the results, it is important, though, to consider potential limitations of this study,
in addition to the general limitations of experimental research. Measuring the dependent variables
for the path models at the same time, and from the same participants, potentially introduces the
problem of common method variance. However, a number of steps have been taken to alleviate this
concern, such as using a different response format for auditors motivations from evidence
demands, ensuring participants anonymity, and conducting robustness tests (P. Podsakoff,
MacKenzie, Lee, and N. Podsakoff 2003; P. Podsakoff, MacKenzie, and N. Podsakoff 2012).
Another potential limitation of the findings is that the diagnostic evidence provided to auditors was
determined subjectively, based on our review of relevant auditing standards and the suggestions of
a panel of four audit partners with experience in leases. Therefore, the diagnostic items provided
may be incomplete and/or vary in strength. Also, since the focus of this experiment was on the
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Peytcheva, Wright, and Majoor

68

impact of accounting standards on the decision process, the nature of the evidence provided was
controlled, i.e., all participants viewed the same amount of evidence.
In closing, an important avenue for future research is to examine the impact of type of
accounting standard on auditors decision performance. The focus on the current study was to
examine auditors motivations and evidence search, so participants had an opportunity to select, but
not to examine, additional evidence. Therefore, future research should investigate the important
issue of whether the additional evidence gathered on balance improves or biases auditor judgments,
for instance, as a result of potential dilution effects (Hackenbrack 1992; Glover 1997). The
potential for principles-based standards to increase auditor demand for nondiagnostic evidence is
something firms should keep in mind when training their auditors, as standards in the U.S. get more
principles-based over time from convergence with IFRS. Finally, our study does not involve
auditor-client negotiations, so it does not examine whether auditors would be better able to defend
their decisions reached using principles-based standards to their audit clients. The greater process
accountability induced by principles-based standards may also have an effect on the review process
and other quality control mechanisms in audit firms. These are promising avenues for future
research on the effect of principles-based versus rules-based standards on the quality of the audit.

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APPENDIX A
Experimental Manipulation of Accounting Standard
Principles-Based
The classification of leases adopted in this standard is based on the extent to which risks and
rewards incidental to ownership of a leased asset lie with the lessor or the lessee.



A lease is classified as a capital lease if it transfers substantially all the risks and rewards
incidental to ownership.
A lease is classified as an operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership.

Rules-Based
If a lease meets any of the criteria specified below, it is to be recorded as a capital lease;
otherwise it is to be accounted for as an operating lease:




The term of the lease is equal to or greater than 80 percent of the leased assets useful life;
The present value of the lease payments is equal to or greater than 80 percent of the fair
market value of the leased asset; or
At the end of the lease term, asset ownership is transferred to the lessee.

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Peytcheva, Wright, and Majoor

72

APPENDIX B
Menu of Evidence Itemsa
1
2
3
4

15

Schedule of all fixed assets

Tax return from previous year
Aging schedule of accounts receivable
Depreciation schedules for the last two
years
Other obligations of the company
Bad debt estimation assumptions
Penalties for failing to continue the
lease
R&D related investments
Flowchart of internal control
Schedule of solvency ratios
Attorney representations related to
leases
Capital stock repurchase agreements
Analysis of all revenue accounts
Minutes of the meetings of the Board
of Directors
Revenue projections for next year

16

Options to cancel the lease

5
6
7
8
9
10
11
12
13
14

17
18
19
20

Restrictions on retained earnings

Number of annual Audit Committee meetings
Dividend payout schedules
Loan applications of the company

21
22
23
24
25
26
27

ISO quality control report for the company

Repairs and maintenance expense
Directors and Officers liability insurance
coverage
Debt covenants for the company
Additional incentives related to the lease
Schedule of disposals of long-term assets
Deeds for fixed assets owned

28
29
30

Schedule of annual interest expense incurred

Touring and physical examination of building
Schedule of property pledged to secure loans

31

Planned introductions of new products over

the next 5 years
Cash lead schedule

32

Diagnostic evidence items (items 7, 10, 11, 14, 16, 24, 25, and 29) are shown in italics. All other evidence items are
considered nondiagnostic to the task at hand.

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