The Impact of Rule Precision, Information Ambiguity, and Conflicting Incentives on Aggressive Reporting

There has been much discussion regarding the necessity of moving away from precise (rules-based) standards toward less precise (principles-based) standards. This study examines the impact of the proposed shift by using a controlled experiment to evaluate the influence of rule precision and information ambiguity on reporting decisions in the presence of monetary incentives to report aggressively. Using motivated reasoning theory as a framework, we predict that the malleability inherent in both rule precision and information ambiguity amplify biased reasoning in a manner that is consistent with individuals’ pecuniary incentives. In contrast, consistent with research exploring ambiguity aversion we predict that high levels of ambiguity will actually attenuate aggressive reporting. Our results support these predictions. Specifically, we find an interactive effect between rule precision and information ambiguity on self-interested reporting decisions at moderate levels of ambiguity. However, consistent with ambiguity aversion, we find decreased self-interested reporting decisions at high levels of ambiguity relative to moderate ambiguity. This study should be of interest to preparers, auditors, and regulators who are interested in identifying situations which amplify and diminish aggressive reporting.