Critical Review of Principles-Based Accounting Standards

1324 WordsNov 10, 20126 Pages
Introduction Schipper (2003) who is a member of FASB conducted a study on the rules-based and principles-based accounting standards. The aim of this article is to discuss the attributes and potential effects of transferring from rules-based standards to principles-based standards. To some extent this article is critical, but several limitations need to be discussed, such as implementation guidance. Summary Schipper (2003) demonstrated that there was a long-running debate on whether U.S. GAAP should be shifted to principles-based system instead of rules-based system. To measure its applicability, SEC and FASB had conducted a study and developed a proposal respectively. Schipper (2003) argued that U.S. GAAP was based on principles guided…show more content…
Cheney (2004) stated that Enron fraud resulted from a company justifies financial reporting by using bright lines of specific guidance. Dickey & Scanlon (2006) explained that highly complex transactions may have conformed to technical U.S. GAAP rules, but did not reflect economic reality. Meanwhile, Klein (2003) indicated that rules-based standards allow loopholes for those who want to engineer their way around the standard intent. These may imply that rules-based standards just require information to be relevant, reliable and comparability, but ignore to reflect economic substances. While principles-based standards are simpler with a reduction of complexity, it may make the financial statements more transparency. For this point, Kivi, Smith & Wagner (2004) showed that Enron debacle demonstrated the need for a principles-based definition of control. At the same time, Agoglia, Doupnik & Tsakumis (2011) made a research about the effect of principles-based standards and rules-based standards on aggressive reporting and they found that preparers were less likely to report aggressively when applying a principles-based financial reporting standard. Therefore, principles-based standards may reduce misleading financial statements to some extent. In contrast, Schipper (2003) explained many positive effects of implementation guidance, but did not mention negative effects such as complication.
Open Document