Jonathan Meyer
2/11/14
ACCM 5020

Topical Paper #2: Rules-based vs. Principles-based Accounting Standards

Convergence efforts in international accounting and the prevalence of globalization in the world markets has continued to indicate that worldwide financial statement comparability will continue to become more necessary. In light of this, it’s important to determine whether a principles-based or rules-based system would be more appropriate for harmonization. Although most current accounting systems can be primarily defined as rules-based or principles-based, it appears that most of them encompass foundations from both. In other words, it’s apparent that the more successful accounting systems operate in some varying degree of ‘gray area’ between rules-based and principles-based. Therefore, although both types of system have benefits and challenges, any worldwide accounting standards would have to include elements of each.
Primarily rules-based accounting systems such as U.S. GAAP (Generally Accepted Accounting Principles) have both advantages and disadvantages in the creation and implementation of accounting standards. The major challenge for rules-based systems is that they are reactive and can allow for fraud because they dictate what can or cannot be done rather than what should or should not be done to preserve the ‘true and fair view’. In practice, this shows to be a problem because if the standard-setting body (FASB) reacts to accounting issues rather than being more prescriptive, it can create an endless laundry list of rules to attempt to prevent fraudulent accounting rather than allowing for individualism and professional judgment. Also, it’s logical to assume that if someone is willing to behave unethically in financial reporting prior to an enacted rule, then it follows that a ‘rules are made to be broken’ attitude is possible. Conversely,