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Rules-Based of Principle Based Accounting Frameworks

  • Date Submitted: 04/09/2013 02:43 AM
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Assess whether assigning blame to US standards as a cause of corporate failure is fair. Consider whether an exclusive rules-based or principles-based accounting framework is appropriate for modern financial reporting purposes or whether the current international convergence programme might provide a more appropriate model.
“Recent [corporate] accounting scandals [such as Enron and WorldCom]...have led to a concern within the financial/investing community that U.S GAAP has become too rules-based” (Agoglia, et al. 2011: p.747). Due to the detailed guidance and use of bright-lines tests, corporate executives feel that they invite opportunistic interpretations resulting in less informative and misleading financial statements (Bentson, et al. 2006). Kershaw (2005) states, that rules-based standard have become useless and dysfunctional as managers tend to use creative accounting techniques when the economic environment changes. This had led the FASB to shift towards a more principles-based regime which will result in more economically meaningful reporting for modern financial reporting purposes (Agoglia, et al.2011). Although, principle-based standards provide too much flexibility resulting in a lack of comparability between financial statements, it has its advantages which are later discussed in this essay (Agoglia, et al. 2011). An alternative view is the current international convergence programme which brings together elements of both U.S. GAAP and IFRS (Bader, 2009). This essay will assess the key features and causes of the failure of Enron and it will consider the argument in favour of and against the application of principles-based and rules-based set of reporting standards. In addition, this essay will assess the argument for and against the development of a single set of International Financial Reporting Standards around the world and the current international convergence programme - the obstacles that face harmonization of international accounting standards...

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