Accounting Standards: Rules versus Principles - Term Paper Example

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The author states that the role of professional judgment became unimportant and rules took over professionalism. So, the debate started on whether the current financial reporting system in the U.S. is undesirable or inappropriate because it is rule-based…
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Accounting Standards: Rules versus Principles
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Download file to see previous pages Many top accounting firms have also supported the switch from the rule-based accounting system to a principles-based accounting system. Even the Financial Accounting Standards Committee (FASC) of the American Accounting Association is more in favor of a principles-based accounting system.

Hence, the promulgation of the Sarbanes-Oxley Act of 2002 has possible implications for the adoption of principles-based financial reporting standards. This particular Act has come into force in order to provide detailed and prescriptive corporate governance guidance, at the federal level, in particular. Also, this Act has special emphasis on matters related to financial reporting and auditing. Previously, the principle-based outlook has been associated with the state level, where the fiduciary duties of care and loyalty have formed the basis of governance guidance for officers and directors of corporations. Consequently, the Sarbanes-Oxley Act is completely different from the previous statutes, in the sense that it is now more principle-based and is imposed at the federal level rather than the state level. This is an important angle to the whole issue of standards. Now the officers and directors or preparers of financial reports and the audit committees will seek ever more detailed guidance as to precisely what is expected in terms of their role in financial reporting. So, a clash of the requirement by demand for rules and principle-based standards is foreseen by the analysts.

If explained in the simple language then principles-based accounting standards provide more of a conceptual framework while rule-based are more detailed instructions. Hence, a principles-based accounting system is based on general objectives rather than detailed guidelines. ...Download file to see next pagesRead More
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