December 13, 2007
A Quick Thought on Rules vs. Principles in Accounting
Posted by Troy Paredes

In a 12/12/07 editorial ("Closing the GAAP"), the WSJ addressed the possible move from GAAP to IFRS, pointing out that GAAP is more rules-based and IFRS is more principles-based.  There is much to say, and much has been said, about rules vs. principles in accounting.  I want to underscore just one thing: with principles comes more discretion and with more discretion comes a greater chance that issuers, their officers, their accountants/auditors, etc. will be found to have "gotten it wrong," particularly in hindsight.  Accordingly, doesn't any discussion of rules vs. principles (whether in the context of a shift from GAAP to IFRS or otherwise) have to include a broader discussion of securities enforcement and litigation?

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Comments (4)

1. Posted by Jake on December 13, 2007 @ 21:58 | Permalink

From a litigation viewpoint, a focus on accounting principles, as opposed to rules, should lead to shorter reports by accounting expert witnesses. Or perhaps not. Most of the time today, when you see two accounting experts facing off in a courtroom, one is a "rules" guy and the other is a "principles" fellow. Each side, of course, gets to choose what kind of accounting expert they want to hire. That in turn leads one to wonder whether the debate over accounting "rules" versus "principles" is really just a reflection of the fact that parties having adversary interests over accounting issues have just that -- interests. Doctrinal purity seems to play little or no role.

2. Posted by Lawrence Cunningham on December 14, 2007 @ 11:05 | Permalink


In comment letters on the SEC’s IFRS releases, the Big 4 say that IFRS means expanded discretion and worry that this increases legal liability risks. They support moving to IFRS only if their liability risks are reduced. The trouble is that more discretion also means more room for aggression. So the argument cuts both ways. The problem is made worse by how the SEC extols moving to IFRS in the name of increased comparability when, in fact, as all the Big 4 agree, increased discretion means many similar transactions will be accounted for differently.

As for the Journal’s hysterical editorial, the move from US GAAP to IFRS has more to do with EU (and US) interest in expanding global capitalism than narrow complaints about US standards. It certainly has nothing to do with whether rules or principles are better at preventing fraud. Does anyone seriously believe that IFRS would have prevented Enron’s managers from engaging in deception? A sub-committee of the SEC’s Advisory Committee on Improving Financial Reporting says “the principles vs. rules dichotomy is a specious debate and certain circumstances require more guidance than others.” I think that is refreshingly correct.

3. Posted by reena on January 4, 2008 @ 6:50 | Permalink

I think ruled based is better than prinicpal based any way its very good to know more things.

4. Posted by international accounting standards on March 31, 2012 @ 4:43 | Permalink

Nice Sharing! The main goal of the IFRS is to provide a single universal framework by which public companies can prepare, display, and disclose their financial statements.

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