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Principles‐ versus rules‐based accounting standards: the FASB's standard setting strategy

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  • George J. Benston
  • Michael Bromwich
  • Alfred Wagenhofer

Abstract

In response to criticism of rules‐based accounting standards and Section 108(d) of the Sarbanes‐Oxley Act of 2002, the SEC proposed principles‐based (or ‘objectives‐oriented’) standards. We identify several shortcomings with this approach and focus on two of them. First, the format (type) of a standard is dependent on the contents of what the standard regulates. Given the asset/liability approach combined with fair values, we argue that the combination of this measurement concept with principles‐based standards is inconsistent because it requires significant guidance for management judgment. Second, we propose the inclusion of a true‐and‐fair override as a necessary requirement for any format that is more than ‘principles‐only’ to deal with inconsistencies between principles and guidance. We discuss the benefits of this override and present evidence from the United Kingdom's experience.

Suggested Citation

  • George J. Benston & Michael Bromwich & Alfred Wagenhofer, 2006. "Principles‐ versus rules‐based accounting standards: the FASB's standard setting strategy," Abacus, Accounting Foundation, University of Sydney, vol. 42(2), pages 165-188, June.
    • Handle: RePEc:bla:abacus:v:42:y:2006:i:2:p:165-188
    DOI: 10.1111/j.1467-6281.2006.00196.x
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    References listed on IDEAS

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    1. Gilad Livne & Maureen McNichols, 2009. "An Empirical Investigation of the True and Fair Override in the United Kingdom," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 1-30, January.
    2. Benston, George J., 2006. "Fair-value accounting: A cautionary tale from Enron," Journal of Accounting and Public Policy, Elsevier, vol. 25(4), pages 465-484.
    3. Benston, George J. & Bromwich, Michael & Litan, Robert E. & Wagenhofer, Alfred, 2006. "Worldwide Financial Reporting: The Development and Future of Accounting Standards," OUP Catalogue, Oxford University Press, number 9780195305838.
    4. Shyam NMI Sunder & Ronald A. Dye, 2001. "Why Not Allow the FASB and IASB Standards to Compete in the U.S.?," Yale School of Management Working Papers ysm192, Yale School of Management.
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