IDEAS home Printed from https://ideas.repec.org/a/bla/abacus/v42y2006i2p165-188.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1467-6281.2006.00196.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1467-6281.2006.00196.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    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. & 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.
    3. 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.
    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francesco De Luca & Jenice Prather-Kinsey, 2018. "Legitimacy theory may explain the failure of global adoption of IFRS: the case of Europe and the U.S," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(3), pages 501-534, September.
    2. Dichev, Ilia D. & Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2013. "Earnings quality: Evidence from the field," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 1-33.
    3. Basu Sudipta & Waymire Gregory B., 2019. "Historical Cost and Conservatism Are Joint Adaptations That Help Identify Opportunity Cost," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 9(1), pages 1-13, March.
    4. Karim Jamal & Shyam Sunder, 2014. "Monopoly versus Competition in Setting Accounting Standards," Abacus, Accounting Foundation, University of Sydney, vol. 50(4), pages 369-385, December.
    5. Chikako Ozu & Miho Nakamura & Kyoko Nagata & Sidney J. Gray, 2018. "Transitioning to IFRS in Japan: Corporate Perceptions of Costs and Benefits," Australian Accounting Review, CPA Australia, vol. 28(1), pages 4-13, March.
    6. Pantazi Marius, 2021. "In order to thrive, first we need to fix accounting and management Then, we must report what matters," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 15(1), pages 723-736, December.
    7. Zhang, Eagle & Andrew, Jane, 2016. "Rethinking China: Discourse, convergence and fair value accounting," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 36(C), pages 1-21.
    8. Karim Jamal, 2008. "Mandatory Audit of Financial Reporting: A Failed Strategy for Dealing with Fraud," Accounting Perspectives, John Wiley & Sons, vol. 7(2), pages 97-110, May.
    9. Kajüter, Peter & Klassmann, Florian & Nienhaus, Martin, 2016. "Do Reviews by External Auditors Improve the Information Content of Interim Financial Statements?," The International Journal of Accounting, Elsevier, vol. 51(1), pages 23-50.
    10. Anne Marie Garvey & Laura Parte & Bridget McNally & José Antonio Gonzalo-Angulo, 2021. "True and Fair Override: Accounting Expert Opinions, Explanations from Behavioural Theories, and Discussions for Sustainability Accounting," Sustainability, MDPI, vol. 13(4), pages 1-23, February.
    11. Philip Brown & Ann Tarca, 2007. "Achieving High Quality, Comparable Financial Reporting: A Review of Independent Enforcement Bodies in Australia and the United Kingdom," Abacus, Accounting Foundation, University of Sydney, vol. 43(4), pages 438-473, December.
    12. Robert K. Larson & Paul J. Herz, 2013. "A Multi-Issue/Multi-Period Analysis of the Geographic Diversity of IASB Comment Letter Participation," Accounting in Europe, Taylor & Francis Journals, vol. 10(1), pages 99-151, June.
    13. Shyam Sunder, 2003. "Rethinking the Structure of Accounting and Auditing," Yale School of Management Working Papers ysm392, Yale School of Management.
    14. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    15. Paulo Cesar de Melo Mendes & Jorge Katsumi Niyama & Cesar Augusto Tiburcio Silva, 2018. "The Perception of Auditors in the Measurement of Instruments Financial Institutions at Fair Value in Financial Institutions," Brazilian Business Review, Fucape Business School, vol. 15(4), pages 363-381, July.
    16. Ngaire Kirk, 2006. "Perceptions of the true and fair view concept: an empirical investigation," Abacus, Accounting Foundation, University of Sydney, vol. 42(2), pages 205-235, June.
    17. Alayemi, Sunday Adebayo & Morohunfola Olasunkanmi Abdul-Lateef, 2017. "Accounting Numbers and Management’s Financial Reporting Incentives: Evidence from Positive Accounting Theory," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 2(2), pages 50-53, February.
    18. Shyam Sunder, 2003. "Accounting: Labor, Capital and Product Markets," Yale School of Management Working Papers ysm368, Yale School of Management.
    19. Jordi Perramon & Oriol Amat, 2006. "IFRS introduction and its effect on listed companies in Spain," Economics Working Papers 975, Department of Economics and Business, Universitat Pompeu Fabra.
    20. Kothari, S.P. & Ramanna, Karthik & Skinner, Douglas J., 2010. "Implications for GAAP from an analysis of positive research in accounting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 246-286, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:abacus:v:42:y:2006:i:2:p:165-188. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0001-3072 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.