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Essay Subject: This paper examines rules-based GAAP accounting and principles-based accounting explaining why the provision of ...... More...

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Paper Abstract: This paper examines rules-based GAAP accounting and principles-based accounting, explaining why the provision of a true and fair view required by law is not sufficient in and of itself, and why the other regulations currently part of GAAP are still needed. The issue of ethics is addressed as part of the solution to the rules- vs. principles-based accounting controversy. Paper Introduction: GAAP Beyond True and Fair The true and fair view concept is a legal financial reportingstandard in the UK EU Singapore Australia and New Zealand that islargely principles-based Kirk A competing rules-based conceptprevalent in the United States is the present fairly in conformity withgenerally accepted accounting principles or GAAP accounting standard Kirk Each of these standards has both advantages and disadvantagesin terms of the financial reporting quality that can be achieved throughits use and there are proponents on both sides of the Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. A Question of Judgement. August. Since a principles-based system requires auditors to apply professional judgment "in morecircumstances rather than less," and since auditors "have often set lowstandards for themselves...(even failing to meet those)," there isunderstandable doubt concerning whether they will "rise to the occasion"(Berkowitz & Rampell). Retrieved on August 14, 2 6 from: http://www.nysscpa.org/cpajournal/2 4/8 4/essentials/p34.htmGlobalization's Next Frontier: Principled Codes of Conduct that Bolster the Rule of Law. August 6. Principles-based accounting has both proponents and opponents also,however. (2 1). (2 6). Since principles-based accounting does not require conformanceto many exact rules and provides little implementation guidance, it is upto the company to ensure that general principles are set up to follow andthat its financial statement represents these principles fairly andaccurately (Hines). (2 2). Someadvocates of the principles-based true and fair view accounting approachassert that the rules-based GAAP regulations are not needed, sincetheoretically the legally required true and fair view covers allcontingencies from a broad-based perspective. Third, using a system that employs two quitedifferent bases of acceptability imposes the kind of restrictions onpotential accounting criminals that makes it difficult for them to evade.Whereas it is relatively easy to set up an entire system that contains work-arounds for one accounting system, doing the same thing for a system thatcovers both ends of the spectrum is much more difficult. In fact, however, neitherconcept is complete in itself, and each has inherent weaknesses that mustbe compensated for by the other. United States Accounting Standards - An overview of GAAP. This type of accounting is "filled with specific details in an attemptto address as many potential contingencies as possible," an approach thathas rendered standards much longer and more complex, as well as leading to"arbitrary criteria for accounting treatments that allow companies tostructure transactions to circumvent unfavorable reporting" (Shortridge &Myring). Rules-based GAAP accounting sets forth rules that must be followed inorder to comply with GAAP accounting standards (Hines). Fulcrum Financial Inquiry Library. (2 2). Likewise, the virtue of an individual's character is alsoimpervious to the type of approach employed. And most importantly, will the auditors...abuse their trustand fail to apply the principles in "good faith consistent with the intentand spirit of the standards" (Berkowitz & Rampell). The Sarbanes-Oxley law that was passed following Enron'sfall required that the SEC conduct a study on the adoption of a principles-based accounting system to determine whether it would provide more andbetter information or lead to further accounting abuse (Berkowitz &Rampell). (2 4). Retrieved on August 14, 2 6 from: http://www.blackwell-synergy.com/doi/abs/1 .1111/j.1467- 6281.2 6. A person of good charactercan use either rules- or principles-based accounting to achieve a fair andbalanced reporting of a company's assets, while a person of poor charactercan use either method to cheat. (2 2). Retrieved on August 14, 2 6 from: http://www.deloitte.com/dtt/article/ ,1 2,sid%253D1 14%2526cid%253D5 69, .htmlAlexander, D., Jermakowicz, E. In fact, "The rules-based approach may lead totechnically correct financial statements that do 'not present a true andfair view of the entity's financial performance and position'" (Newberry,3). Will this be comparable to the income reported by itscompetitors? You need good ethics and a goodsystem of corporate governance" (Arthur, Crawford, Hillier, et al., 17).This view underlines the fact that the accounting system used is only atool. Retrieved on August 14, 2 6 from: http://www.fulcruminquiry.com/Principles-Based_Accounting.htmJensen, B. Principles-based accounting, although it leaves room for suchsubjectivity, is quickly coming into favor, particularly following theEnron scandal. Opponents, however, feel that a principles-based system "allows too muchleeway for companies, because they generally do not have to follow specificrules, only wide-arching principles" (Hines). Defining Principles-Based Accounting Standards. SEC: "The basicquestion [is] whether the financial statements performed the function ofenlightenment, which is their only reason for existence" (Alexander &Jermakowicz). Retrieved on August 14, 2 6 from: http://www.trinity.edu/rjensen/fraudVirginia.htmShortridge, R.T., Myring, M. Second, a company thattruly wishes to uphold right and just standards of accounting will welcomethe checks and balances inherent in using both approaches; the combinedapproach offers added thoroughness-what one method fails to cover, theother is likely to address. The "opportunisticdesign of rules" and the requirement for principles-based systems tooperate in "a principled environment" expose the vulnerability of bothaccounting methods-a vulnerability that can only be resolved by ensuringthat all companies operate ethically-a solution that is impossible toeffect across the board (Newberry). Professor Geoffrey Whittington, a member of the InternationalAccounting Standards Board, or IASB, has been quoted as saying, "If peopleare dishonest any system is vulnerable, including a principles-based one.What is true and fair to a scoundrel? GAAP does have deficiencies, however, the chief among them being theloopholes that exist because "Relying exclusively on rules permitsaccountants to declare a financial statement has met the letter of the law,or regulation, even when the spirit of the law is being grossly defiled"(Berkowitz & Rampell). Deloitte CEO William G. Furthermore, a recent studyconcluded that the principles-based system used in Canada "has allowed itscompanies to smooth their earnings over time and therefore mute the impactof negative events on their earnings" (Hines). Wherever judgment is required, subjectivity-and thus the potential for malfeasance-enters in: Enron Corporation appears to have technically followed GAAP accounting rules while creating its numerous complex capital structures and transactions. The CPA Journal Online, 74(8). A competing rules-based conceptprevalent in the United States is the "present fairly in conformity withgenerally accepted accounting principles," or GAAP accounting standard(Kirk, 1). Rules. 195.x Paradoxically, GAAPaccounting's rules-based approach still requires the application ofjudgment to determine whether "various financial reporting tactics arekosher or not," (Hines) a factor that makes GAAP similar to the opposingprinciples-based accounting. Retrieved on August 13, 2 6 from: http://www.enronguide.com/art_princvsrules.htmlCox, J.D. ReferencesShields, H., Arthur, A., Crickett, M., et al. Principles-based accounting standards are alsopopular with accounting firms, because they make it "more difficult forinvestors to sue for damages attributed to misleading financial reporting"(Jensen). Like a surgeon's scalpel, it can be used to do incomparable good orwreak unconscionable destruction, depending upon the intent and the skillsof the one who wields it. Parrett pointsout that corporations cannot "view ethical behavior solely through the lensof financial return," a perspective that highlights the ethical componentof good accounting ("Globalization's Next Frontier: Principled Codes ofConduct that Bolster the Rule of Law"). What Can We Learn From Enron? A rules-based system-while technically ensuringproper accounting according to the letter of the law-fosters "a creativeattitude of reverse engineering and manipulation," in which the followingthe of the mechanical rules satisfies everyone that the accounting isproper-a dangerous assumption ("How Principles-Based Accounting AffectsLawyers"). Retrieved on August 13, 2 6 from: http://www.ala.org/ala/rusa/rusaourassoc/rusasections/brass/brasspubs/a cademicbrass/acadarchives/acadbrassv1n4/acadbrassv1n4a2.htmBerkowitz, A., Rampell, R. As the Enron debacle revealed, under GAAP it is possible to "createspecial-purpose entities such as what Enron had--hundreds of them, and lotsof companies have hundreds of them--and to get the risks and liabilitiesoffshore," an approach that requires the accounts to assess the likelihoodof the liabilities' coming back to the company (Cox). As Hugh Shields states, "The key to true and fairfinancial reporting is the balanced exercise of judgement" (Shields,Arthur, Crickett, et al., 1). Since even the most noble person sometimesmakes errors of judgment, neither accounting method is a foolproof way toensure true and fair accounting statements. The Accounting Debate: Principles vs. (2 3). Principles-Based or Rules-Based Accounting Standards? Judgment cannot be manufactured, either by rules or principles; it isinherent-or not-in the individuals who must exercise it to make theirdecisions. "True and Fair View" versus "Present Fairly in Conformity with Generally Accepted Accounting Principles." Massey University School of Accountancy. Proponents claim that the system "does not allow for Enron-typefinancial engineering, where complex transactions are undertaken in orderto get around following specific rules-based accounting standards" (Hines). In the last analysis, the rules of rules-based GAAP accounting and theprinciples of principles-based accounting are both needed to providecomprehensive protection against corporate malfeasance. Judgment is the inner core, the pivotalpoint, upon which the efficacy and validity of any approach must rest.Shields continues: If standard setters, preparers, auditors and regulators could all exercise judgement on broadly equal terms, then this would provide the healthy tension which is needed for true and fair financial reporting and for communication with stakeholders (Shields, Arthur, Crickett, et al., 1). However, it seems that the sole purpose for entering into many of these Byzantine transactions was to keep billions of dollars of debt and other obligations off its financial statements, thus hiding many liabilities from the view of the company's creditors and investors (Hines). Wall Street Journal Online, December 2. (Kirk, N.E. BRASS Business Reference in Academic Libraries Committee, 1(4), March. Due to the fact that a company must follow specific GAAP rules todetermine how to classify a transaction, the same type of transaction canbe classified differently in different situations: ...a capital lease would have to appear on the balance sheet of the airline...Therefore, two virtually identical lease transactions could be classified entirely differently based upon how they follow the GAAP leasing rules (Hines). First, neither method alone covers all the bases. The primaryadvantage of GAAP is that with its voluminous rules, it covers virtuallyevery conceivable situation, allowing accountants to avoid confrontationswith clients by pointing out that compliance is not a judgment call but arequirement (Berkowitz & Rampell). Q&A: Accounting for Enron. (2 6). Retrieved on August 13, 2 6 from: http://www.dukemagazine.duke.edu/dukemag/issues/ 3 4 2/depqa.htmlNewberry, S. His comment brings the argumentfull circle, back to a statement made in 1942 by the U.S. (2 2). Therefore, the wisest stanceis to use both rules- and principles-based accounting. Ultimately, accounting methods must be coupled with ethicalconduct and a principled environment to achieve the intended accuracy andthe true and fair view intended by the law. Duke Magazine, 88(3), March- April. Each of these standards has both advantages and disadvantagesin terms of the financial reporting quality that can be achieved throughits use, and there are proponents on both sides of the principles-based vs.rules-based controversy that argue for one approach over the other. Given the advantages and disadvantages on both sides of the rules-based vs. principles-based controversy, careful examination of all of theaspects of each type of accounting suggests that neither approach issufficient in itself, and neither one can guarantee to prevent anotherEnron-type scandal. In addition, the principles-based approach could cause a loss of comparability and consistency amongfinancial statements across industries; as one article asks: For example, how much income will General Electric actually recognizeon a multiyear defense contract under the percentage of completion methodof accounting? (2 4). ICANZ discussion document: "Corporate Transparency: making markets work better." Retrieved on August 13, 2 6 from: http://www.icanz.co.nz/staticcontent//////download/ags/ctsub14.docArthur, A., Crawford, J., Hillier, S., et al. GAAP: Beyond True and Fair The "true and fair view" concept is a legal financial reportingstandard in the UK, EU, Singapore, Australia, and New Zealand that islargely principles-based (Kirk, 1). Retrieved on August 13, 2 6 from: http://www- accountancy.massey.ac.nz/docs/Discussion%2 Paper/2 8.pdfHines, T. Abacus, 42(2), June. A true and fair view of the principles/rules debate. (2 4). Retrieved on August 13, 2 6 from: http://www.icas.org.uk/site/cms/download/rs_PVR_Literature_Review_PW.pd fHow Principles-Based Accounting Affects Lawyers. There are several reasons that both accounting methods should be used. Furthermore, "the quest for bright-line accounting rules hasshifted the goal of professional judgment from consideration of the bestaccounting treatment to concern for parsing the letter of the law"(Shortridge & Myring). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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