More discussion of rules versus principles

Dennis over at AccMan Pro has commented on the difference between rules-based US GAAP and international principles-based IFRS, and his thoughts echo mine:

Recent commentary has suggested the idea of convergence between US GAAP and IFRS won’t happen until hell freezes over. I’ve long held the view that the rules based US GAAP system is primarily responsible for many of the problems US based companies have experienced. It is the structural defect of being rules driven. Any time there are rules in place, companies and individuals will seek to find ways around them. It allowed CA and PeopleSoft to engage in creative accounting practices, which, in the case of CA, have been deemed fraudulent. And which eventually led to the corporate nose bleed that is SOX.

I’m discouraged that he seems so certain that convergence of US GAAP and IFRS won’t happen any time soon. Canadian GAAP is moving towards convergence, as is the rest of the world it seems.

I suppose we’ll have to wait until the US is no longer a superpower (which will no doubt happen in my lifetime) before they start to work with the rest of the planet. Rules are meant to be broken, or so the saying goes, and its been played out for all to see in the cases mentioned by Dennis above and with Enron and WorldCom and countless others.

Under a principles based system, professional judgement takes centre stage and the aim is to reflect the substance of the transaction as opposed to fitting it into the rules as they exist. It allows the professionals to do their job: Determining whether the statements are fairly presented. It doesn’t take a professional to figure out if the rules are met.

2 replies on “More discussion of rules versus principles”

  1. Unfortunately, the US doesn’t have a good track record for considering the court of world opinion.

    The good news is I do see a way forward here. If the US is to stop losing its position as a pre-eminent capital market then it has to understand why that’s happening. SOX isn’t the problem – it’s a symptom. When people realise the financial impact they’ll maybe see the light.

    Otherwsie, the US could be in for a tough time.

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