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Arguments Against Rules Based Standards

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Standards used currently in the United States are GAAP, which relies on rules-based standards for financial reporting. The book defines rules-based standards as being highly detailed, yielding the occurrence of numerous scope exceptions and bright line distinctions, which then requires extensive implementational guidance (Wolk, p. 282). Essentially, rules-based standards minimize the utilization of an accountant’s personal judgment by instead requiring that accountants follow a detailed set of rules when formulating financial statements. However, in a study completed in 2002, the SEC states that the belief that applying rules-based standards can minimize professional judgment is simply untrue (SEC, 2003). The SEC explains how eliminating professional …show more content…

Due to lack of professional judgment utilized and the highly detailed rule-based standards, many entities responded with using deceptive accounting methods in attempt to circumvent specific rules in accounting standards. For example, rules-based standards are widely considered as a major factor in enabling Enron to circumvent the intention of the standard. Arguments against the rules-based standards stated that the standards “fostered a culture of noncompliance”, in which enabled opportunities for Enron’s top management and auditors to report fraudulent misstatements, including deceptive accounting techniques among Enron and Special Purpose Entities (SPEs) (Bratton, p.14). Specifically, due to the rules-based standards not providing clear and easily interpretive standards regarding SPEs, top management of Enron had an easy opportunity to overstate earnings. Enron applied the bright line consolidation rule listed under the rule-based standards, which allowed Enron to not consolidate those SPEs, even though they consisted of major business risks that would have been financially detrimental to Enron (Bratton,

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The purpose is “to develop, implement, and establish standards for accounting and financial reporting activities are accurate and reliable, and the resulting financial reports are as accurate and beneficial to the end users.” The end users that are discussed in the purpose are the outside users of the financial statements. Outsider users are……

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71 Words | 1 Pages

The financial scandals in early 2000s caused the Sarbanes-Oxley Act of 2002 to be created. Enron, WorldCom and the accounting firm, Arthur Andersen, to intentionally mislead their shareholders by exaggerating their profits and understating their expenses. The scandals had raised the importance of internal control for enhancing corporate governance. Therefore, the government established the SOX to protect the interest of the investors and employees and to monitor the companies and auditors.

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Which set of accounting standards does the United States follow? Why are some governments reluctant to follow IFRS? The United States requires use of the “standards known as generally accepted accounting principles (GAAP)” (Carpenter & Sanjyot, 2013). “Accounting standards can be complex; this makes modification of standards difficult” (Carpenter & Sanjyot, 2013).

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FASB Accounting Standards Codification Project The FASB Accounting Standards Codification is the source of the authoritative generally accepted accounting principles, which is GAAP, recognized by the FASB to be applied to nongovernmental entities. The Codification is the result of a major 5 years project, including more than 200 people from multiple entities. The FASB developed a codification project which resulted in a key-word searchable data base of the authoritative literature for the US financial reporting. Rationale for the Project The Codification has been approved by FASB in June 2009 as the single official source for the US nongovernmental financial reporting.

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OVERVIEW This article is aimed at offering an overview and evaluation of research on the administrative and political issues surrounding rulemaking. It tries to ascertain the essential issues that define the analysis of rulemaking. Most agencies through their rulemaking authorities formulate regulations that govern them. Their fundamental function is to confine bureaucratic discretion in individual cases.

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552 Words | 3 Pages

In 2002, the SEC adopted new rules and amendments to address public companies’ disclosure or release of certain financial information that is calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles. The accrual accounting is more popular and be widely used in business world because it produces more accurate and faithful financial statements that constitute better representation of actual circumstances than its main competitors. The major weakness of accrual accounting is that there is some time issue such like the time of occurred and time of recorded would probably be different and it increases the risk of financial information and the risk of correctness. Also, the accrual accounting generally cost more to operate compared with cash accounting

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1491 Words | 6 Pages

Another pressure presented in this case for Cendant Corporation was that for the top management once again. The top management needed to have their financial information seem profitable, therefore pressured the accountant of the company to falsify and “cook the books” to make the financial statements seem actually “profitable” when it wasn’t what It really was. As said in the previous question, income smoothing was used in this case by Cendant Corporation as an unethical practice to make the investors believe that their shares were all bright

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2178 Words | 9 Pages

Executive Summary Lehman Brothers were an investment bank involved in transactions worth billions of dollars and one of the most powerful investment banks in the world. Lehman Brothers collapsed in 2008 following bad investment in the sub-prime mortgage market and used bad accounting practices called Repo 105 transactions to try and cover up the bad assets. This report sets out the use of the fraud triangle when describing the actions which led to the collapse. The pressure applied on the bank, the opportunity due to the lack of regulation to carry out the actions and the ability of the bank to rationalise their decision making.

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The requirement in order to make it the reports less complex, is to use “notes to financial statement”, which help explain the complex transactions (Kieso, Weygandt, & Warfield, 2013). The users of the financial reporting such as investors and creditors, have demanded that the information provided be current and predictive. With this demand, the SEC has required businesses to create a financial forecast (Kieso, Weygandt, & Warfield, 2013). Lastly, the SEC has appointed accountants and auditors to control and monitor the concerns of financial reporting such as management compensation, off-balance- sheet, financing arrangements, and related-party transactions (Kieso, Weygandt, & Warfield,

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1654 Words | 7 Pages

“Enron was a pioneer; they were risk takers and treated their employees like entrepreneurs. Think big; take chances, go where no one has gone before. Unfortunately, it now looks like Enron’s profit was as volatile as the natural gas they traded” (DeLongs, 2002). This dilemma was gradual and was years in the making. The simplest summary of the dilemma was that Enron was pushing a culture of promoting rule-bending and legal loopholes to continue their economic growth and success.

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The unrealistic expectations of external users of financial statements to assume that an auditor remains totally impartial to client influence is a conclusion drawn from psychological research. The legal system forms the opposite view and has determined that external users should be able to rely implicitly on an auditor’s determination. Accounting standards have set expectations of auditor independence and neutrality. (Max H. Bazerman, 1997) The entire concept of professional scepticism and its application is the true and fair representation of financial statements to the users of these

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1009 Words | 5 Pages

The false accounting records were unethical because it means management was enriching themselves. They were getting earnings based on the false availability of funds. They also did this to keep their jobs. When a company is not performing financially well the top positions are the ones usually at risk of being retrenched, as a result of implying the company was financially stable they were protecting their jobs. False accounting also results in duping investors that trust the financial records of the company.

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1594 Words | 7 Pages

Having different accounting standards in the world is a problem for multinational public limited companies and investors in order to be able to compare and evaluate financial statements (Doupnik & Perera, 2009). Due to the economic and financial scandals and meltdown in recent years, the pressure has been increased on some countries such as United States. Therefore, it must eliminate the gap between the International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). The world of accounting diversity will have consequences on such changes, and the standard convergence of US GAAP with International Financial Reporting Standards also largely affect corporate management, investment, stock market, accounting personnel and accounting standard setters. In addition, the convergence of accounting standards will change the approach for international accounting harmonization to CPA and CFO, it affects the quality of international accounting quality standards and the effort made toward GAAP and IFRS convergence

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732 Words | 3 Pages

The ILO has created 189 Conventions to date. These conventions are wide in scope, creating standards for various terms and conditions of employment. Examples for such terms and conditions as standards for Night Work, Hours of Work, Unemployment, Minimum Age, Weekly Rest, Holiday Pay, Workmen’s Compensation, and many others. The ILO has eight (8) fundamental conventions. These are C87 or the Convention for Freedom of Association and Protection of the Rights to Organise, C98 or the Right to Organise and Collective Bragaining Convention, C29 or the Forced Labour Convention, C105 or the Abolition of Forced Labour Convention, C138 or the Minium Age Convention, C182 or the Worst Forms of Child Labour Convention, C100 or the Equal Remuneration Convention, and C1111 or the Discrimination (Employment and Occupation) Convention.

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1710 Words | 7 Pages

These are the set rules to guide accountants in their work of preparing and standardizing the financial statements such as income statements, balance sheet, and cash flow statements. This is important because investors rely on these statements to make their investment decisions. GAAP aids in the preparation of statements that reflect the economic reality making the financial statements comparable and easy to understand. For financial information to be useful to the users, GAAP requires the used information to be consistent, reliable, relevant and comparable. Implementation of GAAP is done through disclosure and measurement principles (Bampton and Cowton, 2013, p.557).

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