Over a decade long debate has circled around principles vs. rules based accounting. In this essay we will tease out the advantages and disadvantages of each. We will then go on to discuss which one is most applicable worldwide going forward. The United States incorporates a more rules based approach whereas principles are more European based. Almost all companies are required to prepare their financial statements as set out of the financial accounting standards board (FASB). Rules based accounting:
Following the accounting scandals of Enron and WorldCom the United States introduced the Sarbanes-Oxley Act 2002. This act introduced a set of rules for accounts to be prepared in accordance with and if these rules were not adhered to then significant potential sanctions could be imposed on directors.
WorldCom were one of America’s largest long distance phone companies and between 1999 and 2002 had one of the world’s largest accounting scandals. WorldCom managed to inflate profits by $3.8 billion by booking expenses as capital expenditure and inflating revenues from fictitious accounts. The firm’s external auditors Arthur Andersen signed off on the accounts between 1999 and 2001, failing to recognise the fraud that was taking place. It was a number of employees that uncovered that WorldCom were cooking the books. The auditors ‘refused to respond to some of Ms. Cooper 's questions and told her that the firm had approved some of the accounting methods she questioned’ . As a result