‘It Is Clear That a ‘Principles-Based’ Approach to Accounting Standard Setting Is Far More Appropriate Than Any ‘Rules-Based’ Approach.’ Discuss.

‘It is clear that a ‘principles-based’ approach to accounting standard setting is far more appropriate than any ‘rules-based’ approach.’ Discuss.

With the recent failure of “Enron”, debate has heated up about which of the two approaches of standard setting, principles-based or rules-based, is preferred and more ethically correct. As the initial aim of standard setting is to present financial statements in a “True and Fair view”, one could think that the argument is in favour of the principle-based approach, however opinions are widely ranged as there are several reasons for judging the rules-based approach as more adequate. This essay seeks to examine whether an ethical, principles-based approach is more appropriate than the rules-based approach through looking at what standard setting aims to do and what criteria are used. Furthermore the advantages and disadvantages of each approach will be clarified, before eventually evaluating which approach is more sufficient, the six perspectives mentioned below as measurements.

Financial Statements aim to provide investors or the directors a quick insight into the financial behaviour and performance of the organization. For this to be beneficial to the largest number of people it needs to be presented in a true and fair view, therefore, the concepts of relevance and reliability play a big role. A presentation is relevant when it is “comparable” and “consistent”, as well as “understandable”. ICAS has issued six perspectives that warrant relevance and reliability. These are “Freedom to exercise of professional judgement”, “Complexity”, “Enforceability”, “Comparability”, “Presentation of economic reality”, “Prevention of creative accounting” (Drever, 2007).

Before comparing the two approaches they have to be defined. The principles-based approach can be defined as the following: “Under a principles-based approach, one starts with laying out the key objectives of good reporting in the subject area and then provides...