Switching Standards from Gaap to Ifrs and Ethical Challenges for Accountants.

Major accounting scandals in the late 80s and 90s has resulted in a major impetus in the United States for change in the accounting standards, US GAAP, from a rules-based system to a principles-based system. IFRS has become a dominant force now being used in over 120 countries, while the US GAAP status as a robust standard has declined. Due to the nature of principles-based standards being vague, the quote implies that statements may be manipulated to present firms in better financial positions than those existing in reality. This essay contends that this is not completely the case, and whilst it is true that IFRS will require greater judgment, it will be argued that it is beneficial to the accounting profession. Verschoor’s statement will also be analysed from the perspective of accountants and auditors in the United States in relation to the Securities and Exchange Commission’s (SEC) decision to converge US GAAP with IFRS.

Rules-based systems, such as US GAAP, have undergone major scrutiny as a result of major accounting scandals in the late 1990’s such as Enron and WorldCom, which prompted a convergence of the US GAAP and a principles-based system, IFRS. It is argued that scandals such as the Enron collapse brought to the forefront that “rules-based standards encourage ‘financial engineering’, and that a more principles-based approach such as IFRS would lead to greater clarity and transparency” (Tyson 2011, p. 27). Mintz (2011, p. 69) indicates that under a rules-based system, “companies are able to structure a transaction to achieve technical compliance with the standard while evading the intent of the standard.” On the other hand principles-based systems, instead of prescribing, provides guidance that is predicated on principles such as economic substance over legal form, and true and fair representation.

Companies can use US GAAP to manipulate their financial position in situations such as engineering a lease transaction where that the present value...