A key concern arising from the recent business scandals is that U.S.

accounting standards have become

rules-based, filled with specific details in an attempt to address as many potential contingencies as
possible. This has made standards longer and more complex, and has led to arbitrary criteria for
accounting treatments that allow companies to structure transactions to circumvent unfavorable
reporting. In addition, the quest for bright-line accounting rules has shifted the goal of professional
judgment from consideration of the best accounting treatment to concern for parsing the letter of the
rule.

Principles-Based versus Rules-Based Accounting

Simply stated, principles-based accounting provides a conceptual basis for accountants to follow
instead of a list of detailed rules.

Under a principles-based approach, one starts with laying out the key objectives of good
reporting in the subject area and then provides guidance explaining the objective and relating it
to some common examples. While rules are sometimes unavoidable, the intent is not to try to
provide specific guidance or rules for every possible situation. Rather, if in doubt, the reader is
directed back to the principles.

Implementation of a principles-based approach to standards setting will not be easy, however. It

will require a fundamental shift in attitude from all constituents of financial accounting
information, including standards setters, the SEC, investors, preparers, auditors, and the public.

Finally, the use of principles-based accounting standards may provide accounting statements that more
accurately reflect a companys actual performance because, as Australian Securities and Investments
Commission Chair David Knott has stated, an increase in principles-based accounting standards would
reduce manipulations of the rules