ACCOUNTING

Principles Based Accounting System

Principles Based Accounting System

This paper intends to explore the principles based accounting system. Further, it highlights the potential problems of many organizational events such as Enron, due to which the accounting standard has been considering to employ principles based accounting system. Moreover, this paper critically evaluates the benefits and drawbacks of employing principles based accounting system.

The collapse of Enron in 2001 has alerted the financial standard-setters worldwide for the need to develop a single set of global high quality accounting standards in order to achieve greater transparency, clarity, consistency and comparability of the financial reports. This is important for achieving more efficient global financial markets while benefiting users of financial reports such as the investors, creditors, multi-national companies and auditors.

In additions, it is evident that the financial standard setters are reconsidering the merits of group accounting and its criteria for control to a large extent. In particular, it is indicated that the application of reviewed group accounting standards such as the FIN46 could also be subjective and easily manipulated. As a real world example, this contrasts with the criteria of Australia's basis for group consolidation, namely, “effective control” which is determined by control over the entity's board and the proportion of potential and current voting rights. The observations call for the principle-based accounting system instead of the insufficient and easily manipulated rules-based system. In sum, the abovementioned suggests that the financial reporting standard-setting process is largely uncertain and that the accounting standards may often be incomplete (Jones, 2011).

Transparency, in recent times, has become an issue, as a result of events such as the Enron accounting scandal—coinciding with the progressive adoption of the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) worldwide in replacement of the Generally Accepted Accounting Principles (GAAP), the implementation of the Sarbanes-Oxley (SOX) reporting requirements for corporate governance in the United States, and the credit crisis precipitated when transactions appear to have involved misunderstood, misused, and misrepresented financial products.

The IASB is a group of 14 members from nine different countries that works to develop global accounting standards. The goal of this committee is to create global standards that are transparent, enforceable, understandable, and of high quality. The IFRS is a result of this effort, and is endorsed by some countries with notable exceptions. The exceptions include the U.S. Financial Accounting Standards Board.

Consistent global standards could facilitate the presentation of comparative and commonly understood information. This capability is particularly relevant where businesses operate and have stakeholders in multiple jurisdictions. Convergence of various accounting standards, as well as comparable transparency, could assist in achieving this goal.

The credit crisis revealed information about financial transactions between financial institutions and large companies that had either not been visible or not understood by some of the parties to the transactions and their agents. Subsequent inquiries indicate that misrepresentation of finances and accounting may have resulted from reporting practices that had not been designed to disclose pertinent information. The effect of the crisis triggered a call for improved transparency ...