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The Principles-based Accounting Standards Debate and Politicisation of Accounting - Essay Example

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The Principles-based Accounting Standards Debate and Politicisation of Accounting

Note an early definition of the term "principles" by the American Institute of Certified Public Accountants (AICPA, 1953, p. 9) as "a general law or rule adopted or professed as a guide to action; a settled ground or basis of conduct or practice." This means that principles are more general than rules and therefore do not prescribe exactly how each event occurring in an organisation should be recorded.
The obvious reason is that there are many issues, events, and matters in accounting practice that differ from one organisation to another. Since a single detailed set of rules could not conceivably apply to every organisation, good accounting practice in the U.S. developed initially into what came to be collectively described as "Generally Accepted Accounting Principles" or GAAP.
The core principles of U.S. GAAP were drafted by the Accounting Principles Board (APB) and, later, by the Committee on Accounting Research (CAR), two pre-war professional institutions established to set standards for the accounting profession. In 1973, the Financial Accounting Standards Board (FASB) was created as a non-governmental organisation financed by contributions from business firms and the accounting profession to take over these standards-setting bodies, and accepted the previous pronouncements of its two predecessor organisations, the Opinions of the APB and the Accounting Research Bulletins of the CAR.
The FASB, whose accounting standards apply only in the U.S., coordinates with other accounting boards overseas such as the Accounting Standards Committee (ASC) which sets standards for the U.K. and the International ASC (IASC) which sets standards for the rest of the world. In 1985, the ASB took over ASC; the IASB took over IASC in 2001. Both are U.K.-based and their standards have been and continue to be principles-based (Anthony et al. 2005).
Whilst the ASB and IASB manage to sustain an environment of principles-based accounting standards, it seems the U.S. failed to do so. In the wake of the financial reporting scandals that brought down several high-profile companies in the U.S. in 2001, then- Securities and Exchange Commission (SEC) Chairman Harvey L. Pitt testified in the U.S. Congress that much of FASB's guidance has become "rule-driven and complex", giving as examples the FASB's guidance on issues like derivatives and securitisation (FASB, 2002, p.2).
How did it happen
Over the thirty years since its beginning, the FASB, SEC, and American companies were caught in a cycle of games triggered by companies interpreting GAAP too liberally (e.g., on the treatment of derivatives, revenues recognition, etc.), eliciting shareholder complaints. Investigations by the SEC or Attorneys-General on these practices pressured the FASB to interpret the principles in greater detail by coming out with rules. ...Show more
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Summary

The debate on principles-based accounting standards marks a shift in the U.S. accounting landscape. The issue concerns the possible transition of FASB accounting standards from one that is rules-based to another that would be principles-based, which is the characteristic shared by other major international institutions that set standards such as the Accounting Standards Board (ASB) of the U.K…
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