A True and Fair View of the Principles/Rules Debate

33 Pages Posted: 12 Jun 2006

See all articles by David J. A. Alexander

David J. A. Alexander

University of Birmingham Business School

Eva K Jermakowicz

Tennessee State University

Abstract

In 1942 the U.S. SEC aptly captured the appropriate sentiment: The basic question [is] whether the financial statements performed the function of enlightenment, which is their only reason for existence. The nature of reality in the context of financial reporting is, at best, a generally agreed, inter-subjective human construction. This article considers the nature, and alternative perceptions, of the notions of principles and rules, exploring the idea of true and fair view presentation as a meaningful requirement in its own right, and as an override. An overview of the standard setting process in the United States from the historical perspective identifies factors fostering the rules-based accounting system. We then analyse recent developments in the United States regarding the adoption of a principles-based accounting system, and in the U.K. arising from the introduction of IAS in Europe. Both support the conclusions that: The purpose of financial reporting is to give an understanding, which is not misleading, of the underlying economics of an enterprise; the underlying economics represents an inherently subjective construct; rules, by themselves, are inadequate, whether or not they are based on principles; major and fundamental differences exist between various players on the world regulatory scene; much of the debate at the regulatory and policy level is at best vague and confused, more likely disingenuous, possibly intellectually dishonest; interested parties will interpret words, concepts and agreements differently; significant limitations for international standardization are implied by the above points. Further, no one player, construct or culture can impose its will at a global level. In 1942 the U.S. SEC aptly captured the appropriate sentiment: The basic question [is] whether the financial statements performed the function of enlightenment, which is their only reason for existence.

Suggested Citation

Alexander, David J. A. and Jermakowicz, Eva K, A True and Fair View of the Principles/Rules Debate. Abacus, Vol. 42, No. 2, pp. 132-164, June 2006, Available at SSRN: https://ssrn.com/abstract=907366 or http://dx.doi.org/10.1111/j.1467-6281.2006.00195.x

David J. A. Alexander (Contact Author)

University of Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Eva K Jermakowicz

Tennessee State University ( email )

3500 John A Merritt Blvd.
Nashville, TN 37209
United States

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