Principles-based accounting standards

Some recent discussions of U.S. financial reporting include implicit or explicit recommendations that the U.S. abandon the current allegedly "rules-based" system in favor of a "principles-based" system, with the implication that some or all of the current difficulties facing U.S. financial reporting would be alleviated or even eliminated by such a shift. In addition, Section 108 of the Sarbanes-Oxley Act of 2002 instructs the Securities and Exchange Commission (SEC) to conduct a study on the adoption of a principles-based accounting system. The first theme is that the current financial reporting system in the U.S. is undesirable or inappropriate because it is rules-based, fostering an alleged current "check-box" or compliance mentality that is, in the view of some, an open invitation to financial structuring and other activities that subvert high quality financial reporting. The second theme is that moving to a principles-based system is desirable, because such a system allows (or requires) the appropriate exercise of professional judgment.