Dayana Hernandez
John Mo
Amos Nugent
ACNT-1372-002
March 25, 2018
The Future of Standard Setting
Introduction
In 2003, the SEC published Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act
of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based
Accounting System. The study concluded that the United States should adopt a principles-based
(i.e. objective-oriented) approach to standard setting. The following paper will discuss the
current standard setting environment in the United States, differences between rules-based,
principles-only, and objective-oriented standards, and our perception of these standards. The
paper will conclude with a recommendation as to which method is best and where the future of
standard setting is headed in the United States. Since 2002, The Financial Accounting Standards
Board (FASB) and the IASB have been working hand in hand in order to converge global
accounting standards. Our discussion of standard setting in the United States is not complete
unless we also consider its international counterpart, International Accounting Standards and
International Financial Reporting Standards, IAS and IFRS respectively. The International
Accounting Standards Boards (IASB) produce standards that are considered principles-based as
opposed to rules-based U.S. standards. By using examples from IAS/IFRS we hope to better
illustrate the difference in standards among the various reporting systems.
Rules-based Standards
Here in the United States most accounting standards put into place by FASB are currently
ruled-based. After the Enron scandal in 2001 these standards were put into question. Rules-based
standards are described as “… highly detailed, often have many exceptions, require extensive
implementation guidance, and often have “bright line” distinctions (e.g., 75% capitalization rules
for leases and 50% ownership rules for consolidation). Frequently, the bright line distinction can
be subverted by management” (Wolk et al. 282). These standards are usually criticized for being
easily manipulated. The SEC argues that rules-based standards “not only constitute a guideline to
fraud, but a ready-made set of defenses, providing management and accountants with the colorable
claim that they followed the rules, even while they may have intended to mislead.” They are worried
that these standards only encourage corporations to focus on ways around the rules. Rules-based
standards usually provide a vehicle for misleading the purpose of the standard. One of the areas
where these standards lack are in leases. The rules can disguise the looked-for objective, which is
