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A true and fair view of the principles/rules debate

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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’.

Keywords: Accounting; Judgments; Rules; Standards; conceptual framework; principles

Document Type: Research Article


Affiliations: 1: Department of Accounting and Finance, University of Birmingham 2: College of Business, University of Southern Indiana

Publication date: June 1, 2006


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