CASE STUDY

In U.S history huge accounting scandals happened, such as Enron and WorldCom, which have caused some to question whether current U.S. generally accepted accounting principles (GAAP) are really protecting investors. Critics, including the U.S. Securities and Exchange Commission (SEC), charge that the rules based approach to U.S. GAAP encourages a check-the-box mentality that inhibits transparency in financial reporting. Some observers express a preference for principles-based standards, such as International Financial Reporting Standards or those found in the United Kingdom. Both the Financial Accounting Standards Board (FASB) and the SEC have released reports on the feasibility of principles-based accounting standards in the United States.

The following appeared in a leading British professional accounting journal. Ever since the Enron debacle first hit the news, smug U.K. accountants have found a new excuse for feeling superior to their transatlantic cousins. The U.S. Financial Accounting Standards Boards massive oeuvre has been scoffed at as being merely a whole bunch of rules that dont hang together. Both British and International standards, by way of contrast, are asserted to be based on principles. This essential difference, it is argued, helps to explain why the U.S. profession has got itself into such deep trouble.

It certainly seems true that the highly detailed American standards have tended to invite legalistic interpretations and loop holing, whereas the U.K.s paramount requirement to present a true and fair view has helped to remind us that accounting is more than a compliance activity. However, it is much too glib to characterize their accounting standards as lacking in principle compared to ours; in terms of their intellectual rigor, American accounting standards compare favorably with any others in the world. How is it that the U.K. and International Accounting Standards Boards appear to have found reliable principles on which to base their own standards, principles that have eluded FASB? After all, both bodies have themselves adopted conceptual frameworks that are largely copies of the FASBs version, and claim to follow them. The answer is that they havent. Our standards arent really more principled than the American ones, they are simply less detailed. And even that is changingboth the U.K. and IASB rulebooks have swollen very considerably in recent years, often inspired (if that is the word) by the content of the equivalent American standards.

Required:

1. What is the difference between rules-based and principles-based accounting standards, and what are the advantages and disadvantages of each?

2. Why has U.S. GAAP evolved into a rules-based approach? Would principles-based standards be effective in the United States? Why or why not?

3. What needs to change in the United States to make principles-based standards effective?

4. Are investors and analysts better served by rules-based or principles-based accounting standards? Why do you say so?

CLO PLO Total marks 10 Marks awarded 2.1 Knowledge 2.1 Skills 10 2.1 Competency 20 40 TOTAL MARK AWARDED Requirement: Form a group about 4-5 students and answer all the question from the case study below. The answer must be using Arial 12 font and 1.5 spacing. A proper reference must be included to support the answer provided. Make sure all the member signs the declaration in the table provide above. The assignment must be submitted on Blackboard by latest Thursday Week 7, 14 October 2021 at 1:00 PM