Aftermath of Enron Negative effect on account reliability Essay

Failure of Enron Corporation raised inquiry on accounting criterion and on its dependability. This lead to the argument of ‘rules versus rule ‘ based accounting which is centrally located in subdivision 108 of the Sarbanes- Oxley Act of 2002 ( 2006, p1 ) . This have its ain advantages and disadvantages on different facets. I will take investor as a base to judge which type of accounting is more suited for investor. Investor expression for accounting criterions which represent just representation of histories which can be enforced for its dependability, should non be complex and overloaded. Standard should stand for economic world and consistence and should deter originative accounting.

Ng 33 study reported that rule based accounting is based on professional opinion by comptrollers and hearers which leads to more just representation of histories in both dealing and fiscal coverage. This makes accounting more clear and stand for its just consequence on history, as per accounting experts ( p. 9 ) . On the other manus regulation based accounting based on wide regulations, which focuses on a ‘check- the- box ‘ outlook that inhibits transparence. It make it hard for hearers to take measure back and look into whether the overall impact of the dealing is consistent with the ‘objective of the criterions ‘ or non. ( Robert Herdman address in p.9 ) . ( Research 34, p.9 ) besides finds out that regulation based attack does non cover every state of affairs which arises from new concern activities and in contrast rule based can analyze new dealing or event within the wide rules without the demand to revise them. on Negative side of rule based accounting commissioner Glassman in ( 2006, p.27 ) point out a cautiousness that judgemental coverage may take to ‘bad pick ‘ , commissioner agrees that it could be because of direction purpose to lead on accounting information but it can be possible because of even picks that were technically allowable under GAAP but could be misdirecting to investors.

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Investor requires standard which represent just history and can be enforceable for its statement. SEC in its 2003 survey ( 2006, p.10 ) noted a concern that rule based criterion may confront job in warranting a dealing consequence based on opinion. On the other manus regulation based accounting can be easy protected against any case by turn toing the recognized regulation. Scipper ( 2003, p.8 ) points out that regulations are likely to propagate as comptrollers inquire for counsel that, they hope, will protect them from critisicm and cases. ( unsweet 2.3.2 p.10 ) . But the study reported by Ng 42 included position that trouble in protect against case rule based criterion would necessitate more answerability from accountant and hearers of the fiscal statement. ( Sec 2.3.1, p.10 ) on other manus easy enforceability of regulation based accounting on support of dorsum up regulation may take to false representation of fiscal statement. ( 2.3.1, p.10 )

Complex and overloaded accounting frequently creates job for its user. FASB which based on regulation based accounting acknowledge its restriction of being complex, overloaded and hold ( unsweet 2.5, p.11 ) . SEC commissioner Glassman in ( 2006, p.30 ) presents a statistics which shows the complexness of regulation based accounting. Statisticss shows that 11 regulations take more than one 1000 pages and over a quarter- million words which takes more than twenty seven hundred adult male hr worth of meeting. This brand regulation based accounting really complex and clip taking procedure which frequently make it difficult to implement and get by with altering concern environment. Further Glassman while turn toing the treasury club59, p12 ) criticise regulations on complexness by stating ‘general accepted accounting rules seems to hold become an terminal unto itself, instead than a agency of supplying utile information to investor and other end- users ‘ . That is, complexness of regulation based accounting restricts itself from supplying utile information to its user. ( Bennett et al. 2006, p.3 ) adding to the complex nature of regulation by stating that regulation based accounting contains legion bright line trials, exclusion and excessively elaborate execution counsel but at same clip does non supply any grounds for this claim. On other manus rules based accounting, relies on wide rule which are precise in nature merely supplying guideline for accounting this make it less elaborate and would be easier to grok and use to a wide scope of minutess ( 2.5.1, p.12 ) . Ng55 ( p.12 ) study besides conclude that ‘principle based attack would cut down volume of GAAP the comptrollers would be required to maintain up with ‘ . That is, it will cut down the complexness of GAAP accounting criterion. But Schipper ( 2003, p.7 ) ground for complexness of regulations make it more obvious to utilize it. He says that regulations are complex because they include accounting regulation for some excluded points ( scope exclusion ) or points that received particular intervention ( intervention exclusion ) , which requires a elaborate account and therefore add to the complexness of regulations.

Accounting criterions should stand for economic world as it:

Kevi et Al ( 2004, in 2006, p.15 ) regarded rule based accounting as the most suited criterion to stand for economic world. They besides added that ‘principle based criterion are more antiphonal to alterations in concern pattern and will better transparence of coverage, and rule based standard make it easier for preparer and the hearer to see the large image. Ng ( 2004, 2006, p.15 ) present the position that regulation based had represented economic substance in many occasions.

Comparison and consistence of fiscal standard facilitate investor to garner utile information about company ‘s fiscal public presentation with comparing it with last twelvemonth study or with another company. Robert H Herz, FASB Chairman ( 2006, p.20 ) , stated that ‘principle based accounting cut down comparison of fiscal information and go forth excessively much room for opinion by companies and hearers ‘ . That is principle based accounting required professional opinion which may take to different reading of same accounting statement. This is supported by the study reported by Ng ( 2.4.2, p.11 ) which province that rule based accounting deficiency in precise guidelines that creates incompatibilities in the application of criterions. On the other manus regulation based accounting frequently used to better comparison and consistence ( 2.4..2, p.11 ) . regulation based accounting usage predefined regulations to make accounting which provide consistence and comparison in its usage.

Creative accounting is frequently a point of concern for criterion shapers and users of fiscal statements. Rule based accounting promotes originative accounting by deviating opinion from economic substance to the item of application ( i.e. ) ( unsweet 2.6.1, p.13 ) . schipper ( 2003 ) says regulation based brilliantly line trial provide a roadmap for those who intend to follow with the missive but non the sprit of regulations ‘ , i.e. regulations does non hold its strength to protect originative accounting. On the other manus Shortridge and Myring ( 2004, 2006, p.13 ) favour principle- based- accounting criterion as it may supply more accurate accounting statement and will reflect company ‘s existent public presentation. Ng ( 2004, 2006, p.14 ) in his study province that, respondent to their study agrees with regulation based inability to protect deceit of economic substance, but at the same clip they besides disagree with the fact that rule based would give better consequences in stand foring economic world in the fiscal statements. Jackson ( 2004, p.58, 2006, p.14 ) finds out that rule based users can writhe or whirl the presentation to underscore what they wanted by modeling the economic world. Nelson et Al. ( 2002, 2006, p.13 ) from his study conclude that troughs finds a manner for their earning if it is their purpose inspite of utilizing any accounting criterion method

( 2006, p.21 ) , province that European committee adopt rule based accounting because regulation based accounting is to complex ( i.e. about 10 thousand pages of accounting regulations ) and fails to integrate fast economic alterations and hence fails to stand for true fiscal place. On contrast rule based attack reflect economic world and give true and just position of fiscal place and public presentation of a company. This protest the long term involvement of investors and other stakeholders.

( rule to objective p.25 ) ( p.56 ) ( p.59 ) ( 60 )

Need for convergence: –

Nobes ( 2005, p.1 ) in his survey finds out that regulations are derived from rules and merely unsuitable rules creates a demand for regulations. He pointed out six illustration ( leasing, employee benefits, fiscal assets, authorities grants, subordinates and equity accounting ) of criterion which are regulation based either because they lack rules or they were based on unsuitable rules. Like for renting which is based on rule of ‘transfer of well all hazards and wagess ‘ , which contains no numerical or proficient regulation environing it which make it less practical. To do it more practical Nobes proposed the betterment of using rule based on the definition of assets and liability which make it more practicle. ( Nobes 2005, p.3 ) .

SEC commissioner Glassman ( 2006, p.28, sec, 3.3 ) says that personally he did non believe either rule or regulation based accounting is strongly executable, and suggested to hold a combination of rule and regulation. ( Bennett et al. , 2006, p.10 ) adding to this treatment says in world pure rule based criterion does non be. And regulations are needed to either clear up the conceptual model or to halt possible accounting maltreatment. Benston ( 2006, p.8 ) besides argue against single credence of rule based accounting, by turn toing rule based restriction on asset/liability attack, he says rule require comptrollers opinion, but it is non ever possible without utilizing regulation based criterion.

Convergence in 2002 Robert Heardman in his address on convergence ( 2006, p.54 ) stated that there is a demand to follow criterion which can carry through planetary demand. US regulation based GAAP is controlled by a group of proficient experts and is a civilization or state based attack. On contrast rule based accounting can be a solution for it but its judgemental analysis raised an issue in its pattern which can take to different reading non merely by professional from different states but besides from different audit houses. Sir David Tweedie ( 2006, p.56 ) congratulating SEC and FASB on their inaugural towards a more rule based attack added that rule based accounting is the intense desire internationally and to cut down the complexness of US regulation based accounting. Principle will assist in cut downing the complexness of US regulation based criterion and better accounting in general. But at same there is a demand to hold some explanatory counsel for rule based. And further that to advance international convergence ‘we are determined to concentrate on crafting rules that are sufficiently clear to do elaborate regulations unneeded. in 2002 the planetary caput of PwC, Sam DiPazza ( 2006, p.56 ) suggested to hold a ‘principle based planetary GAAP ‘ and rejected US regulation based theoretical account. He supported this by stating that ‘principle based attack, exemplified by UK GAAP and International Accounting Standard, was the best foundation for doing fiscal describing more relevant to investor ‘ . That means looking for criterion which will let investor to compare the public presentation of any company in any industry with any other in any state of the universe.


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