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Arguments Against Rules Based Standards

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Standards used currently in the United States are GAAP, which relies on rules-based standards for financial reporting. The book defines rules-based standards as being highly detailed, yielding the occurrence of numerous scope exceptions and bright line distinctions, which then requires extensive implementational guidance (Wolk, p. 282). Essentially, rules-based standards minimize the utilization of an accountant’s personal judgment by instead requiring that accountants follow a detailed set of rules when formulating financial statements. However, in a study completed in 2002, the SEC states that the belief that applying rules-based standards can minimize professional judgment is simply untrue (SEC, 2003). The SEC explains how eliminating professional …show more content…

Due to lack of professional judgment utilized and the highly detailed rule-based standards, many entities responded with using deceptive accounting methods in attempt to circumvent specific rules in accounting standards. For example, rules-based standards are widely considered as a major factor in enabling Enron to circumvent the intention of the standard. Arguments against the rules-based standards stated that the standards “fostered a culture of noncompliance”, in which enabled opportunities for Enron’s top management and auditors to report fraudulent misstatements, including deceptive accounting techniques among Enron and Special Purpose Entities (SPEs) (Bratton, p.14). Specifically, due to the rules-based standards not providing clear and easily interpretive standards regarding SPEs, top management of Enron had an easy opportunity to overstate earnings. Enron applied the bright line consolidation rule listed under the rule-based standards, which allowed Enron to not consolidate those SPEs, even though they consisted of major business risks that would have been financially detrimental to Enron (Bratton,

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