A true and fair view of the principles/rules debate

David Alexander and Eva Jermakowicz

Abacus, 2006, vol. 42, issue 2, 132-164

Abstract: 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’.

Date: 2006
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