Paradox of Writing Clear Rules: Interplay of Financial Reporting Standards and Engineering

Shyam Sunder

The Japanese Accounting Review, 2011, vol. 1, 119-130

Abstract: Attempts to improve financial reporting by adding clarity to its rules and standards through issuance of interpretations and guidance also serve to furnish a better roadmap for evasion through financial engineering. Thus, paradoxically, regulation of financial reporting becomes a victim of its own pursuit of clarity. The interplay between rules written to govern preparation and auditing of fi nancial reports on one hand, and fi nancial engineering of securities to manage the appearance of fi nancial reports on the other, played a signifi cant role in the financial crisis of the recent years. Fundamental rethinking about excessive dependence of financial reporting on written rules (to the exclusion of general acceptance and social norms) may be necessary to preserve the integrity of financial reporting in its losing struggle with financial engineering.

Keywords: Financial Reporting; Financial Engineering; Written Standards; Social Norms; Regulatory Equilibrium (search for similar items in EconPapers)
JEL-codes: G24 M41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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