Abstract

http://ssrn.com/abstract=597641
 
 

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Rules, Principles, and the Accounting Crisis in the United States


William W. Bratton


Institute for Law and Economics, University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)


European Business Organization Law Review (EBOR), Vol. 5, No. 1, 2004

Abstract:     
The Sarbanes-Oxley Act and the Securities Exchange Commission move too quickly when they prod the Financial Accounting Standards Board, the standard setter for US GAAP, to move immediately to a principles-based system. Priorities respecting reform of corporate reporting in the US need to be ordered more carefully. Incentive problems impairing audit performance should be solved first through institutional reform insulating the audit from the negative impact of rent-seeking and solving adverse selection problems otherwise affecting audit practice. So long as auditor independence and management incentives respecting accounting treatments remain suspect, the US reporting system holds out no actor plausibly positioned to take responsibility for the delicate law-to-fact applications that are the hallmarks of principles-based systems. Principles, taken alone, do little to constrain rent-seeking behavior. In a world of captured regulators, they invite applications that suit the regulated actor's interests. Rules, with all their flaws, better constrain managers and compromised auditors. Broadbrush reformulations of rules-based GAAP should follow only when institutional reforms have succeeded.

Keywords: Corporation and securities law, illegal behaviour, enforcement of law, accounting, auditing

JEL Classification: K2

Accepted Paper Series





Not Available For Download

Date posted: September 30, 2004  

Suggested Citation

Bratton, William W., Rules, Principles, and the Accounting Crisis in the United States. European Business Organization Law Review (EBOR), Vol. 5, No. 1, 2004. Available at SSRN: http://ssrn.com/abstract=597641

Contact Information

William Wilson Bratton (Contact Author)
Institute for Law and Economics, University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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