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

The Japanese Accounting Review, Vol. 1, pp. 119-130, 2011

Yale SOM Working Paper

Posted: 29 Mar 2012

See all articles by Shyam Sunder

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: December 8, 2011

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 financial reports on one hand, and financial engineering of securities to manage the appearance of financial reports on the other, played a significant 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

JEL Classification: G24, M41

Suggested Citation

Sunder, Shyam, Paradox of Writing Clear Rules: Interplay of Financial Reporting Standards and Engineering (December 8, 2011). The Japanese Accounting Review, Vol. 1, pp. 119-130, 2011; Yale SOM Working Paper. Available at SSRN: https://ssrn.com/abstract=2014409

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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