Reforming the Culture of Financial Reporting: The PCAOB and the Metrics for Accounting Measurements
Posted: 7 May 2003
The metrics of generally accepted accounting principles is undergoing a debate in the wake of the accounting and financial scandals that began with Enron. Central to this debate is whether GAAP has become too rule based and needs to become more focused on principles. Sarbanes-Oxley calls on the SEC to undertake a study of the adoption of more principles-based reporting system for public companies. This article approaches the principles versus rules debate from the cultural perspective of the American boardroom with an emphasis on the monitoring model's dependence on not just the independence of directors but their outside advisor, the auditor. Extensive material is examined to explain the many forces that have caused auditors to be less independent on their audit clients. The principles-rules debate is also placed in the contemporary legal context where an overriding principle of liability and, hence, reporting continues to be that of fair presentation. We find that little has changed in the culture of auditing in the post-Enron era. Against this background the paper examines the likelihood that new requirements for the auditors and audit committee will lead to improved financial reporting, the objective sought by recent reform efforts. The paper concludes that many more reform steps are necessary to be undertaken by the Public Company Accounting Oversight Board if audit committees are to be able to strengthen the financial reporting process.
Keywords: GAAP, PCAOB, Accounting Oversight, principles-based accounting, audit committee, Sarbanes-Oxley, SEC disclosure, accounting profession, non audit services
JEL Classification: K1, K2, G34, G38, K22, M41, M45, M49
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