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

32 Pages Posted: 15 Nov 2004

See all articles by William W. Bratton

William W. Bratton

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)

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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: K22, M41, M44, G34, M49

Suggested Citation

Bratton, William Wilson, Rules, Principles, and the Accounting Crisis in the United States. European Business Organization Law Review, Vol. 5, No. 1, 2004. Available at SSRN: https://ssrn.com/abstract=607361

William Wilson Bratton (Contact Author)

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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