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Auditing Questions: Rules-Based Standards and Enron/Anderson

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1. Explain how "rules-based" accounting standards differ from "principles-based" standards. How might fundamentally changing accounting standards from "bright-line" rules to principle-based standards help prevent another Enron-like fiasco in the future? Are there dangers in removing "bright-line" rules? What difficulties might be associated with such a change?

2. Enron and Andersen suffered severe consequences because of their perceived lack of integrity and damaged reputations. In fact, some people believe the fall of Enron occurred because of a "run on the bank." Some argue that Andersen experienced a similar "run on the bank" as many top clients quickly fired the firm in the wake of Enron's collapse. Is the "run on the bank" analogy valid for both firms? Why or why not?

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This solution discusses how rules-based accounting standards differ from principles-based standards and how a change away from rule-based standards towards principle-based standard will affect ethics in reporting. This solution is 642 words with three references.

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Auditing Questions - Rules-based standards and Question on Enron/Anderson

1. Explain how "rules-based" accounting standards differ from "principles-based" standards. How might fundamentally changing accounting standards from "bright-line" rules to principle-based standards help prevent another Enron-like fiasco in the future? Are there dangers in removing "bright-line" rules? What difficulties might be associated with such a change?

In rules-based accounting standards there are specific details that attempt to give the exact rule for almost every situation. The result is that the standards become very voluminous and necessitate some measures for every circumstances and these might be favorable to some business and not favorable to others.

On the other hand principles based accounting standards means that the objectives of accounting are mentioned and guidelines are given to help achieve these objectives.

To avoid another Enron like fiasco principles based accounting can help because it does not provide a prescription for every situation. In other works there are no hard and fast ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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