Abstract
The recent accounting scandals in the USA and the resulting regulation of the US profession via the Sarbanes–Oxley Act have led to the resurrection of an old debate: principles vs. rules. We argue that such a debate is jejune and serves as little more than a diversion from discussing more substantive issues raised by events like Enron and Andersen. Accounting is not confronted by a choice of principles to the exclusion of rules or vice versa. Principles underlie any set of rules, and any implementation of principles will inevitably involve adopting some rules. We take issue with various analyses of the accounting scandals that rely too exclusively on the principles of neo-classical economics. We conclude by identifying four major obstacles impeding meaningful academic and educational treatment of the maladies of which Enron is merely a symptom.
Notes
1Of course, the conflict of interest potential of such a scheme is enormous because insurance companies are some of the world's largest investors. Insurer independence is as problematic as auditor independence. As any forester knows, fighting fire with fire can be risky. Substituting insurers, with their own extensive problems of corruption, as a solution to the corruption in accounting and auditing, does not appear to be a particularly reassuring or compelling solution.
2Indeed, after over 30 years of capital market research we are still unable to establish a priori a reliable expectation about what the consequences will be of the application of either an accounting rule or principle.