The question posed was whether the recent scandals in corporate America would have occurred if GAAP for U.S. businesses were more principle based like IASB International Accounting Standards rather than Standards based like the FASB U.S. Standards. After much research and investigation, I have come to the conclusion that the presence of principle based accounting standards would not have prevented these scandals.

The U.S. currently operates under a rule (or principle) based accounting system. This system provides accounting standards that are extremely detailed that attempt to contemplate almost every application of the standard. These rules operate much like a check-box system that eliminate judgments from the application of reporting. Some examples of this rule-based system include accounting for derivatives, and leasing.

As you can see both of these systems have their benefits and problems. Therefore, I can not say whether a system of absolute rules or a system of absolute principles would be better. A combination of the two systems would be the best approach. If a principle based system had been applied before the recent scandals broke out in the U.S., it would have given more flexibility and allowed for more room for fraud. There would not have been one right answer for the issues that arose. On the other hand the rule based approach may not have addressed one of the specific issued in question but, instead, a similar issue. This could have led to an accounting rule being adopted for an issue that it was not intended to address.

Enforcement of any accounting standards is also an obstacle in converging these two systems. In the U.S., we have the SEC, but there is not a SEC in the rest of the world

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