Acctg 301 – Intermediate Accounting 1 – Summer 2007
Hot-Topic Issue: Principles- versus Rules-Based Accounting
“Enron and other high profile corporate accounting scandals have intensified scrutiny of the
accounting standard-setting process and the regulatory mechanisms intended to prevent such
problems. In response to these concerns, the Sarbanes-Oxley Act (Section 18(d)) required that
the Securities and Exchange Commission (SEC) conduct a study and report to Congress … on
the feasibility of principles-based standards. The SEC in turn has requested that the Financial
Accounting Standards Board (FASB) solicit input from its constituencies on the merits of a
principles-based system for accounting standards.
“A growing number of stakeholders endorse the adoption of principles-based standards to
replace the rules-based approach. ‘Moving from a rules-based accounting system to principles-
based standards could have a significant impact on eliminating some of the accounting abuses
…’ (PricewaterhouseCoopers 2003.”
You are to assume the role of an accounting professional who, as an interested constituent
affected by this issue, wishes to respond to the FASB’s call for input. Prepare a letter (see
mechanics instructions on the next page) to Robert Herz, Chairman of the Financial Accounting
Standards Board, which addresses the following requirements:
1. Present the pros and cons of principles- versus rules-based accounting standard-
setting systems. Include in this section a description of your understanding of what
is meant by both a principles-based and a rules-based system.
2. Discuss whether or not you believe a “principles-based approach” might help
alleviate some of the issues that have led to the financial accounting and reporting
“scandals” of the past decade.
3. Discuss how a move to a principles-based approach might facilitate the move toward
convergence of international accounting standards.
4. Define “objective-oriented standards” and discuss the merits of this approach as a
possible compromise solution to the “either-or” approach to “principles- versus rules-
5. End your letter with a recommendation to FASB about which standard-setting system
you believe should be followed.
Adapted from “Principles- versus Rules-Based Accounting Standards and the Application to the Determination of
Control for Consolidation,” Pamela A. Smith and Mark V. Hogan, AICPA Professor/Practitioner Case Program,
Copyrigh 2004. These cases may be reproduced for classroom teaching purposes. All other rights are reserved.
Acctg 301 – Writing Assignment, Principles- versus Rules-Based Standards 1
In order that your content and style be appropriate to the task, clearly identify the
following two things before you start writing:
Your objective in writing this letter, and
Format: Your document should be formatted appropriately for a formal business letter.
Each of the five sections of the body identified on Page 1 of this handout should have a
Type and Font: Please use Times New Roman font, size 12. Margins should be no
greater than 1 inch.
Length: The body of the letter should be in the range of 800 to 1,000 words. Mr. Herz is
a busy man and does not have the time to read “The Great American Novel”!
This is an independent, not a team, project; however, you may discuss issues with your study
group, and you are encouraged to obtain advice from your BCMU 302 professor, Jack Whelan.
A hard copy of the letter should be submitted to Elizabeth Widdison no later than the beginning
of class Thursday, July 12.
Acctg 301 – Writing Assignment, Principles- versus Rules-Based Standards 2