Chapter 8 - international Financial Reporting: Ethics and Corporate Governance Considerations

What is now known as IFRS started in 1973 with the formation of the International Accounting Standards Committee. The purpose was to have a single set of standards to facilitate trade and investments. IASC was replaced by the Intrrnational Accounting Standards Board in 2001.
The SEC has done a study of a Principle based system which is within SOX Requirements of 1)certification of company financials by the CEO/CFO, 2) empowerment of the audit committee to approve external audit services, 3) more stringent auditor independence standards,and 4) greater oversight of auditors by PCAOB and also to conduct a principle-based study.
The SEC recommends that principle-based study: 1) Be based on an improved and consistently applied conceptual framework, 2) Clearly state the accounting objective, 3)Provide sufficient detail and structure so it can be applied on a consistent basis, 4)Minimize exceptions, and 5)Avoid use of percentage tests that allow for financial engineering to achieve technical compliance.
In contrast to objectives-based, rules-based standards often leads to avoidance which rewards those who are wiling to go around the intent of the standards.
Representational faithfulness means that the information presents what actually happened or exists. Rather than being considered an element of reliability, the faithful representation of the economic phenomena is a foundation element of useful information in the framework. Relevance and reliability are the primary qualities of decision- useful information in the joint-framework.
SFAS No. 13 establishes rules that can undermine the substance over form concept. One problem with the rules-based criteria for capitalization is that they rely on implementation guidance that can be manipulated. By contrast, IAS 17 provides that if the substance of the transaction is effectively to transfer ownership, then it is accounted for as a purchase and sale (capitalization). This is an example of an objective-based system versus rules-based syst which rewards dishonesty with more access to capital with which to be even more dishonest. I believe the slowness with instituting IFRS is because the U.S. Culture is CEO based and with the freedom to use judgement over rules, there will be even more abuse of the public trust.

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