As a result of the growing concern about the quality and transparency of U. financial accounting and reporting, FASB proposed a principle-based approach to standard setting. This approach will reduce detail and complexity in accounting guidance. The major objective is to provide few exceptions and less interpretive and implementation guidance and focuses more on brad based principle. This approach requires prepares and auditors to exercise professional judgment in applying accounting concepts. .
The primary purpose of accounting is providing users with useful information. Financial statements that are too detailed and complex lose relevance. Therefore, I agree that financial information transparency must improve. The first step is improving the conceptual framework to better guide setting standards and resolving accounting problems. A complete, internally consistent, and clear framework will help limit exceptions in accounting standards that increase detail and complexity. An improved framework will also help limit the amount of interpretative and implementation guidance.
Adopting the principle-based approach, however, may lead to adverse consequences. Lack of specific rules and reliance on judgment may result in different interpretation for similar transactions. Complex transaction will continue to occur and lack of details and exceptions can lead to divergence in practice. This will inversely affect the reliability and consistency of accounting data. Additionally, less guidance gives managers latitude to make fraudulent choices. Recent occurrences, like Enron, demonstrate the degree of pressure on prepares and auditors to manipulate accounting information.
To limit potential abuse and errors resulting from poor judgment, the FASB and SEC must enhance enforcement and litigation actions. Higher threat of litigation will increase willingness to apply professional judgments. Additionally, other standard setting agencies can function as enforcers and monitoring agents.