Approaches To Accounting Standard Setting And Earnings Management

After Enron and other financial scandals, there is a severe controversy all over the world over the approach towards accounting standards setting. Some people believed that rules-based accounting standards should be turned into principles-based accounting standards in the US. Sarbanes-Oxley Act of 2002 required U.S. Securities and Exchange Commission (SEC) to study on financial reporting system of a principles-based accounting system. Financial Accounting Standard Board put forward a Proposal for a Principles-based Approach to U.S. Standard Setting and proposed to apply principles-based approach to accounting standard setting in the US. SEC issued Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System and concluded that objectives-oriented standard setting is desirable. But some basic questions about approaches to accounting standard setting have not been answered, including:Is the US GAAP rules-based or not?Principles-based accounting standards or rules-based accounting standards, which is better?Could principles-oriented or rules-oriented accounting standards be effectively applied? andWhat is the relationship between accounting standards and regulatory environment in any economy?It is important for the US GAAP, accounting standards in other jurisdictions, and the International Financial Report Standard, to answer these questions properly. It is more important for China as a fast growing and the largest transitional economy in the world.