Free Essay


In: Business and Management

Submitted By cavemen
Words 2150
Pages 9
ABACUS, Vol. 42, No. 2, 2006

doi: 10.1111/j.1468-4497.2006.00196.x

ABACUS PRINCIPLES ORIGINAL ARTICLE 2 42 © 2006 0001-3072Publishing, Ltd. Abacus UK VERSUS RULES-BASED ACCOUNTING ABA Accounting Foundation, Unviersity of Sydney Oxford, Blackwell


Principles- Versus Rules-Based Accounting Standards: The FASB’s Standard Setting Strategy
In response to criticism of rules-based accounting standards and Section 108(d) of the Sarbanes-Oxley Act of 2002, the SEC proposed principlesbased (or ‘objectives-oriented’) standards. We identify several shortcomings with this approach and focus on two of them. First, the format (type) of a standard is dependent on the contents of what the standard regulates. Given the asset/liability approach combined with fair values, we argue that the combination of this measurement concept with principlesbased standards is inconsistent because it requires significant guidance for management judgment. Second, we propose the inclusion of a trueand-fair override as a necessary requirement for any format that is more than ‘principles-only’ to deal with inconsistencies between principles and guidance. We discuss the benefits of this override and present evidence from the United Kingdom’s experience. Key words: Accounting standards; FASB; Principles; Rules; Rules-based.

According to a widely-held view, U.S. accounting standards are more rules-based than principles-based.1 This observation stems in large part from the emphasis put on two aspects of the wording of the typical attestation statement: ‘the financial statements present fairly, in all material respects, the financial position of X Company as of Date, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles [GAAP]’ (emphasis added).2 ‘Present fairly’, which indicates a principles-based approach, is essentially converted to a rules-based approach when it is ‘defined’ in SAS 69

The papers in this forum adopt varying positions regarding this view. The FASB’s proposed Statement of Financial Accounting Standards, The Hierarchy of Generally Accepted Accounting Principles (FASB, 2005a), would more explicitly codify the rules. It says in para. A5 it expects to ‘reduce the number of levels of accounting literature under the GAAP hierarchy to just two (‘authoritative and non-authoritative . . . [and] integrate GAAP into a single authoritative codification’). The standards adopted by the FASB would be the first level.


George J. Benston ( is John H. Harland Professor of Finance, Accounting, and Economics, Goizueta Business School, Emory University; Michael Bromwich is the CIMA Professor of Accounting and Financial Management, London School of Economics; and A lfred Wagenhofer is a Professor of Accounting and Management at the University of Graz. We appreciate and benefited from comments by Sudipta Basu, David Cairns, Graeme Dean, Thomas Schildbach and Greg Waymire.

© 2006 Accounting Foundation, The University of Sydney


(.05 a) by reference to Rule 203 of the AICPA Code of Professional Conduct. This rule states that ‘present fairly’ ‘implies that the application of officially established accounting principles almost always results in the fair presentation of financial position, results of operations, and cash flows’.3 GAAP is specified by SAS 69, paragraph AU 411, as a hierarchy of conventions, rules and procedures promulgated by specified authoritative bodies, particularly the Financial Accounting Standards Board and predecessor organizations (e.g., the Accounting Principles Board).4 Thus, if the enumerated and codified GAAP have been followed as specified, presumably the attesting CPAs have done their jobs correctly and adequately in the eyes of the Securities and Exchange Commission and (probably) the Public Company Accounting Oversight Board (PCAOB). Largely because of the Enron Corporation failure, wherein Arthur Andersen was seen as designing or accepting client-originated financial instruments that met the technical requirements of GAAP while violating the intent,5 the rules-based approach has come under fire.6 As a direct result of the misleading accounting procedures revealed in the investigations of Enron’s failure, the Sarbanes-Oxley Act of 2002 included a provision, Section 108(d), instructing the SEC to conduct an investigation into ‘[t]he Adoption by the United States Financial Reporting System of a Principles-Based Accounting System’. The SEC’s Office of the Chief Accountant, Office of Economic Analysis, issued a 68-page Report (the ‘Report’) in July 2003 (SEC, 2003).7 In July 2004, the FASB (2004) responded and in almost

The AICPA’s Auditing Standards Board proposed amendment to SAS 69 (AICPA Auditing Standards Board, 2005) includes this language. Although the statement includes an ‘almost always’ qualifier, it has not been interpreted to allow for an override. If adopted, SAS 69 applied to non-governmental entities would delete the GAAP hierarchy specified, particularly the statement in paragraph .05 a that gives as the first source—‘Accounting principles promulgated by a body designated by the AICPA Council to establish such principles’— and .05 b which includes: ‘Pronouncements of bodies composed of expert accountants, that deliberate accounting issues in public forums for the purpose of establishing accounting principles or describing existing accounting practices that are generally accepted’. These and other sources would be replaced by the FASB, which ‘is responsible for identifying the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States’ (AICPA Auditing Standards Board, 2005, .08). Andersen actually was charged by the Department of Justice with destroying evidence and was found guilty in a jury trial in June 2002 of ‘witness tampering’ because one of its lawyers had ‘corruptly’ persuaded Andersen employees to destroy documents in advance of an SEC investigation. In May 2005 the Supreme Court reversed that conviction, ruling ‘that the jury instructions failed to convey properly the elements of a “corrup[t] persuas[ion]” conviction’ (Arthur Andersen LLP, Petitioner v. United States, No. 04-368, 31 May 2005, Renquist, J., p. 1). The U.S. Department of Justice then chose not to pursue the case. Following a detailed description and analysis of Enron transactions audited or participated in by Andersen, the Examiner in Bankruptcy for Enron (Batson, 2004, Appendix B, p. 167) concludes: ‘The evidence reviewed by the Examiner, and the reasonable inferences that may be drawn from that evidence, are sufficient for a fact-finder to conclude that Andersen was negligent in the provision of its professional services to Enron. In addition, the evidence is sufficient for a fact-finder to conclude that Andersen aided and abetted certain Enron officers in breaching their fiduciary duties to Enron.’ Printed in what the web document describes as the ‘smaller’ text size.





© 2006 Accounting Foundation, The University of Sydney


all respects agreed with the SEC Report (in part, no doubt, because the Report agreed with an earlier FASB [2002] statement and recommended that the FASB be the sole U.S. standard setter).8 Therefore, the Report, which summarizes much of the writing on this subject (including submissions by the FASB), provides a point of departure for an analysis of the ‘rules vs principles’ debate. Given this degree of unanimity and the reasonable presumption that the Commission approved the Report, its analyses and recommendations should be taken very seriously. We begin our analysis by reviewing the SEC’s (2003) Report that suggests a principles-based (or, as it calls it, an objectives-oriented) approach and the subsequent strategy of the FASB with respect to principles-based standard setting. Two major shortcomings are discussed in subsequent sections. First, the format of standards cannot be discussed and decided on without considering the contents of what the standard should prescribe. Observing that the FASB follows the asset/liability approach and increasingly adopts fair-value measurements, we argue that the combination of this measurement concept with principles-based standards is inconsistent. A major reason is that fair values require many rules to provide sufficient guidance, they invite manipulation, and they often cannot be assured by auditors.9 We propose to move back from an asset/liability approach with fair values to the traditional revenue/expense model, which is better able to produce trustworthy and auditable numbers. The second shortcoming is the dismissal of a true-and-fair override that we argue is a necessary requirement for any standard setting approach. The more rules the standards include, the more an override provision is necessary to avoid allowing or even requiring accountants to follow rules by letter but not by intention. The override gives accountants more professional responsibility for financial statement content, and its disclosure gives sufficient transparency for users to understand and, perhaps, challenge its application. We present evidence on the use of a true-and-fair override from the United Kingdom’s experience and discuss how International Financial Reporting Standards (IFRSs) cope with the issue. The format of accounting standards is not exclusively a U.S. issue, although the current debate has emerged there in the aftermath of accounting scandals, but is of international interest because the FASB and IASB have agreed to converge their standards as much as possible. Recent evidence of convergence is their June 2005 joint exposure draft on business combinations (FASB 2005b; IASB 2005a), which has even the same numbering of paragraphs.10 Thus, the U.S. debate on

Furthermore, the AICPA Auditing Standards Board (2005, p. 5), states that the FASB’s (2005a) proposed statement, The Hierarchy of Generally Accepted Accounting Principles, is ‘[i]n response to recommendations in the [SEC’s Report]’. It is interesting to note that when accounting standards (or principles) were controlled by accounting practitioners who served on AICPA committees, proposals for fair- and present-value restatements of assets were not taken seriously. However, the IASB draft includes less content, so that some paragraphs are ‘not used’ to preserve the consecutive numbering with the FASB draft.



© 2006 Accounting Foundation, The University of Sydney


principles vs rules should not be viewed solely from an U.S. perspective but, rather, from an international one. THE REASONS FOR RULES-BASED STANDARDS In October 2002 the FASB issued a Proposal, Principles-Based Approach to U.S. Standard Setting. The Proposal’s introduction (FASB, 2002, pp. 2–3) explains: ‘in the Board’s view, much of the detail and complexity in accounting standards has been demand-driven, resulting from (1) exceptions to the principles in the standards and (2) the amount of interpretive and implementation guidance provided by the FASB and others for applying the standards’. According to the FASB, the exceptions resulted from the Board having to make compromises with presumably powerful interest groups that prevented it from implementing its desired principles. The Proposal makes particular mention of FAS 133, Accounting for Derivative Instruments and Hedging Activities, the complexities of which resulted from the Board having to make numerous exceptions from the general principles promulgated in FAS 133, para. 3. The extensive guidance, it says, results from having to fulfill the objectives of comparability and verifiability. The Proposal rejects ‘principles-only’ standards, because these ‘could lead to situations in which professional judgments, made in good faith, result in different interpretations for similar transactions and events, raising concerns about comparability’ (p. 9). Comparability may be seen as especially important in an international environment, as there is the danger that local accountants and regulators arrive at differing views on the interpretation of contentious accounting issues. In addition, the FASB (and its predecessors) have developed rules-based standards to meet the demand of major constituents, particularly management and auditors, who want a clear answer to each and every perceivable accounting issue. The litigious situation in the United States (and increasingly in other countries) means that the risk of law suits based on alleged wrong accounting is high and gives accountants a strong incentive to ask for rules they can adhere to in case of a costly law suit. As Schipper (2003) points out, rules are likely to proliferate as accountants ask for guidance that, they hope, will protect them from criticism and lawsuits. Detailed rules and authoritative guidance also serve standard setters’ and regulators’ objective of reducing the opportunities of managers to use judgments to manage earnings (and of auditors to have to accept that practice). Standard setters can be and must show that they are active standard setters. Thus, they may tend to overproduce standards and to write detailed rules covering almost any conceivable situation. THE CASE FOR PRINCIPLES-BASED STANDARDS Despite the demand for rules-based standards, the FASB (2002, 2004) and the SEC (2003) reject them and have turned to proponents of principles-based standards, presumably because in the light of the accounting scandals they consider the costs of rules-based standards to outweigh their benefits. The SEC Report states: 168…...

Similar Documents

Premium Essay

“Principle Based Accounting Standard Is More Beneficial to the Society Than Rules Based” - an Evaluative Study

...of Accounting Information A detailed narration of qualities of Accounting Information is given in Appendix:1 Accounting Standards Having seen the qualities expected by the society from the accounting information, it is clear as to the importance of having a set of standards in the preparation and presentation of financial statements of companies; so as to bring uniformity in the ‘accounting process’(Arens,2011). This is achieved by the establishment of Accounting Standards (Hoeven,2010). Need for Accounting Standards Accounting standards act as a Code of Conduct for worldwide accountants in the preparation of accounting statements. They provide guiding lights to accountants in the preparation of Financial Statements (Benston,2006). The following are the major objectives of Accounting Standards. To ensure the uniformity of Accounting Procedures worldwide To assure the comparability of Accounting information To improve the reliability of Accounting Information To assign the accountability for the preparation of Accounting Information To ensure the consistency of Accounting procedures and practices Part 2: Types of Accounting Standards The major forms of Accounting Standards are mentioned as per Figure: 2 Figure:-2 Types of Accounting Standards 2.1 Rules Based Accounting Rules Based Standards are the ‘conventional’ set of Accounting Standards which consist of more detailed rules on accounting procedures (Kumar, 2010). It......

Words: 3080 - Pages: 13

Premium Essay

To What Extent Do Ideologies Influence Our Thinking in Society Today?

...postmodernism is itself an ideology and supports capitalism – postmodernism is described as supportive of inequality by ignoring the fact that the poor cannot afford to consume as the wealthy can. Feminists argue that patriarchal ideology is in more control than the ideology of the ruling class. Feminists identify the power of the patriarchal ideology where the ideas that men are superior; men are more logical; women are too emotional to hold power and it is natural for women to take responsibility for children can all influence thinking in society today. Kate Millet argued that men are socialised to be dominant by modern culture, but other non-ideological factors can affect this, such as violence. A Marxist feminist perspective such as that of Benston argues the power of capitalism as well as patriarchy in subordinating women. Feminist ideas of ideology can be criticised as it could be considered that feminist ideas are becoming less relevant due to increasing opportunities for women, particularly in western societies....

Words: 386 - Pages: 2

Premium Essay

Pestle Analysis of Barclays Plc

...operates and accessing external factors influencing the company in the markets it operates. PESTLE is the acronym for the following categories of investigation: political, economic, sociological, technological, legal and environmental (Cheverton, 2004; Partridge and Sinclair-Hunt, 2006). Discussing the political factors influencing operation of the banks in the national, local and regional levels and legislation, it should be mentioned that banks have always been to a certain degree regulated by the government (Benston, 2000). For example, government determines the fraction of reserves that a commercial bank should keep with the Central Bank. Taking into consideration the fact that Barclays Plc operates in more than 50 countries it will not be possible to study all the possible regulative frameworks within the current research. Various regulative bodies carry out controlling functions under various conditions such as Controller of the Currency (OCC) in the United States (Benston, 2000). Tax regulation the company submits to is one more important political aspect. Barclays obeys regional tax framework in all the countries of its operation. Besides, the company has to submit to double taxation in the cases where there are appropriate agreements between countries. It may be stated that tax risk is observed because regular changes in tax legislation and interpretation of taxation framework (Barclays 2008 Annual Report). The most important economic change in banks’ operation is......

Words: 1083 - Pages: 5

Premium Essay

Risk Assessment Problems Resulting from the Misclassification of Leases

...allows investors and creditors to make appropriate risk evaluations of a firms statement of financial position comes down to whether or not the standard ensures that leases are classified correctly and not abused. The global and Australian accounting standards, particularly section 117, ensure that failure by an auditor to detect false financial statements would cause legal liability as well as severe negative impacts to their professional reputation (Tang, 2009). This was the case with the collapse of Arthur Anderson, once one of the ‘big 5’ CPA firms, which failed to detect Enron’s extensive accounting fraud and allegedly conspired with them, leading to the loss of millions of dollars of investor’s funds and countless civil lawsuits (Benston, 2002). Section 117 provides the preparers of financial statements with a judgemental framework in an attempt to guide them in correctly classifying leases, avoiding any of these personal risks and risks to the public. On the other hand, lease classification still involves a significant degree of second-guessing and most accountants will have to rely on their professional judgement to determine how a lease will be accounted for. However, reliance on the concept of ‘professional judgement’ allows for a broad range of poor justifications and can result in inconsistency and inaccuracy. Many accountants would prefer the accounting bodies to change the 117 standard by issuing more rules to provide them with set answers to solve the......

Words: 1185 - Pages: 5

Premium Essay


...roles in society, fam & workplace. * Parsons: women = expressive. Men = instrumental (breadwinner). Differences are innate and prescribed at birth. Warm bath 4 husband * Murdock: One of roles of fam = to socialise children into gender roles to fit instrumental & expressive roles for society * Human Capital Theory: many women choose to prioritise role as homemaker, fitting with expressive instincts, therefore choosing their own position * Marxist feminists would argue that gender differences = used to exploit women through capitalism at work and in home. * Ansley: Women used to benefit economy, absorbing frustration & anger of husbands who are also exploited at work. ‘Women are the takers of shit’. * Benston: focused on economic aspects of gender inequality. Women = a reserve army of labour. Contribution of domestic labour to capitalism. Marxists: * More critical viewpoint of inequality * Women = useful to a capitalist society – easy to hire and fire * Engels: saw monogamy as giving men greater control over women – up until late 19th century, women = a man’s property. ROLE OF FAMILY IS TO MAINTAIN AND REPRODUCE LABOUR FORCE TO SUPPORT CAPITALISM * Zaretsky: women = a safty valve – women benefit capitalism through unpaid labour of raising a workforce = family PROPS UP capitalism * Postmodernists would argue against this, saying that society is full of choice – we create our own identities. * Claiming that......

Words: 569 - Pages: 3

Premium Essay

Examine Marxist Views of the Role of the Family.

...gender roles depicted by Zaretsky oppress women as they are forced to remain at home doing housework for free which leaves them economically dependent on their husband. This means that they may not be able to leave a relationship in which they are unhappy or even abused. Marxists feminists also believe that capitalism maintains a patriarchal society meaning that it is male dominated. Some Marxist feminists believe that there is a ‘direct causal connection’ between capitalism and the oppression of women. They believe that women are exploited both by their husbands and by their employers. However, other sociologists are critical of this theory as patriarchy predates capitalism and because male dominance exists in non-capitalist countries too. Benston 1972 is a Marxist feminist who believes that the family benefits the bourgeoisie at the expense of the working class and women and that the nuclear family meets the needs of capitalism for the reproduction and maintenance of class and patriarchal inequality. Althusser was a Marxist sociologist who, in 1971, stated that the bourgeoisie maintains false class consciousness through passing on their ideology to the working class. He suggested that the family is an ideological state apparatus which contributes to false consciousness and social control. However, some critics would say that some people enjoy their jobs and therefore aren’t suffering from false consciousness. For example, some women enjoy doing housework and therefore......

Words: 1359 - Pages: 6

Premium Essay

Acc 557 Assignment1

...was one of the key players for the SEC creating new guidelines and punishments for fraudulent behavior, the Sarbanes-Oxley Act. As of today, with the SOX act put in place for almost 11 years, there are still corporate breeches, Chesapeake Energy, Wal-Mart, Green Mountain Coffee, and Groupon are among the most recent (Rogers, 2012). I believe the SOX act helped prevent a lot of accounting illegalities and helped to protect the shareholders, but ultimately the act is not strong enough or covers enough to prevent it all. While more accountability is definitely held with the CFO, and CEO of corporations, as well as with outside accounting teams, the SEC is not going forward with investigations regarding independent CPAs or accounting firms (Benston & Hartgraves, 2002). Chesapeake Energy is a clear example; the CEO had taken out $1.1 billion in loans funded by Chesapeake in return for stake in the company (Driver & Grow, 2012; McKenna, 2012). The SEC has rules against taking out loans for stocks, but because it does not mention any areas related to stake in the company, it falls in a grey area that cannot be prevented by the SOX act or SEC (Driver & Grow, 2012). In section 402 of the SOX act, it states that companies are unable to give personal loans to any director or executive officer, but with grey areas not being defined more, it leaves it open to interpretation and thus for additional fraud. According to Jennings, there are certain factors in corporations that......

Words: 1644 - Pages: 7

Premium Essay


...Benston, G. J. (2006). Fair-value accounting: A cautionary tale from Enron.Journal of Accounting and Public Policy, 25(4), 465-484 Baber, W.R., Fairfield, P.M., & Haggard, J.A. (1991). The effect of concern about reported income on discretionary spending decisions: The case of research and development. Accounting Review, 818-829.  Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of accounting and Economics, 14(1), 51-89. Deegan.C.M. (2012). Australian financial accounting. Sydney: McGraw-Hill Australia, 2012: Feroz, E. H., & Hagerman, R. L. (1990). Management compensation, insider trading and lobbying choice: the case of R & D. Australian journal of management, 15(2), 297-314. Gwilliam, D., & Jackson, R. H. (2008, September). Fair value in financial reporting: Problems and pitfalls in practice: A case study analysis of the use of fair valuation at Enron. In Accounting Forum (Vol. 32, No. 3, pp. 240-259). Elsevier. Gore, P., Taib, F. M., & Taylor, P. A. (2000). Accounting for goodwill: an examination of factors influencing management preferences. Accounting and Business Research, 30(3), 213-225.  Goodacre, A., & McGrath, J. (1997). AN EXPERIMENTAL STUDY OF ANALYSTS' REACTIONS TO CORPORATE R&D EXPENDITURE. The British Accounting Review, 29(2), 155-179. Haldeman, R. G. (2006). Fact, fiction, and fair value accounting at Enron. CPA JOURNAL, 76(11),......

Words: 286 - Pages: 2

Premium Essay

Us Gaming Industry Analysis

...governments have different regulation in relating to casino industry. It creates more opportunity for new casino entrants to start their business in casino industry as there will be a increasing in licensed issued. So it will be expected that there is a increasing in the competition within the industry for better prices, services and infrastructure (Benston, 2007). The deregulation in the casino industry will attract more foreign capital to flow to US casino industry (Berry, 2006). It will lead to the increase in the level of economic growth such as creating more jobs and boost the economy. Besides, lax of immigration policies attract more tourists especially from emerging strong growing economy such as China, India, Vietnam and Indonesia. The economic factor It is expected that the economic factor will have an overall balance effect on future growth in the industry. The global financial crisis is a strong threat to the industry for it will lead to the increase in the level of unemployment rate. Such threat resulting in the decrease in people’s income and prevent them to visit casinos and other entertainment activities (Benston, 2007). The crisis also causes delay in the level of infrastructure construction activities within the casino industry as they ran into financial difficulties. Economic instability is major threat to the American casino industry as it causes a scarcity of both consumer spending dollars and bank capital loans (Berry, 2006). However, global......

Words: 3749 - Pages: 15

Premium Essay

Ssssss notes with government debt (and occasionally other assets), whereas charter banks... Save Paper Rbi Directions On Inspection And Scrutiny, Acquisition And Amalgamation Of Banks, And Foreign Banks. The Reserve Bank of India is the central banking institution. It is the sole authority for issuing bank notes and the supervisory body for banking operations in... Save Paper Banking 1St Century Bank century bank has used this approach to gain more customers by creating different products and services that would attract different types of people with different... Save Paper Is It Necessary To Separate Retail Banking From Investment Banking? Discuss Possible Advantages And Disadvantages... increase in the efficiency. Benston G.J. (1994) also believes that universal banks may end up with too much power over specialized banks and smaller companies... Save Paper Is It Necessary To Separate Retail Banking From Investment Banking? Discuss Possible Advantages And Disadvantages... conventional analysis, was conflicts of interest between the commercial- and investment-banking ... in the future in different but equally destructive ways. A... Save Paper Responsible Banking At Yes Bank team with backgrounds across different sectors in the Food & Agribusiness (F&A) domain in addition to having a rich banking experience. Bank has entered into......

Words: 443 - Pages: 2

Premium Essay

Marxist Essay

...generation of workers by socialising them into accepting the hierarchy owned by the ruling class. This is beneficial for the capitalists as their future workers are being raised and bought up without any extra costs added to themselves. To add to this Zaretsky also mentions that capitalists are benefiting from a culture of unpaid domestic labour because if husbands had to pay their wives wages for doing the housework they would be demanding higher wages from their employers to fund it. However the capitalists can’t afford to lose these workers particularly the most skilled and able employees. Benston who has a key role within the Marxist Feminist ideas has also backed up and agreed to Zaretsky’s idea by saying that the capitalists get to keep more of their profits because male workers don’t have to demand higher wages to pay their wives at home for doing the domestic labour. In addition to this Benston has also said how housewives are supporting capitalists as they maintain their husbands and satisfy their physical and emotional needs which helps to refresh them and keep them in a good working order to return to work the following day to carry on being exploited by their employer/bosses. This is a way of helping capitalists as they benefit from a fresh worker who is ready to carry on being exploited by them for the rest of that working day. By having a housewife at home it may also help and motivate the worker to again return to work each day to carry on being exploited as......

Words: 1262 - Pages: 6

Free Essay

An Essay on “a Transaction Cost Approach to the Theory of Financial Intermediation”

...This essay tries to highlight the contributions made to the theory of financial intermediation by Benston and Smith in 1976. Regarding the theory, there is one fundamental question among others, what is the main reason why financial intermediaries exist? In 1976 there was no clear consensus about the specific role of financial intermediaries and many different approaches existed on the issue how to analyze them in an appropriate way. The primary goal of the authors is to develop a proper framework for the analysis by setting the main focus on transaction costs. Therefore, they take a look at four different aspects: the demand for financial commodities, the production, their pricing altogether with the pricing of additional services and the influence of governmental regulation on financial intermediaries. They start their survey from a contrary point as the other authors did in recent history by defining financial intermediaries as firms which create specialized financial commodities. On the supposition that the individuals’ earnings over time do not enable the achievement of the desired inter-temporal consumption pattern, demand for financial commodities arises. In this case assets held by the consumers serve as a possibility to rearrange their intra- and intertemporal consumption pattern for maximizing their utility. This leads to two key facts. First, utility is based on consumption at different points in time and second, transaction costs occur by acquiring......

Words: 785 - Pages: 4

Premium Essay

Principles vs Rules Based Accounting

...Commission is made up of five commissioners. They are selected by the United States President, and then are approved by the United States Senate. The SEC has the responsibility of protecting the investing community from fraudulent and manipulative practices within the securities market (SEC, 2003). Interpretations of Principles-Based Accounting What is principles-based accounting? Principles-based accounting is also known as objectives- oriented (Spiceland, Sepe, Nelson, & Thomas, 2016). Due to the fact that principles-based accounting does not contain a strict set of rules, many can argue that it is up to interpretation. Some of those interpretations are as follow: * “Principles-based accounting are objectives-oriented standard (Benston, Bromwich, & Wagenhofer, 2006).” * “Principles-only standard may present enforcement difficulties because they provide little guidance or structure for exercising professional judgement by preparers and auditors (SEC, 2003).” * “Principles-based standards require the accounting professional to exercise judgement (Denton, 2012).” * “Principles-based accounting provides a conceptual basis for accountants to follow instead of a list of detailed rules (Shortridge & Myring, 2004).” * “The inherent characteristics of a principles based framework is the potential of different interpretations for similar transaction (Forgeas, 2008).” * “Financial statement prepares are less likely to report aggressively when......

Words: 2499 - Pages: 10

Premium Essay

Too Big Too Fail

...banking can solve the phenomenon of TBTF banks. One of the main solutions to as to why commercial and investment banking should be separated is the concern that conflicts of interest will arise when the same entity that grants credit to customers uses credit to invest. For example, if a bank has outstanding loans to a corporation and prior to public knowledge finds out that the firm is in financial trouble, a bank may underwrite bonds on behalf of this firm and require the corporation to use proceeds to repay the bank loan. However, evidence in the literature on the existence of conflicts of interest is mixed. For example, studies based upon data from the Great Depression era, such as those by Kroszner and Rajan (1994), Puri (1996) and Benston (1990) together with more recent studies from Heb b and Fraser (2003), which are based upon findings from Canada and the UK rejects the existence of conflicts of interest. These studies mainly base their evidence upon the fact that bonds underwritten by commercial banks default less often than bonds underwritten by investment banks. This implies a separation of commercial and investment banking might not be the best solution. However, Bessler and Stanzel (2009) and Johnson and Marietta-Westberg (2009) argue that a conflict of interest is more sever and more likely to exist in a bank that has an underwriting division and asset management division. The main argument here is that asset management divisions appeared to give worse......

Words: 1253 - Pages: 6

Premium Essay

Is It Necessary to Separate Retail Banking from Investment Banking? Discuss Possible Advantages and Disadvantages of Such a Separation Using Academic Literature

...matter will be presented, mainly by stating some of the ideas that are commonly discussed.  The Glass-Steagall Act and how we got here Recently President Obama proposed the separation of investment and retail banks, as it is believed that they were the main reason of the last financial crisis that started in 2007. Avgouleas (2010) points out that the mega banks were created after 1990’s due to the deregulation of the financial industry and they engaged great risk in their investment activities as the deposits (that were used for these purposes) were guaranteed by the government. Benston, G.J. (1994) points out that these mega banks became so large, that even if one of those banks was failed, it would cause a systematic financial crisis, as their role in underwriting and distributing securities makes them vulnerable. However, President’s Obama proposal was based on the Glass-Steagal Act. Benston, G.J. (1994) points out that in the past, steps were made in the US towards narrow banking. The primary law (Glass-Steagal Act, 1933) separated the commercial from the investment banking, while the Bank Holding Company Act and the National Banking Act prevented banks from offering real estate brokerage, insurances and many other financial products. According to Wallison (2009), the Glass-Steagal Act was repealed in 1999 and then replaced by the Gramm-Leach-Bliley act. He also states that the repeal of the Glass-Steagall act was not responsible for the financial crisis that began......

Words: 953 - Pages: 4