A conceptual enquiry into the concept of a ‘principles-based’ accounting standard

In the post-Enron environment there appears to be broad agreement that ‘principles’, or accounting standards that are ‘principles-based’, provide a solution to the problem of poor financial reporting, even though the idea of ‘principles’ and of being ‘principles-based’ has not been well understood. This paper considers whether the SEC has succeeded in resolving the problems that arise from the wide variety of views on the meaning of the term ‘principles-based’. It conducts a conceptual enquiry into the meaning of this expression as it is used by the SEC. The method of such enquiries is explained using the work in the philosophy of language of Wittgenstein. A descriptive conceptual enquiry into how the SEC uses this expression suggests that there are two broad ways of explaining what is meant by ‘principles-based’ standards. A distinction is made between ‘principle-based’ accounting standards that are explained as standards ‘based-on’ ‘principles’ and ‘principle-based’ accounting standards that are rules of accounting that instantiate certain characteristics. It goes on to examine the nature of the explanation given by the SEC of the idea of being ‘principles-based’ in the sense that this relates to a certain kind of standard. It argues that the SEC is not explicit in identifying the kind of explanation of the expression ‘principles-based’ and, hence, the kind of concept that it expresses. The paper then goes on to examine the usefulness of different kinds of explanations of the concept in the context of the debate about the kind of accounting standards that should be promulgated by standard setters in an evaluative conceptual enquiry. It suggests that it is more important to understand the characteristics of useful accounting standards than to try to identify a kind of standard, a ‘principles-based’ one.