Essay: The Application of Rigid Rules to Accounting Practices

Sample Essay

The application of rigid rules to accounting practices and procedures causes values in a financial statement to be distorted as rules only state how values have to be calculated based on specific methods which could impact certain values significantly where use of some other method would yield more real and transparent results. This misrepresentation of values impacts transparency of financial statements and decisions based on these financial statements would be substantially distorted. The transparency of these statements can be enhanced by applying principle based standards.

The comparison and analysis of advantages and disadvantages of financial statements indicates that the principle based approach for setting standards is much better than rule based approach. The increased number of financial scandals and fraud cases based on disclosure of significant financial information makes transparency and reliability of financial statements much more important. Standards need to be formulated in a manner which ensures transparency and reliability of financial statements for investors, shareholders and other users of financial statements. The transparency is increased by application of principle based standards and most practitioners related to accounting and auditing professions also view these standards as more effective for better understanding and effective communication of financial information through financial statements.

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