Question

Differentiate between rule-based and principles-based corporate governance regulations

Differentiate between rule-based and principles-based corporate governance regulations

Homework Answers

Answer #1

Rule- based system-

  • List of detailed regulations that accountants follow in order to create fiscal statements.
  • Many accountants and comptrollers specially in US, rule-based system is preferred because if their financial systems ever end up as a subject of a court or arbitration case, they can point to specific rules they followed to calculate figures, which created financial statements.
  • It establishes a specific and verifiable procedure which is used when creating financial statements.
  • Negative side is that it can create needless complexities when readying fiscal statements.

Principle-based system-

  • used as conceptual footing for comptrollers and accountants.
  • Aim to create guidelines rather than rigorous rules ,to help accountants in creating financial documents.
  • Allow flexibility.
  • Negative side is that information can be undependable or inconsistent that leads to difficulties when a company compares its books and financial statements with those of other companies.
  • Without strict rules and procedures, documents can lack consisteny: revenue,net and gross income figures , and calculations of projected revenues can vary widely.
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