Question

Countries are using different approaches to strengthen auditor independence. Some countries have taken a principle-based approach to auditor independence, while others have taken a conceptual approach. What are the main differences between these two approaches? Which approach do you think is most effective and why?

Answer 1

The conceptual-based accounting is basically a list of detailed regulations and dictates that are required to be followed when preparing financial statements. Several accountants favor the prospect of using rules-based standards, because in the rules absence they could be brought to court if their judgments of the financial statements were in appropriate. U.S. GAAP is conceptual-based. Under the principle-based approach the standards of accounting may take the form of general principles, thus mainly rely on interpretation and judgment by the financial statement preparers before it's implementation. IFRS is principle-based.

Most of the accountants prefer a conceptual-based system over a principles-based accounting system. The main reason for this is the legal liability removal from accountants in preparing financial statements. Although a rules-based system may be difficult to apply in an operating environment of the company, however the rules governing financial accounting reports leave no subjectivity in the preparation and evaluation of the financial information.