Since the Enron implosion, along with other financial and accounting fraud cases that have emerged in the last few years, many commentators have argued that the United States’ rules-based regulatory system contributed to the abuses by permitting public companies to comply with the letter of Generally Accepted Accounting Principles and Generally Accepted Auditing Standards but not their underlying principles.
Federal Reserve Board Chairman Ben Bernanke, for example, has recently called for more principles-based regulation in the United States. Interestingly, securities firms here also have affirmed their desire to shift from rules-based to principles-based regulation in part because it gives them flexibility to achieve regulatory objectives in ways that are tailored to their own businesses. Yet in an environment in which a regulator’s priority is enforcement, principles-based regulation is a Pandora’s box.
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