In any discussion of auditing and changes in the application of accounting principles, it is important to understand differences in how accounting standards are set across the global environment. It is also critical to understand that the rules-based approach that evolved with U.S. accounting standards is one of the factors that led some companies involved in the financial scandals to interpret the standards for the purpose of achieving their own objectives. Enron and others employed financial engineering techniques to further their personal accounting objectives and avoid reporting on economic reality. Further, the U.S. accounting standards have not been in conformance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). These standards are predicated on an approach that requires both the preparer and the auditor to step back to evaluate and consider if the proposed accounting is consistent with the underlying principle. It is strongly felt that if such a principles-based approach had been in effect, the Enron scandal would have never happened. The Sarbanes-Oxley Act of 2002 required the SEC to conduct a study of the adoption of a principles-based accounting system within one year of enactment of the legislation.

A principles-based approach to setting accounting standards, in contrast to current U.S. GAAP, means that principles would apply more broadly and there would be less interpretative and implementation guidance for applying the standards. This means that more commitment from both preparers and auditors' will be required to resist pressures for following the principles in contrast to...