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I have read the ACCA technical articles regarding to the above topic but I still not really understand on some areas.
1) Is rules-based approach binding by law? (i.e: Getting sue for non-compliance)
2) What is the main difference of rule-based and principles-based approach if both are not binding by law.
I wish to get advice for the above. Thank you.
Rules based is everyone need to do it. While principles based is comply or explain. Principles based leave it to customer to choose whether they want to buy product from the one that comply to the requirement or not.
the typical example of rules-based approach is SOX. congress make compliance a matter of law rather than a rule of listing. US-listed companies are required to comply in detail with Sarbox provisions disregarding the size of the company.
principles-based approach is more flexible which is of ‘comply or explain’. companies could be in non-compliance as long as they make clear in their annual report the ways in which they were non-compliant and the reasons why.
Thank you for the reply.
I would like to clarify my understanding on these 2 approaches. Please correct me if there is any misunderstanding.
SOX is only an example to explain the rules-based approach. I remembered that my tutor has taught us that rules-based is follow what is written, for example SOX but not necessary it is binding. If so, what is the consequences for non-compliance if adopting rules-based approach?
Whereas, for those Companies who adopt principles-based approach, they are refer to what is written (e.g.: Combine code, SOX) as minimal standard and amend according to fit their Company’s culture and size and principles-based approach doesn’t mean that the Company is allow to choose to comply or not.
If so, is it mean that the Company MUST follow the best practices written in Combine Code? What is the differences with rule-based approach if this statement is true?
In my understanding – rules based approached has to be used by American companies. They have enforced it to their subsidiaries outside America too. I don’t think they have a choice on whether to adopt it or not.
Basically they have a set of rules on how to to treat different transaction. They are not allowed to think out of the box pretty much.
Principles is purely based on interpretation. This is more of a flexible approach but people interpret things in different ways. I personally belief it would be easier to get away from fraud this way because you can just say that is not what you thought it meant.
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