I have expored how the prevailing romance over “principles-based” corporate regulation, especially in accounting, cannot be explained by a correspondence between the labels “principles-based” or “rules-based” and any actual accounting or regulatory system. The interim report of the Committee on Capital Markets Regulation (a.k.a. the Paulson Committee) unwittingly shows the difficulty of connecting the labels to reality when it advocates “principles-based” systems yet prescribes reforms that would yield more rules than principles.
The lack of connection between rhetoric and reality concerning principles-based accounting might be explained as an unconscious move to a new stage of accounting necessary to facilitate globalization of capitalism and democracy. This new stage evokes the theories that Max Weber explored about capital accounting as a pre-condition to capitalism within the broader social and political dimensions of market exchanges (see, e.g., Weber, The Protestant Ethic and the Spirit of Capitalism).
Accounting was a representation of the calculative mentality focused on maximizing rates of return on invested capital. Other social institutions were necessary too, including requisite technologies, religious sensibilities, state bureaucracies and an entrepreneurial spirit. Those remain mostly in place. What is needed is a system of international capital accounting as a pre-condition to the globalization of capitalism and democracy.
The current challenge is to forge a single system commanding worldwide recognition. For decades, US GAAP has been the front-runner but other powers, especially Europe and its member states, champion International Financial Reporting Standards (IFRS). Lately, IFRS is attracting more support, including from the Securities and Exchange Commission (SEC). The SEC has long indirectly controlled US GAAP and increasingly exerts indirect control over IFRS. The result is that IFRS may emerge as the system of capital accounting necessary for globalization. The US and other countries all can claim some ownership of IFRS: it appears to emanate from outside the hegemonic power but really is its product. Packaging and celebrating IFRS as “principles-based” increases the chances that it will command requisite global recognition.