Reporting entity concept: a case study of the failure of principles‐based regulation

Abstract

Since 1990 a key element of Australia's regulatory arrangements has been reliance on a ‘principles‐based’ rule to the effect that all ‘reporting entities’ should prepare general purpose financial reports (GPFRs) that comply with accounting standards. The concept of reporting entity was defined in terms of whether it was ‘reasonable to expect the existence of users’ who were dependent on GPFRs for information which will be useful to them when making and evaluating decisions about resource allocation. Australia's differential reporting arrangements are reviewed so as to highlight the extent to which reliance is placed on practitioners to apply the ‘reporting entity’ rule for entities other than publicly listed corporations or borrowing corporations. Illustrations are provided of how this ‘principles‐based’ rule has been ignored. This experience suggests that there is little reason to expect full observance of a principles‐based rule, if reliance is placed upon practitioners to ensure compliance.

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