The Social Construction of Accounting Reality: Translation of a Principles-Based Discourse

Abstract

Purpose—Applying the concept of translation, this study aims to develop an understanding of how the principles-based discourse emerged and became rule-like social facts and thus constructed an accounting reality in a particular regulatory space. Design/methodology/approach—This study focuses on various stakeholders’ discourses. The material and analysis presented in this paper derive from an extensive review of congressional documents, official reports, consultation documents, comment letters, and a range of additional information available on the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) web pages, as well as related academic papers. Findings—The “principles-based” concept was originally introduced to describe the features of International Financial Reporting Standards (IFRS), in contrast with the “rules-based” concept. Through the principles-based versus rules-based debate in the early 2000s, the following accounting reality was temporarily constructed: IFRS is principles-based and US Generally Accepted Accounting Principles (GAAP) rules-based, and the principles-based accounting standards (PBAS) are more relevant and useful in decision-making. That is, the principles-based discourse and its recurring narrative provided a rational account and moral basis for a comparative advantage of IFRS. Originality/value—In line with the existing discourse-related accounting literature, this study focuses on the principles-based discourse and analyzes its critical roles in the process of accounting change. It also shows how the US SEC and the FASB played essential roles in the translation process that constructed the US accounting reality. Furthermore, this historical case sheds light on how local actors react to changes and shows how scandals, a historical contingency, became an impetus for accounting changes.