- obsession with principles over rules

The current thinking of the financial world is ‘principles’ is preferred over ‘rules’. The regulators and accounting watchdogs believe that rules-based reporting regime has failed us. They are saying that rules are mere box-ticking exercise and crooks can find loopholes to circumvent them. So, don’t just follow the books you should also dig into your conscience!

Surely, no one would want to challenge the use of principles in our transactions. It gives one a sense of righteousness, morality and conscience. It cuts across a person’s religious belief, education and upbringing. But, one man’s principle may be quite different from another man’s interpretation. A man would steal food if he has no food to eat, a player would foul another to win a game; a man’s principle would be severely tested if the stake is high.

Regulators blamed it on the lack of principles which led to the collapse of some of the world’s largest companies in recent years and the current financial crisis brought about by the US subprime lending. If anything, there should be more and clearer rules in accounting and reporting of financial transactions, especially in less understood but highly speculative financial instruments such as derivatives and hedge funds. Financial institutions that trade with such speculative financial instruments should disclose more information e.g. the volume and content of their trading so as to enhance transparency. If there were clearer, transparent and accountable reporting rules that permeate the whole value chain of an underlying financial instrument the financial problems as we witnessed today might have been detected or reduced.

They say that rules are more complex to apply than principles. Are we then saying principles are easier to apply? One person’s beliefs may be very different from another. Rules are simpler to follow than principles. Rules demarcate a clear line between acceptable and unacceptable behaviour. Rules also reduce discretion on the part of individual decision makers.

Rules and principles should be promoted with equal prominence. Many rules are in fact born out of principles. It is unthinkable to have one without the other.