There are two types of generic accounting rules to follow. Common law, where there is a bigger focus on public records, and code law, which relies more on private accounting. These two rules are the most widely practiced rules of accounting followed worldwide.
In the United States, we follow a common law practice. Other countries include England, Australia, Canada and New Zealand (International Financial Reporting and Analysis, p. 28). Common Law is when a country’s generally accepted principles of accounting are nationalized publically. In our country, the most generalized system we use is GAAP. There is not so much an emphasis on private accounting as there is public. Through common law, civil litigation is how firms are expected to be punished for any misinformation they give. Though these firms are not punished by the government, they are still heavily monitored through their public records to ensure they are keeping the most honest and up-to-date information flowing through to their investors. The focus of common law accounting is to deter bad accounting practices. Common law has a weak correlation between the law and taxation. This differs from code law, where financial reports are tax influenced.
Common law was originated in England and branched out from there to almost twenty countries throughout colonization. Code law originated in
Some code law countries are France, Germany, Spain, Japan and Belgium (International Financial Reporting and Analysis, p. 28). The private accounting spectrum is written and regulated by the government and is punishable by criminal charges if there are any serious problems with financial statements. These countries rely more on private information than they do public, which is what separates them from common law countries. The focus of code law accounting is to widely mandate acceptable accounting behaviors.
Because accounting is held in such high esteem in common law countries, it is mostly self-regulated. There are also a number of qualifications one must make in order to enter into the field and meet even more in order to stay within the realm of accounting. Because of this, these countries can set higher accounting and auditing standards based on how the individual companies and corporations are doing. Code law countries, whose rules are written and regulated by the government, cannot set their standards as high as those who follow common law. They are known to be less powerful because there are no individual companies who are competing to be the best within the accounting industry.
These types of accounting laws are very different and regulate distinctly separate parts of the accounting world. With different mandates for each type of law come different levels of enforcement. An example of low compliance is the Asian financial crisis of the 1990’s. Because Asia was at the time ruled by individual families instead of the branch government system, it was easy for companies whose leaders were close to the royal families to get away with not having to comply with the rules of accounting practiced. Investors in these companies were fooled into believing that the companies they were investing in were in compliance with financial laws when they, in fact, weren’t and therefore were severely hurt financially when the actual financial statements were revealed.
A more recent example happened in the United States in 2009. Bernie Madoff and his accountant David Friehling were found guilty of investment fraud. Madoff’s company was in the process of liquidating when they were found of owing an estimated $64.8 billion to his clients, money he did not have because the majority of his worth was in assets. He and his accountant were scheming for years, but because his firm was not more closely monitored, they got away with what is known as the greatest Ponzi scheme in the history of Wall Street.
Economic ties between countries also have a large influence on what system of accounting a country chooses to use. Canada, for example, uses common law both because of its geographic location to the United States but also because the U.S provides so many exports to Canada. Multiple Canadian firms also operate within our stock exchange (International Accounting; A User Perspective p. 8).
My opinion, through my research, is that although there is more room for error on the federal standpoint, a common law system of accounting is a better option to use over code law. Even though the rules are not as laid out as they are in a code law country, common law is more peer reviewed, and therefore there is less room for error. The customer will get their information from a company’s public records and make a decision based on that. There is not a lot of companies who are willing to risk their reputation by giving false public information because it will be reviewed by competing companies and will come out. I would much prefer to work and live in a common law system as opposed to a code law system of accounting.