US Agencies Rethinking Financial Reporting

According to the Financial Times (sorry, no free link), both the Securities and Exchange Commission and the Treasury Department are planning studies of a complete financial oversight overhaul:

The rules-based regulatory structure, built up since the 1930s, has been criticised by representatives of the financial services executives, who have called for a more flexible regulatory philosophy akin to one in the UK.

For those that done realize, the US and Europe have taken different directions toward financial controls. In our own land of individualists and rule-breakers, the approach has been an ironic reliance on rules and checklists. If you were able to mark off all the boxes, you'd be safe. The difficulty is that you have to go through all the checklists, even if they didn't really apply to your circumstances, which meant increased compliance costs.

Europe has employed a more principle-driven approach of stating what needs to happen and allowing corporations to find their own ways. It's become popular to invoke this model, particularly among many who think that it will mean an end to "needless" regulation. Personally, I think that many hope a new approach would largely free their companies from regulation, period.

While both models have their strengths and weakness, I'm not sure that the European approach will deliver American companies what they think they want. After all, it's generally easier to satisfy the letter of the law than its spirit. But if you must satisfy principles rather than checklists, aren't you essentially looking at the spirit instead of the letter? Directors and managers won't necessarily be able to say "We followed the checklist" when investors claim a violation of the principles, or spirit. I've found in life that almost every time something seems to be the solution to a problem, it almost inevitably makes things worse. Let's hope that American companies don't rue getting what they asked for.