Co-evolution of Accounting Rules and Creative Accounting Instruments—The Case of a Rulesbased Approach to Accounting Standard Setting

Current accounting standards in the U.S., and in the U.K. of the 1980s, are sometimes characterized as rules-based. This paper examines the co-evolutionary relationship between accounting rules and creative accounting instruments under the rules-based approach. The case of financial instruments evolved from convertible bonds in the U.K. is used as an illustrative example to show that the co-evolutionary structure is the source of proliferation of complexity and diversity of accounting rules and creative accounting instruments. The proliferation of accounting rules and creative accounting instruments triggered initiatives to alter the accounting standard setting approach towards being more principles-based in the U.K. and with a decade lag in the U.S.