Current Views on Principles versus Rules

The Institute of Chartered Accountants of Scotland (ICAS) published the research report Principles not Rules: A Question of Judgement in April 2006. Five years on, the ICAS hosted a conference in London on December 8, 2011 to debate the issues. In preparation for this event, a survey was issued to 4,965 ICAS members who had expressed an interest in corporate accounting and reporting. Replies were received from 335 members, a 7% response rate.

Survey findings show that there is strong support for a principles-based framework for financial reporting, with nearly 92% expressing a preference for principles with additional guidance. When asked where IFRS is currently positioned on the continuum of principles versus rules, 16% said it is very rules dominated and 56% said it is mainly rules. Compared to the situation five years ago, 67% said IFRS is now more weighted towards rules, 15% think there is no change and 18% think it is more weighted towards principles.

Survey respondents overwhelmingly believe that the impact of the financial crisis and the outstanding decision on US convergence will lead to more rules-based accounting standards in the future. On the positive side, most respondents believe that both preparers (89%) and auditors (84%) are capable of operating within a principles-based framework. The survey asked participants to rate 17 suggested barriers to principles-based accounting standards. The accompanying two exhibits show the five items that were rated the most significant barriers and the five items that were rated the least significant barriers.

 

Education and professional development of accountants are seen as crucial, as are strong ethical guidelines. In addition, the need for a change in mindset by regulators is seen as essential given that there may be a range of acceptable outcomes when professional judgment is exercised. Furthermore, there is a need for guidance to help put principles-based standards into operation, including the use of case studies to demonstrate the application of principles.

Overall, the survey results suggest that there is a need to ensure judgment remains the cornerstone of the accounting profession and financial reporting. For more information, read the research article “Principles or Rules?” in The CA Magazine, December 2011 (Volume 115, Number 1265), pages 90-91. For details, contact Michelle Crickett, ICAS Director of Research.

About the AICPA Ethics Codification Project

The American Institute of Certified Public Accountants (AICPA) Professional Ethics Executive Committee (PEEC) is amending the ethics standards to improve the AICPA Code of Professional Conduct (Code). The objective of the Ethics Codification Project is to help members in the practice of public accounting, in business and others apply the rules and reach correct conclusions more easily and intuitively.

To achieve this objective, PEEC is restructuring the Code into several parts, each organized by topic, editing the Code using consistent drafting and style conventions, and incorporating a conceptual framework. Certain Code provisions will be changed to reflect the “conceptual framework” approach (also known as the “threats and safeguards” approach). Where applicable, the existing non-authoritative guidance will be referenced to the relevant topic. The restructured Code is being exposed for public comment (see comment letters received to date). Before final adoption, the PEEC will pilot test the restructured Code with a group of users.

For additional information, read the AICPA Ethics Codification Project Briefing Paper issued in November 2010 and see the Draft Estimated Timeline and Key Strategic Goals As of 4/2/2012. Also, refer to the January 31, 2012 posting It’s Time for Principles-Based Accounting Ethics.

Leveraging Change – The New Pillars of Accounting Education

According to Tim Forristal, CA (Vice President, Education at the Canadian Institute of Chartered Accountants), “Ours is a time of incredible change in the accounting world. Within a few short years, a new, multi GAAP environment has emerged, with the adoption of IFRS, new accounting standards for private enterprises, and the evolution of not for profit standards. Thus it has never been more important for the accounting profession and accounting and business educators to work together to determine how best to prepare tomorrow’s accountants.”


In November 2010, the Canadian Institute of Chartered Accountants (CICA) partnered with the University of Toronto to respond to this challenge. The result was Leveraging Change – The New Pillars of Accounting Education, a one-day symposium during which leading academics from Canada, the United States, and the United Kingdom explored the new pillars of accounting education along with 100 delegates from across the country.

The five new pillars were identified for the symposium as: (1) accounting principles and concepts; (2) ethical decision-making; (3) professional and personal attributes; (4) professional judgment; and (5) integration. The Pillars are not based on a formal research process but on an extended dialogue among the CICA, the University of Toronto and other interested academics. The Pillars re-position and re-emphasize areas that have long been of interest to educators and to the accounting profession alike.

The objective of the Symposium is to begin the process of rethinking accounting education by articulating the questions that accounting educators need to ask. During the Symposium, 15 thought papers were presented. Those papers raise the questions eloquently and so begin this important discussion. For more information, visit the CICA’s newly redesigned website section on Supporting CA academics. Also, refer to the blog post on October 11, 2011, Should Professional Judgment be a Pillar of Accounting Education?

Code of Ethics for Professional Accountants – proposals to address conflicts of interest

In December 2011, IFAC's International Ethics Standards Board for Accountants (IESBA) issued a 26-page exposure draft called Proposed Changes to the Code of Ethics for Professional Accountants Addressing Conflicts of Interest. Comments were requested by March 31, 2012. As of April 10, 2012, there were 47 Submitted Comment Letters. The exposure draft proposed changes to various sections in the Code of Ethics for ProfessionalAccountants (the Code) related to provisions addressing conflicts of interest. The aim is to provide more comprehensive guidance for identifying, evaluating and managing conflicts of interest.

The Code contains two sections that address conflicts of interest, Section 220 for professional accountants in public practice and Section 310 for professional accountants in business. Section 220 states that a professional accountant shall take reasonable steps to identify circumstances that could pose a conflict of interest, and that such circumstances may create threats to compliance with the fundamental principles. The section also states that a professional accountant shall evaluate the significance of threats and apply safeguards to eliminate them or reduce them to an acceptable level. Potential safeguards are provided in the section and it is stated that, depending on the circumstances giving rise to the conflict, obtaining consent from all relevant parties is generally necessary. If threats to the fundamental principles cannot be eliminated or reduced to an acceptable level or consent is refused by the client, the professional accountant shall not accept a specific engagement or shall resign from one or more conflicting engagements.

Section 310 of the Code describes a professional accountant’s responsibility to an employing organization and professional obligations to comply with the fundamental principles. Certain examples are provided of where these two requirements might be in conflict and certain pressures a professional accountant in business may face. The section provides examples of safeguards that may be applied to reduce the threats to the fundamental principles that might arise from a conflict of interest.

Failure to identify and address conflicts of interest on a timely basis may result in an accountant having to withdraw from an arrangement at a point in time where the affected parties have insufficient time to effect an orderly transition to an alternative service provider.

Doing the Right Thing…When Tax Ethics Get Murky

An AICPA Insights article called “Doing the Right Thing…When Tax Ethics Get Murky” was recently posted by Edward S. Karl, CPA, Vice President of Taxation, American Institute of Certified Public Accountants (AICPA). The article states that he often gets phone calls from members who are troubled by a professional ethics issue. “Ed, I have a conflict with a client; I don’t trust him.” Or, “I just engaged with a new client and I suspect the old accountant of doing something wrong; should I turn her in?” The scenarios change but in the end, they always ask: “What should I do?” He always says: “I can’t tell you what to do!” It comes down to a matter of ethics. How do you tell someone how to behave?

According to the article, Mr. Karl states that: “Over the years, while teaching classes on subjects like the AICPA’s enforceable tax ethics, the Statements on Standards for Tax Services, or the Internal Revenue Services’ Circular 230, I often ask the participants to define ethics.  “Guided by a code of conduct,”  “acting with integrity,” “having a moral code,” “moral principles that govern a person’s behavior,” or “living your life with high values” are examples of what I’ve heard.” The definition that resonates best is “doing the right thing.”

He goes on to say: “that’s why I tell people I can’t tell them what to do; within the framework of the actual ethical guidance, “doing the right thing” for me may not be the right thing for someone else. Now, I don’t leave people hanging; I give them information about the rules, for example, the SSTSs and the Code of Conduct, ask them questions, suggest various alternatives, and try to help them formulate an answer that makes sense for them. It’s still not easy. What do you do when the ethical rules say one thing but your conscience says another?”