The Deloitte Fireside Chats are made possible through a partnership between Deloitte LLP and the SEC Historical Society. As noted in the previous posting (June 24, 2012), an interactive conversation on October 22, 2009 explored the role of professional judgment in accounting and auditing. On October 28, 2009, a further interactive conversation explored the issues surrounding principles versus rules-based accounting and auditing standards.
Patricia
Fairfield, Associate Professor, McDonough School of Business, Georgetown
University served as moderator. The two panellists were: Scott A. Taub, Managing Director,
Financial Reporting Advisors, LLC and former Acting and Deputy Chief
Accountant, SEC Office of the Chief Accountant; and Robert
Kueppers, Deputy CEO of Deloitte and a trustee of the SEC Historical
Society.
The discussion addressed a number of issues. ...What is meant
by principles-based and rules-based accounting standards? What are the characteristics
of ideal accounting standards? How can ideal standards be achieved? When we
talk about principles versus rules, do we have any idea what we are talking
about? The reality is that preparers, auditors, investors and regulators all
have different needs but they would like to see the same economic substance
portrayed in a way that is most useful and most transparent. There’s a lot at
stake in this debate.
One of the seminal events in the debate was the Study Pursuant
to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the
United States Financial Reporting System of a Principles-Based Accounting
System. According to that Study, imperfections exist when standards are
established on either a rules-based or a principles-only basis. "Principles-only
standards may present enforcement difficulties because they provide little guidance
or structure for exercising professional judgment by preparers and auditors.
Rules-based standards often provide a vehicle for circumventing the intention
of the standard. As a result of our study, the staff recommends that those
involved in the standard-setting process more consistently develop standards on
a principles-based or objectives-oriented basis."
In order to have a true principles-based accounting system,
it isn’t just accounting standards that need to be written differently, but
those applying the standards need to be thinking differently. There are
implications for all parts of the financial reporting system, not just the
writer of accounting standards. The term “objectives-based” or
“objectives-oriented” recognizes that everybody has different views of what
“principles-based” means. For example, a standard would set out the principles or
objectives that the accounting for the particular item in the scope of that
transaction is supposed to be looking towards. Then, those applying the standard
would be charged with finding a method of accounting that is consistent with
those objectives and principles.
...Yes, there might be implementation guidance but
the purpose of the implementation guidance is to illustrate the principles and
objectives, not to address specific fact patterns. An optimum amount of
implementation guidance is going to require more judgment, more civil
interchange with clients about what’s the best accounting and what’s the right
answer. In this regard, those who look at the potential of a professional
judgment framework as a panacea and those that look at it as a trap are
misunderstanding the purpose of the judgment framework. The purpose is to get
to better accounting answers, not to mandate a way to do
things. It’s to help people who are applying accounting standards to make those
judgments in an intelligent way.
To learn more about this debate, refer to the “Deloitte
Fireside Chat – Part II: Exploring Principles vs. Rules-Based Accounting and
Auditing Standards (October 28, 2009)” available as an Edited
Transcript and as an Audio
Recording on the SEC Historical
Society website. Also, refer to the August 2011 postings on SEC Views on a Framework for Professional Judgment – Part 1, Part 2 and Part 3.
