Perceptions of CPAs and CFOs about Principles-Based versus Rules-Based Accounting Standards

Although there appears to be a widespread agreement that principles-based standards are superior to rules-based standards, little has been done to test this consensus. Accordingly, recent research was done to investigate the perceptions of CPAs and CFOs in the United States. A survey was sent to a random sample of 500 CPAs who were practicing auditors from public accounting firms that have substantial publicly-traded companies as clients. The research instrument was also sent to 500 CFOs from the Fortune 1000.

The survey comprised 11 brief definitions of qualitative characteristics of financial reporting along with demographic questions. To place the respondents’ observations in context, the research focused on their views regarding whether the two regimes were likely to attain the qualitative characteristics of financial reporting included in the Conceptual Framework for Financial Reporting updated by FASB in September 2010 and the corresponding document updated by the IASB at the same time. Also included was a question on professional judgment that was derived from a white paper, “Principles- Based Accounting Standards” published by the major accounting firms in 2008.

The research found that there were no significant differences between the answers provided by auditors and the answers provided by CFOs for any of the questions. The first observation to draw from the data is that there is no consensus among CPAs that one accounting regime is better than another along all the dimensions analyzed. The second observation is that there is strong support for both regimes with respect to each concept. The third observation is that there are a few concepts where respondents thought one regime would have a very significant advantage over the other. For example, with respect to whether financial statements will allow for the use of professional judgment in considering whether the accounting representation is consistent with economic reality, nearly all (91%) found a principles-based regime to be preferable.

To learn more, read the article “CPAs’ and CFOs’ Perceptions Regarding Principles-Based Versus Rules-Based Accounting Standards” in the March 2012 issue of The CPA Journal. The research was undertaken by John McEnroe, DBA, CPA, and Mark Sullivan, PhD, CPA, both in the school of accountancy and management information systems at DePaul University, Chicago, Illinois, USA. Also, refer to the ICAS paper “Principles- Based or Rules-Based Accounting Standards: A Question of Judgement” published in 2006.

Promoting Professional Judgment by Objectives-Oriented Accounting Standards

A 2013 study “analyzes how the International Accounting Standards Board (IASB) promotes professional judgment by issuing objectives-oriented accounting standards and exposure drafts.” The focus is on the role of judgment as outlined in Phase I of the IASB 2010  Conceptual Framework, Chapter 1 - Objective of General Purpose Financial Statements and Chapter 3 - Qualitative Characteristics of Useful Financial Information.

This research discusses how the Conceptual Framework, through objectives-oriented accounting standards, encourages professional judgment as recommended by the United States Securities and Exchange Commission (SEC) in its 2003 Report, 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.

The research findings indicate that the five IFRS issued after the 2010 Conceptual Framework are objectives-based, but the eight issued before then are not.. Specifically, the objectives-based IFRS clearly stated the objective, they are based on the Framework without significant exceptions and bright-lines and they provide adequate application guidance. More significantly, a framework for judgment is provided.

The study concludes that: An increasingly complex financial environment demands accounting standards that narrow the range of professional judgments in accounting decisions. Although new accounting principles and approaches do not eliminate the necessity of judgments entirely, the IASB's process of improving transparency and comparability of financial reporting hinges on its ability to promote professional judgment. It depends on the standard setter and the practitioners. The IASB is issuing more objectives-based standards that provide a framework for judgment. Professional accountants, auditors and managers need to be cognizant of the IASB's efforts so they can cooperate in the pursuit to judgment.

The research paper is available online at International Journal of Business and Social Research (Vol 3, No 7 (2013). For more information, refer to The International Accounting Standards Board’s Progress in Promoting Judgement through Objectives-Oriented Accounting Standards by Tanja Lakovic and Jayne Fuglister, Faculty of Economics, University of Montenegro.