RSS feedsIncreasingly, it looks to have been a defining moment. In April last year an American lawyer stood up at a conference in New York and waved two books in the air.
The event was one run by the Institute of Chartered Accountants of Scotland and aimed to discuss how the concept of principles-based standards could be put into financial reporting practice. It was seen as a brave move, taking a concept which refuted the domination of lawyers in the rules-based arena that is the American corporate scene, to their home territory.
What the lawyer, Michael Young, was up to, was a practical demonstration of why the days of rules rather than principles holding sway were over. In his right hand he held a copy of the US Declaration of Independence, a slim pamphlet. In his left he held a sprawling volume which turned out to be FAS133, the American accounting standard dealing with derivatives. “The Declaration of Independence is principles-based,” he declaimed. “FAS 133 is rules-based. And, as an attorney, I’d much rather be defending the Declaration of Independence.” His point was simple. You could defend something which was principles-based by showing that it followed the principles. Try defending a decision which depended on a mass of rules and you would find yourself stumbling over an arguable transgression of a detail on page 745.
The debate rumbles on. But events in January this year suggest that the case is won. Back in New York again, it was the turn of the six major global audit firms to emphasise the case with the unveiling of what they termed a white paper on principle-based accounting standards. In an audit world still dominated by the Americans, this was extraordinary. But auditors have much to gain from throwing off the yoke of the lawyers over there.
Part of the reason is that the growing global capture of the world’s market by international financial reporting standards, is forcing change. The US market is the only major one left in the world which either doesn’t use this relatively new global reporting language, or which has not committed itself to a definite date for implementation. From a position of global domination just a few years ago, the US has moved to a position of feeling isolated in the world’s markets. “We have been struck,” said the six CEOs in the opening message of the paper, “by the breadth of support for international financial reporting standards as a single set of high-quality accounting standards that ultimately can be used around the world.” And then they made the crucial link which the world has been pressing upon the US for so long. “Stakeholders,” they said, “indicated their support for IFRS, in part, because it is more principles-based than US GAAP.”
This sudden capitulation is both a boon and a bit of a challenge for financial directors the world over. It is obviously an advantage to have the world’s largest capital market turn its attention and acceptance to a system which values the concept of economic clarity in financial reporting higher than the incomprehensible due process of lawyers.
And, if the benefits of a principles-based system do flow through, life in the finance function should become simpler. The Chairman of the International Accounting Standards Board, Sir David Tweedie, is fond of saying that his ultimate goal is to hand back accounting to the accounting profession. By this he means that if financial reporting standards can progressively become more principles-based, then the actual judgements and decision-making over what goes into company reports can be handed back to a process of dialogue between auditors and financial directors. With the principles firmly emblazoned above their desks, both the people in the finance function and the audit group will be able to concentrate on what the emerging annual figures should look like. This, it is hoped, will take away the need for specialists arguing over intricacies and turning endlessly back to the standard-setters for some sort of ruling.
On the other hand, accountants, with or without bullying lawyers down the corridor, tend to have an extraordinary ability to complicate things. And this is why the emerging global consensus over principles-based standards may be a challenge for financial directors in the long-term. There are clues in the white paper. It calls for the existing conceptual framework project being run, somewhat half-heartedly, by the IASB and FASB, the American standard-setter, to be finalised as a priority, “even at the cost of delaying other projects”.
In the past, audit firms urging standard-setters to concentrate on conceptual framework issues has always meant one thing. It is a smokescreen. It signals that the big audit firms want more leeway. They want the standard-setters to do less work on things which really limit auditors’ ability to be kind to their clients and instead spend more time working harmlessly in the cul-de-sacs of academic accounting arcana. It is, in short, a power play. And it has little to do with the professed goal of faithfully representing the economics of transactions. It has much more to do with keeping their fee-payers sweet.
