The six largest accounting networks released a report that
endorses a single set of high-quality principles-based
international accounting standards. Carolyn Canham
questions Deloitte Global chief James Quigley about the report and
where to go from here.

In a significant show of professional unity, leaders of the
world’s largest accountancy networks unanimously supported a move
towards a single set of principles-based international accounting
standards at the fourth Global Public Policy Symposium in New York
this month.

The global chief executives of Deloitte, PricewaterhouseCoopers,
Ernst & Young, KPMG, Grant Thornton and BDO International
issued the report ‘Global Dialogue with Capital Market
Stakeholders’ based on the outcomes from a series of recent
stakeholder roundtables in financial centres across the

The influential Big Six, which audit the majority of listed
companies worldwide, hope the white paper will stimulate further
discussion between accountancy networks, investor groups, standard
setters and regulators. It summarises the round-table discussion
into four categories: global convergence – the need for consistency
in financial reporting; audit quality – the need for continuous
improvement and greater consistency; prevention and detection – a
two-pronged approach to fraud; and the future of business

Strong consensus

Deloitte Global chief executive James Quigley tells IAB
the ultimate goal is to strengthen global capital markets and
improve the effectiveness of all market players in the

Quigley says the highlight of the report for him was the strong
consensus for a high-quality globally accepted set of accounting
standards. Key themes that emerged were the preference for
principles-based accounting, the need for education and training,
the unique needs of SMEs and sovereignty.

In order to advance the dialogue on principles-based standards, the
chief executives released, in conjunction with the global dialogue
paper, another report that proposes a framework to use when
developing principles-based standards.

Quigley says there is momentum towards more principles-based
standards globally, even in the traditionally rules-heavy US.
“[There is] the feeling that the current rules-based system that
exists in the US has created some complexity that is beyond the
ability to effectively manage and so the need for change and the
voices for change in the US are starting to become consistent,”
Quigley says.

Quigley stresses that there never has been or will be a purely
principles-based or rules-based system. “Every accounting standard
will fit someplace on that spectrum and the challenge for standard
setters is to be able to find a sweet spot,” he says.

Give it time

Due to the litigious nature of the US legal and regulatory system,
the Deloitte chief says it will take a significant period of time
for the country to adopt more principles-based standards. “If the
US were to commit to a timetable or a blueprint to adopt IFRS, the
amount of time that would be required to make all the changes
needed in the regulatory environments – make changes that would be
needed in the capabilities and competencies inside of the preparer
community and the auditor community – those things would take
multiple years. That’s why a change isn’t like turning on the light
switch,” he says. “I believe that principles-based standards, in
order for them to be effectively implemented, will require the
creation of a judgement framework that would need to be sanctioned
by the regulator and then respected by the regulator.”

He explains that if the judgements of preparers and auditors are
not respected and second-guessed, then preparers and auditors will
ask for rules. Standard setters will then provide rules, “and you
have that process repeat itself many times over, and over many
years you end up with the complex environment that we have in the
US”, Quigley explains.

The next step

Efforts to develop such a framework are already underway by a US
Securities and Exchange Commission sponsored committee. “I would
like to see those discussions also continue with other regulators.
I think it’s a very significant and important development,” Quigley

Quigley suggests the framework is something that could be used by
standard setters such as the International Accounting Standards
Board and the Financial Accounting Standards Board as they develop
and improve new and existing standards.

He concedes that standard setters might say the white paper
articulates what they have already stated as their target. However,
he questions whether any individual standard issued recently meets
all six criteria. Quigley adds: “I believe the white paper on
principles-based standards and those six characteristics can be an
important litmus test for any future standard.”

The white paper states the next step should be to test any agreed
proposals using a practical example and see whether the framework
is useful in designing principles-based standards and whether
principles-based standards can be used when accounting for complex
business transactions. “The practical example should encompass a
full actual standard-setting project. The effort will not be easy,
but if successful, it would empower standard setters to make
meaningful progress on the use of principles-based standards,” the
paper states.

Setting guidelines

The Big Six accountancy networks believe principles-based standards
should be:

  • A faithful presentation of economic reality
  • Responsive to users’ needs for clarity and transparency
  • Consistent with a clear conceptual framework
  • Based on an appropriately-defined scope that addresses a broad
    area of accounting
  • Written in clear, concise and plain language
  • Allow for the use of reasonable judgment.

    Source: Global Public Policy Symposium