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April 30, 2008

Big Six back principles-based standards

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 world.

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 reporting.

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 process.

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 says.

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

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