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In what can only be described as a dramatic about-face, the Financial Accounting Standards Board (FASB) said it will discuss whether to take a principles-based approach to accounting. Some members of the board believe such a move might improve the quality and transparency of financial reporting and affect development of future standards.
This approach relies more on broadly applied principles and less on specific, detailed rules.
FASB is seeking public comment on the proposal by January 3, 2003, and will hold a public roundtable discussion on the topic on December 16.
Linda A. MacDonald, FASB project manager, explained that some constituents have expressed concern that detailed accounting standards are more difficult to use and costly to implement. Still others believe that detailed rules allow for structuring transactions that meet the literal requirements of the rules -- but ignore the intent and spirit of the standards.
FASB and standards-setters at Europe's International Accounting Standards Board (IASB) have long differed over which of the two approaches is superior. The IASB has promulgated a principals-based system, and to date, Europe has been relatively free of the corporate scandals that have roiled the U.S. markets.
As CFO.com reported last month, FASB and the IASB met on Sept. 18 to discuss harmonizing accounting standards by 2005. At the meeting, the two sides agreed to look at 15 different accounting treatments, and to settle on one approach in each of those 15 areas. At the time, Sir David Tweedie, chairman of the IASB, reportedly said: "What has happened here is quite historic. This is a public commitment that we will try to get rid of those differences."
Yesterday, Robert Herz, FASB chairman, insisted that the American board is committed solely to improving U.S. financial accounting standards "Many believe that moving to broader, more principles-based accounting standards such as those used in other parts of the world would facilitate better reporting in the United States," Herz noted.
Not all finance managers cleave to that opinion, however. As Herz himself noted: "[Some] are concerned that a principles-based approach could reduce the comparability of financial information and leave too much room for judgment by companies and auditors."
FASB said it needs more information before it undertakes initiatives to adopt the approach. Indeed, the setting-board concedes that adoption of a principles-based approach would require changes in the mind-set of all participants in the U.S. financial accounting and reporting process.
While a switch to principles-based accounting would be a real switch for FASB, the board has little choice but to consider such a move. The recently enacted Sarbanes-Oxley Act requires the SEC to investigate the feasibility of implementing a more principles-based approach to accounting in the U.S. FASB said it worked closely with the Commission in preparing this new proposal.
A number of accounting-watchers were less than enthusiastic about the news from FASB.
"It runs the risk that different firms will start accounting for the same type of transaction in different ways," Ed Ketz, an associate professor of accounting at Pennsylvania State University, told the Associated Press.
An IASB-type system would also potentially provide wide latitude for auditors to make their own interpretations of specific rules and practices.
Lynn Turner, an accounting professor at Colorado State University and the SEC's former chief accountant, told the wire service: "I don't think it's an either-or answer. The bottom line is anyone who thinks a broad-based principle fixes the problem, they're dreaming."
(Editor's note: Is governance in Europe better than governance in the U.S? Should American companies adopt some of the governance practices championed by European regulators and executives? Read "Transatlantic Answers," a CFO.com exclusive.)
Ex-Manugistics Executive Sentenced
Another finance executive is going to jail.
Barry L. Saffer, a former director of financial planning and analysis with Manugistics Group, Inc. was sentenced to 24 months in jail for illegal insider trading.
On July 2, Saffer pleaded guilty to 10 counts of securities fraud.
The SEC said Saffer used his position at Manugistics to obtain nonpublic information and traded in advance of company news announcements on a number of occasions. The illegal trades were made over a three-year period from Jan. 1999 through March 2002.
The Commission also filed a related civil action against Saffer alleging that he violated the antifraud provisions of the federal securities laws by engaging in illegal insider trading.
The SEC is seeking an injunction, disgorgement and a penalty.
Is Martha Next?
Speaking of illegal insider trading: it looks like Martha Stewart could be the next high-profile executive to be charged with using non-public information to trade shares of stock.
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