Regulation

Wary Auditors, Clients Worry FASB’s Herz

Fearful of being second-guessed, auditors, executives, and audit-committee members are asking for more rules, the chairman of the accounting standa...
Stephen TaubJanuary 25, 2005

Financial Accounting Standards Board chairman Robert Herz told the Financial Times he is concerned that auditors as well as the companies they audit are acting too conservatively when preparing financial reports—especially given the Securities and Exchange Commission’s (SEC) endorsement of a principles-based approach.

Herz contends that practitioners are hesitant to be more aggressive because accounting maneuvers are being increasingly scrutinized by regulators, lawyers and even the media, according to the paper.

“There is clearly a fear — not only among auditors but among [company executives] and audit committees — of being second guessed,” Herz told the FT. “There seems to be a reluctance to exercise more judgment.” Further, the FASB chairman pointed out that practitioners seem to be requesting more rules, “because they want clarity and defenses against being second-guessed.”

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In 2003, the SEC issued a report urging FASB to replace complex, rules-based standards with a principles-based approach that would result in “objectives-oriented” standards. The ultimate goal of the principle-based standards was to assure that companies adhere to the spirit rather than the letter of accounting rules.

Herz reiterated FASB’s commitment to help set up an objectives-oriented reporting regime as a way to simplify current accounting standards. According to the FT, Katherine Schipper, another FASB member, added that the board was discussing some “fairly dramatic proposals” aimed at simplifying and improving its standards on financial instruments, for instance. The newspaper speculated that the proposals may focus on rules such as FAS 133, among others. FAS 133 addresses the accounting treatment of derivatives, an issue at the center of the Fannie Mae accounting scandal.