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January 14, 2008

Momentum builds for principles

The six largest accounting networks have released a report that endorses a single set of high-quality principles-based international accounting standards. Carolyn Canham speaks to Deloitte Global chief James Quigley and International Accounting Standards Board chair David Tweedie.

In a significant show of professional unity, the 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 TA the ultimate goal is to strengthen global capital markets and improve the effectiveness of all market players in the process. He 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, 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 suggests the framework is something that could be used by standard setters such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) as they develop and improve new and existing standards. He concedes that standard setters would 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.

IASB chair David Tweedie agrees the new paper is very similar to ones already produced by the IASB and FASB, however he welcomes it as a tool to bind the firms to a commitment to principles-based standards and a green light to press ahead.

“The beauty of this paper is there are the senior executives of the firms signing up for it – it’s not a minor thing because it means a whole new mind set,” Tweedie says.

Tweedie echoes the white paper in saying there are still some things that can “wreck” the move towards principles-based standards. “One is if people play fast and loose – if the integrity isn’t there we will have to say ‘you can not do this, you can not do that’, so that will lead to more rules,” he says.

Other potential hurdles include people within the industry asking for interpretations and guidance, and failing to defend each other in court.

Tweedie adds that it is an interesting time for the profession. “If [the move to principles-based standards] comes off, it will give the profession back to the professionals,” he says. “At the moment, there are some standards that are so complicated because people… don’t like volatility and they’ve asked for exceptions. This means the standard becomes the ownership of the expert and the average partner shies away from it because he doesn’t fully understand. That’s hopeless and that’s why we [moved towards principles-based standards] and we’re thrilled that the firms have come along and backed it.”

Quigley warns that due to the litigious nature of the US legal and regulatory system, it will take 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 judgement of preparers and auditors is not respected and is second-guessed, then they 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.

Efforts to develop such a framework are under way by a committee sponsored by the US Securities and Exchange Commission.

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; and 
  • structured in a way to allow the use of reasonable judgement.

    Source: Global Public Policy Symposium

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