Striking the right

Finding the right balance between rules-based and
principles-based standards is the key to the current accounting
standards debate. Nicholas Moody attended a discussion on the topic
in Brussels this month and spoke to two leaders about their
thoughts on the matter

European Financial Reporting Advisory Group (EFRAG) technical
expert group chairman Stig Enevoldsen says the choice between
rules-based and principles-based standards does not need to be
mutually exclusive.
“I don’t think it’s an either/or [question], life is not black and
white, it’s much more complicated than a simple argument. I think
it’s more a movement in one direction or the other,” he says.

Enevoldsen made the comments following a panel discussion on the
issue organised by the Institute of Chartered Accountants of
Scotland and the European Federation of Accountants in Brussels
this month.

Paul Koster, chairman of the financial arm of the Committee of
European Securities Regulators (CESR-Fin) and fellow panel member
at the Brussels discussion, says convergence is an intellectually
charged debate that does not have a finite conclusion. “I think the
discussion has not ended. I think there will be some convergence
where countries that are really rules based will slowly shift
toward a broader guideline approach and countries that are really
principles based will discover that they need some more detail,” he

Direction of debate

Koster, who is also a board member on the Authority for the
Financial Markets in the Netherlands, says he does not know where
the debate is heading. “We need principles but the truth is that
most like some rules. So as soon as a regulator brings out some new
guidelines and it is on a broad term, people can have their own
interpretation and judgement. Nevertheless they always ask, ‘can
you give us some more guidance?’” Koster says.

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He adds that “true and fair” is the overall principle that should
be followed with IFRS. “That is a very good principle but as soon
as you get a standard, with new content, there will be moments
where you might say ‘well we are not very happy with the way this
is going’. And so you might slowly and surely see additional
explanations and interpretations being given,” he says.

Koster sees merit in a principles-based system with guidance rules.
“The problem with principles is you have [a very wide] interpretation rule and one of the players might find themeless on
the far left of the spectrum and the other on the far right. I
still think that there are very good elements to the US system and
they shouldn’t just deny the benefits of their approach. London has
had enormous success; everyone says it is principle based. There
are however rumours at times that some are also wondering in the UK
if there’s not too broad a concept that could be more specific,” he

Enevoldsen has a slightly different view and approves of a
principles-based approach with guidance at a limited level. “I
think in some respects US GAAP has too many details, too much
guidance and the International Accounting Standards Board [IASB] is
moving in that direction in my mind and they need to pull back. But
that’s just one of the issues, to me the important issue is to get
good financial reporting and robust financial statements,” he

The move toward the convergence of international accounting
standards is also being helped by the “very fruitful” relationship
with senior members of the US Securities and Exchange Commission
(SEC), Koster tells TA.

“The general mood is that we are in a constructive episode and it
is simply having one voice on accounting in Europe for the first
time that has helped a great deal, making us a more critical
partner vis à vis the US. This is also happening because the US is
looking around for what they can do to make their markets the place
to be. So I think our interests in the end are converging. This
will be a far more important path with China, India, Russia and the
Middle East coming up as significant financial centres since we
will actually be collaborating toward a goal that will help all
companies list in their territory,” says Koster.

Shift towards principles

Enevoldsen also sees the SEC top brass moving toward using more
principles-based regulations although he is sceptical about how
easy it will be to implement the changes. “I think it’s genuine at
the SEC. They are very good thinkers, people with genuine
intentions of doing the right thing for investors in the US. But
whether it results in a change is more difficult because you don’t
move your environment so quickly. I’m more hesitant about [their] move into a principles-based direction because it’s a lot easier to
say ‘well we have ticked every box and therefore it is right’. It
is much more difficult to change attitudes,” he says.

Both regulators emphasise the intellectual, almost esoteric, nature
of the principles versus rules debate and Enevoldsen favours
conducting it in the background. “I think it’s a fascinating,
slightly artificial, debate and not the everyday life we deal with,
not even when you’re talking about accounting standards,”
Enevoldsen tells TA. “I think it is good having the debate
moving in the background to ensure that it gets to the IASB. It’s
interesting how much influence the debate has on the practical

Baker Tilly International president Geoff Barnes is also wary of
pushing the rules- versus principles-based standards discussions
too far into the public forum.

Barnes, who was also on the Brussels panel with Enevoldsen and
Koster, warns “inconsistency [in deciding which approach is best] can damage the reputation of our profession”. It is vital to have a
consistent global view about which path to take on the issue, he