The Institute of Chartered Accountants of Scotland will tell high-powered US financiers at a conference in New York that individual judgment should play a bigger role than strict adherence to a rule book.
Ah, this old classic. Once again the rules-based US system is coming under attack by external sources, this time from Scottish accountants enjoying their visit to the Statue of Liberty and Times Square with a sharp admonishment of the US accounting hegemony post Sarbanes-Oxley.
The debate over principles and rules goes to the heart of the profession as it begs questions about the type of training given and the way that accountants interpret accounts.
“We want to make accounts more accessible and we want a greater place for judgment and common sense in the way that opinion is given on the financial position of a company.”
Canadian GAAP is principles-based. International accounting standards are principles-based. US GAAP is the exception to the rule (no pun intended). Did rules prevent Enron from happening? No. Will they prevent something like it from happening again? Of course not.
Crooks are crooks regardless, and audits are not designed to detect fraud. Management fraud, like the kind at Enron, is even tougher because management can override the internal controls that are the focus of Sarbanes-Oxley!
Yes, there’s something to be said for principles. Principles allow greater judgment, which in turn allow auditors to get their way when management attempts to put an overly rosy glow on their financial reporting. If there are rules, then you can structure transactions to be just within those rules, even if the spirit of the deal is clearly out of bounds. Judgment, and principles-based accounting standards are really the only way to address this concern.
4 responses so far ↓
1 Dennis H // Apr 7, 2007 at 5:53 am
Meil — if you trace the history of many of the US scandals, it is possible to argue that they came about because of the rules system. Or rather the super smart asses that thought they could find a way around them.
2 Neil // Apr 7, 2007 at 3:11 pm
Cennis, I completely agree with you. As I was saying, accounting based on principles allows auditors to make sure the transaction/balance reflects substance, rather than form, which could and often is tailored to meet the rules only.
3 James // Apr 18, 2007 at 11:47 am
There was no need for the line: ‘enjoying their visit to the Statue of Liberty and Times Square’ as there was no mention of such visits in the Scotsman article. It sounds slightly patronising. I’ll remind you that ICAS is the oldest professional accountancy body in world and Scottish accountants have historically made a huge contribution to the financial services industry in North America!
4 Neil // Apr 18, 2007 at 9:31 pm
First of all, if they visited New York without seeing those landmarks, it’s their loss.
Second, if you’d bothered to read the rest of the post and indeed any of my other posts on this blog about rules vs. principles, you’d know I’m firmly behind principles.
Third, in case you hadn’t noticed I’m of Scottish heritage myself.
Thanks for the reminder — when I was writing the article I was thinking something along the lines of the Scots being the first chartered accountants or something like that, but a quick search through Wikipedia turned up nothing so I ignored my hunch.
Thanks for commenting James!
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