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.