Regulators say they’re committed to creating a less complex, more principled system of financial reporting, but they need more cooperation from accountants and preparers. Accountants, on the other hand, say they’re pleased with regulators’ interest in simplifying accounting rules, but need some cues from regulators that they’ll not be punished in the enforcement arena for exercising reasonable judgment.

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Prepared Remarks By PCAOB Board Member Charles Niemeier

Remarks By FASB Chairman Robert Herz

Remarks By SEC Chairman Christopher Cox

Remarks By SEC Acting Chief Accountant Scott Taub

Noll

“That’s the circular nature of this topic,” said Daniel J. Noll, director of accounting standards for the American Institute of Certified Public Accountants. “CPAs have a centuries-old tradition of exercising professional judgment.” He says accountants and preparers of financial statements would be less demanding of guidance and interpretations, “if we could get back to an environment that lends itself to the use of judgment.”

Leaders of the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Public Company Accounting Oversight Board addressed an AICPA conference last week outlining their vision for a simpler system of accounting that will be more transparent to investors and less prone to abuse.

Cox

In a videotaped address, SEC Chairman Christopher Cox said the need is obvious. “The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules,” he said. “Criminal conduct could be concealed in a ticket of detail.”

That detail is the “cumulative product of pressure from different constituencies,” he said, which once was a strength for U.S. accounting standards but over time became instead a weakness. “Convolution is now reducing its usefulness,” Cox said.

FASB Chairman Robert Herz was even more direct in his comments. “I believe it is time to stop observing the problem and start thinking about how to solve these issues,” he said. Herz said for its part, FASB is reviewing existing accounting standards to identify major areas where complex, outdated rules fail to provide relevant, transparent financial information. The board also is codifying accounting literature to better organize GAAP and provide a roadmap for simplifying it.

In addition, FASB is streamlining rulemaking under its authority, developing new standards that are less prescriptive, and overhauling its conceptual framework to provide the foundation for more principles-based accounting standards in the future. Separately, Herz and other FASB members have said the board is resisting as much as possible demands for detailed guidance and interpretations on existing rules.

Reasonable Diversity

Herz

Herz added it will take a coordinated effort by FASB, SEC and PCAOB to change the rules, but also a change in culture and behavior on the part of preparers and auditors. He acknowledged the fear of second-guessing. “Some believe that changes in the legal, regulatory and enforcement frameworks surrounding financial reporting are prerequisites for any move to a more principles-based or objectives-oriented system,” he said. “Principles-based standards, it is argued, cannot succeed without more principles-based regulatory review and enforcement and without a more principles-based legal framework around financial reporting.”

SEC’s acting chief accountant Scott Taub also acknowledged the SEC’s role in creating the current complexity. “Because of actions we have taken in the past, we have been accused of being unwilling to accept judgments that differ from our own, of relying on bright-line rules, including some that don’t exist in the literature, and of being unwilling to accept reasonable diversity in practice,” he said. “I could tell you, over and over again, that we don’t as matter of policy, do any of those things.” Perception, he said, has led to requests for details.

Taub said the environment is already shifting away from stretching the rules to justifying aggressive accounting treatment. “I was all too familiar with the question from public company registrants that went, ‘Where does it say we can’t do this?’” Taub said. Instead, he now hears more often, “Are we sure that this treatment is all right?”

Taub and PCAOB member Charles Niemeier called on accountants to do what they can within existing rules and standards to simply be more straightforward with investors. “I propose to you that there are things that we can do immediately to start affecting positive change,” Niemeier said. “It requires getting back to basics in how we view financial reporting. What good is financial reporting if it is not useful to the financial statement reader? … There is a simple truth that there is no rule against doing the right thing, and often we know what the right thing to do is. And in no stretch of one’s imagination is the absence of a rule ever a good excuse for doing the wrong thing.”

Noll said it will take time to shift not only the rules, but also the culture of reporting. “There is no magic bullet to this problem,” he said. “It requires a change of mindset that’s developed over many years.”

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