New York (Nov. 20, 2002) -- A move to principle-based accounting standards will require nothing short of a huge environmental shift as well as a commitment from several factions, panelists said during a discussion on business ethics.
The Securities and Exchange Commission, auditors and preparers, and the legal profession all have to be on board to make the much-discussed shift toward principle-based accounting standards a reality, said Elizabeth Fender, director of corporate governance at TIAA-CREF. Fender's remarks were made during a panel discussion on ethics in business at Fordham University.
"The move toward principle-based rules sounds good, but from the perspective of writing accounting standards, the problem is that you get pressure from a number of constituencies to provide more guidance. That's how you end with all of these pages of exceptions," said Fender. She previously served on the staff of the Financial Accounting Standards Board for nine years.
Panelist Sam Ranzilla, partner-in-charge of the SEC group at KPMG, noted three reasons for the complexity of the current standards. "Because of the litigious nature of our society, preparers and auditors want particular rules to stand by," he said. "Second, the SEC is a second guesser. They make their own interpretation of GAAP. The third reason is that the vast majority of complex standards are written to eliminate volatility in the income statement."
"To move to principle-based standards, we have to accept volatility in the income statement, but the marketplace has rewarded companies that take the volatility out of the income statement," Ranzilla said.
In addition, while she said she would welcome broader standards, Fender noted that they would "leave the door open for those with intent to deceive."
-- Melissa Klein
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