SEC: Adopt "Objectives-Oriented" US Accounting Approach

July 28, 2003 (PLANSPONSOR.com) - The US accounting industry should moved to an "objectives-oriented" approach to corporate accounting and drop the current rules-based system, which many claim has been too easily manipulated, according to a new report.

US Securities and Exchange Commission (SEC) Chairman William Donaldson said the new approach should give investors clearer information about a company’s financial results and position and help keep executives from distorting their earnings data while still following the rules, Dow Jones reported.

Congress ordered the SEC to study “principle-based” accounting as part of the sweeping corporate accounting reform bill adopted last summer.The spate of corporate accounting scandals at Enron Corp. and elsewhere were “a call for action” to revisit US standards, the SEC staff report said.

The SEC staff said the new system needed to clearly state the objective of the accounting standard and provide enough detail so that accountants can apply it consistently. Exceptions from accounting standards should be rare, the SEC staff said.US accounting rules are set by the Financial Accounting Standards Board (FASB), a private, Connecticut-based organization. The FASB sought comment on principle-based accounting last fall and already has begun moving in that direction, which will bring the US more in line with Europe and international standards (See  FASB Proposes Principle-Based Rules ).

International standards already rely on principle-based accounting rather than the rules-based system reflected in US generally accepted accounting principles (GAAP).

US accounting rules can “reward those willing to engineer their way around the intent of standards,” the SEC staff report acknowledged, leading to financial reports that stress compliance over meaningful communication. At the other extreme, the SEC staff said a principles-based approach could give companies and accountants too much leeway and too little structure, resulting in inconsistent treatment that would make it hard to compare financial results at different companies. “We believe that neither US GAAP nor international accounting standards, as currently comprised, are representative of the optimum type of principles-based standards,” the SEC staff said.

As an alternative, the SEC staff endorsed an “objectives-oriented” approach that would set broad goals backed by enough detail to produce meaningful, informative financial statements. Overall, the benefits of that approach should exceed costs, although neither would be easy to calculate, the SEC staff said.

More information about the report is at  http://www.sec.gov/news/press/2003-86.htm  while the text of the report is at

http://www.sec.gov/news/studies/principlesbasedstand.htm .

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