A Road to Hell?
As it stands now, many CFOs fear that principles-based accounting would quickly lead to court. “The big concern is that we make a legitimate judgment based on the facts as we understand them, in the spirit of trying to comply, and that plaintiffs’ attorneys come along later with an expert accountant who says, ‘I wouldn’t have done it that way,’ and aha! — lawsuit! — several billion dollars, please,” says Rickard.
Massive shareholder lawsuits were a concern for 36 percent of CFOs who oppose ditching rules, according to CFO’s survey, and regulators are sympathetic. “There are institutional and behavioral issues, and they’re much broader than FASB or even the SEC,” says Herz, citing “the focus on short-term earnings, and the whole kabuki dance around quarterly guidance.”
Other obstacles abound. It’s not clear, for instance, who should take the plunge first — or if anyone can take that step alone. “FASB can’t keep coming up with answers for everything,” says Dennis Beresford, the Board’s chairman from 1987 to 1997 and now an accounting professor at the University of Georgia’s business school.
The biggest source of new guidance in the past few years has taken the form of FASB staff positions. Since 2003, some 40 such documents have been issued, including 17 in 2005 alone. Many of them, says Beresford, are so narrow that “it’s hard to even understand the title, let alone how to apply it.” And nearly everyone agrees that some are superfluous. The broader fundamental FASB standards also show little evidence of a tight rein on rules. The business-combinations draft, at a hefty 236 electronic pages, is one example of the continued love affair with rules, says FEI’s Cunningham.
FASB’s Herz argues that the Board is only responding to the requests of neurotic auditors and CFOs, as well as references from the SEC staff. “It’s not usually to our liking, but we’ve had to — I’d say clarify, but really, it’s tell — people that yes, they can do this in this commonsense area, because they fear if they don’t have it in the accounting literature, they’ll be second-guessed,” says Herz. He says FASB responds only to repeat issues that would affect many companies. And FASB’s practice of soliciting opinions from all sides — generally considered a plus — is part of what leads to the lengthy rules in the first place.
CFOs blame the auditors. Of those opposing principles-based accounting, 45 percent say they do so because auditors are too conservative, making it too hard to come to an agreement, according to CFO’s survey. “After what happened to Arthur Andersen, risk mitigation seems to be the auditors’ biggest concern,” says Lyondell Chemical controller Charles Hall.
When it comes to the SEC, CFOs and auditors are united in saying that overzealous scrutiny would make a more subjective system unattractive, notwithstanding acting chief accountant Taub’s reassurances that he himself will be reasonable. “It’s one thing for the chief accountant to say, ‘We accept a principles-based world. It’s another thing for that to trickle down to the junior staff,” says Neuhausen. Notes Rickard: “If principles-based accounting is going to work, we need to be presumed to be right.” That would be a change from his past experience. Earlier this year, Rickard lost his controller and treasurer after the SEC opened an investigation into how the $38 billion company accounted for a $55 million barter transaction back in 2000.