SEC Study Endorses Principles-Based Accounting

Approach should provide "more transparent information about a company's financial results and position." Also: Chase and Citigroup settle Enron-related matters; no LOL at AOL, thanks to SEC; and more.

The Securities and Exchange Commission has prepared a staff study that supports the adoption of a principles-based accounting system. This approach relies more on broadly applied principles and less on specific, detailed rules.

The SEC staff study, prepared by the Office of the Chief Accountant and the Office of Economic Analysis, was submitted last week to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. It recommends that new standards should:

  • Be based on an improved and consistently applied conceptual framework.
  • Clearly state the accounting objective of the standard.
  • Provide sufficient detail and structure so that the standard can be operationalized and applied on a consistent basis.
  • Minimize the use of exceptions from the standard.
  • Avoid use of percentage tests — so-called bright lines — that allow financial engineers to achieve technical compliance with the standard while evading its intent.

The study, ordered under the Sarbanes-Oxley act passed last summer, “endorses an approach to setting accounting standards that should result in investors receiving more transparent information about a company’s financial results and position,” said SEC Chairman William Donaldson in a statement.

“Objectives oriented” is the term that the SEC will use for this approach to principles-based standard setting. Standards would clearly establish the objectives and the accounting model for the class of transactions, while also providing management and auditors with a framework that is sufficiently detailed for the standards to be operational, maintains the SEC.

“An objectives-oriented approach should ultimately result in more meaningful and informative financial reporting to investors and also would hold management and auditors responsible for ensuring that financial reporting complies with the objectives of the standards,” adds the commission.

The SEC points out that the Financial Accounting Standards Board has begun the shift to objectives-oriented standard setting and is doing so on a prospective, project-by-project basis. It adds that it expects the FASB will continue to move towards objectives-oriented standard setting on a transitional or evolutionary basis.

(Read more about how U.S. and international standard-setters are trying to get “On the Same Page.”)

Chase and Citigroup Settle Enron-Related Charges

The SEC reports that it has settled charges against J.P. Morgan Chase & Co. and Citigroup Inc. for their roles in Enron Corp.’s “manipulation of its financial statements.”

Each of the financial giants helped Enron mislead its investors by characterizing what were essentially loan proceeds as cash from operating activities, charges the SEC.

The proceeding against Citigroup also resolves other charges, adds the commission, stemming from the assistance Citigroup provided Dynegy Inc. in manipulating that company’s financial statements through similar conduct. Citigroup agreed to pay $120 million under its settlement; $101 million pertains to Citigroup’s Enron-related conduct and $19 million to the Dynegy conduct.


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