Quest for principled practice

And it was to New York that Sir David Tweedie, chair of the International Accounting Standards Board, took the message of "convergence".

Tweedie, a keynote speaker at the half-day conference in New York, entitled Principles into Practice, believes that as accounting standards converge, it would be preferable for the global profession to gravitate towards a principles-based approach.

He is a staunch advocate of accountants using judgment and professionalism rather than mere "box-ticking".

He and his fellow advocates of principles-based standards say their approach is less likely to lead to fraud and financial engineering than would a complex system of rules. Also, says Tweedie, a principles-based system is more likely to promote stable capital markets.

They also argue that convergence cannot be achieved if it is to be based on a detailed rules-based approach, which they say would prove to be very difficult to roll out across different jurisdictions and cultures around the world.

In a kneejerk response to the massive frauds at Worldcom and Enron, the US government tightened its rules-based approach through the 2002 Sarbanes-Oxley Act. With it came onerous reporting requirements for US-listed companies, which many claim has sapped the health of US capitalism and encouraged growing numbers of firms to list their shares on international stock exchanges rather than on the NYSE and Nasdaq.

Speaking at the conference, held with the American Institute of Certified Public Accountants, Tweedie said: "If people keep coming to me for clarification on the principles-based standards that are issued, then the game is up. Principles will then become rules. This is one of the last chances we've got to get this right. If the US fails to accept principles-based standards, then the IASB may have to consider a Plan B' on convergence."

David Wood, executive director of technical policy at ICAS, said: "We have reached a critical point, and there had been a risk that IFRS (international financial reporting standards) could start moving towards the US's rules-based system. That's why we decided to take the debate to the place that really matters. This is where the battle is going to be won or lost."

Icas believes that principles-based accounting provides a comprehensive basis for the preparation of financial statements in that it is the definition of flexible, and leaves auditors less scope to convince themselves that an inappropriate interpretation may be acceptable.

Wood says he detects some chinks in the armour of the Americans. Some prominent figures are beginning to question whether their overly rules-based approach may explain the exodus of stock market listings to London and other international markets. In March, US Treasury Secretary Henry Paulson argued in favour of lighter-touch regulation, indicating that a principles-based system might be preferable for the US markets.

Paulson said: "We should also consider whether it would be practically possible and beneficial to move toward a more principles-based regulatory system, as we see working in other parts of the world."

At the ICAS event, Bob Herz, chairman of the US Financial Accounting Standards Board (FASB), stressed that principles-based accounting standards would best serve users of accounts and the public interest.

Wood added: "We have heard widespread support from US and UK speakers for principles-based standards. Now the challenge is to put this into practice. To do that, the global profession must promote judgment through the training of accountants; reject a slide into the safety-net of rules and work with regulators to ensure that they accept properly documented decisions that have been arrived at using judgment, instead of blindly following the rule book."

At the ICAS event, principles-based standards also received support from US litigation lawyer Michael Young. An expert on financial reporting and financial fraud at the New York firm Wilkie, Farr & Gallagher, Young said that principles-based standards could survive in the US, despite perceptions that it is a highly-litigious corporate culture.

He said: "Principles-based standards, according to conventional wisdom, would increase liability for preparers and auditors. Rules would seem to offer more certainty. My experience suggests the opposite: if something fishy is going on, rules can't get you off the hook. Rules send corporate culture in the wrong direction - they say we don't trust you'. Finally, rules spawn more rules - not something anyone wants to see."

Michael McKersie, manager of investment affairs at the Association of British Insurers last year, says the idea of a global monopoly of financial reporting is not necessarily a good thing.

"We need to ask the question whether some degree of competition is necessary to achieve objectivity or better standards."

Speaking at an earlier Principles into Practice event, he said that Tweedie's IASB needs to stand up for non- US views around the world, adding that principles are absolutely right but there are "enormous grey areas" which may sometimes need rules.

ICAS intends to hold similar Principles into Practice events in Luxembourg in May and Brussels in September.