The Move to Principles-Based Accounting

Companies that do business internationally are moving to switch their GAAP-based accounting to IFRS (International Financial Reporting Standards) accounting. The Wall Street Journal notes that under “principles-based accounting, companies use judgment in applying a set of guidelines.” The Barometer is uncertain how to take this description. I believe a good part of what lost investors who relied on GAAP-based financial statements in the dot-com bust, the Enron era, and then the subprime mess was that companies seemed to be using GAAP rules as mere guidelines. What will happen when there are no rules, i.e., guidelines are guidelines? That “wiggle-room” in the interpretation of rules will surely turn into considerable “flailing-about room” when it comes to guidelines. Also, the Barometer is fuzzy on the meaning of the word “judgment.” One man’s judgment is another man’s fraud.

Ford Motor Company has a war room dedicated to the transition and indicates that the change-over will save it money through simplification as well as uniformity across 138 countries. Sure, when you get to make stuff up as you go, it does make compliance a tad easier.
The Barometer offers what she has said since the debate over the change to principles-based accounting began – “The problem with principles-based accounting is that it assumes those who use it have some principles.” If it takes the finance folks about two weeks to get around a GAAP rule, which the accounting profession two years to develop, imagine how mere judgment and discretion will shorten that two-week effort.

Michael Rapoport, “Accounting Move Pits Big v. Small,” Wall Street Journal, July 6, 2011, p. C1.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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