Dennis Beresford's essay on the problem of creeping GAAP complexity ("It's Time to Simplify Accounting Standards," JofA , Mar.99, page 65) was both fascinating and thought-provoking. His background as a senior partner in a Big Five firm and 10 years as chairman of FASB give him a unique perspective regarding possible solutions to financial reporting problems.
Beresford's challenge to FASB to "just say no" to more detail comes at an especially significant point in standard-setting history. The International Accounting Standards Committee (IASC) recently completed its core standards project. If the standards are accepted by the International Organization of Securities Commissions, of which the SEC is a member, there will be a movement throughout the world to use IASC standards in cross-border capital market listings. For example, assuming the SEC goes along with this approach, international companies could list their shares on the New York Stock Exchange using IASC standards. No conversion or reconciliation to U.S. GAAP would be required.
How good are the IASC standards? We need to ask this question, not only because U.S. investors may have to rely on them, but also because U.S. companies, whose shares are listed on overseas markets, may wish to use them. Until quite recently, the IASC standards were criticized because they allowed an excessive number of alternative treatments. But, IASC's "improvements project" has identified specific benchmark treatments, and most alternatives have been eliminated. Today, the most commonly heard criticism of the IASC standards is that they lack adequate specificity when compared, for example, to U.S. GAAP.
But how legitimate is that criticism? As Beresford calls to our attention, U.S. GAAP has probably erred on the side of being excessively detailed. First, SEC Chairman Arthur Levitt and, more recently, the Blue Ribbon Committee on Improving the Effectiveness of Audit Committees have issued challenges to the U.S. financial community to focus more on the quality, not just the technical acceptability, of a company's financial reporting.
Why do the IASC standards tend to be less detailed than U.S. GAAP? Agreement on general principles of accounting can almost always be reached. But, considering the number of countries involved, is it possible to address and answer every application question encountered around the world?
Of course not. Thus, financial statement preparers and auditors operating in our ever-growing global capital markets will be called on to accept IASC's general principles and to apply them in good faith to satisfy the requirements of financial statement readers.
Is U.S. financial reporting at a crossroads? I think so. Shall we continue down the road of producing more answers to more detailed questions? If the answer is yes, we may well become known as guardians of an old, nationalistic way of doing things.
Alternatively, shall we join the international movement toward, as Beresford suggests, "enough specifics to ensure parallel application without going overboard on detail?" If the answer is yes, U.S. accounting and auditing professionals will be leaders in the worldwide development of quality financial reporting.
John P. McAllister, CPA, PhD
Chair and Professor of Accounting
Michael J. Coles College of Business
Kennesaw State University