The CPA Journal

I was surprised to read Dr. John P. McAllister’s guest editorial, “The Charge: Failure to See the Big Picture in Financial Reporting. The Plea: Guilty!” in the October issue.

He discusses two interrelated points: Should preparers and auditors be concerned about the overall fairness of financial statements as well as their compliance with GAAP? And, if so, would general standards be more likely to accomplish this objective than detailed standards? He then confesses that, despite his experience as an auditor and a professor, he never knew of either issue until reading two recent essays in Accountancy magazine.

My experience has been completely different. The first point—overall fairness or compliance with GAAP—was being debated when I entered the profession in the 1950s. The debate has continued to this day and, as McAllister indicated, has been resolved in favor of compliance, largely because of legal considerations. One proposed solution—subtle but significant—was to add “and” so that the standard would read “present fairly and in accordance with generally accepted accounting principles“ [emphasis added]. This was rejected for the reason previously mentioned: An undefined concept of fairness was too subjective to withstand attack in American courts.

The question of whether general standards (now referred to as principle-based standards) or detailed standards (now referred to as rule-based standards) would result in better financial reporting also has a long history. For example, I served on the board of the International Accounting Standards Committee and chaired of one of its task forces from 1990 to 1995. My overseas colleagues reminded me at every meeting that, in their view, our detailed approach was self-defeating and that general standards would result in better reporting. It is interesting to note that FASB, which in the 1990s rejected this approach out of hand, is now considering the general standards approach.

Rather than trying to resolve these long-standing questions, my purpose in writing is to correct the misimpression that may have been conveyed by McAllister’s editorial that the accounting profession in the United States has never been aware of these matters. Your October issue also contained two articles about accounting education in this country. If McAllister’s professed lack of knowledge about the long-standing discussions on these two matters is representative of his colleagues in academia (which I hope is not the case), then accounting education in this country is in far more trouble than I had realized.

The writer is a former member of the FASB Emerging Issues Task Force (EITF) and Advisory Task Force on the Consolidation Project, the International Accounting Standards Committee (IASC), and the AICPA Accounting Standards Executive Committee (AcSEC).

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