FASB states "many have expressed concerns about the quality and transparency of U.S. financial accounting and reporting. A principal concern is that accounting standards, while based on the conceptual framework, have become increasingly detailed and complex." While true, people must remember that accounting rules attempt to map the activities of the corporation into financial statements. As corporate transactions grow in complexity, one should not be surprised that accounting rules also grow in difficulty and intricacy. If we really want simple rules, maybe instead of changing the accounting we should outlaw derivatives.
 
FASB quotes outgoing SEC Chairman Harvey Pitt, "The development of rule-based accounting standards has resulted in the employment of financial engineering techniques designed solely to achieve accounting objectives rather than to achieve economic objectives." Besides quoting somebody who has lost all his moral authority and is a laughing stock within the profession, FASB quotes a statement that is as silly as it is disingenuous. Anyone else who thinks that managers are going to quit engineering financial results with the creation of principles-based accounting is whistling "Yankee Doodle." It won't happen.
 
FASB states that one reason for the current complexity of accounting rules is the development of exceptions to the principles. While that seems accurate, let’s ask ourselves what would happen under a principles-based approach. Corporate managers would apply the accounting principles to their situations, bending and twisting the principles to conform to their circumstances. Exceptions to the principles would become applications of the principles themselves, as managers find ways to fit what they want to do with the accounting rules. As exceptions become the principles, accounting in practice would in fact become far more complex for investors and creditors. The investment community would have great difficulty in comprehending how corporate managers actually implemented the accounting rules. Worse, it might make financial statements of companies less comparable with those in the same industry.
 
FASB says that a second reason for the current complexity is that they must provide interpretive and implementation guidance. In our litigious society, do we really think managers and auditors would quit asking for such advice under a principle-based system? Not for a second do I entertain that idea.
 
FASB quotes the chairman of the International Accounting Standards Board David Tweedie, "[A principles-based approach requires] a strong commitment from auditors to resist client pressures." I agree but wonder whether such an approach makes it easier or harder for auditors to resist those kinds of pressures. Tweedie carefully sidestepped that issue.
 
Finally, as I reflect on the accounting for derivatives and the accounting for SPEs, I ask whether a principles-based approach would provide better valuations, more and better disclosures, and a more candid discussion and analysis by management. Contrasting those European entities who follow IASB standards with American companies, I think not. I see no evidence that these European concerns present better valuations, more and better disclosures, or more candid discussions and analyses.
 
The conclusion appears obvious. Those intent on pursuing the principles-based approach actually long for less reform and more accounting shenanigans. May the courts help us!

J. EDWARD KETZ is associate professor of accounting in Penn State's Smeal College of Business Administration. Check out his column, where you'll find more articles on controversial, cutting-edge topics.