The Financial Accounting Standards Board met with representatives of the Big Four accounting firms and corporate executives to discuss the implications of shifting to a "principles-based" accounting system that provides broad objectives, from the detailed instructions companies and accountants now follow in preparing their financial statements.

"We're trying to find the sweet spot," FASB member John K. Wulff said during the roundtable discussion, which covered how the new regime would be enforced and whether it would be readily accepted. "Everybody is saying there is a need for guidance. The board is trying to find out that spot."

Both the standard-setters and regulators at the Securities and Exchange Commission are under political pressure to remove some of the complexities in the current rules after the recent flood of accounting scandals. SEC Chairman Harvey L. Pitt told the Senate Banking Committee in March that the development of rules-based accounting standards "has resulted in the employment of financial engineering techniques designed solely to achieve accounting objectives rather than to achieve economic objectives."

Critics of the rules-based approach most often point to the FASB's rule on accounting for the financial instruments known as derivatives, which contains more than 800 pages of instructions. That is one of the rules Enron Corp. relied on in engineering the complex financial transactions that ultimately led to its downfall.

But accountants and others said making a shift to a system already embraced by international standard-setters would not be easy, particularly given the litigious nature of U.S. society. Some also said it would require a big change in attitude.

"The biggest challenge is cultural," Gordon E. Goodman, trading control officer for Occidental Energy Marketing Inc., a subsidiary of Occidental Petroleum Corp., said during the discussion. "Our industry is made up of people who like rules. That's why they are accountants."

Accountants in particular have opposed a principles-based approach out of fear it would encourage regulators and investors to second-guess their judgments, leading to more lawsuits and enforcement actions. While those concerns are still prevalent -- and dominated the concerns raised in public comment letters to the FASB -- some accountants said they are willing to embrace a new system.

"It's very much doable," said James F. Harrington, a partner with PricewaterhouseCoopers. "From the standpoint as an accountant, I would feel more confident in a principles-based world that I could use my position to look at the substance of the transaction. I have more leverage to question the transaction than I do under rules-based accounting."

Jackson M. Day, acting chief accountant for the SEC, said that regulators also would have far more discretion to go after frauds and abuses under a new system.

But he added that regulators would also have to be willing to accept that companies and their accountants could come to different conclusions about which accounting method achieved the objective of a principles-based approach. "This where the rub is," Day said. "We've got to make sure that when we have multiple interpretations of rules that investors are adequately protected."

[Monday's] meeting was one of the first steps in a process that will likely take months before any formal conclusion is reached. The SEC is in the process of conducting its own study of a principles-based accounting system as part of a congressional mandate.

"In the current environment, the SEC wants answers so they can enforce the principles and auditors want answers so they don't get second-guessed by others," said FASB member John M. Foster. "We also live in a very litigious society where everybody gets sued. It indicates people's attitudes and behaviors are going to have to change for this to work."

-- Jackie Spinner