Principles-based standards and judgement
Ian Dennis
Business School
Oxford Brookes University
Abstract
Although there is considerable support for the idea that a financial reporting system should be based upon
‘principles-based’ standards, progress in achieving this end has been slow. This paper argues that one of the
reasons for the lack of progress is the vagueness of the idea of standards being ‘principles-based’. The
characteristics of such standards are identified through a conceptual enquiry into how standard setters,
regulators and academics explain their nature. Superficial agreement on these characteristics masks
disagreement about the reasons why these characteristics are thought to be desirable. These depend upon
underlying assumptions about the nature of prescriptions in standards and about the purpose of providing
implementation guidance in an accounting standard. The apparent agreement that ‘principles-based’
standards are a good thing is facilitated by the fact that this concept refers to a ‘boundary object’. With such
concepts common characteristics allow for communication between parties who have different underlying
interests and start from different assumptions about how those interests can be achieved. The failure to
agree on these assumptions manifests itself in disagreement in the application of the concept to particular
standards. This means that the concept is vague. Boundary objects may be useful for certain purposes,
including political ones, but are not helpful in achieving the objectives of the current project of converging
accounting standards. The paper concludes that a debate about fundamental issues about standard setting
and accounting standards would be facilitated if the concept of ‘principles-based’ standards was
abandoned.
Key words: Accounting standards; boundary objects; judgement; principles-based standards; standard
setting
Contact address:
Dr Ian Dennis
Senior Lecturer in Accounting and Finance,
Oxford Brookes University Business School,
Wheatley Campus,
Wheatley ,
Oxford OX33 1HX.
Tel. (01865) 485957
Email: iddennis@brookes.ac.uk
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1. Introduction
It is a truth (that ought to be) universally acknowledged1, that if there is agreement on an
accounting proposition then it must be expressed in language that is vague. One small
piece of evidence to support this truth is provided by the debate about ‘principles-based’
versus ‘rules-based’ standards. That ‘principles-based’ standards are fairly universally
supported is well documented. The Institute of Chartered Accountants in Scotland
(ICAS) state that in interviews with professional accountants they found ‘almost
unanimous agreement for principles-based accounting’ (ICAS, 2007, p. 1). Both the
Securities and Exchange Commission (SEC) and the U.S. Financial Accounting
Standards Board (FASB) claim to support the idea of ‘principles-based’ standards (SEC,
2003; FASB, 2004). The International Accounting Standards Board (IASB) states that its
objectives are ‘to develop, in the public interest, a single set of high quality,
understandable, enforceable and globally accepted financial reporting standards based on
clearly articulated principles’ (IASB, 2011, §6). Acknowledging support for the
proposition that ‘principles-based’ standards are the ideal kind of standards, the ICAS
seem mystified by the fact that ‘we can’t get there’ and that standard setters appear to be
moving towards ‘rules-based’ accounting standards rather than embracing ‘principlesbased’ ones (ICAS, 2007, p. 1). A survey of members of ICAS in 2011 revealed that 72%
of them believed that International Financial Reporting Standards (IFRS) were very rules
dominated and 67% believed that IFRS were more weighted to rules than they were five
years ago. They also believed that the financial crisis and the move to convergence with
the U.S. would result in more, rather than fewer, rules.
The apparent support for ‘principles-based’ standards is just that – apparent. Standard
setters may be cynically announcing that standards of this kind are best but in practice
seeking to promulgate standards that are ‘rules-based’. Standard setting is a political
process and subject to intensive lobbying by pressure groups (Armstrong, 1977; Zeff,
1978; Dopuch and Sunder, 1980). The U.S. system of standard setting is seen as ‘rulesbased’ (SEC, 2003, p. 10). One reason for this is that the SEC as an ‘enforcement agency’
that leads auditors ‘to protect themselves from litigation by encouraging the setting of
1
With apologies to Jane Austen.
2
clear and detailed rules’ (Nobes, 2005, p. 26). The ‘litigious situation in the United
States…means that the risk of law suits based on alleged wrong accounting is high and
gives accountants a strong incentive to ask for rules they can adhere to in case of a costly
law suit’ (Benston et al, 2006, p. 168). This pulls U.S. standard setters away from a
commitment to the ‘principles-based’ standards that the IASB is committed to and
towards ‘rules-based’ standards. This creates a problem for under the Norwalk
Agreement both Boards are committed to the convergence of accounting standards
(FASB/IASB, 2002) and a common goal was established by the FASB and the IASB for
their accounting standards ‘to be “principles-based.”’ (FASB/IASB, 2005, p. 1). No
wonder they appear to say one thing but do another.
Another, more charitable, explanation for what is happening is that the expression
‘principles-based’ standards ‘still seems to mean very different things to different people’
(Cairns, 2011, p. 71). Standard setters may promulgate standards that they conceive of as
‘principles-based’ but these standards may not be perceived to be of this kind by others.
The SEC acknowledges that the categories of ‘principles-based’ and ‘rules-based’
standards are ‘not well defined and, therefore, are subject to a wide variety of
interpretations’ (SEC, 2003, p. 5). The concepts are vague which means ‘there is in the
practice of its application, significant disagreements about what uses of it are correct’
(Baker and Hacker, 1980, p. 218). Standard setters who claim standards are ‘principlesbased’ may simply be applying the term differently from others who judge that
accounting standards are not of this kind.
This paper examines whether the concept of a standard being ‘principles-based’ is vague.
This is to conduct a conceptual enquiry into this concept in the sense explained in the
section about theoretical frameworks. The paper considers the objectives that might
underlie the construction of a concept of standards that are ‘principles-based’. It then
goes on to look at the explanations of this concept that are given by regulators,
professional bodies and accounting academics. It considers whether apparent agreement
in explanations actually masks disagreements in the application of the term to accounting
standards because the explanations themselves may be variously understood. It examines
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whether one reason for the differences in understanding might lie in the underlying
assumptions that are made about accounting standards and how they are to be followed.
These are identified by looking at two problems of standard setting and how underlying
assumptions about how they are to be dealt with may differ. Superficial agreement on the
meaning of the expression ‘principles-based’ masks underlying disagreement in the kind
of things they apply to. The paper then considers whether this arises because the
concepts used in the ‘principles versus rules’ debate are ‘boundary objects’. It considers
whether such concepts are adopted to present the appearance of agreement in concepts
where the concept is, in fact, vague. Such concepts facilitate communication between
parties with different underlying interests. The paper examines the idea that the concept
of ‘principles-based’ standards may be adopted for political reasons as part of a strategy
in the battle for control over global standard setting and as a means of accommodating
the interests of lobbyists. It concludes by asking whether a concept of standards being
‘principles-based’ actually provides a useful ‘road map’ for standard setters and whether
it can support the weight of the convergence project. In place of the commitment to such
standards it urges debate about the underlying assumptions about standard setting in an
effort to identify the qualities of good standards. The next section of the paper sets out the
theoretical framework used in the paper.
2. Theoretical frameworks: Wittgenstein’s Philosophy of Language and Social
Constructivism
The method used in the paper is derived from the philosophical approach adopted by
Wittgenstein. His philosophical method might be called conceptual enquiry (Dennis,
2008). In modern philosophy, in general, and in the philosophy of Wittgenstein in
particular, the idea of a concept is generally equated with the meanings of words (Craig,
2005, p. 135). An enquiry into concepts is thus to be understood as an enquiry into the
meaning of words or expressions. Wittgenstein suggests that ‘the meaning of a word is
what is explained by the explanation of the meaning’ (Wittgenstein, 1953, §560). An
explanation of the meaning of a word is something that gives a rule for the use of the
word. (Baker and Hacker, 1980, p. 35). A conceptual enquiry thus seeks to identify the
rules for the use of the word or expression that are followed by those who use it. The
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objective of a descriptive conceptual enquiry is to determine whether those who use the
word or expression follow the same rules. This is shown by whether they give the same
explanations of the expression, that is whether they give the same rule in explaining its
meaning, and whether they agree on the application of the expression to the same things
(Baker and Hacker, 1985, p. 244). If the same explanations are given but the rules for
meaning are applied differently then the concepts used are different and there is no
common understanding of what it is to be a thing of this kind.
Undertaking a descriptive conceptual enquiry into the concept of being ‘principles-based’
involves looking at the explanations of the meaning of this expression and determining
whether there is an agreed understanding of what constitutes a ‘principles-based’
standard. The explanations of the term that given by regulators, standard setters and
academics are examined. Where there is evidence that the same explanations do not result
in the application of the term to the same things then further examination of the
expressions used in the explanation may be undertaken. Explanations of the meaning of
expressions are given in language by using other expressions (Baker and Hacker, 1980, p.
32) and the rules for the use of these other expressions may not be agreed. This may
account for the apparent agreement in meaning of the original expression but, in fact,
conceals differences in understanding it.
It is worth considering why differences in understanding of expressions arise.
Wittgenstein adopted, what has been called, a ‘naturalistic’ view of language. This is the
idea that language ‘develops over millennia to fit our needs. As something arises that we
need to mark off, so we develop, by a linguistic reflex, as it were…to mark distinctions
that it seemed important to us to make’. It follows that ‘to understand the meaning of any
term is to understand those human interests, needs and practices in the context of which it
arose and into which it fits’ (Lyas, 1993, p. 163). Concepts are created and do not just
happen. To understand why a concept has been created, why a certain meaning or rule for
the use of the expression has been established, it is important to grasp the objectives or
desires that prompted it creation. This is a key assumption that is also made in the
literature on social construction. The underlying idea is that the concepts we use are
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shaped by us and not found in nature (Young, 2006, p. 581). Where there are different
explanations of the meaning of expressions or where the explanations are understood
differently this may be because the underlying ‘interests, needs and practices’ that prompt
the development of the concept are different. A conceptual enquiry into ‘principlesbased’ standards tries to understand why the concept may be understood differently by
different parties to the ‘principles versus rules’ debate.
Before the detailed explanations of the concept of ‘principles-based’ standards are
examined it is worth briefly reviewing the context in which the idea of a kind of standard
is constructed.
3. Why construct the concept of standards that are ‘principles-based’?
Accounting standards are promulgated in order to help to achieve the objectives of
financial reporting. These objectives are realized by producing information that meets the
objectives of financial reporting and has certain qualitative characteristics set out in the
conceptual framework (CF). These include the fundamental qualitative characteristics of
relevance and faithful representation and enhancing characteristics such as comparability,
verifiability, timeliness and understandability (IASB, 2010). The concept of a kind of
standard, that is one that is ‘principles-based’, is useful if it assists in producing useful
financial information that achieves the objectives and characteristics. Identifying the ideal
standard is meant to assist in the promulgation of useful standards. As a result of scandals
such as Enron it was believed by some interested parties that part of cause of the collapse
of the company was that accounting standards were not useful. Instead of the ideal kind
of standard ‘rules-based’ standards predominated. This did not achieve the objectives and
qualitative characteristics of useful financial information. The SEC was mandated by the
Sarbanes-Oxley Act of 2002 to conduct a study into the approach to standard setting
adopted in the U.S. The conclusion of this study was that ‘principles-based’ or
‘objectives-oriented’ standards are better than ‘rules-based’ or ‘principles-only’ standards
(SEC, 2003, p. 4-5).
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‘Rules-based’ standards are sometimes favoured because it is suggested that they help to
achieve the qualitative characteristic of comparability in financial reporting. Others argue
that they do not and argue, as an example, that the ‘bright line’ tests that distinguish
circumstances where pooling of interests was possible and those where it was not result
in very different financial reporting for two circumstances which are basically the same
(SEC, 2003, p. 18). As Schipper points out ‘the desire to achieve comparability and its
over-time counterpart, consistency, is the reason to have reporting standards. That
is…similar things are accounted for the same way’ (Schipper, 2003, p. 62). At least one
objective of inventing a concept of ‘principles-based’ standards, then, is to create a kind
of standard that will better achieve comparability. The characteristics of standards that
achieve comparability are used in the definition of ‘principles-based’ standards.
Comparability is one of the ‘interests’ that underpin the construction of the concept.
Other arguments in favour or against different kinds of standards begin with a desire to
achieve other qualitative characteristics of useful financial information such as relevance
or faithful representation. It has been argued that ‘principles-based’ standards do not help
to achieve these other characteristics even if they do improve comparability (Alexander
and Jermakowicz, 2006; Wüstemann and Wüstemann, 2010). This may lead to
questioning whether the concept of a particular kind of standard is actually useful in so
far as it may not be able to meet all of the desires that prompt its development.
Before any analysis of whether a concept of a kind of standard is useful the
characteristics of such standards need to be examined. To this end a review of the
explanations of ‘principles-based’ standards will be undertaken.
4. A descriptive conceptual enquiry into the concept of ‘principles-based’ standards
One influential explanation of the ‘principles-based’ approach to standard setting is
provided by the report of the Principles versus Rules Working Group set up by ICAS. It
states that ‘principles-based’ accounting standards are based on a conceptual framework
(ICAS 2006, p. 1). They go on to say that such standards ‘require a clear hierarchy of
overarching concepts, principles that reflect the overarching concepts and limited further
guidance’ (ICAS, 2006, p. 7). They define a principle as ‘a general statement, with
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widespread support, which is intended to support truth and fairness and acts as a guide to
action.’ They go on to say that ‘principles cannot be replaced by mechanical rules’
(ICAS, 2006, p. 4).
This explanation of the nature of ‘principles-based’ standards is deficient in a number of
ways. The characteristics that are meant to identify such standards flow seamlessly
between those that identify standards that are ‘based on principles’ and standards that
express ‘principles’. These are two distinct concepts of being ‘principles-based’. One
involves the idea of standards which are derived from a standard setting process that
starts by considering ‘principles’ of the kind expressed in a CF. Another concept involves
the idea that standards have certain qualities, that is they express prescriptions that might
be called ‘principles’ (Dennis, 2008). Standards can be ‘principles-based’ in that they are
‘based on principles’ but still not be ‘principles-based’ in that they do not have other
characteristics that define such standards (Schipper, 2003, p. 62).
The desire for standards ‘based on principles’ in a CF might be related to the objective of
consistency. The FASB originally described the idea of a CF as ‘a coherent system of
interrelated objectives and fundamentals that can lead to consistent standards and that
prescribes the nature, function, and limits of financial accounting and financial
statements’ (FASB, 1976, p. 2). In order to achieve this the fundamental concepts in the
CF ‘need to constitute a framework that is sound, comprehensive, and internally
consistent’ (FASB/IASB, 2005, Revisiting the Concepts, p. 1). It has been suggested that
there are two kinds of consistency that are recognized in the accounting literature. The
first is the ‘internal consistency of accounting standards’ which is the idea that any
individual standards should be consistent with the existing system of standards. The
second is the ‘consistency in the application of those standards’ which means that the
standards are applied in the same way from period to period in a single entity or between
entities (Wüstemann and Wüstemann, 2010, p. 2). The requirement to base standards on a
CF appears to aim for the first kind of consistency. If a CF justifies two particular
standards and it is not possible to follow both of them in the same circumstances then the
CF is inconsistent. The consistency of a CF is thus conceptually related to the consistency
8
of the standards derived from it. If one has a consistent CF this means that one has a CF
from which only consistent standards can be derived. This idea of the consistency of a CF
makes sense if a CF is used in a deductive system. In such a system standards are derived
by a deductive argument from ‘principles’ in the CF. With deductive arguments ‘given
two valid deductions with incompatible conclusions, their premises must also be
compatible’ (Salmon, 1992, p. 26). If the principles in a CF enable the deduction of
standards that are incompatible, inconsistent in the first sense, then so must the
‘principles’ be inconsistent. Standards have to be consistent if deduced from a CF which
is consistent since a CF being consistent simply means enabling the deduction of
consistent standards.
A lot can be said against such a picture of a CF and there is no space to consider all of the
arguments here. The ideal of a CF as something to be used in a deductive system, which
appears to be implied by the FASB characterization above has been seen as an important
one in the development of CFs (Power, 1993). Against this picture is the idea that the
‘principles’ in a CF are not to be used in deductive arguments to accounting standards but
that some other kind of argument, perhaps involving ‘practical reasoning’ (Dennis, 2010)
or ‘instrumental’ reasoning (Mattessich, 1995), is used to derive, rather than deduce,
standards from such a framework. Practical reasoning is similar to inductive reasoning,
and unlike deductive reasoning, in that it is not the case that incompatible conclusions
must have incompatible premises (Salmon, 1992, p. 25). One problem in understanding
the arguments about the nature of the derivation of standards from principles in a CF is
that in the explanations of deductive reasoning the ‘consistency’ of premises is
understood in terms of truth. The incompatibility of the conclusions of two deductive
arguments is understood as the fact that both cannot be true. This suggests
incompatibility of the premises also means that both cannot be true. In the context of
accounting standards if it is standards that are deduced then they are not true or false.
Prescriptions are not the kind of things that can be true or false. Prescriptions are
inconsistent if they cannot both be followed. Is the idea of the inconsistency of principles
in a CF also to be understood in similar terms? This means that the principles in a CF
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cannot both be followed. This raises the question of what it is to ‘follow’ a principle. Are
principles, like standards, some kind of prescription?
Is this how principles in a CF are to be understood though? They might be understood as
objectives or desires that financial reporting is meant to fulfil. The history of the search
for ‘principles’ in the twentieth century shows equivocation between viewing principles
as prescriptions and as expressions of desire. It is no wonder that little help was derived
from looking back at the ‘principles and postulates’ debate of the 1960s and 1970s
(ICAS, 2006, p. 4). This has a knock-on effect in trying to understand what it means to
say that standards are ‘based on’ principles. The derivation of standards from ‘principles’
can be understood as the deduction of standards, understood as specific prescriptions,
from general prescriptions or as the derivation of standards from considerations of what
is wanted from financial reporting using practical or instrumental reasoning. The ICAS
should perhaps have learned the lesson of history and avoided entanglement with
‘principles’. Their own definition is so vague that the nature of ‘principles’ is scarcely
indicated. The ICAS definition does not explain what kind of ‘general statement’ a
‘principle’ is supposed to be. It could mean a general prescription of what is to be done or
else a general desire that is wanted all or most of the time. The fact that a ‘principle’ is a
‘guide to action’ does not distinguish the sense in which prescriptions guide actions from
the sense in which desires guide actions. How prescriptions ‘support truth and fairness’ is
not clear. Does this mean that by following the prescriptions, doing what is required,
truth and fairness in financial reporting results? Are the ‘principles’ supposed to guide the
standard setter in producing prescriptions that, if followed, result in truth and fairness?
The same equivocation between prescriptions and desires is evident in Alexander’s
description of different types of criteria used in approaches to determining the adequacy
of financial statements (Alexander, 1999). It is not clear whether ‘Type A’ criteria, that is
‘a generally expressed all-pervasive fundamental concept’ (Alexander, 1999, p. 240), are
prescriptions or desires. Nobes equates these, and also ‘Type B’ criteria, that is ‘a set of
rules, conventions or ways of thinking which are to be consistently applied to situations
both familiar or unfamiliar’ (Alexander, 1999, p. 240), with ‘principles’ (Nobes, 2005, p.
10
26). This is mysterious since ‘concepts’ would appear to be a rather different kind of
thing to ‘rules’ or ‘conventions’. The FASB calls their CF ‘statements of financial
accounting concepts’. The UK Accounting Standards Board calls their CF a ‘statement of
principles’. Both are unclear as to what kind of thing their statements’ state. This has a
knock-on effect in understanding of what it means to say that standards are ‘based on’
principles. There is also a more general question of whether ‘principles’ in standards are
meant to be the same kind of thing as ‘principles’ in CFs. A ‘principles-based’ standard
might be one that sets out desires of the kind that are included in CFs or it might be one
that includes prescriptions of a certain kind. It is not clear whether CFs also include
prescriptions. The shift between these two meanings in discussion of ‘principles’ both in
standards and in CFs results in a lack of clarity and difficulty in understanding whether
someone using the term is talking about one or the other kind of thing when referring to
‘principles’ in the CF or in standards.
The ICAS pamphlet rather hurries on to the question of the characteristics of the
prescriptions that appear in accounting. Two kinds of prescription are identified which
are called, respectively, ‘rules’ and ‘principles’. Most of the study relates to a discussion
of the relative merits of these two kinds of prescription. The views of those interviewed
for the study are solicited about the relative merits of each but there is little detailed
exploration of what the interviewees actually mean by the word ‘principle’. This
undermines the message derived from the interviews. The interviewees were largely
supportive of the idea that standards should include ‘principles’ rather than ‘rules’ but it
is not clear exactly what they had in mind in giving such support.
Despite the problems in understanding the nature of principles and what it means for
standards to be ‘based on’ them there considerable support for idea that standards should
be based on principles. The alternative of promulgating ‘ad hoc’ standards or standards
‘based on’ the political interests of various lobbying groups is not attractive. Most would
agree that any reasonable accounting standard should, in some sense, have this
characteristic. This suggests that being ‘based on’ a CF is not a characteristic that
11
differentiates one kind of standard from another in any other sense than that it
differentiates ‘ad hoc’ from reasoned standards.
The characteristics that differentiate prescriptions in standards between ‘rules’ and
‘principles’ are implied by the characterization of ‘principles-based’ standards set out in
the SEC Study. They attempt to rectify the problem of vagueness in the terms they
acknowledge by defining a ‘principles-based’ standard as one that:
i)
includes a ‘concise’ statement of ‘substantive accounting principle’ that
‘incorporates’ the ‘accounting objective’
ii)
includes few, if any ‘exceptions or internal inconsistencies’
iii)
provides an ‘appropriate amount of implementation guidance’
iv)
is devoid of ‘bright-line tests’
v)
is ‘consistent with, and derived from, a coherent conceptual framework’
(SEC, 2003, p. 12).
The implication of this characterisation is that ‘principles-based’ standards are those that
are ‘based on principles’ in a CF, include a statement of the objective of the standard and
include prescriptions that have the characteristics set out in ii) to iv). To the
characteristics identified by the SEC might be added another that is identified by ICAS,
namely that ‘principles-based’ standards should:
vi)
allow for the exercise of judgement
(ICAS, 2006, p.1)
This final characteristic has support elsewhere (Schipper, 2003, p. 61; FASB, 2002).
This explanation of ‘principles-based’ standards also suffers from the problem of
understanding the sense in which standards are ‘derived from’ a CF and understanding
the nature of ‘principles’. Other issues are also raised by the SEC’s explanation. What is
meant by the words ‘few’ or ‘appropriate’ in the expression of the characteristics? It is
12
not clear whether all of these characteristics have to be present if a standard is to be said
to be ‘principles-based’ (Dennis, 2008, p. 266). The SEC recognizes that some standards
might be called ‘principles-based’ even if they do not have all of the characteristics of
being ‘principles-based’. These characteristics are thus not necessary conditions for a
standard to be ‘principles-based’. The SEC refer to this concept as an ‘ideal variant’
which means that standards of this kind may have most but not all of the characteristics.
They recognize that standards may only ‘approach’ the ideal (SEC, 2003, p. 24). It has
been suggested that the concepts of being ‘principles-based’ and ‘rules-based’ form ‘a
continuum’ (AAA, 2003, p. 74). A similar problem exists in the area of Law. These
concepts have been described as ‘crude’ (Cunningham, 2007, p. 1413) and ‘imperfect’
(Cunningham, 2007, p. 1492). It is suggested that ‘accounting systems, like corporate law
and securities regulation, defy tidy classification as rules-based or principles-based’
(Cunningham, 2007, p. 1460). Given that these characteristics are not necessary
conditions, standards can be called ‘principles-based’ if they have only some of the
characteristics. The perception of the relative importance of these characteristics may
vary. Standards that are ‘principles-based’ can have different collections of such
characteristics and one group of standard setters and professional using this expression
can have a different collection in mind when they refer to a standard as ‘principles-based’
than another group. There is no ‘checklist’ of characteristics that has to be ticked before a
standard can be termed ‘principles-based’.
If there are different practices in using the expression amongst different people the term
is vague. This does not necessarily mean that the concept is not useful for some purposes.
The characteristics identified by the SEC for ‘principles-based’ standards may be ‘a
sensible and desirable list of characteristics and admonitions’ that amounts to something
of a ‘wish list’ (Benston et al., 2006, p. 170). No standard has to have all of these
characteristics to count as ‘principles-based’. The problem is that different people may
have a different ‘wish list’ in mind when they consider whether or not a standard is
‘principles-based’. This can become important. Standard setters who are trying to
converge their accounting standards, as the IASB and the FASB are attempting at the
present time, may find difficulty in achieving convergence if there is no common ‘wish
13
list’ of characteristics. A particular standard with a particular set of characteristics may be
acceptable to one and not to another.
The problem of agreeing on the characteristics of ‘principles-based’ standards results
from different assumptions that are made in dealing with problems of standard setting.
These will now be explored.
5. Problems of standard setting
i) Problem 1: exceptions
The first problem to be considered is what to do when the standard setter realizes that
following a standard will not always meet the objectives of the standards, that is the
objectives set out in the CF that are meant to be achieved by the promulgation of
accounting standards. Some standard setters may think that such a problem does not arise
because standards are only promulgated when they will achieve these objectives on every
occasion when they are to be followed. No solution is required to the problem because
there is no problem. This kind of claim appears to be made by the SEC who argue that ‘it
is…precisely the role of the standard setter to define the class of transactions included
within the economic arrangement and then to establish the appropriate accounting for that
class of transactions. While not everyone will agree with the standards setter’s
conclusions, making the determination of the underlying economics of an arrangement
and the appropriate accounting for that arrangement are integral to the standard setter’s
role’ (SEC, 2003, p. 32). The ‘underlying economics of the arrangement’ is, presumably,
what would be shown if financial statements are ‘representationally faithful’. What is
being argued is that the standard setter sets standards that result in financial information
that is representationally faithful and, hence, meets one of the fundamental qualitative
characteristics of useful information in the CF. There is a problem if the belief that
standard setters are clever enough to avoid the problem of standards that will not always
meet the objectives is rejected. The belief that following accounting standards can result
in portraying ‘economic arrangements in a way that omits nothing of relevance to
investors, creditors and other users, and can specify and effectively deal with how these
14
should be accounted for’ has been called an ‘impossible dream’ (Benston et al., 2006, p.
177). There is also the problem that different accounting standards may require
conflicting accounting treatment in certain circumstances. Those following such
standards cannot do both. It was suggested above that a ‘consistent’ CF is not an answer
to this problem. Inconsistencies may still arise where the reasoning to promulgating
standards is not deductive.
A solution to both problems is to include exceptions in a standard. These exceptions
exclude from the requirements in a standard those circumstances where following them
will not achieve the characteristics or where meeting the requirements of a standard
conflict with meeting the requirements of another standard that would require different
treatment. In order to adopt this approach the standard setter would need to be able to
predict the circumstances where either of these problems will occur. Against this solution
it can be argued that including exceptions creates further problems. It may result in
‘inconsistencies in accounting treatment of transactions and events with similar economic
substance’ (SEC, 2003, p. 11). If including exceptions meets the characteristics of
relevance and representational faithfulness, including exceptions may undermine the
characteristic of consistency. The CF is supposed to have an answer to this problem.
Standard setters need to look for relevant information first, then consider whether
following the standard will result in faithful representation (IASB, 2010, QC18). If so
then they consider whether comparability enhances these fundamental characteristics.
This makes it look like an ‘on/off’ switch for relevance and faithful representation. What
if a standard will not always result in relevant information that is a faithful representation
but mostly does so? Are standard setters meant to look for another solution where this
does not happen? What if there is no other solution, that is, there is no standard that will
always meet these characteristics? Promulgating a standard which will mostly meet these
characteristics but on occasion will not might be a better standard than any other one. The
standard setter may simply accept the failure to meet the characteristics on all occasions
and not worry about it. However, this solution undermines the commitment to meeting
the qualitative characteristics if this is understood as meeting them on all occasion where
standards are followed. Is there another solution?
15
There is a solution that starts with acceptance of the need to meet the qualitative
characteristics whenever a standard is followed but does not include exceptions but
instead allows those who follow the standard to override it where following the
requirements will not achieve the objectives of the standard or where there are conflicting
standards. This solution invites them to decide on whether or not to override the standard,
that is, to allow them to exercise judgement. In this context ‘judgement’ is understood
along the lines of the report Professional Judgment in Financial Reporting. ‘Judgement’
is defined as ‘the process of making a choice, a decision, leading to action’ (CICA, 1988,
p. 4). This seems a reasonable description of what is going on in the decision as to
whether or not to override the standard. The characteristics of exercising judgement are
used to identify standards as ‘principles- based’ according to ICAS and others. Including
exceptions is to give the job of exercising judgement to standard setters. The link
between the override and a ‘principles-based’ approach has been made in the academic
literature (Alexander and Jermakowicz, 2006; Benston et al., 2006, p. 167). It has been
observed that ‘the suggestion by many commentators…that the IRFS regime is
principles- rather than rule-based…gives reason to imagine that such a distinction is
underpinned by the qualitative criterion, ‘true and fair view’ (or its equivalent) legal or
professional override’ (Dean and Clarke, 2005, p. 1). The possibility of a solution of
allowing the override depends upon the jurisdiction in which the standard is followed.
This, in turn, depends upon the particular conception of the prescriptions in standards that
is adopted in that jurisdiction. One issue that lies behind this adoption is whether or not
those who follow the standards can be trusted to implement the override and whether
their judgements are or are not open to challenge in the courts or by regulators. Different
standard setters may have different attitudes to both of these matters.
Whether or not an override is allowed depends upon the conception of prescriptions
adopted in a jurisdiction (Dennis, 2010). Rawls identified two conceptions that might
apply. With prescriptions, or as Rawls refers to them ‘rules’, that are ‘rules of thumb’
‘each person is in principle always entitled to reconsider the correctness of a rule and to
question whether or not it is proper to follow it in a particular case’ (Rawls, 1955, p.
16
161). In other words, an override is allowed. With prescriptions on the ‘practice’
conception accepting the prescription ‘necessarily involves the abdication of full liberty
to act on utilitarian and prudential grounds’ (Rawls 1955, p. 162). In other words, the
prescription is to be followed whether or not, in particular circumstances, it will fulfilled
the objectives that prompt its promulgation. The rule is not to be overridden. Some
prescriptions fit one conception while some fit the other. What kind of prescription is
included in accounting standards?
In the UK the requirement of the Companies Acts allows companies to override the rules
in standards where following them will not result in a true and fair view (TFV). The UK
conceives prescriptions as ‘rules of thumb’. In the U.S. listed companies are required to
‘present fairly’ their results and financial position and the auditors report includes the
statement that the financial statements ‘presents fairly’. Zeff (1990) argues that the idea
of a TFV is not the same as the U.S. ‘presents fairly’ in the auditor report. The words
‘presents fairly’ never stand alone but are always seen in conjunction with ‘generally
accepted accounting principles’. For this reason the ‘TFV legal requirement with its
override implications has not been adopted in the U.S. regulatory system’ (Alexander &
Jermakowicz, 2006, p. 144). Rule 203 of the AICPA Code of Professional Conduct
allows departure from GAAP in ‘unusual circumstances’ and says that it ‘is a matter of
professional judgment’ to determine what circumstances warrant such a departure
(Alexander & Jermakowicz, 2006, p. 145). However, van Hulle noted that ‘the
representative of the SEC argued that – although there is an override test in the auditing
standards in the US – no registrant with the SEC had ever applied the override in its
financial statements’ (van Hulle, 1997, p. 718). In effect, there is no override of
accounting standards in the U.S. Rules are conceived on the ‘practice’ conception. The
move to a ‘principles-based’ in the U.S. does not appear to be proceeding by changing
the conception of prescriptions from those on the ‘practice’ conception to those
conceived of as ‘rules of thumb’. The SEC rejects the view that ‘a necessary component
of principles-based standards is the inclusion of a “true and fair override”’ (SEC, 2003, p.
32). This contradicts the view of some academic commentators who argue for a
connection between the override and ‘principles-based’ standards.
17
The position with respect to international accounting standards and to jurisdictions
applying them in the European Union (EU) is not so clear cut. Although there is a similar
override in the Fourth Directive of the EU and an override is allowed in IAS 1 it is not
clear whether this is interpreted as similar to the UK’s override or closer to the U.S.
position. It has been suggested that it is likely to be differently interpreted in different
jurisdictions within the EU and who follow international accounting standards (Evans,
2003). It is thus unclear whether accounting standards as conceived by the IASB and
adopted by the EU include prescriptions that are ‘rules of thumb’ or conceived on the
‘practice’ conception and consequently on the kind of judgement that may be exercised.
It appears rather strange that the project to converge accounting standards could proceed
without agreement on the fundamental question of the conception of prescriptions in
standards. How can there be agreement on the characteristics of the ideal standards
without agreement on this underlying assumption about prescriptions contained in them?
If a standard setter promulgates a standard for jurisdictions where there is an override and
where they think of standards as ‘rules of thumb’ they may agree that standards require
few, if any exceptions. One standard setter may think that ‘principles-based’ standards
require an override and for this reason no exceptions are needed for standards of this
kind. If another standard setter promulgates a prescription for a jurisdiction where there is
no override and they think of standards as on the ‘practice’ conception but they believe
that they are clever enough to promulgate standards where there are no circumstances
where following the standard will not meet the objectives or that, if there are, then they
do not matter then they too will agree that standards require few, if any exceptions. Their
conception of ‘principles-based’ standards may not imply the need for an override. There
can be still be agreement that a standard is of the ‘principles-based’ in that it requires
few, if any exceptions without thinking that such standards must allow an override. The
problem is that this agreement on standards of the kind that do not need exceptions can
break down when a new standard is proposed where it is not possible to promulgate a
standard that meets the objectives on all occasions and where this matters or on whether
standards can be ‘crafted so that they exclude contradictions’ (Benston et al., 2006, p.
18
177). It may be difficult to obtain agreement on how to revise existing standards which
contain exceptions. In such circumstances the second standard setter may well feel that
exceptions are needed whereas the first standard setter may not. The apparent consensus
breaks down. The reason for this is that the underlying assumptions about standards are
different. True convergence may not be possible without convergence on these
underlying assumptions about the nature of prescriptions in standards.
ii) Problem 2: implementation guidance
As with the previous characteristic of ‘principles-based’ standards of including few
exceptions, the reasons for thinking that such standards should provide an appropriate
amount of implementation guidance and should be devoid of ‘bright-line tests’ need to be
grasped. Accounting standards are expressed in language. If there is to be agreement in
understanding what the standard requires accountants to do then there must be agreement
about the meaning of the expressions used to communicate the requirements, that is,
about what is in accord with the prescription (Baker and Hacker, 1985, Ch. 111).
Expressions must not be vague. Where there is evidence that the rule is explained
differently or where the rule is followed differently then this may be overcome by the
inclusion of implementation guidance in the standard. Guidance of this kind explains the
meaning of the expressions used to express the requirement in the standard and should
result in different parties meeting the requirement by doing the same thing.
If the language used in a standard is not vague then no guidance is required. The
appropriate’ amount of implementation guidance would be none. There is an argument in
the accounting literature that all language is vague (Brown et al., 1993). The origin of this
idea is said to be in the philosophy of Wittgenstein. In fact, this has been referred to as a
‘caricature’ of the ideas in Wittgenstein’s later work and ‘radically misconceived’ (Baker
and Hacker, 1980, pp. 215-217). Although he did not deny that some language is vague
he did not insist that all language is vague. Actual vagueness arises where there are actual
disagreements in the practice of explaining or using language. This is not always the case.
As Wittgenstein puts it ‘the sign-post is in order – if, under normal circumstances, it
fulfils its purpose’ (Wittgenstein, 1953, §87).
19
Wittgenstein’s actual argument is that no language is immune from possible vagueness.
Possible vagueness arises where it is possible that there will, in some circumstances
where it is used, be disagreements in explanations or in using the language. What he was
suggesting was that no language has ‘determinacy of sense’. If an expression has
‘determinacy of sense’ then an explanation of the expression would enable someone to
determine whether or not the expression applies to any particular object or state of affairs
(Baker and Hacker, 1980, p. 210). In the context of accounting standards this would mean
that someone who understood the language used to express a requirement would know
what is in accord with the requirement in any circumstance. This has been claimed to be
one of the objectives of a ‘rules-based approach’ to formulating accounting standards.
The implementation guidance has as it objective to ‘minimize (and in certain instances to
trivialize) the judgmental component of accounting practice through the establishment of
complicated, finely articulated rules that attempt to foresee all possible application
challenges’ (SEC, 2003, p. 15). It is designed to eliminate possible vagueness and to
achieve ‘determinacy of sense’. The SEC appears to accept that, as Wittgenstein
suggests, no language has ‘determinacy of sense’. They argue that ‘it is simply
impossible to fully eliminate professional judgment in the application of accounting
standards’ (SEC, 2003, p. 16).
Interestingly, it is sometimes thought that the use of ‘bright-line tests’ can achieve this
ideal. Requirements that include such tests involve numbers and it is thought that these
have ‘determinacy of sense’. If the objective of standard setters is to eliminate possible
vagueness then the use of ‘bright-line tests’ is understandable. The problem with such
tests is that they undermine comparability. Very similar circumstances are treated
differently if they fall on different sides of the ‘bright-line’ (SEC, 2003, p. 18). It looks as
though a choice has to be made between the objective of ‘determinacy of sense’ and
comparability. ‘Rules-based’ standards give more weight to determinacy of sense
whereas ‘principles-based’ standards give more weight to comparability.
20
The underlying issue that should be debated in order to obtain agreement about the nature
of standards is the objective of including implementation guidance in an accounting
standard. If the objective of such guidance is to eliminate possible vagueness, that is, to
achieve ‘determinacy of sense’, then it is not surprising that voluminous amount of
implementation guidance is needed. In fact, no amount of guidance will achieve this end.
If the objective is to eliminate actual vagueness then less guidance is required. In some
cases, none at all is appropriate if there is no actual vagueness in the expressions used to
set out the requirements of the standard. There is another possible objective in the
provision of implementation guidance. It may be designed to eliminate probable
vagueness, that is, where expressions are not actually used in different ways but it is
possible to see that they would be in certain foreseeable circumstances. Different
amounts of guidance may be appropriate given these different objectives. No agreement
on the characteristics of different types of standard can be reached without agreement on
the underlying assumption about the objective of implementation guidance. No one
would argue against the idea that implementation guidance should be of an ‘appropriate
amount’. The real argument is about the objective of such guidance.
There is another underlying assumption that also needs to be debated in relation to
standards. It is important to agree on how vagueness, of whatever kind, is to be tackled. It
does not follow that including implementation guidance is the only solution. Another way
of dealing with vagueness is to leave it to the judgement of those meeting the
requirements of a standard to determine how the requirements in the standard are to be
interpreted in the circumstances where the prescription is to be applied. Interpreting a
standard means attributing a meaning to the expressions used to formulate the
requirements in the standard. In effect this means determining what the prescription
actually is. This does not mean that any meaning can be given to expressions. The
meaning of an expression is determined by the practice of using expressions and this
cannot be completely ignored. Much depends upon judgements as to whether or not the
circumstances in which the prescription is to be applied are similar to those where it is
actually applied, that is where there is a practice of applying it. This means that some
decision or choices will be required in determining what is in accord with the prescription
21
in the standard. It has been argued that the U.S. system of standard setting does not wish
to allow those who follow standards to have such choices. One reason for this has been
said to be the existence of the SEC as an ‘enforcement agency’ that leads auditors ‘to
protect themselves from litigation by encouraging the setting of clear and detailed rules’
(Nobes, 2005, p. 26). It has been suggested that ‘the litigious situation in the United
States…means that the risk of law suits based on alleged wrong accounting is high and
gives accountant a strong incentive to ask for rules they can adhere to in case of a costly
law suit’ (Benston et al, 2006, p. 168). Leaving decisions or choices to the preparer and
auditor, that is leaving them to exercise judgement about what to do in following a
standard, opens the possibility of legal challenges to such judgement. It makes it difficult
to produce accounting standards with one of the characteristics of ‘principles-based’
standards.
This kind of decision is similar to promulgating a standard. In prescribing standards
standard setters have to consider the objectives of the standard. Those who follow the
standard have to use objectives to do decide on the prescription adopted. There is some
room for choice given the expressions and the objectives and this is why interpreting the
expressions in a standard counts as an exercise of judgement, albeit constrained. Where
judgement in interpretation is allowed then it makes sense, as it did with standards where
an override is allowed, to include a ‘concise’ statement of ‘substantive accounting
principle’ that ‘incorporates’ the ‘accounting objective’ to guide this interpretation. One
can begin to see how the characteristics used to identify ‘principles-based’ standards are
relevant to solving this problem. However different underlying assumptions about the
problem and its solution may result in different attitudes towards the amount of
implementation guidance required as well as the kind of language that is to be used in
accounting standards. Agreement on the underlying assumptions is required if there is to
be agreement on using this characteristic to promulgate standards. Although all parties in
a convergence project may agree that the amount of implementation guide should be
appropriate exactly how much should be provided when faced with a standard setting
situation will depend upon the underlying assumptions about language and the objectives
22
of providing implementation guidance. Once again, true convergence will not be attained
without convergence on the underlying assumptions.
Where the characteristics of ‘principles-based’ standards are detached from the
underlying reasons for using them then agreement on applying the characteristics to
standards is difficult.
6. Detaching characteristics
In explaining the override it was stated that those who follow standards have to exercise
judgement in deciding not to follow the standard where doing so on a particular occasion
will not meet the objectives of the standard. One problem with the idea of exercising
judgement is that the explanation of judgement set out by CICA, talking as it does about
decisions relating to courses of action, is itself vague. It can be interpreted in different
ways given that there are a number of different decisions relating to courses of action that
may need to be taken when following the requirements of standards. Two exercises have
already been considered in this paper, that is, decisions about an override and decisions
about how to interpret the expressions used in a standard. Other decisions may also have
to be made in following certain standards. If there is a requirement to make predictions
about future cash flows then, in order to follow such a requirement, inductive reasoning
may have to be exercised whereby generalizations are used in conjunction with facts
about the current circumstances to derive a conclusion about future cash flows. With
inductive reasoning the conclusion does not follow necessarily from the premises.
Various decisions have to be made about how strong the conclusion has to be and hence
how strong the generalizations in inductive reasoning have to be. Deciding whether or not
there are other generalizations and facts that undermine the conclusion also involve
decisions. These can all be called exercises of judgement. Any kind of standard may
requires that such decisions to be made and hence involve an exercise of judgement. This
characteristic does not differentiate one kind of standard from another. If such a
characteristic is taken to define ‘principles-based’ standards then any standard that
requires some kind of exercise of judgement might have some grounds for being referred
23
to as ‘principles-based’. Different people may nonetheless have different kinds of
exercise of judgement in mind in so characterizing a standard as ‘principles-based’.
A similar kind of argument applies to the other characteristic of ‘principles-based’
standards as those that express the objective of the standard. In the discussion of the
underlying assumptions it was suggested that including an objective in a standard is
useful where such objectives are used in exercising judgement about the override or
interpreting the standard. However, stating an objective can be divorced from these
underlying assumptions. Any standard that expresses a requirement to do something can
be re-phrased as a requirement to do something to bring about an objective. The ability to
re-phrase requirements follows from the fact that requirements are prescriptions to
someone to undertake an intentional action. Intentional actions are those actions that are
done for reasons which include the desire to bring about a certain end (Anscombe, 1957,
§5). An example from auditing standards will make this clear. ISA 500 requires the
auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor’s opinion. Auditors must do something that
brings it about that they have sufficient appropriate audit evidence. What is brought about
might be called the objective of the action. Such a requirement is ‘objectives-oriented’.
This can be used to re-state the requirement in terms of an objective. In ISA 500 the
objective is stated as ‘the objective of the auditor is to design and perform audit
procedures in such a way as to enable the auditor to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the auditor’s
opinion’ (IAASB, 2010, ISA 500). There appears to be a fudge going on here.
Objectives, at least as expressed in a CF, are things that are desired to be brought about
by the actions of financial reporting. The manoeuvre of re-stating a requirement for
action enables an objective to be stated. This was observed at the time that auditing
standards were being revised as part of the Clarity Project. An objection was made during
the due process of developing new auditing standards that the objectives of the standard
were nothing more that requirements re-stated (Dennis, 2010, p. 298). Anyone could
agree that standards should state objectives in this sense in so far as they agree that
24
standards should express requirements. Given that any standard expresses requirements
this characteristic does not distinguish one kind of standard from another.
7. The problem of explaining ‘principles-based’ standard in terms of characteristics
The reasons for choosing some of the characteristics may depend upon the underlying
assumptions that are made about accounting standards and what it is to follow them. If it
is assumed that standards express prescriptions that are ‘rules of thumb’ then no
exceptions are required as an override is possible. Where a standard setter assumes that
the problem of failure to meet the objectives will not arise because either the standard
setter will only promulgate standards that if followed will achieve the objectives in all
applications and where they assume that in setting standards they can avoid inconsistent
standards, that is, standards which result in contradictory requirements for actions in
following them, they too may agree that exceptions are not required. The same
characteristic of standards may be thought to be useful in identifying ‘good’ standards but
for very different reasons. The consensus may break down where the assumptions
become untenable and may result in a desire to promulgate standards that do not have
such a characteristic. A similar argument can be made for agreement on characteristics
such as there being ‘appropriate’ amounts of implementation guidance where there may
be very different assumptions about the objective of such guidance and as to whether or
not language is vague in some sense.
It might be simply accepted that in such circumstances standards will not have such a
characteristic and, hence, that such standards will not be ‘principles-based’. The problem
is that these standards may still have other characteristics that are used to identify
‘principles-based’ standards. They may contain little in the way of implementation
guidance. They may include objectives, particularly where the nature of objectives is
vague. The standard may, as all useful standards are thought to be, ‘based on’ a CF. If
there is discretion as to which and how many of the characteristics of ‘principles-based’
standards such standards have to have then there can be different views on whether or not
standards that are promulgated are ‘principles-based’ or not. It may be, as Cairns
suggests, that the term ‘still seems to mean very different things to different people’. How
25
can apparently unwavering support for promulgating standards of this kind go hand in
hand with lack of agreement as to what is being supported? A superficial agreement on a
concept despite underlying disagreements in what is wanted in inventing such a concept
is characteristic of concepts that refer to ‘boundary objects’. The idea of a ‘boundary
object’ will now be explored.
8. ‘Principles-based’ standards as ‘boundary objects’
The concept of a boundary object was developed in sociology. It was recognized that
science requires cooperation and this involves the creation of ‘common understandings’.
There is also a ‘‘central tension’ in science between divergent viewpoints and the need
for generalizable findings’ (Star and Griesemer, 1989, p. 387). Against the myth that
scientific cooperation requires a ‘consensus imposed by nature’ it is argued that there is
no such consensus and it is not necessary for cooperation in scientific endeavours. On the
other hand communication must be possible between actors if there is to be some
cooperation (Star and Griesemer, 1989, p. 388). The creation of ‘boundary objects’ is a
means of achieving communication despite the different interests and viewpoints of those
who cooperate in scientific endeavours. Such objects ‘come to form a common boundary
between worlds by inhabiting them both simultaneously’ (Star and Griesemer, 1989, p.
412). Objects of this kind ‘are both plastic enough to adapt to local needs and the
constraints of the several parties employing them, yet robust enough to maintain a
common identity across sites…They have different meanings in different social worlds
but their structure is common enough to more than one world to make them recognizable,
a means of translation. The creation and management of boundary objects is a key
process in developing and maintaining coherence across intersecting social worlds’ (Star
and Griesemer, 1989, p. 393). In natural history work of the kind described by Star and
Griesemer ‘boundary objects are produced when sponsors, theorists and amateurs
collaborate to produce representations of nature’ (Star and Griesemer, 1989, p. 408). In
such collective work ‘people coming together from different social worlds frequently
have the experience of addressing an object that has a different meaning for each of
them’ (Star and Griesemer, 1989, p. 412).
26
The idea of a ‘boundary object’ is useful in understanding how different parties involved
in setting and following accounting standards can cooperate by using the ‘boundary
object’ of ‘principles-based’ standards. Instead of ‘scientific endeavours’ the activity
involved is standard setting. The analysis above suggests that these parties may start with
‘divergent viewpoints’ about the nature of accounting standards and the kind of
prescriptions included therein as well as about the exercises of judgement that is allowed
in following them. The project to converge accounting standards requires cooperation
between these parties. The ‘boundary object’ of ‘principles-based’ standards is not
something that exists ‘out there’ in nature but is created to facilitate cooperation given
divergent views about accounting standards. The idea of ‘coherence across intersecting
social worlds’ is understood as coherence amongst parties to the convergence project who
inhabit different worlds where what is wanted from standards and what is believed to
achieve these desires is not common to all parties.
‘Boundary objects’ are said to have ‘different meanings in different social worlds’ and
can be ‘abstract or concrete’ (Star and Griesemer, 1989, p. 393). Elsewhere they are
referred to as ‘artefacts’ (Kimble et al. 2010, p. 438). Referring to them as ‘artefacts’ and
‘concrete’ suggests that they are physical objects. The suggestion that boundary objects
can be ‘abstract’ and have ‘meanings’ suggests, on the contrary, that they are part of a
language. One way of bringing these two together is to say that a boundary object is the
referent of a particular kind of concept or expression. Something is a ‘boundary object’ if
it is referred to by a concept or expression that has a particular kind of meaning. It might
be more accurate to say that ‘boundary objects’ are what are referred to by boundary
concepts. This follows from the kind of approach in philosophy undertaken by
Wittgenstein. He did not see philosophical enquiries as a form of scientific exploration of
objects (Baker and Hacker, 1980, Ch. XIII). The focus of philosophical enquiries is on
getting clear about the meaning of expressions that denote the kind of objects that science
investigates. Ontology, that is the investigation of the kind of things that exist (Craig,
2005, p. 756), is only ‘a shadow in the Platonic Cave’ (Hacker, 1990, p. 261). The objects
that exist are shadows cast by the meaning of expressions used to denote them. This
throws light on the idea of the ‘social construction of reality’. What is constructed are
27
meanings and objects come into being, are constructed and have reality, as the shadows
cast by meaning.
The need for communication where different parties in an activity give different
meanings to expressions used to denote ‘boundary objects’ creates a problem of
managing such objects. Star and Griesemer suggest a number of ways in which ‘problems
posed by conflicting views’ can be managed, some of which are evident in the context of
adopting a ‘principles-based’ approach to developing accounting standards. One way is to
develop the concept of a ‘principles-based’ standard ‘via a ‘lowest common denominator’
which satisfies the minimal demands of each world by capturing properties that fall
within the minimum acceptable range of all concerned worlds’ (Star and Griesemer,
1989, p. 404). The property of ‘being consistent with, and derived from, a coherent
conceptual framework’ would appear to be of this kind. All parties agree on this
characteristic as providing a ‘minimum acceptable’ criterion of a standard being
‘principles-based’. Another management device is ‘the use of versatile, plastic,
reconfigurable (programmable) objects that each world can mould to its purposes locally’
(Star and Griesemer, 1989, p. 404). The kind of vague generalized definition of a
‘principle’ given by ICAS and the lack of clarity about what being ‘based on’ a principle
so defined might be taken as a device to facilitate communication about ‘principlesbased’ standards that enables various parties to mould to their own ends. Yet another
device is to enable ‘each participating world can abstract or simplify the object to suit its
demands; that is, ‘extraneous’ properties can be deleted or ignored’ (Star and Griesemer,
1989, p. 404). The SEC identification of various characteristics of ‘principles-based’
standards that do not all have to be met by standards to come under this concept. The
suggestion made above that this concept may be understood as a ‘family resemblance’
concept facilitates its use as a device of this kind. The characteristics themselves are
acceptable as a ‘lowest common denominators’ such as the characteristics of including
‘an appropriate amount of implementation guidance’ or the characteristic of requiring the
exercise of judgement. This characteristics and that of having minimum exceptions may
be an example of a ‘plastic’ criterion that masks different ‘purposes’ in so far as parties
28
may adopt them from different underlying assumptions. The literature on ‘boundary
objects’ identifies political motives in their use that is relevant to the accounting context.
9. The politics of language
It is suggested that ‘the selection of the boundary object can be a political act directed
towards maintaining or redefining the direction of the group’s activities’ (Kimble et al.,
2010, p. 442). There are two objectives of this direction. One objective is to further
collective goals and the other to choose ‘boundary objects’ to defend a position. Both of
these objectives are evident in the debate over ‘principles-based’ standards. The idea of
standards of this kind is used to further the collective goal of standard setters to achieve
agreement on accounting standards. The development of the classification of standards as
‘principles-based’ may also be prompted by the political motives of defending the
authority of particular standard setters. The ‘international accounting promulgators
promote their product as principles-based against US GAAP, which they rebuke as rulesbased, to gain leadership in establishing the global accounting system’ (Cunningham,
2007, p. 1416). As McSweeney suggests ‘representations, accounting and other, are not
disinterested characterizations of the world but rather are arguably created in order to act
on and master it’ (McSweeney, 1997, p. 708). The ‘boundary object’ of ‘principlesbased’ standards has assisted in achieving this end. Indeed, the use of boundary concepts
in accounting is often responsible for the ‘unbearable ambiguity of accounting’
(McSweeney, 1997) whereby the appearance of agreement is possible only by the use of
ambiguous concepts.
The IASB appear to have won in the first ‘game’ to establish leadership and ‘mastery’ of
the world of standard setting. However, while both parties appear to agree on the
characteristics of ‘principles-based’ standards and in the commitment to converge on
such standards they do so from very different starting positions. The Convergence Project
was made possible only by using the ‘boundary object’ of ‘principles-based’ standards.
These different starting positions, that is different underlying assumptions about
prescriptions, may result in differences that emerge in determining the standards upon
which the Boards converge. Political wrangling can still take place under the umbrella of
29
apparent agreement on the nature of standards. A boundary object like a ‘principlesbased’ standard acceptable precisely because ‘it is fairly vague; it serves as a means of
communicating and cooperating symbolically - a ‘good enough’ road map for all parties’
(Star and Griesemer, 1989, p. 410).
There is a lot of talk about ‘road maps’ in the U.S. in connection with the convergence
project and with the move towards ‘principles-based’ IFRSs. The question is whether the
‘road map’ provided by the concept of ‘principles-based’ standards is going to assist this
convergence or not. The failure to agree on the underlying assumptions about
prescriptions is useful in so far as it allows the appearance of convergence on a kind of
standard without the necessity to achieve convergence on the underlying assumptions.
However, as the problems considered above show this superficial agreement on a concept
may be compatible with disagreements on the standards that are promulgated. Even if
such disagreements are thrashed out in the standard setting process it may be a mystery to
preparers and auditors as to why the resulting standards are to be referred to as
‘principles-based’ standards. There may be a perception that they are not really of this
kind.
10. Conclusions
The paper has considered why it might be the case that despite widespread agreement
amongst standard setters, regulators and those who follow accounting standards that
accounting standards should be ‘principles-based’ there is an apparent difficulty in
promulgating such standards or agreeing that the standards formulated are of this kind. It
is suggested that one reason for this is that the concept of a standard being ‘principlesbased’ is vague. The concept is one that expresses a ‘boundary object’ and concepts of
this kind while achieving the appearance of agreement conceal underlying differences in
understanding them. Although such concepts enable some kind of communication
between parties with different interests they are not able to sustain the more
comprehensive agreements that are required by a project such as the one to converge the
accounting standards of the IASB and the FASB. One benefit of the ‘principles versus
rules’ debate is that it has focused attention of important underlying issues in standard
30
setting. It is important to debate the nature of the CF that sets out reasons for
promulgating accounting standards and the kind of reasoning that leads from the CF to
standards. The kind of prescriptions that are included in standards needs to be considered.
Are the ‘rules of thumb’ or prescriptions understood on the ‘practice’ conception. This
leads on to the question of whether or not standards can be overridden where following
the standards will not meet the objectives of the standard or where there the requirements
in standards lead to conflicting actions when following them. The objective of
implementation guidance needs to be agreed. It is important to decide whether the
objective is to eliminate actual or possible vagueness. This leads on to the question of
whether those who follow the standards are allowed to exercise judgement in interpreting
the standard, that is in determining what the prescription in the standard actually is in
certain circumstances, or whether the judgement in determining the prescription is only to
be exercised by the standard setter.
The paper has argued that these questions have not been fully debated in the context of
the ‘principles versus rules’ debate. It is not surprising that this has not been done. Given
that agreement on some of these issues is unlikely the development of a ‘boundary
object’ concept of being ‘principles-based’ provides a way of achieving the appearance of
convergence against a failure to converge on the underlying assumptions that are
expressed in different attitudes towards these issues. Wittgenstein once observed
‘concepts lead us to make investigations; are the expression of our interest, and direct our
interest (Wittgenstein, 1953, §570). The paper argues that the concept of being
‘principles-based’ does not provide clear direction of the interests of standard setters.
The conclusion of the paper is that it would be better to recognize the impotence of such
a concept. It is time to ‘neutralize the rhetorical and political power of the false binary’
and allow a ‘fizzling out of the vocabulary altogether’ (Cunningham, 2007, p. 1493). The
idea of ‘principles-based’ standards has outlived its ‘sell by’ date and should be dumped.
31
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