Improved Judgment in Financial Accounting: A Principled Approach

Martin T. Stuebs, PhD, CPA, and C. William Thomas, PhD, CPA

In July 2007, the SEC chartered the Advisory Committee on Improvements to Financial Reporting (CIFR) to examine the U.S. financial reporting system and to recommend changes that would improve the usefulness of reported financial information while reducing its complexity. In periodic progress reports, the CIFR has made several proposals, including the promotion of “principles-based” (or objectives-based) accounting standards in the united States that incorporate fewer “bright-line” tests, fewer exceptions, and greater reliance on preparer and auditor judgment than is required by present standards. To accommodate this recommendation, the CiFR initially proposed—and later significantly modified—a recommendation that would lead to the creation of a disciplined framework for the increased use of professional judgment required to implement these standards. (See the progress report issued February 14, 2008, and modified on May 2, 2008, www.sec.gov/rules/other/2008/33-8896.pdf.)