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Companies wary of rushing to judgment

Companies wary of rushing to judgment

by Rick Turoczy on January 23, 2005

US companies and their auditors are reluctant to exercise more judgment in work on accounts despite the Securities and Exchange Commission’s call for a principles-based approach.

They fear challenges by regulators, lawyers or the media, according to the head of the body that writes US financial reporting rules.

The statement by Robert Herz, chairman of the Financial Accounting Standards Board, underlines the scale of the task if the US is to switch to a financial reporting regime based on principles rather than rules.

The SEC, the chief US financial regulator, in 2003 called on the US to ditch its tradition of complex accounting rules and adopt financial reporting standards rooted in principles.

The report, mandated by the 2002 Sarbanes Oxley legislation, was a response to the fall in investor confidence in US accounting rules after the Enron scandal. But the switch to a reporting regime rooted in principles would require companies and their auditors to exercise far greater judgment as to whether financial statements complied with accounting standards.

Mr Herz told the Financial Times he believed auditors would like to exercise more judgment but felt inhibited by regulators, the trial bar and the business media.

“There is clearly a fear, not only among auditors but among [companies] and audit committees, of being second guessed,” he said.

Companies wary of rushing to judgment

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