I took the title for this essay from a recent piece by Lawrence W. Smith in The FASB Report (February 28, 2005). Mr. Smith examines three items in the consideration of this simplification: who sets accounting standards, the GAAP hierarchy and the codification project, and principles-based accounting. As we shall see, his first two points make sense, while the last point has the potential of seriously undermining accounting reports, in part because it abets those who lust for earnings management, if you know what I mean.

Smith begins by reviewing the landscape of the accounting standard-setting process. The SEC has the final authority and responsibility for setting accounting rules (oh my, I hope I'm not condemned for uttering such a word!). Following Sarbanes-Oxley, the SEC designated FASB as the private-sector body to set accounting rules (oops! I said it again) for public companies. The AICPA and AcSEC finally got out of the business, which is good, as it never made sense why FASB delegated SOPs and Industry Guides to them. Smith also mentions that FASB is now assuming responsibility for EITF rules(!), and that too makes sense.

Smith talks about the smorgasbord of documents, including "Statements, Interpretations, Technical Bulletins, 'D-Topic Announcements,' staff implementation guides (Q&As), Derivatives Implementation Guidance Issues…." He also mentions the new kid on the block, FASB Staff Positions (FSPs). Smith intimates that the board is reconsidering this buffet in hopes to having a slimmer menu. Let's hope so, since the current list of offerings is unnecessary and makes it quite difficult to find authoritative literature on any particular point.

Smith's second area of concern deals with the GAAP hierarchy and the codification project. Here too FASB has complexified that which is unnecessary to complexify. Instead of putting accounting rules (!!) on some continuum between authoritative and nonauthoritative, how about a simple demarcation between the two? I know that the board spurns bright lines, but I think that what preparers and auditors and financial statement users need is some clear notion about what is acceptable and what is not.

The third topic—principles-based standards—remains an elusive elixir incapable of delivering the promises made by the IASB or FASB. I find it distasteful and repugnant how Smith begins. He states, "I am not going to recap here all that has been said for and against principles-based standards. Quite frankly, its time for some action, not words." Well, that can be true only if FASB has given up on due process. I don't remember any debate on the topic. All I recall are assertions about how principles instead of rules will make the earth a better place in which to live.
Recently, I have heard discussions about oil prices and whether futures prices were in normal backwardation or following a contango pattern. How can accounting simplify things such as accounting for forwards when the world itself is getting more complex? As long as the financial engineers keep inventing new-fangled things to achieve a variety of economic goals, including the manipulation of financial statements, the accounting world needs to have tools to analyze these situations and to respond accordingly.

Actually, there is one simplification that I think of tremendous value -- the AICPA's rule 203. In essence it says when an application of GAAP leads to a misleading financial report, then the CPA can express an unqualified opinion. I would change the "can" to "must," but then I like financial statements that aren't misleading. Of course, I haven't seen a 203 exception in so long that I must believe that auditors don't care for such simplification.

Simplify the standards-setting process? Sure. Simplify the GAAP hierarchy? By all means. But use principles-based accounting? Only if you want more accounting scandals.

Maybe there will be a "Miss Congeniality 3" in which Gracie Hart rescues a board member after getting kidnapped. Instead of entering a beauty pageant or joining a Vegas show, she will join the staff at FASB in an attempt to prove their beauty and to improve public relations. At the end of the movie, after rescuing the hapless board member, I can hear Gracie whisper, "Principles-based standards will lead to world peace."

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J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals.