Effective simplification needed to overcome complexity.

• Author: Cunningham, Colleen
• Position: President'sPAGE

The Securities and Exchange Commission (SEC), in its recent study on Off-Balance Sheet Accounting, discussed the critical need to make accounting standards less complex. The Financial Accounting Standards Board (FASB) has stated that it is striving for simplicity. Many of the material weaknesses noted in the first Sarbanes-Oxley Section 404 reports relate to misapplication of complex accounting standards.

That's not all. The American Institute of Certified Public Accountants' (AICPA) recent task force found that current GAAP is too complex and not necessarily useful to the users of private company financial statements. FEI's Committee on Corporate Reporting (CCR) has frequently noted that the complexity of accounting standards is simply outpacing our ability to keep up. In fact, both the SEC and FASB have indicated that simplification of accounting standards is a priority, and I commend both for recognizing that.

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So, if we all agree the standards are too complex, the solution should be easy, right? Just simplify them! Unfortunately, it isn't that easy. First, we need to make sure that "complexity" means the same thing to all. In a recent speech, Don Nicolaisen, then the SEC's Chief Accountant, stated:

"Much of what I describe as complexity is the direct result of 1) a desire to reduce volatility in the income statement, 2) the development of numerous exceptions to basic principles or 3) the application of detailed rules. When I talk about reducing complexity, I am not talking about dumbing down accounting or implying that accounting or auditing will be simple.

".... Changes--even to reduce complexity--are not simple, and they will take time and, of course, must be subject to appropriate due process. Further ... every single change in accounting will, for many companies, require systems changes and testing to ensure that internal controls are effective before the change can be made. It's clear that the FASB has a very difficult job ahead."

When regulators and standard-setters think about "complexity," they understand it to mean the inability to succinctly determine the principle of an accounting standard, due to the myriad of exceptions and interpretations. Many of these are issued at the request of auditors and preparers. I agree that these can add to the complexity, and we should certainly strive for the ability to exercise judgment in applying an understood accounting principle.

This may require some change in...