Principles-based standards and professional judgment - then and now

At a historic roundtable discussion in New York, the chairman (Charles B. Couchman) stated that: “For many years the leading practitioners of public accountancy have been reducing the practice of accountancy to rules and standards as far as it has been found practical and logical to do so. The elements that make up financial statements have been reduced to standard classifications to the extent permitted by complicated and constantly changing transactions of the business world. Rules have been adopted covering, to a large extent, the various entries affecting the financial classifications. These classifications and these rules have been made widely available through books, articles, addresses and accounting curricula. Practically all the progress that has been made in reducing accountancy to rules and standards has been accomplished by the public accounting profession.”

“If all of the transactions of business were susceptible to analysis into a definite and rigid number of effects that could be analyzed to an extent that would allow exact classification, then rules could be adopted that would cover correctly each one. However, that is not the case. No matter how long one is engaged in an extensive practice of accountancy, he is continually faced  by new and unexpected transactions, each legitimate but each presenting combinations of effects not previously encountered. That is why the sorting of accounting transactions is rigid classifications to which rules and standards may be applied without distortion of fact is a slow process and cannot be otherwise.”

“No fixed rule may be laid down until all of the accounting elements that may fall within its scope have been studied and their effects determined so completely as to bring exact knowledge that the rule, when applied to them, will result in a proper statement of financial facts. Even then the rule must be subject to possible exception, as there is always the possibility that a new and unexpected set of circumstances may arise to which the rigid application of this rule would result in distortion of truth.”

“It is true, not only of accountancy, but of almost every other complicated subject, that the one who has only a smattering of knowledge of it considers that the subject is reasonably simple and that he can readily devise rules governing each phase thereof. To the simple, all things are simple. It is only when one goes deeply into the subject, whatever it may be, that he becomes aware of the complications and the difficulties of proper treatment that is applicable to each element.”

To learn more about the history of the principles versus rules debate, read the transcript of an October 19, 1937 roundtable at the Waldorf-Astoria, New York titled “To What Extent Can the Practice of Accounting Be Reduced to Rules and Standards?” For more information and different perspectives regarding this ongoing debate, refer to previous postings during the past year.

Generally Accepted Auditing Standards: Audit Evidence – 1977

In February 1975, the CICA’s Auditing Standards Committee (AuSC) proposed, subject to comments received following exposure, to publish the contents of an Exposure Draft as CICA Handbook: Section 5100 - Generally Accepted Auditing Standards. In July 1976, the AuSC issued a 32-page Exposure Draft on “Internal Control” (for inter-related Sections 5200 to 5230).

Then, in May 1977, the AuSC issued a 12-page Exposure Draft on “Audit Evidence” (for Sections 5300). This material was intended to provide guidance, in general terms, as to the attributes of audit evidence and the manner in which the auditor obtains and evaluates such evidence to adhere to field work standard (iii) within generally accepted auditing standards. Field work standard (iii) states: “"Sufficient appropriate audit evidence should be obtained, by such means as inspection, observation, enquiry, confirmation, computation and analysis, to afford a reasonable basis to support the content of the report.”

The Exposure Draft emphasized that “The auditor is concerned with audit evidence in all phases of his audit engagement, from the planning stage, through the study and evaluation of internal control including the performance of compliance auditing procedures, to the performance of substantive auditing procedures.” It addressed the following matters: Introduction and Definition; Knowledge of the Business; Necessity for Performing Substantive Auditing Procedures; Sufficiency and Appropriateness of Evidence; Methods of Obtaining Evidence; Timing of Auditing Procedures; Errors and Irregularities; and Evaluation of Audit Evidence. In this regard, “The auditor relies on his professional judgment [emphasis added] in deciding which procedures will give him sufficient appropriate audit evidence. He evaluates the audit evidence gathered to determine the content of his report.”

Canada Day 2012 – a country celebrates 145 years of confederation

Canada Day is often called “Canada’s Birthday,” ever since Canada was united into a single country on July 1, 1867, 145 years ago. Each year, Canadians celebrate that event on Canada Day, July 1. From coast to coast to coast, communities will put their unique stamps on the day.

On Parliament Hill in Ottawa, the Peace Tower carillon will ring in British-legacy military pageantry, including a 200th anniversary look-back to the War of 1812 and a concert. Elsewhere, people will celebrate with citizenship ceremonies, maple beer swigging, a yoga fest, block parties, some cheering for our Olympians, kicking back at the cottage, horse shows, “O Canada” singing contests, a Montreal “mega-cake,” salmon barbecues, Inuit games, bannock-making, a Bollywood fashion show, line-dancing, and all manner of revelry.

View a video from the Prime Minister, Stephen Harper, and statements from Thomas Mulcair and Bob Rae. See the Toronto Star article, “On Canada Day 2012, show the flag for all of us.” Also, refer to “Google celebrates Canada Day with home-page doodle.”