In my technical accounting research class and in recent consulting work, I often have been reminded of the need for reasoned judgment in our profession. With the general move toward more objectives-based standards (using the SEC parlance), the need for professional judgment only will increase.  Recognizing the need to teach and understand what professional judgment is, I was pleased to discover a speech given in December 2007 by Jim Kroeker, who was then an SEC deputy chief accountant and is now the SEC chief accountant. In the introduction to his speech, he explained:

The fact that there are challenges faced in getting to the “right answer” in our current financial reporting system has been an issue of significant attention over the last several years. On the one hand, there are those who express concern that the volume of interpretive guidance that exists makes it difficult to comply and thus difficult to have confidence in reaching a conclusion (think about the accounting for liabilities and equity). On the other hand, in areas where the volume of interpretive guidance is less expansive there are those who express concern that, in the absence of detailed rules, they lack confidence in reaching a conclusion due to fear of having the conclusion overruled (think about fair value measurements). Those two views seem to be diametrically opposed. While I do not proclaim to have the answer to this issue, I would like to provide some thoughts that I believe could be helpful in providing an increased level of confidence when you make an accounting determination whether dealing with detailed guidance or broader objectives.

Mr. Kroeker then provided four steps an SEC registrant can take to increase its confidence that the accounting conclusions it reaches will be acceptable.

  1. Make sure you have a complete understanding of the transaction or arrangement.
  2. Involve those with adequate knowledge and experience up front.
  3. Realize that there may not always be one “right” answer.
  4. Provide transparent disclosure.

I think these suggestions (along with Mr. Kroeker’s explanations of what he means) are instructive and helpful. But what I’m not sure about is how often the ideals expressed in this speech have trickled down to the rest of the SEC staff. Specifically, I’m wondering whether there is any evidence that would suggest that the SEC staff has indeed taken these ideals to heart. I wonder what the recent experiences of registrants would suggest about these ideals, perhaps as observed in letters between the SEC and registrants. I guess I’m not entirely sure what evidence I would call on to examine these issues. But the reason I think it’s an important issue is that a lot of people question the extent to which auditors and regulators will be able to allow for reasonable diversity in practice if the US ever adopts IFRS. Is there any evidence to suggest that the SEC is becoming more open to diversity of practice with its registrants? Is there any evidence to suggest the opposite?