A common thread running through the recent “Incentives, Risk and Regulation” symposium held by the Institute for Excellence in Corporate Governance (IECG) was the concept of principle-based standards.
Reason and self-discipline were called the best defense against financial crisis and what speaker Dr. Karim Jamal our “animal spirits” – irrational exuberance arising from aggressive business tactics or panic.
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Governance Conference Oct. 7
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“Human beings get carried away with greed or fear,” said Dr. Jamal, who holds the Chartered Accountants’ Distinguished Chair in Accounting at the University of Alberta. “Allowing conditions to go along, until failures interrupt the cycle, solves nothing.”
Jamal favored reform that rewards self-discipline, open exchange, fair-value accounting and principle-based standards. In his view, entrepreneurs make the best regulators, and no organization should be exempt from regulations.
The Aug. 27-28 UT Dallas School of Management event, IECG’s fourth annual symposium, brought together educators and business leaders to share research and experience on such topics as executive compensation, auditing and risk management, and financial system reform. The symposium’s second day was devoted to presentation of six academic research papers that further explored the same topics.
“The symposium started with talk about standards and principles and went all the way to religion, philosophy, auditing, judgment and psychiatry,” said moderator Dennis McCuistion, IECG’s director of special projects and development.
Executive Compensation Issues
Opening speaker Donald P. Delves, founder and president of The Delves Group, a Chicago-based consulting firm, was encouraged by his work with the Independent Directors’ Executive Compensation Project. The program began gathering data last year from more than 200 U.S. professionals and directors about executive compensation programs. The goal has been to create a set of standards that independent businesses would voluntarily adopt.
“Four principles that emerged from the debate included fairness, accountability, alignment and transparency,” Delves said.
Delves found a kindred spirit in Mark Peecher, who reviewed best practices from the perspective of financial-statement auditing. Professional judgment plays a critical role in auditing, and the best-case scenario includes principles-based standards, said Dr. Peecher, the Deloitte and Touche Professor of Accountancy at the University of Illinois.
“We hope auditors will have the courage to call it as they see it in a principle-based world,” Peecher said.
Peecher advocates extending statement auditors a “business-judgment rule” similar to that used by directors or psychotherapists. Auditors uphold standards like good faith, careful examination, objectivity and reasonable action. Further study and cooperation can clarify many questions, he believes.
Accounting and Auditing Practices
During a panel discussion in which legislation was a hot topic, Anthony J. LeVecchio, president of The James Group, a Dallas-based consulting group, shared insight on the evolution of accounting practices since the passage of the Sarbanes-Oxley Act of 2002.
“The rules became unclear, eventually eased, and now a whole new batch of rules is making things complex again,” LeVecchio said.
Auditing standards also sparked considerable debate. Craig Woodfield, assurance partner in the Dallas office of the audit, tax and advisory firm Grant Thornton LLP, recommended further study of the International Financial Reporting Standards (IFRS), which is due to replace U.S. Generally Accepted Accounting Principles (GAAP) by 2016.
“There’s real tension right now on this notion of judgment,” he said. “IFRS is a good standard, but I’m skeptical it will happen that fast. There’s also the problem of enforcing the rules. It’s hard for a regulator to comprehend judgment.”