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Principles‐Based Reasoning about Accounting Estimates

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  • Wally Smieliauskas

Abstract

This article proposes a key principle and related concepts for reasoning about accounting estimates. The reasoning is consistent with a principles‐based professional judgment framework proposed by Ross Skinner and the Institute of Chartered Accountants of Scotland. The principle deals with reasonable ranges and related risk assessments in the audit of accounting estimates. It does so by using concepts first introduced by Boritz and Skinner and updates them for the requirements of CAS/ISA No. 540 and International Financial Reporting Standards. The article identifies the conditions for the existence of the benchmark ranges proposed by Smieliauskas in identifying fairly presented estimates. The need for a professional judgment framework and related guidance has been recognized recently by the International Federation of Accountants, a 2010 EU Green Paper, and the Public Company Accounting Oversight Board as a result of challenges auditors have been facing in the current reporting environment. This recognition echoes calls first made by Ross Skinner in his pioneering 1995 article, and reinforced by the FASB/IASB 2006 proposal for principles‐based accounting standards. Raisonnement fondé sur les principes sous‐jacent aux estimations comptables Résumé Les auteurs proposent un principe clé et les notions qui s'y rattachent en ce qui a trait au raisonnement sous‐jacent aux estimations comptables. Ce raisonnement s'inscrit dans le cadre du jugement professionnel axé sur les principes proposé par Ross Skinner (1995) et par l'Institute of Chartered Accountants of Scotland (ICAS 2006). Le principe se rapporte aux intervalles raisonnables et aux évaluations connexes du risque dans l'audit des estimations comptables. Il fait appel en cela aux notions initialement proposées par Boritz (1990, 1991) et Skinner (1995) et met à jour ces notions conformément aux exigences de la NCA/ISA 540 et des IFRS. L'auteur définit les conditions d'existence d'intervalles de référence de Smieliauskas (2008) dans l'identification des estimations dont la présentation donne une image fidèle de la réalité. La nécessité d'un cadre de jugement professionnel et d'une orientation connexe a été reconnue récemment par l’IFAC (2011a), dans le Livre Vert de l'Union européenne (2010) et par le PCAOB (2008), par suite des défis que les auditeurs ont été appelés à relever dans le contexte des exigences actuelles en matière d'information. Cette reconnaissance fait écho aux recommandations initialement formulées par Ross Skinner, dans son article précurseur publié sur le sujet en 1995, recommandations renforcées par l’IFAC (2006) dans sa proposition d'instauration de normes comptables fondées sur les principes.

Suggested Citation

  • Wally Smieliauskas, 2012. "Principles‐Based Reasoning about Accounting Estimates," Accounting Perspectives, John Wiley & Sons, vol. 11(4), pages 259-296, December.
    • Handle: RePEc:wly:accper:v:11:y:2012:i:4:p:259-296
    DOI: 10.1111/1911-3838.12001
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    References listed on IDEAS

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    1. Wally Smieliauskas, 2008. "A Framework for Identifying (and Avoiding) Fraudulent Financial Reporting," Accounting Perspectives, John Wiley & Sons, vol. 7(3), pages 189-226, August.
    2. Mary Barth, 2006. "Including estimates of the future in today's financial statements," BIS Working Papers 208, Bank for International Settlements.
    3. Wally Smieliauskas & Russell Craig & Joel Amernic, 2010. "Auditing, Reasoning Systems, Reporting Frameworks, and Accounting Policy Risk: A Response to Alexander," Abacus, Accounting Foundation, University of Sydney, vol. 46(4), pages 455-463, December.
    4. Petroni, K & Beasley, M, 1996. "Errors in accounting estimates and their relation to audit firm type," Journal of Accounting Research, Wiley Blackwell, vol. 34(1), pages 151-171.
    5. Dechow, Patricia M. & Myers, Linda A. & Shakespeare, Catherine, 2010. "Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 2-25, February.
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