Most companies report their economic activity in the form of accounting standards. In the US, Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) help the accountants, managers, information system designers, investors, and auditors in the processing, interpreting the economic state of the firm.
The current accounting standards are diluted by ambiguity. There are instances where different firms have been able to interpret available standards to fit within GAAP and at the same time deserve additional action by the Financial Accounting Standards Board (FASB). There is need fore the use of accounting standards formalization like the use of pseudocode to address exactly the concerns. Feasibility then comes in as to what extent should the accounting standards be formalized. Some scholars support the decoupling of accounting standards setting from the setting of regulatory capital and reserves. Some on the other hand advocates for a government oversight organization to change the accounting standards in order to protect the stability of capital markets.
FASB should make accounting standards more understandable. Ambiguity has shown real world consequences. It allows inertial tendencies to continue within management accounting. Formalization becomes the solution as it cannot tolerate inconsistency. Formalization is the creation of strictly ordered rules with interactions and objects that abide by the same rules. Pseudocode is a form of formalization with a deliberately platform free programming like structure of presentation. Pseodocode helps in alleviating ambiguity by doing the following: Mimics the code used by actual programmers. It follows a framework that is very rigid. Formalization has also been used in other fields like the medical field where ontologists have managed to use the principle in their practice.
When a rule is too simple then the formalization becomes a trivial task. On the contrary, if complexity grows then the chances for diversity in interpretation widen. FASB should delineate those areas that are to be left to the judgment of practitioners. The ones that follow a set of predetermined options. A completely automatable, involving no judgment whatsoever. The main aim is to attain a fundamental shift in the manner in which standards are developed. Software vendors and in house computer professionals are left at accounting firms to bridge the gap between non formalized prose and the formal computer language.
Formalization generally involves object generation and attributes generation. A middle ground must be determined. Ideal treatment of accounting objects within a formalized codification that will include only those attributes necessary to develop sound uniform financial statements subject to a reasonable cost benefit analysis. Delineation between automatable sections and sections requiring some level of human input should also be employed.
FASB must clearly state whether some calculations must be carried on a certain way or whether the decision lies with the managers. Prose standards will not be eliminated at this point, but rather an open ended type of prose language. The practice of formalization must tighten the feedback loop through the reduction in latency. Should the intention of FASB be made clearer through a formalized exposure draft, then it is likely that the draft will be misinterpreted by potential users. XBRL is a much more computer friendly medium than plain text. It has some two disadvantages. It allows for creation of extensions unique to individual firms. They take long to generate. Formalization encourages a uniform presentation of financial statements to the interested parties. FASB will do no good to any one if it disseminates rules for a game no one is playing.