Something of a Joke

Over the past several years, the field of accounting has undergone quite a metamorphosis.

After starting out as a boring but functional method of keeping tabs on how a business is doing, it has become a tool for manipulation, a means of executive aggrandizement, a shroud for nefarious activities, and a vehicle for creating alternative realities.

In sum, suggests columnist Jonathan Weil in a thoroughly entertaining Bloomberg commentary, "Freebasing in Caymans Would Be a Banker’s Dream," it has become something of a joke.

The race to the bottom is on for the two boards that set most of the world’s accounting standards. This can mean just one thing. It’s time they got competition.

Let us begin with a critical question. In this era of infinite possibilities, what might a truly industry-friendly setter of accounting principles look like? Allow me to present for your consideration the Financial Reporting Irregularities Board. That’s FRIB, or “Free-Bee,” for short. Its motto would be simple: You report, you decide.

Ever since last fall, the big news from the accounting mandarins in the U.S. and Europe has been one relaxation of their precious rules after another. One day, the International Accounting Standards Board in London is rushing to please bankers and politicians by softening its pronouncements on “mark-to-market” accounting, only to watch the U.S. Financial Accounting Standards Board loosen its own rules later.

Nothing they’ve done has been enough to satisfy the banking and insurance industries. They just keep playing the two boards against each other, begging for more breaks.

After the FASB’s latest cave-in, for example, U.S. Representative Spencer Bachus, ranking Republican on the House Financial Services Committee, last month called for new congressional hearings, saying that “questions remain as to the ultimate effectiveness of the fair-value accounting revisions.” Meanwhile, some European finance ministers complained the IASB hasn’t done enough to match the FASB’s changes.

The U.S. Chamber of Commerce’s “Fair Value Coalition,” composed mostly of banks and insurers, says managers still lack the discretion they need to “recognize true economic losses and allow for a realistic valuation of assets.” In other words, they want to value their companies’ securities at the prices they wish they could get, rather than what others would pay.

Start a Winner

So now it has come to this. The world must find a way to make sure neither of these boards can win this sordid contest. That leaves only one option: Let the banks start their own accounting board to win it instead.

From its sunny headquarters at a mail-drop in the Cayman Islands, the Free-Bee would gather the best and brightest minds from the planet’s greatest financial catastrophes to create a new set of free-market standards. Lehman Brothers, Royal Bank of Scotland, American International Group, Fannie Mae, the nation of Iceland -- their former brain trusts all would reside here.

Adherents, known as freebasers, would prepare their financial statements in accordance with Free-Bee rules, all of which would fit neatly in a 10-page brochure, double-spaced.

Accountant-Free

Most importantly, not one of this new board’s members would be an accountant. The Free-Bee would be a for-profit venture, designed to maximize revenue. And there’s no surer way to screw up a perfectly good set of toothless accounting standards than to let some bean counter take a crack at writing them.

How would this operation work? I’m glad you asked.

Let’s say your company would show earnings of two to three bucks a share under FASB or IASB rules, and $5 under Free-Bee rules. The Free-Bee would get a cut of the difference, negotiated quarterly on a client-by-client basis. Naturally, your company would be free to spend these extra “profits” however it sees fit -- perhaps, for instance, on larger executive bonuses.

Before you dismiss this plan as a mere pipe dream, take a look at this quote by Charlie McCreevy, the European Union financial-services commissioner, from a speech he gave May 7 in Brussels. “Accounting is now far too important to be left solely to -- accountants!” he said. “Independence of standard- setters is important, but they must be fully accountable.”

Wasted Money

To this, the Free-Bee’s trustees would cry out: Hear, hear! They would promise to be fully accountable to you, the humble chief executive, and you alone.

Sure, you could try getting the FASB and IASB to keep outdoing each other, using the same tried-and-true pressure tactics. By this point, though, all those campaign checks to lawmakers would be a waste of good money you otherwise could be spending on yourself.

Imagine the possibilities. Just this week, the FASB said it will make banks bring zillions of dollars of assets back onto their balance sheets next year by eliminating an off-the-books trick known as qualified special purposes entities. While the Free-Bee’s staff might not understand what a QSPE thingy is, they would know this: If the FASB wants to ban them, then the Free-Bee adores them and would demand you get them back.

Better Values

Do you treasure the discretion to value worthless commercial real-estate loans any way you like? It’s yours. Remember, the better your values, the greater the Free-Bee’s profits.

Have you had enough with all the red ink on junk-rated mortgage securities? The Free-Bee’s board members would be strong believers in the principle that all losses are temporary and all non-cash gains are golden, especially when the asset prices you’re using exist only in your imagination.

Or perhaps you run a publicly traded strip-club chain and want to make sure certain back-room activities don’t get reported as violations of the Foreign Corrupt Practices Act. Not only could this new board help you keep hookers off your balance sheet. The Free-Bee would deliver them back to your doorstep, showered and re-perfumed, with just 30 minutes notice.

Let the mainstream accounting poobahs have their race to the bottom. The Free-Bee’s mission would be to win it hands down. And while this new board may face hurdles, such as formal recognition by the U.S. Securities and Exchange Commission or the European Commission, history has taught us there’s nothing we can’t overcome as long as we have the right connections.

Any takers? I thought so.

Comments

[Ancient Brit]

Count me in!

[Independent Accountant]

MP:
I couldn't agree more. Weil is one of the few people to note the CPAs involvement in the current "crisis". The various accounting regulators have been worthless or have supported bad acccounting, particularly with regard to banks.

[Alexandra]

The observation is correct, the IASB and FASB have become enablers of this rip-off by Wall St.
One could also classify what is going on here as 'control fraud' as William K. Black has done, this adds an element of intent in the whole thing.
One really must wonder, whether these people are just bungling idiots, messing up everything up that they touch, or whether there is a deeper, darker truth behind them 'failing'.
http://alexandrahamilton.wordpress.com/2009/04/13/though-this-be-madness-yet-there-is-method-int/

[Abraham]

I used to be an accountant, still am I guess. It runs in your blood.

I worked for a publicly traded company. Not a huge company, but in the $100,000,000 range of sales. We had one of the Big Eight as our auditors.

My boss used to always play games with the reserves to get his boss off of his case.

For those of you who aren't familiar with reserve accounting, it's basically money that is set aside for known liabilities that are hard to accurately value. So each month you may tuck $50,000 or $100,000 in this thing called a reserve for obsolescence or scrap materials. Over time it builds to some real money.

Then you hit a rough quarter, my boss doesn't want the shit to flow down to his plate, so what does he do, take money out of the reserve to pump up the numbers. Reserves exist for a specific purpose and it ain't to pad your quarters.

It skews everything and makes the financial statements meaningless. Utterly meaningless.

Dishonest? Probably.

Being done EVERYWHERE? CERTAINLY.

Take everything in a prospectus or annual report with a ton of salt. Always start at the back with the endnotes and explanations.