BY PAUL B. W. MILLER AND PAUL R. BAHNSON
Be careful when you
wish for high-quality
Melancon and his advisors should be careful
when wishing for “high-quality accounting
standards.” While theoretically possible, hard
facts reveal that nothing like them exists today
and can’t be created anytime soon. Further, if
they were created, they wouldn’t be familiar
to accountants steeped in U.S. GAAP, or even
International Financial Reporting Standards,
for that matter.
To show we’re not newcomers to this are-
na, here’s what we said in May 2005 (“Conver-
gence: Don’t confuse the means with the end”):
“It will do absolutely no good to converge on
today’s compromised and other wise medio-
cre standards. Indeed, we’re convinced the
current brand of convergence will not just fail
to produce better accounting but will inhibit
the development of truly high-quality new
standards. Once labor and political capital
are sunk into getting mere convergence, no
one will want to rock the boat by daring to
bring entirely new solutions to bear on the
problems. Yet it is entirely new solutions that
Melancon’s flawed premise is that high
quality will be achieved by merely merging
GAAP and IFRS. If he and others really want
high-quality standards, they face a mountain
of work and substantive change, because the
system doesn’t need a few hasty tweaks but a
complete rebuild that will take years to finish.
Consider this seemingly incontro- vertible Feb. 24, 2010, assertion by American Institute of CPAs chief ex-
ecutive Barry Melancon: “Our increasingly
global economy makes it clear that the U.S.
should move toward a single set of high-qual-
ity, globally accepted accounting standards
for public companies.”
Actually, his contention is controversial and
this column delves into the controversy by ex-
ploring the issue of “high-quality” standards.
Our next will discredit the illusory advantages
of “a single set” of global standards.
served by having high-quality standards: Financial reporting must provide capital markets with useful and timely information.
To produce quality, participants must
adopt these behaviors:
Standard-setters must continually raise
the bar, because standards create minimum
requirements, far short of everything users
Managers must provide useful information voluntarily, instead of begrudgingly reporting only those bare minimums.
Auditors must understand that their role
is to protect the system’s integrity, not their
Regulators must encourage better minimum standards and enforce them to the
maximum extent of the law.
Achieving high quality requires nothing
short of relentlessly pursuing useful truth.
Merely blending two sets of outdated and
other wise mediocre politically compromised
rules won’t get it done.
Paul B. W. Miller is a professor at the
University of Colorado at Colorado Springs
and Paul R. Bahnson is a professor at Boise
State University. The authors’ views are
not necessarily those of their institutions.
Reach them at firstname.lastname@example.org.
OBJECTIVES FOR REPORTING
To set the stage, here is the objective to be
A “TO-DO” LIST
Here are 20 of our highest-priority reforms
that will enhance quality. (We focus on GAAP,
but IFRS shares most of these limitations.)
1. Cash: Existing rules permit reporting
egregiously boosted cash balances by classifying outstanding checks from deliberately
overdrawn checking accounts as liabilities
(e.g., Abercrombie & Fitch). Instead, overdrafts should reduce reported cash, period.
2. Cash flows: The indirect format is indecipherable and useless. The preferable direct
method should be required; also, investment
income and interest don’t belong in operating cash flows and income taxes should be
allocated among operating, investing and
3. Accounts receivable: Recognizing receivables at their realizable amount overstates
their value while frontloading and misclassifying revenue by including future interest
income in sales. They should be reported at
market with interest recognized later.
4. Inventory: Today’s practices obscure
how much value is added through produc-
tion by not reporting it separately from value
added by marketing. Inventories should be
marked to wholesale value to produce more
reliable balance sheets and more complete