the effect that they erroneously
believe that nothing is fundamentally wrong with today’s financial
reports and standards.
In their eyes, all that’s needed is
a few tweaks here and there before
etching the status quo in stone,
slapping the IASB seal of approval
on it, and leaving it untouched for
generations to come.
We hold out hope that the commissioners don’t subscribe to this
view, because heretofore we’ve
seen only perfunctory and lukewarm support for adoption in official releases and speeches. Perhaps
they’ve succumbed to either political pressure or an idealized fantasy
that GAAP and IFRS produce useful
information. Or both.
Bottom line, if the staff paper is
a trial balloon to test an idea for
embalming current standards, we
think it’s made out of lead.
Spirit
FROM PAGE
18
this anachronism should still be in
place despite the obvious benefits
from staying informed? Instead,
managers should satisfy today’s
enhanced hunger for knowledge by
applying 21st century technology to
implement continuous reporting
that publishes information weekly,
daily and even more frequently.
The consequences of implementing these true reforms would
be less uncertainty, risk and market
volatility, leading to lower capital
costs and higher stock values. In
other words, they are desperately
needed.
Subjugating FASB to “
condorsing” IFRS is a questionable, even
contemptible, end run around
long-standing statutory protections
for U.S. markets. It will not achieve
progress because it will preserve
today’s incomplete and grossly inadequate financial statements in
suspended animation.
WHY PROGRESS IS NEEDED
Space keeps us from explaining the
many flaws in the status quo with
any detail, so here are quick sum-maries of the four biggest:
Assets and liabilities: Under
GAAP and IFRS, these items’ reported amounts are determined
six different ways: cost, book value,
impaired value, market, realizable
amount, and present value. Instead, they should all be reported
at market values all the time.
Earnings: GAAP and IFRS artificially smooth reported earnings
by spreading revenues, systematically allocating costs, and excluding
unwanted items, leading to totally
imaginary manipulated results. Instead, they should be based on empirical measures, namely observed
changes in market values. Further,
all income items belong (where
else?) on income statements.
Cash flows: Practitioners cling
to the indirect method that obscures more than it reveals. Instead,
it’s slam-dunk obvious that cash
flows are best reported as gross inflows minus gross outflows.
Reporting frequency: The
New York Stock Exchange mandated quarterly reporting 80 years
ago, and the SEC made it mandatory 40 years ago. Who can think
FROM FARSB TO FARCE
Here’s our point: Even though current GAAP and IFRS might be the
best existing standards, they do
not produce high-quality financial
statements and must be replaced
with new standards that produce
rational and useful information.
Therefore, this move to neutralize
FASB will not lead to significantly
more useful financial reports. In-
stead, it will produce a condition we
call FARCE: “Financial Accounting
and Reporting Cannot Evolve.”
yond the SEC’s statutory mandate
and regulatory jurisdiction.
Second, the SEC must compre-
hend that its only constituents who
matter are the people of the United
States. Yes, that’s all the people, not
just investors, because the capital
markets help drive the economy’s
health and efficiency. Clearly, the
SEC’s constituents do not include
residents of other countries and
their politicians, especially the
oft-quoted G- 20. The same is com-
pletely true for big CPA firms and
the AICPA; as entities regulated
by the SEC, their views should get
scant attention, if any.
Third, the SEC should encourage
and enable FASB to be more inde-
pendent, reform-minded and for-
ward-looking, so that it can apply
bold new solutions to old problems
and stop applying ineffective old
solutions to new problems.
THE SEC’S TO-DO LIST
What should the SEC do to stand
firm, instead of throwing in the
towel?
First, it must acknowledge that its
authority extends only to regulating
U.S. capital markets. Thus, it cannot
legitimately try to make global mar-
kets more efficient. While strength-
ened non-U.S. markets might help
the U.S. economy, that goal lies be-
into the status quo like it’s going
to last forever, the SEC and its staff
should dare the entire U.S. report-
ing community to emulate the rest
of today’s commercial world, which
remains viable only through con-
tinuous, even radical, innovation.
