Crimes Against Accounting

Several stories last week offered another glimpse of the disarray among international rule-makers struggling to reform “a dangerously flawed accounting system.” The stories below focus largely on lease accounting, a long running controversy in which new rules, if approved, could add hundreds of billions of dollars to the liabilities on corporate balance sheets. Sadly, most of this coverage merely highlights miscellaneous symptoms of a deeper problem that rarely grabs headlines.

The current accounting regime for public companies is not imperfect; it is fundamentally obsolete, and it predictably distorts asset values. Even if the bureaucratic drudgery at FASB and IASB ever produces a clear consensus on any controversy du jour, neither investors nor issuers should rush to celebrate. Bureaucratic Band-Aids applied to gushing wounds do not heal the wounds; they only deepen our collective distrust and our pessimism about the prospect of substantive change.

As far as I know, only one organization — the recently founded Sustainability Accounting Standards Board (SASB) — appears to understand the scope of the problem and the need for thorough system-wide reforms. It’s too soon to judge SASB’s impact, but the group’s initial conceptual framework presents a sensible model.

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The Path of Lease Resistance (CFO.com, 3/18, 2014)

  • “Many CFOs now agree that companies should put leases on the balance sheet. It’s the how that has them up in arms.”
  • “If approved, the new rules could add hundreds of billions of dollars to the liabilities on corporate balance sheets. Finance executives have been vocal in their criticisms, and no one is sure what will happen next.”

Rule Makers Still Split on Lease Accounting (WSJ/CFO Journal, 3/18/2014)

  • “U.S. and international rule makers remained divided in meetings aimed at resolving differences on lease accounting.”
  • “We have been struggling with this standard for many years,” Hans Hoogervorst, chairman of the IASB said at the meeting in Norwalk, Conn. “There is no simple answer.”

Watchdog is called to account (The Telegraph, 3/15/2014)

  • “The IFRS financial regulator has itself failed to follow accounting rules and faces a far-reaching inquiry.”
  • “Few can remember the last time a regulatory authority provided the industry with such a laugh.”
  • “For the critics of IFRS, the foundation’s administrative errors are only the   tip of the iceberg. They argue that poor governance has run deeper than mere   record-keeping and, crucially, that this has led to the introduction of a dangerously flawed accounting system.”

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