by Paul B.W. Miller and Paul R. Bahnson
With near-morbid fascination, we have been watching accountants - especially those who occupy leadership positions in large firms and professional bodies - trying to cope with the upheaval that started with Enron and Global Crossing and continues with almost daily revelations that something is terribly wrong with the state of the art in financial reporting.
It’s as if the deep flaws in generally accepted accounting principles and generally accepted accounting standards, as well as common attitudes and assumptions, were totally invisible and otherwise beyond perception. In addition, these so-called leaders seem to be unable to see that everything has changed. There is no way to turn back to the way it was.
For this and several other reasons, we have decided to reprise a column on this topic that appeared in the Jan. 24, 2000, issue of Accounting Today. (Back then, Ed Ketz was one of the writers.) We think that the ideas are even more topical and insightful today than they were nearly three years ago.
The following paragraphs reproduce that column verbatim, except for some shortening and polishing. Read it and compare what you think now with what you were thinking about financial reporting back then. If there is no difference, you are a candidate for some therapy.
• • •
Psychologists, particularly those who deal with trauma, know that one normal immediate response to a crisis is the denial that anything bad has happened. One typical initial reaction is to say, "I can’t believe it!"
We have all been shocked by sudden losses of property, loved ones or the familiar faces of public figures. In a sense, denial is a natural initial defense against the unthinkable and can actually prove to be helpful.
However, before long, reality sets in, and we go on with our lives despite the loss. Like the initial reaction, this adaptation to the new situation is also normal and healthy.
But, what if denial persists for months or years? This condition is unhealthy because the victim is living an illusion, and a life in denial is often unproductive.
Denial has played a great role in literature. In "Great Expectations," Charles Dickens wrote about Miss Havisham, who lived out her life wearing the dress she wore on the wedding day that never happened. In Alfred Hitchcock’s "Psycho," Norman Bates was in such denial about his mother’s death that he kept her body in the upstairs bedroom and assumed her personality.
More recently, one of the characters in Tim O’Brien’s Vietnam war novel "Going After Cacciato" makes endless efforts to put his boot back onto the foot he just lost to a land mine. These stories help us understand that denial is a distorted and crippling view of reality. But, what does all this have to do with financial reporting?
It’s simple - we are convinced that nearly all financial accountants are in denial. We think that this problem infests the whole profession, including corporate accountants, auditors, standard setters and enforcers and even academics.
This malady is especially prevalent in the senior ranks of the profession because they, in particular, are determined to keep doing what they have always done without acknowledging that anything has changed. As a result, the world now looks askance at financial reporting and auditing, and goes elsewhere for help.
The markets are surely not paying much attention to GAAP statements, except those few analysts who use the numbers to sucker investors into buying or selling whatever it is they are selling or buying.
Independence is one of the most obvious blind spots. Accountants just don’t get it that non-accountants perceive that large fees diminish independence. That perception will not be eliminated by writing more rules or denying that non-audit services compromise independence. Something else is needed.
Similarly, most auditors still think that there is meaning in their opinions about the statements’ conformity with GAAP. Given its limitations, who cares if statements conform with GAAP? We’d much rather the auditors attest that statements are sufficiently truthful to be useful.
Further, plenty of evidence shows that accountants are in denial about GAAP. Surely no one else thinks that historical numbers are relevant or reliable depictions of assets, liabilities and income. After all, how many people, when asked to describe their height and weight, state numbers from their birth? Accountants compound the problem by continuing to allocate original costs over an asset’s predicted life in accordance with ARB 27 - even though it was issued in 1946!
ARB 29, which followed ARB 27 by only nine months, still governs managers’ choices of an inventory flow! How could anyone believe that it is useful to apply either last-in/first-in, first-in/last-out, average or something else, without noticing that something is terribly bizarre about their equal acceptability?
Doesn’t it seem likely that accountants are in denial when they apply 50-year-old standards in these two key areas?
Corporate accountants are also in denial because they don’t see that today’s markets are highly efficient and that sophisticated statement readers know what to do with GAAP financial statements. In particular, there has never been a real justification for off-balance-sheet financing. Although it is fraud to omit facts that cause people to make decisions detrimental to their wealth, corporate accountants keep leaving a few (or a great many) liabilities off here and there to do just that.
Denial also leads them to think that they will be rewarded with higher stock prices by using off-income-statement reporting of expenses, especially for stock options. Managers deny that there is an expense, chief financial officers deny the wisdom of using preferable accounting and auditors deny any responsibility for the flaws in their clients’ statements. Of course, the Financial Accounting Standards Board was also in denial when it thought that recommending recognition was good enough.
Another denial problem is the fallacy that the best way to avoid volatile reported income is to manipulate the income reporting rules instead of eliminating the root causes of the volatility. For example, bankers shouted down FASB’s efforts to put unrealized investment gains and losses on income statements. They denied that users would cut these items off the balance sheet and paste them into the income statement. They also denied that their own investment policies could be redesigned to control the real volatility.
To bring some balance, we believe that most academics are in serious denial because they continue to think that outstanding students are attracted to accounting despite the low pay, long hours, high pressure, incredibly high turnover and useless product offerings. There’s no other reason they would lobby to put students through another 30 semester hours to qualify for these benefits.
In "The Glass Menagerie" by Tennessee Williams, Laura reveals her feelings about her former high school hero, Jim O’Connor. To her amazement, Laura’s brother Tom brings him home for a visit. That evening, he reveals that he is engaged and displays his vulnerability by accidentally breaking the horn off Laura’s glass unicorn. After he leaves, Laura retreats to the world of her glass figurines as if nothing has happened to her long-held fantasies.
We think that accountants are a lot like Laura. They just can’t come to grips with the idea that reality doesn’t match their imaginations. Some day, accountants will wake up to the fact that society doesn’t need them or their useless artifacts.
While it’s possible that the profession might awaken from its sleep of denial, we’re afraid that most of its members will just retreat to their own glass menageries. What a great opportunity for the few who will rise to challenge and meet society’s needs.
Now, as never before, this opportunity is more obvious than it ever has been. Which reaction will you display? Denial or confrontation?
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