by Paul B.W. Miller and Paul R. Bahnson

Back in January 1996, “The Spirit of Accounting” made its debut in Accounting Today when Ed Ketz and Paul Miller published a column titled, “Self-regulation: Oxymoronic or just plain moronic?”

Thus began a non-stop critique of practices in the accounting profession. We could not let this anniversary pass without doing a retrospective on the more than 180 columns that we’ve done since. Just for fun, we looked back at what was published each January. We thought you would enjoy seeing the results, too.

With regard to the first column, we found that today’s Public Company Accounting Oversight Board-dominated accounting world validates our then-unpopular analysis that society was not very well protected when it relied on CPAs to regulate CPAs.

While self-regulation is a good concept, it lost traction in accounting when many CPAs (especially with leading firms) became preoccupied with fees and profits to the point that they diminished the integrity of core audit services. Seems like we were right on target, unfortunately.

In January 1997, our first anniversary column was “Like oil & water — auditing, investment banking don’t mix.” It examined an emerging trend in which some CPA firms were partnering with, and even obtaining ownership in, investment banking entities.

We’ll never know, but we imagine that our objections were viewed by those involved as the naive whining of a couple of unsophisticated academics. The conventional wisdom held that investment banking was being done by fine upstanding individuals who had nothing but their clients’ best interests in mind, superseded only by the obligation to care about the investors who acquired the shares issued in all those initial public offerings. Hindsight shows that we certainly were not the naive ones.

In January 1998, we kicked off the new year with another sarcastic title: “Dim bulbs and poor results: Shedding light on Westinghouse.” The gist of the column was that the management and accountants for this huge company had been exposed. They were using generally accepted accounting principles to manage their reported earnings without realizing that they couldn’t possibly get away with it for long. The “dim bulbs” were those who didn’t realize (and perhaps still don’t) that the surest way to a high cost of capital is to fudge reported earnings-per-share numbers.

Over and over again, we have pointed out that the fastest way to the markets’ heart is to tell the truth, the whole truth, and nothing but. The test of time confirms that message.

Then, in January 1999, we showed that we can say positive things by bringing out a column called: “Finally, somebody who understands capital markets.” This time we dressed up in fig­urative tuxedos and handed kudos to Warren Buffett for his stolid resistance to all the accounting gamesmanship that was going on. We extolled both his own reporting practices and his condemnation of the manipulations that were becoming so routine as the Dow and Nasdaq kept climbing.

People were snickering and casting aspersions on his quaint idealism and his inexplicable decision to avoid tech stocks. After awhile, even he became apologetic. But, of course, he was eventually proven once again to be just about the wisest of them all. The market is still in love with him, as reflected in the recent runup of Berkshire-Hathaway to over $80,000 per share. It seems we got another one right.

We kicked off Y2k with a column that we still consider one of our best: “Are financial accountants in denial?” Using analogies from literature, including The Glass Menagerie, by Tennessee Williams, we called on accountants and auditors to open up to the obvious truth that GAAP financial statements and audit reports are really not very useful. They can’t be when they’re rooted in historical costs, which are then biased and smoothed to provide predictable results. How else can one justify systematic depreciation and the lower-of-cost-or-market doctrine?

In light of the facts that GAAP produces useless statements and that audit reports merely attest to the statements’ compliance with GAAP, it follows that the only thing that an audit opinion declares to the world is that the statements cannot and should not be used to support decisions.

Alas, since then, we have seen even more pathological denial behavior as accountants of all ilks, especially those in leadership, continue to pretend that all the recent huge frauds and scandals are isolated events. We regret that subsequent events have not altered our view that denial is rampant. We just haven’t seen that many people seriously engaged in the new reality.

By the time January 2001 rolled around, Paul Bahnson had stepped in for Ed Ketz without a noticeable shift in topics or tone. In that month, we chided some of our friends for producing SFAS 142 with a column called, “FASB forgets who’s been ‘pfooling’ around.”

While we were pleased that the board got rid of pfooling of interests accounting, we were (and still are) perplexed by its satisfaction with carrying residual debit balances as assets instead of just writing them off.

Of course, SFAS 142 does call for writing down goodwill, but only when it’s impaired. We preferred the straightforward treatment of just writing off all goodwill at the time of purchase.

After all, capable analysts surely ignore the reported cost of goodwill in assessing future cash flows from the company, because this number represents only a premium paid in the past that has nothing to do with the future. Even though our point was made in vain, it is still valid.

Two years ago, in January 2002, we got somewhat caustic in taking Financial Executives International to task for its September 2001 press release denouncing efforts to put stock options expense on income statements. The leaders had even tried to capitalize on the anxiety and grief concerning the atrocities of 9/11. Specifically, they claimed that expensing options would undermine efforts to achieve international harmonization, a result that would only weaken a world economy that was reeling from the World Trade Center attacks.

As we analyzed the facile arguments in the release, we suggested that the acronym “FEI” might better stand for such things as “Fatuous Egotistic Individuals,” “Fatally Egregious Ideologues,” “Fully Entrenched Incompetents” and “Factious Engineers of Ignominy.” We also made the point that the rank-and-file members of the FEI are fine people who are trying hard to do a difficult job. We have sensed a change at the top of the organization, but we’re still looking for more.

Just a year ago, we published the second of two columns on the bizarre twists and turns surrounding Harvey Pitt’s blundering through his precipitous de-selection of John Biggs and his ill-fated hasty substitution of William Webster as the chair of the PCAOB without checking into his background.

We noted the unsettling irony that Biggs was apparently dumped at the urging of the American Institute of CPAs’ management, acting through none other than Rep. Michael Oxley, R-Ohio. Pitt was frozen in the headlights as he faced the dilemma of either appointing the immaculately qualified Biggs or listening to those who had orchestrated his own appointment to the Securities and Exchange Commission. As we said, his political instincts were stronger than his ethical tendencies, and he cast Biggs aside. Ultimately, this act brought down Pitt himself.

We ended up that column with these three paragraphs, which we still consider to be a rallying cry for the complete reformation of financial accounting regulation and practice:

“We call on our fellow professionals, regardless of position, to adopt a new ‘spirit of accounting’ that truly aims to advance the public interest in more complete and more useful financial reporting. It is time to abandon the thoroughly discredited, self-serving, inward-looking attitudes and practices that produced one disaster after another. The old era must be closed.

“A new dawn is coming. With the right vision, a strong commitment, and the bold courage to take hold of the future, the profession can achieve an incredibly high level of service, satisfaction and prosperity. On the other hand, if the wrong powers fill the vacuum, we’re in for a long dark night.

“Which will happen? It act­ually depends on all of us. For sure, this is no time to abdicate power back into the hands of leaders who performed so poorly.”

We believe that this message has been consistently stated in this column, time and time again. We are confident that it has needed to be said, that it still needs to be said, and that we will keep saying it. We also know that some readers simply cannot tolerate our commentary, to the point of occasionally condemning our competence and character. But, after eight years of dishing it out, we have to be prepared to take it. (An attack of this nature occurred in November. Although we prepared a response, the editorial staff chose not to publish it to avoid prolonging a debate. We accept that decision, of course; those who would like to read our draft can find it at http://cobe.boisestate.edu/work­-­­­ingp/ParadigmGap.pdf.)

In any case, we are unbowed in our commitment to keep calling for new attitudes, new leaders and new practices. We might even keep at it for eight more years.

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