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

Occasionally, we’re asked how we come up with so many topics to keep this column going (after all, we’ve met 170 consecutive deadlines since 1996). Sometimes it’s hard, but at other times ideas just fall into our laps, like the one we’re addressing in this issue.

On two previous occasions, we have critiqued materials written by Alfred King, a former head of the Institute of Management Accountants and a self-appointed apologist for the status quo. Although he makes a living doing valuations, he steps into accounting issues with no hesitation.

Back in June 2001, in our column “Public policy arguments to FASB - uninformed, disingenuous or both?,” we dismantled his timeworn, discredited assertion in a Financial Accounting Standards Board comment letter that the board needed to encourage the publication of biased financial statements in order to lead the capital markets in a desired direction.

Then, as now, he had no grasp of the importance of neutrality for useful financial reports, despite its prominent place in FASB’s conceptual framework and the board’s dialogs with its constituents over the last 20 years.

Six months later, in another column (“A different tune, but still the same old song and dance”), we again found ourselves trying to “undo” King’s bald-faced encouragement to managers to make accounting policy choices to produce what he considered to be favorably biased impacts on reported earnings when they implement SFAS 142 on accounting for intangibles.

Alas, he’s at it again, this time in the September 2003 issue of the same journal, with an article titled, “Fair Value Accounting - Its Time Has Come and Gone.” As we see it, he could have called it, “The joy of living in the past.”

We have rarely seen such royal poppycock in all our days. It’s as if King has been living in a sealed box, hidden from view and safe from any new influences as time marches on.

For example, he assails market values for being “imprecise” and, therefore, not useful. More than 20 years ago, FASB published Concepts Statement 2 on the qualities that make information useful for investment and credit decisions. “Precision” is not among them, and for good reason.

This misbegotten focus on precision has long been debunked by the adage, “It is far better to be approximately right than precisely wrong.” (In fact, it has been so long since it was first uttered that the speaker’s identity has been lost, although we think it probably was then-Securities and Exchange Commission chief accountant Sandy Burton.)

For example, which is useful to financial statement users who want to predict future cash flows: the exact $100,000 original 30-year-old cost of land, or an estimate that the fair value is between $10 and $12 million?

Furthermore, how could anyone assert that depreciated book values have any precision? After all, they are based on unverifiable (even unknowable) predicted future lives, as King himself proudly notes in his article. He didn’t mind the lack of precision here, if he even noticed it.

As we see it, book values have no verifiability, no reliability, and hence no usefulness. In fact, they’re actually worse than useless if unwitting managers rely on them for making any decision. Thus, all of King’s claims that historical costs and book values are worth reporting are empty-headed.

The centerpiece of his present article is an observation that there are lots of values for a given asset. Not really, although we will agree that there are lots of estimates of values.

What King is missing, despite his expertise, is that values are distributions of results of a large number of transactions. When talking about the truck in his example (an incredible oversimplification, by the way, as well as his $89 microwave oven), he falls into the trap of believing that one transaction between one buyer and one seller establishes the exchanged asset’s value. That’s like watching a roulette wheel come up with a 22 and believing that it will come up 22 every time!

Some transactions occur at higher prices and some occur at lower prices. The asset’s reportable fair value is probably somewhere close to the mean of the distribution of all actual prices. And, as we used to think everyone knew, nothing can be learned about a distribution by taking a sample of only one. Again, King produced pure poppycock, unadulterated by common sense.

Another shallow analysis occurs later in the paper as he rambles on about prices “typically” moving up in inflationary periods, trying to justify his a priori assertion that book values are useful. How can anyone make a rational decision in a specific situation on the basis of what “typically” happens? And how can one even know what is “typical” without an adequate sample of observations?

Perhaps the silliest of the silly is his lack of awareness that sophisticated statement users have long been demanding public information about market values. Here are several pertinent quotes from the 10-year-old monograph, published by the Association for Investment and Management Research, called “Financial Reporting in the 1990s - and Beyond:”

● “Inexact measures of contemporaneous economic values generally are more useful than fastidious historic records of past exchanges.” (p. 33)

● “It is axiomatic that it is better to know what something is worth now than what it was worth at some moment in the past.” (p. 33)

● “There is no financial analyst who would not want to know the market value of individual assets and liabilities.” (p. 39)

● “In Financial Accounting Standard No. 33, we were provided with information that, although imprecise, was a godsend to those financial analysts who understood it and were able to use it in their work.” (p. 86-7) (Did you notice that they called “imprecise” information a “godsend?”)

In addition, King continues clinging to the erroneous idea that sophisticated statement readers simply use reported numbers without assessing their usefulness.

Based on the AIMR quotes and more common sense, we are confident that users are trying to guess fair values. Being conscious of the uncertainty associated with their limited knowledge, they make defensive analyses, assuming the worst. That is, if they determine that a company’s assets are worth, say, somewhere between $800 million and $900 million, they will tend to act as if they’re worth $600 million, just to be sure. They also do the same with the off-balance-sheet liabilities, but in the other direction.

According to our book, “Quality Financial Reporting,” there is no positive payoff from presenting capital markets with information that is incomplete, unverifiable, non-neutral, unreliable and irrelevant.

Indeed, managers’ insistence on reporting that kind of trash (and defending it with inane arguments) very clearly communicates that they cannot be trusted. The consequence is higher capital costs and lower security prices.

It’s a free country, and managers who fall for King’s arguments should just keep on reporting useless historical numbers. However, the capital markets are free, too, and we’re confident that competitive forces will drive these managers out and replace them with others who have far more understanding than King evidences in his three pages of babble.

We say, let that competition begin. We know that truth will win, despite those who adamantly argue that it is good to knowingly report numbers that are out of date or otherwise off the mark.

After the recent scandals, it is poor reporting (and King) whose time has come and gone. There is now more interest than ever in integrating fair values in public financial statements, despite his vacuous denials.

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

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