It's the end of-the-semester crunch for us and we couldn't find the time to produce a completely new column. As a result, we've rejuvenated a popular column that we first published in 2001.

As you'll see, we poke fun at the foibles in GAAP by showing how those weaknesses would never be considered acceptable if they were to be used to track golf scores.

The image is especially meaningful to Paul M. because the original column came out when he was creating a PGA Golf Management Program at the University of Colorado - Colorado Springs. This program's mission is to create new members of the Professional Golfers' Association of America who not only hold university degrees but also have passed professional exams, displayed outstanding playing skills, and completed 16 months of co-operative internships. The UCCS program is one of only 19 accredited by the PGA and just finished its 11th year.

Read on...

For several reasons, we've been thinking about golf lately, and it's occurred to us that the game would be a lot different if players kept score using a system that would emulate generally accepted accounting principles. As we have pursued that train of thought, we've speculated what it would be like if there were a "Generally Accepted Golf Scoring" system, or GAGS, instead of the U.S. Golf Association's Rules of Golf.



One conspicuous difference would be that the GAGS scorecard would be accompanied by 10 pages of footnotes.

GAGS would also require a predicted number of putts per round to be allocated among the holes expected to be played, all without regard to the actual numbers. For example, it would be common to predict that 36 putts would be taken over an anticipated 18-hole round, with two assigned to each hole. While this allocation would eliminate having to report any dreaded three-putt greens, it would fail to usefully report what actually happened, including such achievements as one-putts and chip-ins.

Another GAGS provision would allow off-scorecard sand-shots under specified circumstances. Even though other players and spectators would see that a ball actually landed in a bunker and that the golfer took several shots to get it onto the green, this rule would allow those strokes to be left out of the reported score. After all, counting those real strokes would make that player's score look bad compared to those of competitors who actually avoided the hazards.

One popular feature of GAGS would be deferring unwanted strokes in excess of par. Under this system, players would record no scores higher than par on any hole despite actually having a bogey, double bogey or worse. The excess strokes would simply be deferred without penalty until they could be offset against birdies or eagles that might be scored in possible future rounds, if ever. Again, the questionable effect of the rule would be covering up bad news, even though doing so would destroy the connection between the actual results and the carded scores.

Some players would also prefer a GAGS-supported practice of applying a lower-of-past-or-present-score method that would require a real score on any given hole to be recorded only if it was lower than any previous score. In addition to forcing golfers to maintain a history of the lowest score ever achieved on each hole, the questionable outcome would be biased scores that lack usefulness because they don't faithfully represent real results.

One more feature of GAGS would allow a golfer to select between a pair of alternative practices, with one being preferable and the other merely acceptable. One example might be the treatment of shots into water hazards. When players hit a ball into the drink, they would have the option of adding that stroke plus a penalty to their recorded score, or not adding them as long as they disclose them in a footnote showing a pro forma score compiled as if the actual shots had been counted.



Obviously, there is no such thing as GAGS, but imagine what would happen if golfers using that system showed up at an official USGA tournament and tried to submit phony scores showing that they beat the players who applied the strict rules of golf. The futility of this effort would be compounded by the fact that everyone watching, including the television audience, would want to know the real number of strokes taken. And, of course, the event organizers would award the trophies and prize money only to the players who had the fewest actual strokes in accordance with the strict rules of golf, while the GAGSters would be laughed off the course and excluded from future tournaments.



Here are some unfortunately actual flaws in GAAP that correspond to the imaginary GAGS rules:

The most helpful information in GAAP reports often appears in the footnotes, not the financial statements.

Accountants allocate assumed depreciation costs among predicted reporting years without trying to observe what actually happened to the underlying assets' real values. It's inarguable that income results based on assumptions, instead of observations, lack reliability because they cover up real outcomes, especially volatility. Presenting these numbers is also less than fully ethical because they prevent observers from grasping what really occurred.

Carefully crafted lease agreements allow lessees to leave liabilities off their balance sheets, even though experienced financial statement users know that these debts exist and that they aren't reported because the managers are trying to hide the truth from them.

Lower-of-cost-or-market and impairment accounting are mandatory, thus presenting users with grossly incomplete reports that deliberately leave out information about any enhanced market values of assets. The consequences include more uncertainty and risk for the users and higher capital costs for the reporting companies.

When circumstances create deductible temporary differences, the GAAP tax deferral method can cause companies that currently pay income taxes to postpone reporting the expense until years later, when those differences reverse.

As another example, GAAP for defined-benefit pension plans still permits employers to defer unexpected gains and losses from one period and offset them against unexpected losses and gains in later periods; the whole idea is simply to avoid reporting the truth, the volatile truth, and nothing but the truth. Of course, only managers are fooled by these machinations.

Although it has been superseded, SFAS 123 was in effect for 10 years; in that interval, virtually all managers described options-based compensation in pro forma footnotes, instead of deducting it from reported earnings. Another pair of acceptable alternatives was created in 1987 when the Financial Accounting Standards Board issued SFAS 95 that still allows managers to opt for the indirect presentation of operating cash flows, despite the fact that users want and need to know the information that would be provided by the direct presentation. Managers' decisions to not use the preferred methods shout that they're willing to shortchange the users of their financial statements.



It's important that managers and their accountants realize that investors in today's capital markets include a great many sophisticated participants who collectively watch each public company carefully. Contrary to managers' naive and lackadaisical assumption that they can use accounting foibles to fool the markets, these users develop their own financial scorecards based on actual events, instead of swallowing the compromised, predicted, smoothed, deferred, and grossly incomplete and misleading numbers in GAAP reports.

And, just like in real golf tournaments, the capital markets' prizes of lower capital costs and higher stock prices go to those managers who actually create greater real future cash flow potential, instead of those who try to look successful by fabricating higher reported earnings.



This analogy shows that anyone who believes that GAAP statements report even approximate descriptions of results and conditions has been fooled, either by others or by themselves.

Just as the winner in a strict-rules golf match has the lowest number of actual strokes, the winners in the capital markets are the managers who are most likely to achieve the highest real future earnings and cash flows.

Even if they report the occasional bad news with candor as soon as it happens, the gallery cheers them on, and they're still eligible to compete in future events.

The only permanent losers (and the bigger fools) are the cheaters who are exposed for what they are.



It's long past time for all managers and accountants to change their outlook and practices. GAAP financial statements don't reflect much of anything that really happens or exists because the standard-setting process has been so often compromised by political pressure and so often thwarted when its participants failed to resolve hard issues, such as those related to leases, taxes, pensions, asset and liability measurement, and income.

The capital markets understand these facts, and there's no doubt that stock prices in general are lower because of the uncertainty created by the lack of useful information.

Above all, managers should stop fooling themselves because they sure aren't fooling anyone else.



In closing, let's step over to the first tee in the fourth round of the U.S. Open, where the final two players are tied for the lead and preparing to start their match.

Suddenly, the TV commentator shouts into the microphone: "Fans, the championship is over! Lyon Forrest and Mel Michaelson have just compared their predicted scores for today's rounds and Michaelson has won the open because his anticipated score of 62 is lower than the 64 Forrest expected to shoot. What an amazing turn of events and a great victory powered by one of the game's greatest imaginations!"

Of course, that's utter nonsense, but then so are most GAAP earnings announcements.

It's time to produce a new reality.

Paul B. W. Miller is professor emeritus 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 or Accounting Today. Reach them at