Not long ago, one of us noted an inspirational quotation on the editorial page of the hometown paper. It captured our full attention because its insight applies to a major issue facing the financial reporting community and profession:"The disappearance of a sense of responsibility is the most far-reaching consequence of submission to authority."

(The thoughts are attributed to Stanley Thompson, but we were unable to determine just what other things he may have accomplished that gave him this insight.)

These thoughts brought to mind the Financial Accounting Standards Board's currently stalled project on the hierarchy of accounting principles. Among other things, this seemingly innocuous project contains a provision that chills us because of its far-reaching implications. Indeed, we are so concerned about it that we dedicated six columns to it in the summer of 2005.

That provision is the board's proposal to eliminate the existing Rule 203 exception that permits practicing accountants to prepare or audit financial statements that do not comply with generally accepted accounting principles if they believe that compliance leads to misleading financial statements. Although this is seldom exercised, it remains a crucial means of escaping the tyranny of the tried-but-untrue practices within GAAP.

Adding to our concern is the simplistic assertion that the board uses to justify taking away what is essentially freedom of speech for accountants: "The board believes that the selection of accounting principles in accordance with the GAAP hierarchy results in relevant and reliable financial information." In other words, the board seems to believe that if it's authoritative GAAP, it's got to be good as gold, end of discussion.

Our series in 2005 should have dispelled the validity of that premise by showing that GAAP is too politically compromised, flexible and obsolete to generate this much confidence in its ability to generate useful information. We provided many examples of these shortcomings.


There are so many different settings in which authority is created in order to promote tranquility and efficiency that we feel no need to rehearse them here. In the case of public financial reporting, we concur that there is good reason to regulate it for the good of society. Specifically, the goal is to provide useful information that promotes economic stability and well-being by enabling greater efficiency in the capital markets.

To be clear, we support that authority only to the extent of setting minimum standards for reporting. We strongly oppose using that authority to establish maximum standards.


We also support creating authoritative standards through a due process, and we support using experts, such as FASB, for setting those standards. However, everyone, including the Securities and Exchange Commission and the board, as well as leaders in the management, auditing and financial analysis professions, absolutely must acknowledge that this due process has been, and probably always will be, political in nature. By that, we mean that it is designed to make change happen only slowly and incrementally. And we also mean that it is subject to being controlled or dominated by one or more participating interest groups to the detriment of the public's interest in useful financial reporting.

This domination and deterioration of quality is not theoretical, as anyone can see when they look critically at GAAP, with its choices like FIFO and LIFO, its compromises like pension and option accounting, and its obsolete practices like cost-based depreciation, with its roots in the beginning years of the prior century - if not the one before.


Of course, authority means nothing if there is no submission to it. (Anyone with teenage children knows about that... .) In the financial reporting context, that relationship means that auditors and managers need to submit to the authoritative guidance inherent in GAAP, but only in the context that these are minimum standards designed to help achieve market efficiency through useful information. Importantly, financial statement users are not bound to submit to the standard-setters' authority at all. Indeed, they are perfectly free to use or not use the financial statements according to their own judgment.

It is this difference that creates the issue for us. Suppose, for example, that some managers and auditors are actually in tune with the needs of the statement users, and know that they are not using some of the information provided by GAAP because it is not relevant and/or reliable. It makes all the sense in the world that these managers and auditors would be empowered to go beyond the minimum standards to serve the users' needs, and thereby benefit themselves and society.


Of course, we do not advocate anarchy in accounting (how's that for an oxymoron?) by letting managers and auditors decide every reporting issue on their own. Rather, we favor a system that creates informative minimum standards and then encourages managers and auditors to climb well above them to provide actually useful information, instead of stopping dead in their tracks when they've merely complied with GAAP.

Here's the thought that was triggered by the quote in the opening paragraph: We fear that FASB's proposal will come across as an absolute proclamation that the one and only route to providing useful information is compliance with GAAP. If managers and auditors embrace FASB's view and submit completely to the board's authority, then it will be only a matter of time before they wash their hands of any and all professional responsibility for serving society by providing information that is truly useful and in demand. (Of course, it's quite possible that this abdication of responsibility has already taken place.)

Rather than testing the results of compliance to determine whether they are useful depictions of a company's financial position and the results of its operations, they will simply test the statements to see whether they comply with GAAP, and go no further.

In effect, we see FASB's premise that compliance always produces relevant and reliable information as having the insidious outcome of discouraging responsible and creative evaluation of financial statement quality. In addition, it stifles innovative ideas, except for those that survive the tortuous political due process. By and large, it makes no sense to depend on bureaucratic systems to create innovation.


Because of our past history and current relationships with the board, we know that the members and staff are well aware of the limitations of GAAP. After all, it is those limitations that caused FASB to be formed and that have sustained it for a third of a century. Further, we know that they work long and hard trying to find ways to fix those limitations and bring more usefulness to financial statements.

Knowing that, we find it paradoxical that the same people would assert that compliance with GAAP guarantees relevant and reliable financial statements. It just isn't so, and we strongly urge our friends at FASB to find another way to solve the problem they're trying to solve. We just don't see how limiting free speech and encouraging blind submission to authority will lead to progress in financial accounting and reporting. In fact, we see the elimination of Rule 203 exceptions as a huge step backward that must not be taken.

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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