We hate to say how long we have been watching accounting standard-setting, but trust us, it has been a long time. Over those eons, we have been frustrated at the lack of attention granted to the interests of financial statement users and the perennial promotion of the interests of auditors and statement preparers. This imbalance simply does not work for the economy's good, because the capital markets are inefficient if users don't have ready access to the information they need for allocating capital to the right places at the right prices.


Proof for our assertion about the short shrift given users is found in accounting standards. First, we think auditability has been the prime motive for keeping so many cost-based numbers in statements. Second, familiarity and defensibility have left systematic allocations (especially depreciation) virtually unchallenged, even though the numbers are based on subjective assumptions and predictions, instead of actual observations.

Third, some standards have been driven by the ease of preparation to the detriment of the usefulness of the output; the chief example here is the indirect method of reporting operating cash flows, which the Financial Accounting Standards Board permitted after preparers complained that they didn't know how to do the direct method. Fourth, risk minimization for auditors perpetuates lower-of-cost-or-market and asset impairment practices in good standing, even though they are obviously one-sided and otherwise biased. Finally, the pursuit of non-volatility has kept other practices in place, especially for pensions but also for investments, options and liabilities.

All in all, when a choice has offered what seem to be advantages to auditors and managers, it has gone their way, while users and the public have taken it on the chin. If it were otherwise, standards would provide information that users find dependable for guiding their decisions. In addition, the information would support their decision models without all the additional hunting and grinding that users have to do.

In addition, we have walked the halls of FASB and the Securities and Exchange Commission, not just figuratively but literally, as staff members and chroniclers. In these roles, we attended staff and board meetings where we observed decisions that overtly catered to auditors and preparers, while neglecting users. We remember hearing project managers often lament that the so-called "business community" would not go for one alternative or another, with the result that a more palatable answer just had to be found.


To illustrate what's crazy about this, we're reprinting a fable that appeared in Paul Miller's 2002 article in the Journal of Accountancy (slightly updated):

"A customer walks hopefully into a car dealership. When the salesperson asks what she is looking for, the customer says she is tired of the standard model and wants a car with an MP3 player, leather seats, cruise control and a bright color. The salesperson breaks out laughing and responds, 'You have to be kidding - we don't have anything like that!' When the customer asks why, the salesperson replies with scorn: 'Because we aren't required to. If you order this tan model, we'll deliver it some time in the next three to six months.' The customer can hardly believe her ears and quickly walks toward the door."

So it goes when those who supply a product or service put their own convenience ahead of their customers' needs.


In fall 2006, FASB made a significant move in a direction 180 degrees away from this historical pattern. And, as is typical with the understated but nonetheless imaginative and firm leadership of Chairman Bob Herz, there was no huge splash, no brass band, and no banners hung across Wall Street. Rather, a brief comment in one of FASB's periodic publications announced that Chandy Smith had been added to the staff as a senior technical advisor.

Heretofore, the folks occupying these high-level staff positions have been seasoned and battle-proven accountants, and their task has been to help project managers develop a consensus among the board members.

What's different about Chandy is that she is not just an accountant. Oh, she has some great accounting experience in her background, having earned her CPA while doing a three-year stint with KPMG. She then went back for an MBA and emerged on a new path, working as a sell-side analyst, first for Merrill Lynch and then for CIBC World Markets. Later on she switched to the buy side, taking a senior analyst position at New Amsterdam Partners, managers of $6 billion of institutional money.

What is readily apparent from her résumé is that Chandy is a genuine user who knows a lot about financial reporting from both sides. Furthermore, based on our interview with her, Chandy did not join FASB's staff just to be a symbol. She expects to earn her paycheck every day by doing her job. As she explained to us, she was initially reluctant because of the possibility that she would not really have a chance to shape the process. After several visits, though, she was convinced that the board's interest was genuine and justified her risk. She is committed to making a difference, and is convinced that she is supported by every board member, as well as the staff.

Chandy is basically charged with two tasks. The first is finding ways to get other users to take a more active and visible part in the due process. This involves forming advisory groups, as well as encouraging her user colleagues to send comment letters and otherwise get their views before the board.

The second role is internal and less visible, but could prove more effective. Specifically, she is to help the staff and board continually keep users' needs in mind when they define, debate and resolve accounting issues. We don't think she will encounter much resistance in providing this perspective, although history shows that some old dogs elsewhere in the profession will have to learn new tricks. She reported to us that she has been well received, and that more and more people are coming to her for insight and guidance.


We think that bringing Chandy onto the staff is a big step for the board and a giant leap for the capital markets. The inevitable result will be better standards that provide useful information. The upside is very large, and we don't see any downside at all.

What's especially good about satisfying users is that it also produces great benefits for auditors and preparers. What value do auditors currently add by attesting to the fact that the statements comply with GAAP, when compliance tends to produce outdated and otherwise useless information? What good does it do for preparers to provide statements that users can't or don't use because they aren't useful?

Just as in every other endeavor, the greatest good for the greatest number is achieved when those who are supposed to serve others do so without compromising for some short-sighted, self-serving benefit.


Miller's article in the JOA closes with another fable that illustrates this essential economic point. As you read it, consider what the world would be like if everyone involved in financial reporting understood the importance of meeting users' needs:

"A customer walks hopefully into a car dealership. When the salesperson asks what she is looking for, the customer says she is tired of the standard model and wants a car with an MP3 player, leather seats, cruise control and a bright color. The salesperson breaks into a big smile and says, 'You've come to the right place. Sit down and we'll find out what we can build to meet your needs. We'll offer you a competitive price and deliver the car in a week - less if our network has one that matches your specifications.' The customer can hardly believe her ears and walks quickly toward the salesperson's office."

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 paulandpaul@qfr.biz.

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