My academic career predates the "sky is falling" period that began in the fall of 2008. I find myself wondering how to reconcile the events in that short span of time to the common body of knowledge previously embraced. In particular, I am increasingly curious as to how those responsible for filing, auditing, exercising oversight and investing in today's market setting answer a small set of queries.

* Controls. Boards of directors are intended as a check and balance on strategic operating decisions and leadership. Yet, if such control is ignored and overridden by government action, then how can it be said to be intact? Sarbanes-Oxley mandated certain reports on control and certifications by public company officials. What would you say in these circumstances is the state of control?

* Contracts. Arm's-length transactions evidenced by contracts have been the core means of describing and enforcing property rights. Yet, if contracts are initiated under duress exerted by government, abrogated through legislation or regulators' actions, or overridden by government expropriation, then what rights lie with those who hold legal instruments?

* Capital. Traditional forms of capital have been debt and equity, with certain hybrid instruments and sweeteners observed in the marketplace. Valuation reflects both risk and expectations, combined with the enforceability of promises exchanged. Traditionally, decisions to issue stock or debt have been evaluated by stakeholders, overseen by directors, and monitored by regulators. Yet, if government can force debt onto private sector entities, extract ownership rights, and continually advertise nationalization as an option, how can capital markets be operable?

* Communication. Full disclosure has been a mantra, leading to hundreds of pages of 10-K filings, describing events that are planned, have happened, or have been canceled. Formal contracts are increasingly attached onto the filings, permitting transparency. Deadlines for notification of trading practices and key events are monitored.

Yet, more recently, the term "systemic risk" has been invoked to excuse no communication to stakeholders or directors, no lead time for clear articulation, reading or deliberations, behind-closed-door meetings, votes on nontransparent legislation, and vagaries that morph into backdated requirements. Why is communication in a reasonable time frame for oversight by those affected not demanded?

* Cost. The notion of cost incurred has been a key ingredient to computing profitability, asset basis, and obligations tied to the passage of time. The information age is applauded for providing a means for monitoring not merely cost of acquisition but multiple dimensions of fair value and replacement cost. Yet, when the government led the way to displace actual exchange with possible exchange, the reliability and verifiability dimensions of good business were undermined considerably. Why is profit reported on a notion of cost other than that which a given entity has actually incurred?

* Chaos. The claimed role of fair value and exuberance in explaining price-earnings ratios from just above zero to one-hundred-fold is part of the chaos story. However, rational expectations cause one to pause and ask some obvious questions. Why would a company trade below its real book value? How could volatility climb from a historical norm of 20 percent to 75 percent so quickly? To what extent does anyone accord attention to the volume of trading and its respective volatility? Do people understand that stock market quotes reflect those who have chosen to trade in periods of chaos? Are those indicative of the values existing among those not prone to trade in such time frames?

CURIOUS

The very idea that anyone represents the "sky is falling" era as a reflection of the free market is most curious. The uncertainty of government actions and the question mark surrounding property rights have created a calamity. The best answers to this series of unfortunate events are to return to that common body of knowledge that served the country well from its genesis.

Wanda A. Wallace, Ph.D, is the John N. Dalton Professor of Business Emerita at the College of William and Mary. She has served on FASB's Financial Accounting Standards Advisory Council and the Comptroller General's Government Auditing Standards Advisory Council.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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