Statement of Financial Accounting Standard No. 128, Earnings per Share (Appendix E: Glossary, Paragraph 171), defines "Dilution (dilutive)" as: "A reduction in earnings per share resulting from the assumption that convertible securities were converted, that options or warrants were exercised, or that other shares were issued upon the satisfaction of certain conditions."
The media has reported that a wrinkle in the intended effects of federal actions targeting the largest banks has prompted a promise from the Securities and Exchange Commission and the Financial Accounting Standards Board to provide guidance unique to such entities' treatment of warrants. Such a precedent is unwarranted and vividly illustrates how politics have co-opted the process of setting accounting standards in a manner that is increasingly unrecognizable to professionals.
Once upon a time, a bright line was visible between generally acceptable accounting principles and regulatory accepted accounting principles.
Professionals in the fields of accounting and auditing wrote the former, while regulators and legislators penned the latter. The savings and loan debacle might never have occurred had the regulators embraced GAAP, rather than RAAP. Now, as another debacle is touted in the financial pages, the approach of government is backwards. Rather than adjust RAAP as it chooses to address thin or non-existent markets and avoid the unintended consequences of government intervention, the tendency is to push the profession to cooperate in camouflaging what is happening.
The result is not merely deterioration and confusion of GAAP, but a total disregard for the professional role distinct from that of regulation. Consider the coveted attributes of consistency and comparability, partnered with due process and transparency in the writing of standards. Contrast such goals with the expedient adoption of rules special-ordered by legislators for a subset of companies to be enshrined within GAAP.
I remember when historical cost ruled, GAAP was reasonably sensible and transparent, and a well-educated professional could easily understand the concepts and guidance that permitted objective depiction of economic position and operating results.
As disclosures were added in the spirit of relevance, sharing increasingly available market information, many applauded the insights gained. The problem began when the SEC launched its initiative to begin substitution for historical cost with "market-value accounting" at its Nov. 15, 1991 conference.
The rest, as they say, is history.
Had GAAP only clung to its principle that fair market value only achieves relevance when actual transactions occur involving a particular party, rather than when secondary market offerings are generically posted and fluctuate!
Common sense had to have been suspended in order to even debate "partial" poolings, in-substance defeasance, "dirty" surplus, and untold variations of off-balance-sheet treatments. Had such common sense been, instead, asserted by professionals, resistant to political pressure, then the problems tied to securitizations and special-purpose entities - and their aftermath of variable-interest entities and structured investment vehicles - might well have been avoided.
The time has come to draw a line.
Standard-setting reflecting the collective thinking of the profession has to be distinguished from legislative fiats and regulatory foibles. Otherwise, be honest about the accounting framework being no more sensible or coherent than the Internal Revenue Code and step aside as a profession. Do not cloak the facts in collaboration with government. Such a path is treacherous.
Mark my words: Future regulatory actions and legal proceedings will blame the profession, no matter how motivated the unwarranted action was to cooperate with government.
Wanda A. Wallace, Ph.D, is the John N. Dalton Professor of Business Emerita at the College of William and Mary, and has served on FASB's Financial Accounting Standards Advisory Council and the Comptroller General's Government Auditing Standards Advisory Council.
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